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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1999
REGISTRATION NO. 333-88439
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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T/R SYSTEMS, INC.
(Exact name of registrant as specified in charter)
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GEORGIA 3577 58-1958870
(State or other jurisdiction of (Primary Standard Industrial (I. R. S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1300 OAKBROOK DRIVE
NORCROSS, GEORGIA 30093
(770) 448-9008
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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MICHAEL E. KOHLSDORF
PRESIDENT AND CHIEF EXECUTIVE OFFICER
1300 OAKBROOK DRIVE
NORCROSS, GEORGIA 30093
(770) 448-9008
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
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LISA A. STATER, ESQ. BRENT B. SILER, ESQ.
JONES, DAY, REAVIS & POGUE HALE AND DORR LLP
3500 SUNTRUST PLAZA 1455 PENNSYLVANIA AVENUE, NW
303 PEACHTREE STREET, N.E. WASHINGTON, D.C. 20004
ATLANTA, GEORGIA 30308 (202) 942-8400
(404) 521-3939
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell securities, and we are not soliciting offers to buy
these securities, in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 17, 1999
[TR SYSTEMS LOGO]
3,000,000 SHARES
COMMON STOCK
T/R Systems, Inc. is offering 2,880,000 shares of its common stock and one
of our shareholders listed under "Principal and Selling Shareholders" on page 50
is selling an additional 120,000 shares. This is our initial public offering and
no public market currently exists for our shares. We have applied to have the
common stock approved for quotation on the Nasdaq National Market under the
symbol TRSI. We estimate that the initial public offering price will be between
$8.00 and $10.00 per share.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 4.
------------------------------
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to T/R Systems..................................... $ $
Proceeds to the selling shareholder......................... $ $
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Some of our shareholders have granted the underwriters a 30-day option to
purchase up to 450,000 additional shares of common stock to cover
over-allotments.
------------------------------
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
RAYMOND JAMES & ASSOCIATES, INC.
The date of this prospectus is , 1999
<PAGE> 3
Graphics on inside front cover:
Text "the MICROPRESS(R) is a scalable document production system that
accepts files from multiple print sources, processes them, and then outputs
black and white, color, and wide format documents across multiple print
devices." The text is accompanied by an illustration of work flow into the
MicroPress, from digital, Macintosh, personal computer or scanner input, and
each input has a corresponding icon. The illustrations show information
processed by the MicroPress, which is pictured, as output to either black and
white output, color output, wide format or digital, and each output format has a
corresponding icon. There is a line showing ten print devices connected to the
MicroPress picture and the word "MicroPress."
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 10
Use of Proceeds............................................. 11
Dividend Policy............................................. 11
Capitalization.............................................. 12
Dilution.................................................... 13
Selected Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition 16
and Results of Operations.................................
Business.................................................... 28
Management.................................................. 40
Related Party Transactions.................................. 49
Principal and Selling Shareholders.......................... 50
Description of Capital Stock................................ 54
Shares Eligible for Future Sale............................. 61
Underwriting................................................ 63
Legal Matters............................................... 66
Experts..................................................... 66
Where You Can Find More Information......................... 66
Index to Financial Statements............................... F-1
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PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus,
especially "Risk Factors" and the financial statements and related notes, before
deciding to invest in shares of our common stock.
Unless otherwise indicated, the information contained in this prospectus
assumes the underwriters do not exercise their over-allotment option and gives
effect to the conversion of all outstanding shares of our preferred stock into
common stock, which will occur before the closing of this offering. Our fiscal
year ends on January 31. References to fiscal 2000, fiscal 1999, fiscal 1998 and
fiscal 1997 each refer to the corresponding year ended January 31, 2000, 1999,
1998 and 1997. Information in this prospectus gives effect to a 1 for 1.65
reverse stock split which will occur before the closing of this offering.
T/R SYSTEMS, INC.
T/R Systems, Inc. designs, develops and markets digital document processing
and printing systems, consisting of proprietary software and hardware, for the
print-on-demand market. Our highly functional product, the MicroPress Cluster
Printing System, manages multiple digital print devices provided by us or by
third parties as an integrated printing system. The MicroPress is a server-based
software and hardware system built on industry-standard open-architecture
technologies. This system allows our customers to flexibly and economically
print desired quantities with minimum lead time. The MicroPress fills the
critical gap in the digital document production market by delivering a
high-quality solution to mid-range users at prices that are often significantly
lower than those of traditional high-end digital systems. Key features of the
MicroPress include consistent color quality across multiple print devices as
well as the capability to simultaneously support color and black and white
digital printing devices and digital input. Other features available with the
MicroPress include:
- Internet-based remote job submission, ticketing, proofing, monitoring and
managing;
- document merging, distribution and archiving;
- variable data printing;
- electronic collation; and
- imposition, a document layout tool used most commonly to produce booklets
and proof-reading sheets.
The emergence of digital printing technologies is driving significant
changes in all sectors of the printing and publishing industry. Among the
sectors that have experienced the most significant changes is the rapidly
growing print-on-demand market. CAP Ventures, Inc., a consulting and research
firm focused on this market, estimates that the U.S. market for print-on-demand
equipment, supplies and services will be approximately $6.1 billion in 1999 and
will grow to approximately $11.8 billion in 2003.
We distribute our products in North America and internationally through a
network of independent dealers and through our distribution relationship with
Minolta Co., Ltd. We also maintain a sales force consisting of regional managers
located throughout the United States, as well as one in each of Canada and the
United Kingdom.
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THE OFFERING
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Common stock offered by T/R Systems.................. 2,880,000 shares
Common stock offered by the selling shareholder...... 120,000 shares
Common stock to be outstanding after the offering.... 11,613,190 shares
Use of proceeds...................................... For general corporate purposes, including
working capital, research and
development, capital expenditures and
possible acquisitions of technology. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol............... TRSI
</TABLE>
The number of shares to be outstanding after the offering excludes:
- 1,497,151 shares issuable under outstanding options at a weighted average
exercise price of $2.11 per share; and
- 976,708 additional shares reserved for issuance under our stock plans,
after giving effect to the adoption of our 1999 stock option plan.
NOTES TO PROSPECTIVE INVESTORS
T/R Systems was incorporated in Georgia in September 1991. Our principal
executive office is located at 1300 Oakbrook Drive, Norcross, Georgia 30093, and
our telephone number at that office is (770) 448-9008. Our world wide web home
page is located at http://www.trsystems.com. Information contained on our
website does not constitute a part of this prospectus.
We own or have rights to the product names, trade names and trademarks that
we use in conjunction with the sale of our products, including T/R Systems(TM),
MicroPress(R), Cluster Printer(TM), and Cluster Printing System(TM).
This prospectus also contains product names, trade names and trademarks
that belong to other organizations, including the following registered
trademarks: PostScript(R), a registered trademark of Adobe Systems Incorporated,
Harlequin(R) and ScriptWorks(R), registered trademarks of Harlequin Group plc.,
Microsoft(R), Microsoft Windows NT(R) and Visual Basic(R), registered trademarks
of Microsoft Corporation, Macintosh(R), a registered trademark of Apple
Computer, Inc. and Intel(R) and Pentium(R), registered trademarks of Intel
Corporation.
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SUMMARY FINANCIAL DATA
The following table is a summary of the financial data for our business.
You should read this information together with our financial statements and the
related notes appearing at the end of this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The pro forma as adjusted balance sheet data give effect to:
- the conversion of all outstanding shares of our preferred stock into
6,068,913 shares of common stock before the closing of this offering; and
- the sale of 2,880,000 shares of common stock offered by T/R Systems at an
assumed initial public offering price of $9.00 per share, the mid-point
of the estimated offering price range, and our receipt of the net
proceeds of the sale of those shares, after deducting estimated
underwriting discounts and offering expenses payable by us.
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<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JANUARY 31, ENDED OCTOBER 31,
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1995 1996 1997 1998 1999 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................ $ 94 $ 1,194 $ 4,036 $12,032 $15,847 $12,034 $15,704
Cost of sales...................... 27 1,013 3,387 6,107 6,579 5,041 6,662
Gross profit....................... 67 181 649 5,925 9,268 6,993 9,042
Total operating expenses........... 1,725 3,051 4,982 7,329 9,801 7,240 8,711
Operating income (loss)............ (1,658) (2,870) (4,333) (1,404) (533) (247) 331
Net income (loss).................. (1,657) (2,819) (4,120) (1,218) (623) (352) 412
Basic net income (loss) per
share............................ $ (1.14) $ (1.82) $ (2.43) $ (0.60) $ (0.26) $ (0.15) $ 0.16
Basic weighted average shares
outstanding...................... 1,460 1,555 1,702 2,052 2,444 2,429 2,532
Diluted net income (loss) per
share............................ $ (1.14) $ (1.82) $ (2.43) $ (0.60) $ (0.26) $ (0.15) $ 0.04
Diluted weighted average shares
outstanding...................... 1,460 1,555 1,702 2,052 2,444 2,429 9,700
</TABLE>
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<CAPTION>
OCTOBER 31, 1999
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PRO FORMA
ACTUAL AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,344 $26,437
Working capital............................................. 5,444 28,589
Total assets................................................ 10,067 33,160
Redeemable, convertible preferred stock..................... 15,059 --
Total shareholders' equity (deficit)........................ (8,781) 29,484
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RISK FACTORS
Any investment in shares of our common stock involves a high degree of
risk. You should carefully consider the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely suffer.
In these circumstances, the market price of our common stock could decline, and
you may lose all or part of the money you paid to buy our common stock.
WE HAVE A HISTORY OF LOSSES, AND WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY
We have incurred net operating losses in each fiscal year since our
inception in 1991, including a loss of $623,000 in fiscal 1999. As a result, we
had an accumulated deficit of $10.9 million as of October 31, 1999. We may not
be profitable in the future. We are making significant investments in research
and development, sales and marketing and our operating infrastructure. We expect
our spending in these areas will increase in the future. If we do not increase
our revenue at an equal or greater rate than this spending, we may have
operating losses. If our revenue does not grow sufficiently, we would need time
to scale expenses back. If we are not able to react quickly enough to
unanticipated decreases in revenue, we will not be able to maintain
profitability.
OUR OPERATING RESULTS HAVE FLUCTUATED AND WE EXPECT THEM TO CONTINUE TO
FLUCTUATE, SO YOU SHOULD NOT RELY ON HISTORICAL OPERATING RESULTS AS AN
INDICATOR OF FUTURE PERFORMANCE
Our operating results have fluctuated from quarter to quarter and year to
year in the past and we expect them to continue to fluctuate in the future. As a
result, you should not rely on our historical operating results as an indicator
of future performance. For example, we reported operating income in the fourth
quarter of fiscal 1998 and the first quarter of fiscal 1999 followed by
operating losses in the last three quarters of fiscal 1999, followed by
operating income in the first three quarters of fiscal 2000. We may experience
further fluctuations in our operating results because of:
- competitive market conditions;
- the general level of sales of printer/copiers which connect to our
products;
- the cost and availability of components of our products; and
- variations in the proportion of hardware and software in systems we sell.
SINCE MANY OF OUR POTENTIAL END USERS ARE SMALL BUSINESSES, IF THEIR BUSINESSES
FAIL OR THEY CANNOT OBTAIN THIRD-PARTY FINANCING, OUR SALES WILL DECLINE
Many of our potential end-user customers are small businesses and run a
greater risk of business failure than large businesses. If their businesses
fail, we will lose potential sales and our revenue will not increase. Further,
if these customers are unable to obtain acceptable third party financing, they
may not purchase our products. Some of our competitors could use their
significant financial resources to offer more attractive financing terms than
the financing terms otherwise available to purchase our products. These factors
could limit or reduce our customer base, causing our sales to suffer.
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WE RELY ON SALES OF ONE PRODUCT LINE, AND WE WILL NOT HAVE AN ALTERNATE SOURCE
OF REVENUE IF DEMAND FOR THIS PRODUCT LINE DECLINES
We generate substantially all of our revenue from one product line, the
MicroPress. If potential customers prefer competing products, we would lose a
substantial amount of revenue. Additionally, this product line may not be
profitable for other reasons, including pricing pressures or manufacturing
difficulties. If this product line is not profitable, we will not be profitable.
WE DERIVE A LARGE PERCENTAGE OF OUR REVENUE FROM A FEW OEM CUSTOMERS; A LOSS OF
ANY OF THESE CUSTOMERS WOULD REDUCE OUR REVENUE AND OUR RESULTS OF OPERATIONS
WOULD SUFFER
Since fiscal 1998, our original equipment manufacturer customers, referred
to as OEM customers, have represented a significant portion of our revenues.
Minolta Co., Ltd. accounted for 39.1% of our revenue for the nine months ended
October 31, 1999. If we lose one of our OEM customers or they decrease orders of
our products, our revenue would decline and our results of operations would
suffer. For example, in June 1998, Mita Industrial Co., Ltd. of Japan
discontinued orders of our systems and subsequently entered into reorganization
proceedings. An OEM customer could decrease its orders for our products if
demand for its products declines. Alternatively, our OEMs could choose to
purchase a competitor's products, particularly if available in their region.
Also, since our current OEM customers are all Japanese companies, volatility in
the economies of Asian countries could impact their businesses, which could
result in decreased orders of our products.
WE RELY HEAVILY ON OUR DEALER NETWORK AND IF THEY DO NOT EFFECTIVELY MARKET OR
SELL OUR PRODUCTS, WE WILL LOSE REVENUE
The majority of our revenue has come from sales through our dealer network
and we generally do not sell our products directly to end users. However, we do
not control our dealers and cannot be certain that our dealers will continue to
effectively market or sell our products. If they do not, our sales will suffer.
In the future, if we do not add new dealers and increase business with our
existing dealers, our business will not grow.
BECAUSE OUR PRODUCTS DEPEND ON SOFTWARE LICENSED TO US BY THIRD PARTIES, ANY
LOSS OF THESE LICENSES WOULD RESULT IN INCREASED COSTS AND PRODUCTION DELAYS
Our products depend on software licensed to us on a non-exclusive basis by
third parties. If those parties fail to continue to license their software to us
or to support this software, we would incur costs and experience delays of at
least several months in integrating alternate software into our products. This
would result in diversion of our research and development resources, delay in
production and could result in lost revenue and harm to our reputation. In some
instances, there are a limited number of suppliers of specialized software and
we could have difficulty in obtaining an alternate supplier. This is true of
Harlequin ScriptWorks, a PostScript page description software for which there
are extremely limited alternatives.
NEW RELEASES BY OUR SOFTWARE SUPPLIERS OR THE DEVELOPMENT OF SUPERIOR SOFTWARE
BY THEIR COMPETITORS COULD RESULT IN DELAYS IN SHIPMENT OR LOSS OF REVENUE
We may be required to expend significant time and resources to make our
systems compatible with new releases by our software suppliers, which could
result in product shipment and revenue recognition delays. In addition, if the
competitors of our suppliers develop superior
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<PAGE> 10
software, our products may not achieve market acceptance and we would lose
revenue unless we obtain a license for the superior software. We may not be able
to obtain new software licenses on commercially reasonable terms, or at all.
IF THIRD-PARTY SUPPLIERS OF EQUIPMENT FAIL TO DELIVER, WE COULD INCUR
SIGNIFICANT COSTS AND DELAYS IN PRODUCT SHIPMENT
We purchase hardware, such as print devices and scanners, from third-party
manufacturers and resell them under our brand as part of our systems. In
addition, we outsource the manufacturing of some of the hardware components of
our products. If those third party manufacturers fail to deliver these products
or components, we would have to find alternate suppliers, would incur
significant development costs and could experience delays in product shipments.
For example, our black and white print devices are purchased from a Japanese
manufacturer. It would take a significant amount of time and effort to find an
alternate black and white print device and develop the connectivity of that
device to the MicroPress. Failure to find alternative suppliers of other
components could affect our product availability and sales. Additionally, since
we purchase many parts and components from manufacturers in Asia, instability in
this region could impact the pricing or availability of these products.
OUR MARKET IS EXTREMELY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE GREATER
MARKET PRESENCE AND RESOURCES THAN WE HAVE
The market for our product is extremely competitive and we expect
competition to increase. Many of our existing and potential competitors have
longer operating histories, significantly greater resources and greater name
recognition than we have. As a result, these competitors may have an advantage
over us in gaining market acceptance, may respond more effectively to changes in
the market and may devote greater resources to the development, promotion, sale
and support of their products. Increased competition could result in a loss of
revenue as a result of loss of market share and significant price reductions,
reducing our profits.
OUR INTERNATIONAL SALES ARE SUBJECT TO REGULATORY, POLITICAL AND CURRENCY
EXCHANGE RATE RISKS WHICH COULD REDUCE OUR REVENUE
Revenue from customers outside the United States represented 33.7% of our
revenue in fiscal 1999 and 47.9% of our revenue for the first nine months of
fiscal 2000. Our international sales could decrease if tariffs, duties or taxes
increase the cost of our products in foreign countries. Our foreign product
sales could be limited by the imposition of government controls or political and
economic instability, resulting in lower revenues. We may also experience delays
in receipt of revenue or increased difficulties in collecting accounts
receivable.
Additionally, our results of operations could be harmed by changes in
currency exchange rates. Currently, all our sales are denominated in U.S.
dollars. If the value of the U.S. dollar increases relative to a particular
foreign currency, our products could become relatively more expensive. This
could result in a reduction in our sales in a particular country.
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, AND IF WE FAIL TO
DEVELOP AND MARKET NEW TECHNOLOGIES RAPIDLY, OUR RESULTS OF OPERATIONS WILL
SUFFER
Customers are demanding faster systems with more features and our
competitors are developing new technologies to meet these demands. If we do not
continually develop new technologies and improvements to our existing
technologies we will not remain competitive and our sales and our results of
operations will suffer.
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The product life cycle is shortening as new technologies are brought to
market, while development of new technologies requires an increasing amount of
time and money. We may experience delays in product development due to
technological constraints, which could result in lost sales. In addition, our
cost to develop the technologies may be so great that we cannot make a profit
selling products using these technologies. Finally, our competitors may develop
technologies that make our technologies obsolete or less attractive to potential
customers which would also harm our sales.
IF OUR PRODUCTS CONTAIN DEFECTS, OUR SALES COULD SUFFER AND WE COULD HAVE
INCREASED COSTS WHICH WOULD HURT OUR RESULTS OF OPERATIONS
Complex products like ours may contain defects or errors that can only be
detected when the product is in use. Despite extensive testing of our products,
we may release products into the market with undetected errors, which could
result in:
- the loss or delay of revenue;
- loss of market share;
- diversion of research and development resources; or
- increased service and warranty costs.
In addition, if our products are not reliable, we may lose credibility with
existing and potential customers, resulting in lost sales.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS,
WHICH COULD HARM OUR COMPETITIVE POSITION, RESULTING IN DECREASED REVENUE
Our success is based, in part, on our proprietary technology. If we cannot
protect our intellectual property and proprietary rights, we may not remain
competitive. Trade secret and copyright laws provide only limited protection of
our software, documentation and other written materials. We may not be able to
protect our rights if the patents for which we apply or have applied are not
granted or if our patents are challenged or invalidated. Further, because we
sell many of our products in foreign countries where intellectual property laws
are not well developed or are poorly enforced, we may not be able to protect our
proprietary technology in these countries.
A third party could reverse engineer our products, or bypass hardware
security devices and obtain access to our software, or independently develop
similar software or proprietary information and use it to compete with us.
INFRINGEMENT CLAIMS BY THIRD PARTIES COULD BE COSTLY AND CAUSE PRODUCT SHIPMENT
DELAYS
Third parties may file claims against us alleging infringement of their
patents, copyrights or other intellectual property rights. Regardless of its
merit, an infringement claim against us could:
- require significant management time and effort;
- result in costly litigation; or
- cause product shipment delays.
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Further, any claims may require us to enter into royalty or licensing agreements
which may not be obtainable on terms acceptable to us.
OUR FAILURE TO RETAIN AND ATTRACT PERSONNEL COULD HARM OUR BUSINESS, OPERATIONS
AND PRODUCT DEVELOPMENT EFFORTS
Our future success depends, in significant part, upon the continued service
of key personnel and our ability to attract, retain and motivate highly
qualified employees. In particular, the services of Michael E. Kohlsdorf, our
president and chief executive officer; E. Neal Tompkins, our executive vice
president and chief technology officer; and Michael W. Barry, our senior vice
president, development and engineering are critical to our business. If we lose
any of our key personnel, or fail to attract qualified new employees, our
business, operations and product development efforts would suffer. Although we
have employment agreements with Messrs. Kohlsdorf and Tompkins, these agreements
do not obligate them to remain in our employ. We do not have key man insurance
on any of our employees.
IF OUR SYSTEMS OR THE SYSTEMS OF OUR SUPPLIERS OR CUSTOMERS ARE NOT YEAR 2000
COMPLIANT, OUR BUSINESS COULD BE SEVERELY DISRUPTED
Although we have attempted to identify and address year 2000 issues related
to our business, we cannot be certain that all potential year 2000 issues have
been identified or corrected. Additionally, we cannot guarantee that the
third-party servers, printers, scanners and operating systems used in, or in
conjunction with, our products are year 2000 compliant. If our products, or
components used in our products, are not year 2000 compliant, we would have to
delay shipping our products until they are year 2000 compliant. Delays in
product shipments could result in lost revenue and harm to our reputation.
Additionally, we cannot assure you that our customers will not assert year 2000
related claims against us even if our products are year 2000 compliant, which
could require us to incur substantial costs and invest significant time
defending any claims.
As a result of year 2000 issues, customers may delay purchases of our
products. Any resulting changes in our customers' purchasing patterns could
result in decreased sales and revenue.
Further, if our internal systems or those of other third-party vendors,
such as utilities and telecommunications providers, are not year 2000 compliant,
our business could be materially disrupted.
OUR ARTICLES OF INCORPORATION AND BYLAWS AND PROVISIONS OF GEORGIA LAW COULD
MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE
IN YOUR INTEREST
Provisions of our articles of incorporation and bylaws as they will be
amended before closing could make it more difficult for a third party to acquire
us, even if doing so would be in the best interest of our shareholders. It could
be difficult to acquire us because:
- our directors serve for staggered terms;
- our directors may be removed only for cause by a supermajority vote of
our shareholders;
- our shareholders may act only at meetings, and not by written consent;
and
- we are subject to the fair-price and business combination provisions of
the Georgia corporate laws.
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Also, our board of directors can issue preferred stock and determine the price,
rights, and preferences of this preferred stock without shareholder approval.
This authority gives our board greater flexibility to take actions such as
making acquisitions. However, if we issue preferred stock, a third party may
find it more difficult to acquire control of us.
OUR OFFICERS AND DIRECTORS WILL HAVE SIGNIFICANT INFLUENCE OVER MATTERS
REQUIRING SHAREHOLDER APPROVAL, WHICH COULD DELAY OR PREVENT A CHANGE OF CONTROL
After this offering, our directors and officers and their affiliates will
own about 33.4% of our outstanding common stock. As a result, they will have
significant influence over all matters requiring shareholder approval, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying or preventing a
change in control of T/R Systems.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
THE PRICE YOU PAID
There has been no public market for our common stock and we cannot assure
you that an active trading market will develop or that you will be able to
resell your shares at the price you paid.
Additionally, in recent years, the stock market in general, and the stock
prices of technology companies in particular, have experienced extreme price
fluctuations, sometimes unrelated to the operating performance of particular
companies. These market fluctuations may result in a material decline in the
market price of our common stock. The price of our common stock after this
offering is likely to fluctuate due to many factors, including:
- variations in actual, anticipated or estimated quarterly earnings;
- announcements by competitors; and
- future sales of significant amounts of our common stock.
9
<PAGE> 14
FORWARD-LOOKING STATEMENTS
This prospectus, including the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" sections, contains
forward-looking statements that involve risks and uncertainties. The statements
relate to future events or our future financial performance. In many cases, you
can identify forward-looking statements by the use of words such as may, will,
should, expects, plans, anticipates, believes, estimates, predicts, potential or
continue, or the negative of these terms or other comparable terminology. Our
actual results could be materially different from those anticipated in these
forward-looking statements as a result of a number of factors, including the
risks we face described above and elsewhere in this prospectus. Before you
decide to invest in our common stock, you should be aware that if any of the
events described in the "Risk Factors" section and elsewhere in this prospectus
occur, they could have an adverse affect on our business, financial condition
and results of operations. We are not obligated to update any forward-looking
statements.
10
<PAGE> 15
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
2,880,000 shares of common stock offered by us will be $23.2 million. Our
calculation of the net proceeds assumes an initial public offering price of
$9.00 per share, the mid-point of the initial public offering price range of
$8.00 to $10.00, and is net of the estimated underwriting discounts and
commissions and estimated offering expenses of $2.7 million payable by us. We
will not receive any proceeds from shares sold by the selling shareholder.
The principal purposes of this offering are to establish a public market
for our common stock, to facilitate future access by T/R Systems to the public
equity markets and to obtain additional working capital. We have not allocated
any portion of the proceeds for any particular purpose. We intend to use the
proceeds for general corporate purposes, including working capital, research and
development and capital expenditures. We may in the future use a portion of the
proceeds to acquire or invest in complementary products, technologies or
businesses. However, we have no present plans or commitments and are not
currently engaged in any negotiations for any of these types of transactions.
Pending our use of these proceeds, we will invest them in interest-bearing
deposit accounts, certificates of deposit, government securities or short-term
and investment-grade financial instruments of varying maturities. In addition,
we will not invest more than 10% of the proceeds in securities of any one
issuer, other than the U.S. government.
DIVIDEND POLICY
We have never paid cash dividends and do not anticipate paying cash
dividends in the future. We currently intend to retain any future earnings to
fund the development and growth of our business. Our revolving line of credit
does not allow us to declare or pay cash dividends.
11
<PAGE> 16
CAPITALIZATION
The following table presents T/R Systems' capitalization as of October 31,
1999 on an actual basis, on a pro forma basis and on a pro forma as adjusted
basis to reflect:
- the conversion of all outstanding preferred shares into 6,068,913 shares
of common stock, which will occur before the closing of this offering on
a pro forma and a pro forma as adjusted basis; and
- our sale of 2,880,000 shares of common stock in this offering at an
assumed initial offering price of $9.00 per share, the mid-point of the
initial public offering price range, and our receipt of the net proceeds
from that sale and the use of a portion of those proceeds to repay
long-term debt on a pro forma as adjusted basis.
You should read this table together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and the related notes.
<TABLE>
<CAPTION>
OCTOBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt............................................ $ 61 $ 61 $ --
Redeemable, convertible preferred stock; 9,500,000 shares
designated:
Series A redeemable, convertible preferred stock;
5,000,000 shares designated; 4,799,999 shares issued
and outstanding, actual; none issued or outstanding,
pro forma and pro forma as adjusted................... 4,789 -- --
Series B redeemable, convertible preferred stock;
3,000,000 shares designated; 2,961,585 shares issued
and outstanding, actual; none issued or outstanding,
pro forma and pro forma as adjusted................... 7,538 -- --
Series C redeemable, convertible preferred stock;
1,500,000 shares designated; 1,215,500 shares issued
and outstanding, actual; none issued or outstanding,
pro forma and pro forma as adjusted................... 2,732 -- --
Shareholders' equity (deficit):
Preferred stock; 12,000,000 shares authorized; 9,500,000
shares designated as redeemable, convertible preferred
stock; 222,222 shares designated as convertible
preferred stock; 222,222 shares of series D
convertible preferred stock issued and outstanding,
actual; none issued or outstanding, pro forma and pro
forma as adjusted..................................... 2 -- --
Common stock; 88,000,000 shares authorized, actual and
pro forma as adjusted; 2,551,247 shares issued and
outstanding, actual; 8,620,160 shares issued and
outstanding, pro forma; 11,500,160 shares issued and
outstanding, pro forma as adjusted.................... 26 86 115
Additional paid-in capital.............................. 2,171 17,172 40,349
Deferred compensation................................... (68) (68) (68)
Accumulated deficit..................................... (10,912) (10,912) (10,912)
-------- -------- -------
Total shareholders' equity (deficit)............... (8,781) 6,278 29,484
-------- -------- -------
Total capitalization............................. $ 6,339 $ 6,339 $29,484
======== ======== =======
</TABLE>
The number of shares of common stock outstanding as of October 31, 1999
does not reflect:
- 1,610,181 shares issuable under options outstanding as of October 31,
1999 at a weighted average exercise price of $2.02 per share; or
- 976,708 additional shares reserved for issuance under our stock plans.
12
<PAGE> 17
DILUTION
Our pro forma net tangible book value as of October 31, 1999 was $6.3
million, or $0.73 per share of common stock. We have calculated this amount by:
- subtracting our total liabilities from our total tangible assets; and
- then dividing the difference by the total pro forma number of shares of
common stock outstanding, including the number of shares of common stock
that will be issued upon the conversion of our preferred stock before the
closing of this offering.
If we give effect to our sale of 2,880,000 shares of common stock in this
offering, our adjusted pro forma net tangible book value as of October 31, 1999
would have been $29.5 million, or $2.56 per share. This amount represents an
immediate increase in pro forma net tangible book value of $1.83 per share to
existing stockholders and an immediate dilution of $6.44 per share to new
investors. The following table illustrates this dilution of net tangible book
value per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $9.00
Pro forma net tangible book value per share
as of October 31, 1999................................. $0.73
Increase per share attributable to new investors.......... 1.83
-----
Pro forma net tangible book value per share after the
offering.................................................. 2.56
-----
Dilution per share to new investors......................... $6.44
=====
</TABLE>
The following table summarizes, on the pro forma basis discussed above, the
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid by existing shareholders and by the
investors purchasing shares of common stock in this offering, before deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us. Shares to be sold by the selling shareholder are excluded from
the shares purchased by the new investors and included in shares purchased by
the existing shareholders in this table.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 8,620,160 75.0% $17,136,000 39.8% $1.99
New investors....................... 2,880,000 25.0 25,920,000 60.2 9.00
---------- ----- ----------- -----
Totals.................... 11,500,160 100.0% $43,056,000 100.0%
========== ===== =========== =====
</TABLE>
Sales by the selling shareholder in this offering will have the following
effect:
- it will reduce the shares held by existing shareholders to 8,500,160
shares, or 73.9% of the total shares outstanding after this offering; and
- it will increase the shares held by new investors to 3,000,000, or 26.1%
of the total shares outstanding after this offering.
If the underwriters' over-allotment is exercised in full, the number of shares
held by new investors will increase to 3,450,000 shares, or 30.0% of the total
number of shares of common stock outstanding after this offering.
The above computations exclude 1,610,181 shares of common stock issuable
upon the exercise of options outstanding as of October 31, 1999 at a weighted
average exercise price of $2.02 per share. If any of those options are
exercised, new investors will incur further dilution.
13
<PAGE> 18
SELECTED FINANCIAL DATA
The following data were derived from our financial statements audited by
Deloitte & Touche LLP, independent auditors, presented elsewhere in this
prospectus:
- selected financial data for the fiscal years ended January 31, 1997, 1998
and 1999; and
- selected financial data as of January 31, 1998 and 1999.
The following data were derived from our financial statements audited by
Deloitte & Touche LLP, independent auditors, not included in this prospectus:
- selected financial data for the fiscal year ended January 31, 1996; and
- selected financial data as of January 31, 1996 and 1997.
The selected financial data as of and for the period ended January 31, 1995
were derived from our unaudited financial statements.
The selected financial data as of and for the nine months ended October 31,
1998 and 1999 were derived from our unaudited interim financial statements
presented elsewhere in this prospectus. The unaudited financial statements
include all adjustments, consisting solely of normal recurring accruals, that we
consider necessary for a fair presentation of our financial position and results
of operations for these periods. Results of operations for the nine months ended
October 31, 1999 are not necessarily indicative of the results to be expected
for the entire year.
You should read the following selected financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED JANUARY 31, OCTOBER 31,
----------------------------------------------- ------------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ 94 $ 1,194 $ 4,036 $12,032 $15,847 $12,034 $15,704
Cost of sales.................................. 27 1,013 3,387 6,107 6,579 5,041 6,662
------- ------- ------- ------- ------- ------- -------
Gross profit................................... 67 181 649 5,925 9,268 6,993 9,042
Operating expenses:
Research and development..................... 1,610 1,732 1,786 2,164 3,202 2,423 2,555
Sales and marketing.......................... -- 590 2,185 3,542 4,891 3,532 4,668
General and administrative................... 115 729 1,011 1,623 1,708 1,285 1,488
------- ------- ------- ------- ------- ------- -------
Total operating expenses................... 1,725 3,051 4,982 7,329 9,801 7,240 8,711
------- ------- ------- ------- ------- ------- -------
Operating income (loss)........................ (1,658) (2,870) (4,333) (1,404) (533) (247) 331
Interest income, net........................... 1 51 213 186 150 135 81
Other expenses................................. -- -- -- -- (240) (240) --
------- ------- ------- ------- ------- ------- -------
Net income (loss).............................. $(1,657) $(2,819) $(4,120) $(1,218) $ (623) $ (352) $ 412
======= ======= ======= ======= ======= ======= =======
Basic net income (loss) per share.............. $ (1.14) $ (1.82) $ (2.43) $ (0.60) $ (0.26) $ (0.15) $ 0.16
======= ======= ======= ======= ======= ======= =======
Basic weighted average shares outstanding...... 1,460 1,555 1,702 2,052 2,444 2,429 2,532
======= ======= ======= ======= ======= ======= =======
Diluted net income (loss) per share............ $ (1.14) $ (1.82) $ (2.43) $ (0.60) $ (0.26) $ (0.15) $ 0.04
======= ======= ======= ======= ======= ======= =======
Diluted weighted average shares outstanding.... 1,460 1,555 1,702 2,052 2,444 2,429 9,700
======= ======= ======= ======= ======= ======= =======
Pro forma basic net income (loss) per share.... $ (0.07) $ 0.05
======= =======
Pro forma basic weighted average shares
outstanding.................................. 8,378 8,549
======= =======
Pro forma diluted net income (loss) per
share........................................ $ (0.07) $ 0.04
======= =======
Pro forma diluted weighted average shares
outstanding.................................. 8,378 9,700
======= =======
</TABLE>
14
<PAGE> 19
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
------------------------------------------------ -----------
1995 1996 1997 1998 1999 1999
------- ------- ------- ------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 685 $ 7,721 $ 2,826 $ 3,527 $ 1,966 $ 3,344
Working capital............. 526 8,251 3,820 5,117 3,892 5,444
Total assets................ 819 9,721 5,459 8,184 7,770 10,067
Redeemable, convertible
preferred stock........... 2,348 12,252 12,272 15,020 15,042 15,059
Total shareholders'
deficit................... (1,703) (4,510) (8,635) (9,759) (10,238) (8,781)
</TABLE>
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
T/R Systems was founded in 1991 as an engineering services company
providing consulting services to the printing, copying and multimedia markets.
In 1993, we began development of our own products and in 1995, we introduced the
MicroPress Cluster Printing System, our digital document processing and printing
system.
We derive our revenue primarily from the sale of digital document
processing and printing systems and related add-on software and hardware.
Additionally, we receive revenue from:
- the sale of consumable products, such as toner, and replacement parts
that support our systems;
- engineering services for the development of technology;
- customer service plans; and
- royalties for technology previously licensed.
As required by American Institute of Certified Public Accountants Statement
of Position 97-2 Software Revenue Recognition, we recognize revenue from
printing systems when persuasive evidence of an arrangement exists, the system
has been shipped, the fee is fixed or determinable and collectibility of the fee
is probable. Under multiple element arrangements, we allocate revenue to the
various elements based on vendor-specific objective evidence of fair value. Our
products do not require significant customization. Before the effective date of
this statement, we recognized revenue on printing systems upon shipment. The
adoption of this statement had no effect on our accounting for revenue. We
recognize revenue from the sale of consumables upon shipment.
We recognize revenue from customer service plans ratably over the terms of
each plan, typically one to three years. Engineering service fees are recognized
as the services are rendered. Nonrefundable prepaid royalties are recognized as
revenue over the term of the royalty agreement, based on the greater of actual
royalties earned or the straight-line method. Revenue from customer service
plans, engineering services and royalties have each been less than 10% of total
revenue in each of the last three fiscal years and the nine month periods ended
October 31, 1998 and 1999.
We distribute our products in North America and internationally through a
network of independent dealers and through our distribution relationship with
Minolta. We sold our first systems under the Minolta OEM agreement in February
1999. In fiscal 1998 and 1999, we sold systems under an OEM agreement with Mita
Industrial Co., Ltd. Mita, which sold our systems in Japan, discontinued orders
of our systems in June 1998 and subsequently entered into reorganization
proceedings. Since then, our sales to Mita have been negligible.
One factor that affects our gross margin is product configuration. Product
configuration, which is determined by the end user, typically affects gross
margin due to the relative amount of software and hardware in each system. The
relative amount of add-on software and hardware we sell also affects our gross
margin. The hardware in our systems typically includes two or more print devices
and, in some instances, a digital scanner. Because we purchase these hardware
devices from third parties for resale, we typically realize lower margins on
them than we realize on our software products.
16
<PAGE> 21
Sales to international customers were $5.3 million, or 33.7% of revenue, in
fiscal 1999 and $7.5 million, or 47.9% of revenue, in the first nine months of
fiscal 2000. Of the $7.5 million of sales to international customers in the
first nine months of fiscal 2000, $3.8 million, or 24.2% of revenue, was billed
to Minolta, a Japanese company, but the product was shipped to Minolta's United
States subsidiary for re-sale in the United States. We expect that international
sales will continue to represent a significant portion of our revenue.
Currently, all our sales are denominated in U.S. dollars. If the value of the
U.S. dollar increases relative to a particular foreign currency, our products
could become relatively more expensive, which could result in a reduction in our
sales in a particular country.
As of January 31, 1999, we had approximately $8.2 million in tax net
operating loss carryforwards which, if not utilized, expire at various dates
beginning in 2007. We must recognize taxable income in future periods to be able
to utilize these net operating loss carryforwards. We have not recognized any
benefit from the future use of these carryforwards because we are uncertain that
we will be able to utilize them. Further, under the ownership change limitations
of the Internal Revenue Code of 1986, our utilization of approximately $658,000
of these carryforwards is subject to an annual limitation of approximately
$330,000. If we use these carryforwards in future periods, we will incur
alternative minimum taxes in those periods. We expect that the completion of our
initial public offering will result in another change in ownership that may
result in additional limitations on the use of our net operating loss
carryforwards.
We record software development costs as required by Financial Accounting
Standards Board Statement No. 86. To date, we have expensed software development
costs as incurred due to the immaterial amount of costs incurred between the
establishment of technological feasibility and the time that the software is
generally available for sale.
RESULTS OF OPERATIONS
The following table presents operating data as a percentage of revenue.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
JANUARY 31, OCTOBER 31,
------------------------ --------------
1997 1998 1999 1998 1999
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 83.9 50.8 41.5 41.9 42.4
------ ----- ----- ----- -----
Gross profit........................... 16.1 49.2 58.5 58.1 57.6
Operating expenses:
Research and development............. 44.3 18.0 20.2 20.1 16.3
Sales and marketing.................. 54.1 29.4 30.9 29.4 29.7
General and administrative........... 25.0 13.5 10.8 10.7 9.5
------ ----- ----- ----- -----
Total operating expenses..... 123.4 60.9 61.9 60.2 55.5
------ ----- ----- ----- -----
Operating income (loss)................ (107.3) (11.7) (3.4) (2.1) 2.1
Interest income, net................... 5.3 1.5 0.9 1.1 0.5
Other expense.......................... -- -- (1.5) (2.0) --
------ ----- ----- ----- -----
Net income (loss)...................... (102.0)% (10.2)% (4.0)% (3.0)% 2.6%
====== ===== ===== ===== =====
</TABLE>
COMPARISON OF THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
Revenue. Revenue for the nine months ended October 31, 1999 was $15.7
million, representing an increase of 30.5% over revenue of $12.0 million for the
nine months ended
17
<PAGE> 22
October 31, 1998. This increase was primarily due to an increase in revenue from
our OEM relationship with Minolta. We began shipping systems under our OEM
agreement with Minolta in February 1999. This increase was partially offset by a
decrease in revenue from our OEM relationship with Mita. Revenue from Mita for
the nine months ended October 31, 1999 was negligible, and we do not currently
have any significant orders from Mita for future shipments.
Revenue from sales to customers outside the United States was $7.5 million
for the nine months ended October 31, 1999, representing 47.9% of revenue, and
$3.8 million for the nine months ended October 31, 1998, representing 31.7% of
revenue. Of the $7.5 million in sales to international customers for the nine
months ended October 31, 1999, $3.8 million, or 24.2% of revenue, was billed to
Minolta, but the product was shipped to Minolta's United States subsidiary for
re-sale in the United States. The balance of international revenue for the nine
months ended October 31, 1999 reflected sales primarily to Minolta and other
dealers in Europe and Canada. International sales for the nine months ended
October 31, 1998 represented sales primarily to Japan and, to a lesser extent,
sales in Europe.
Gross Profit. Gross profit, revenue less cost of sales, for the nine
months ended October 31, 1999 was $9.0 million, as compared to $7.0 million for
the nine months ended October 31, 1998. Cost of sales, which consists primarily
of third-party hardware, principally print devices, board components, finished
boards and consumables, and third-party software, as well as labor and overhead,
for the nine months ended October 31, 1999 was $6.7 million, as compared to $5.0
million for the nine months ended October 31, 1998. Gross margin, or gross
profit as a percentage of revenue, for the nine months ended October 31, 1999
was 57.6% as compared to 58.1% for the nine months ended October 31, 1999.
Research and Development. Research and development expenses consist
primarily of employee salaries and benefits, equipment depreciation, software
and hardware supplies used in product development and an allocation of overhead.
Research and development costs are expensed as incurred. These expenses
increased 5.4% to $2.6 million, or 16.3% of revenue, for the nine months ended
October 31, 1999, from $2.4 million, or 20.1% of revenue, for the nine months
ended October 31, 1998. The increase was primarily due to an increase in
employee salaries and benefits. We believe that research and development
spending, including spending for employee salaries and benefits, will increase
in the future as we add hardware connectivity and software functionality to the
MicroPress.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries and benefits, sales commissions, trade show costs,
advertising, technical support and travel-related expenses. Sales and marketing
expenses increased 32.2% to $4.7 million, or 29.7% of revenue, for the nine
months ended October 31, 1999, from $3.5 million, or 29.4% of revenue, for the
nine months ended October 31, 1998. The increase was primarily due to the growth
in our sales force and associated increases in salaries and benefits of $533,000
and travel-related expenses of $265,000, as well as an increase in sales
commissions of $220,000 due to an increase in sales. We believe that we will
need to continue to increase our sales and marketing efforts to address new
markets and support additional OEM customers in the future.
General and Administrative. General and administrative expenses include
employee salaries and benefits, professional service fees and employee
recruiting expenses. General and administrative expenses increased 15.8% to $1.5
million, or 9.5% of revenue, for the nine months ended October 31, 1999, from
$1.3 million, or 10.7% of revenue, for the nine months ended October 31, 1998.
This increase was due primarily to an increase in headcount resulting in a
$133,000 increase in salaries and benefits. Additionally, the provision for bad
debt increased $45,000 due to an increase in revenue and accounts receivable. We
believe our general and
18
<PAGE> 23
administrative expenses will continue to increase as we hire additional
administrative staff and incur additional expenses, including insurance, annual
and other public reporting costs and professional service fees.
Interest Income, Net. Interest income, net consists of income generated
from our cash, cash equivalents and short-term investments, net of interest
expense paid on our equipment line of credit. Interest income was $81,000 for
the nine months ended October 31, 1999 and $135,000 for the nine months ended
October 31, 1998. The decrease in interest income was the result of a decrease
in funds available for short-term investment due to the use of cash to fund
operations.
Other Expense. During the first nine months of fiscal 1999, we expensed
$240,000 for legal and audit services related to a then planned initial public
offering. In July 1998, we suspended our plans to go public, necessitating the
recognition of those expenses in fiscal 1999. No similar expenses were incurred
in the first nine months of fiscal 2000.
COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
Revenue. Revenue was $15.8 million for fiscal 1999, representing an
increase of 31.7% over revenue of $12.0 million for fiscal 1998. Revenue for
fiscal 1998 increased 198.1% over revenue of $4.0 million for fiscal 1997.
The increase from fiscal 1998 to fiscal 1999 was due in part to an increase
in sales of the MicroPress through both our independent dealer channel and our
OEM arrangement with Mita. Of the $3.8 million increase in revenue, $2.1 million
was due to an increase in sales of the MicroPress and related hardware and
software components. Adding to the year-over-year increase in revenue were:
- a $664,000 increase from engineering service fees;
- a $417,000 increase from royalties;
- a $402,000 increase from the sale of consumable products; and
- a $150,000 increase from customer support plans.
The increase from fiscal 1997 to fiscal 1998 was primarily the result of
increased sales of the MicroPress, including the systems sold under our OEM
agreement with Mita. This increase in the number of systems sold represented
$5.0 million of the $8.0 million increase in total revenue. Additionally, the
average price per system sold increased in fiscal 1998 over fiscal 1997
primarily due to the enriched content and additional connectivity of the systems
sold. Enhancements to the MicroPress, which increased the fiscal 1998 average
selling price, included the introduction of a scanner and additional devices and
software. This increase in the average selling price of systems sold represented
$1.8 million of the $8.0 million increase in total revenue. The fiscal 1998
increase in revenue was also partially attributable to a $769,000 increase in
sales of add-on hardware and software and a $302,000 increase in sales of
consumable products to support the MicroPress as a result of more systems being
in service.
During fiscal 1999, we derived $11.0 million, or 69.3% of our revenue, from
sales in the United States. This compares to $8.0 million, or 66.4% of revenue,
in fiscal 1998 and $2.3 million, or 55.8% of revenue, in fiscal 1997. The
remaining revenue in fiscal 1999 and fiscal 1998 was primarily generated by
sales in Asia through our OEM agreement with Mita, sales to Minolta for research
and development purposes and sales in Europe. The balance of revenue in fiscal
1997 reflected sales in Europe and royalty revenue from Asia. Domestic revenue
grew at a
19
<PAGE> 24
faster rate than international revenue during the three years ended January 31,
1999 because of a more established domestic distribution infrastructure and our
greater focus on the domestic market.
Gross Profit. Our gross profit was $9.3 million in fiscal 1999, $5.9
million in fiscal 1998, and $649,000 in fiscal 1997. Gross margin was 58.5% in
fiscal 1999, 49.2% in fiscal 1998 and 16.1% in fiscal 1997. The increase in
gross margin from fiscal 1998 to fiscal 1999 was primarily due to an improvement
in OEM gross margin reflecting the systems sold to Mita and Minolta, which
included more high-margin software and less hardware than the systems sold to
Mita in fiscal 1998. Additionally, our margin improved due to an increase in OEM
revenue as a percent of total revenue. We typically realize higher margins on
OEM revenue than we do through our independent dealer network as the OEM systems
typically include less hardware than systems sold through independent dealers.
The improvement in gross margin from fiscal 1997 to fiscal 1998 was due to
reductions in component costs, the allocation of fixed costs over a larger sales
volume and the introduction of relatively high margin software modules and our
PrintLinks in fiscal 1997 and fiscal 1998. PrintLinks are the MicroPress'
interface to supported digital printers and copiers not sold by us.
Research and Development. Research and development expenses were $3.2
million in fiscal 1999, $2.2 million in fiscal 1998, and $1.8 million in fiscal
1997. Research and development expenses represented 20.2% of revenue in fiscal
1999, 18.0% of revenue in fiscal 1998 and 44.3% of revenue in fiscal 1997.
Research and development expenses increased 48.0% from fiscal 1998 to fiscal
1999 and 21.2% from fiscal 1997 to fiscal 1998. $742,000 of the $1.0 million
increase from fiscal 1998 to fiscal 1999 was due to an increase in salaries and
benefits resulting from the hiring of additional research and development
personnel to assist in the further development of the MicroPress. The remaining
increase was due to an increase in spending on supplies, hardware and software
for project development and an increase in depreciation expense on equipment
purchased for development of the MicroPress' connectivity to additional devices.
The increase from fiscal 1997 to fiscal 1998 was also due primarily to an
increase in employee salaries and benefits as a result of hiring additional
personnel.
Sales and Marketing. Sales and marketing expenses were $4.9 million in
fiscal 1999, or 30.9% of revenue. These expenses were $3.5 million in fiscal
1998, or 29.4% of revenue, and $2.2 million in fiscal 1997, or 54.1% of revenue.
$773,000 of the increase of $1.3 million from fiscal 1998 to fiscal 1999 was due
to an increase in employee salaries and benefits due to an increase in our sales
force and marketing personnel during fiscal 1999 and the second half of fiscal
1998. The year-over-year increase was also due to an increase in travel expenses
of $244,000. The increase of $1.4 million, or 62.1%, from fiscal 1997 to fiscal
1998 was primarily due to a $589,000 increase in salaries and benefits as a
result of the addition of new sales personnel and the establishment of a
marketing department in the second half of fiscal 1997. Other costs that
contributed to the overall increase in sales and marketing expenses included a
$141,000 increase in travel expense, a $96,000 increase in payments for outside
consulting services and a $95,000 increase in trade show costs.
General and Administrative. General and administrative expenses were $1.7
million in fiscal 1999 compared to $1.6 million in fiscal 1998 and $1.0 million
in fiscal 1997. These expenses represented 10.8% of revenue in fiscal 1999,
13.5% of revenue in fiscal 1998 and 25.1% of revenue in fiscal 1997. These
expenses increased $85,000, or 5.2%, from fiscal 1998 to fiscal 1999 and
$612,000, or 60.5%, from fiscal 1997 to fiscal 1998. The increase from fiscal
1997 to fiscal 1998 was primarily due to the $180,000 charge in fiscal 1998
related to our plan to move our headquarters and to a $241,000 increase in
employee compensation for fiscal 1998 over fiscal 1997 resulting from the hiring
of additional administrative employees and improved
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<PAGE> 25
operating performance. Additionally, we incurred a $69,000 increase in the
provision for doubtful accounts, a $57,000 increase in professional service and
a $34,000 increase in travel-related expenses from fiscal 1997 to fiscal 1998.
Interest Income, Net. Interest income, net was $150,000 in fiscal 1999,
$186,000 in fiscal 1998 and $213,000 in fiscal 1997. The decrease in interest
income over the three year period was due to a decrease in funds available for
short-term investment during the period because we used cash to fund operations
and purchase property and equipment.
Other Expense. In fiscal 1999, we expensed $240,000 for legal and audit
services related to a then planned initial public offering. In July 1998, we
suspended our plans to go public, necessitating the recognition of those
expenses in fiscal 1999. No similar expenses were incurred in fiscal 1998 or
fiscal 1997.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly statement of operations
data for the eleven quarters ended October 31, 1999. This data has been prepared
on a basis consistent with our audited financial statements included elsewhere
in this prospectus. This data includes all adjustments, consisting solely of
normal recurring adjustments, that we believe necessary for a fair presentation
of this information. The operating results for any quarter are not necessarily
indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1997 1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $1,713 $2,169 $3,151 $4,999 $4,842 $3,498 $3,694 $3,813 $4,656
Cost of sales........ 965 1,039 1,384 2,719 2,025 1,489 1,527 1,538 1,946
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit......... 748 1,130 1,767 2,280 2,817 2,009 2,167 2,275 2,710
Total operating
expenses............ 1,384 1,639 1,864 2,442 2,409 2,374 2,457 2,561 2,651
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss).............. (636) (509) (97) (162) 408 (365) (290) (286) 59
Interest income,
net................. 45 52 49 40 44 52 39 15 16
Other expense........ -- -- -- -- -- (240) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).... $ (591) $ (457) $ (48) $ (122) $ 452 $ (553) $ (251) $ (271) $ 75
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
-------------------
JULY 31, OCT. 31,
1999 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Revenue.............. $5,233 $5,815
Cost of sales........ 2,264 2,452
------ ------
Gross profit......... 2,969 3,363
Total operating
expenses............ 2,859 3,201
------ ------
Operating income
(loss).............. 110 162
Interest income,
net................. 26 39
Other expense........ -- --
------ ------
Net income (loss).... $ 136 $ 201
====== ======
</TABLE>
The following table presents the same data as a percentage of revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
APR. 30, JUL. 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30,
1997 1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........ 56.3 47.9 43.9 54.4 41.8 42.6 41.3 40.3 41.8
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit......... 43.7 52.1 56.1 45.6 58.2 57.4 58.7 59.7 58.2
Total operating
expenses............ 80.8 75.6 59.2 48.9 49.7 67.9 66.5 67.2 56.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income
(loss).............. (37.1) (23.5) (3.1) (3.3) 8.5 (10.5) (7.8) (7.5) 1.3
Interest income,
net................. 2.6 2.4 1.6 0.8 0.9 1.5 1.1 0.4 0.3
Other expense........ -- -- -- -- -- (6.9) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).... (34.5)% (21.1)% (1.5)% (2.5)% 9.4% (15.9)% (6.7)% (7.1)% 1.6%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
THREE MONTHS ENDED
-------------------
JULY 31, OCT. 31,
1999 1999
-------- --------
<S> <C> <C>
Revenue.............. 100.0% 100.0%
Cost of sales........ 43.3 42.2
------ ------
Gross profit......... 56.7 57.8
Total operating
expenses............ 54.6 55.0
------ ------
Operating income
(loss).............. 2.1 2.8
Interest income,
net................. 0.5 0.7
Other expense........ -- --
------ ------
Net income (loss).... 2.6% 3.5%
====== ======
</TABLE>
Revenue for the fourth quarter of fiscal 1998 and first quarter of fiscal
1999 included sales under our OEM agreement with Mita. Sales to Mita represented
41.1% of revenue in the fourth quarter of fiscal 1998 and 33.9% in the first
quarter of fiscal 1999. Mita discontinued orders of our systems during the
second quarter of fiscal 1999 and subsequently entered reorganization
proceedings. Since then, our sales to Mita have been negligible. As a result of
the Mita reorganization, we reserved and subsequently wrote-off during fiscal
2000 $76,000 of accounts receivable. At October 31,1999, we had no amounts due
from Mita outstanding. Revenue increased about $843,000, or 22.1%, from the
fourth quarter of fiscal 1999 to the first quarter of fiscal 2000. This increase
was primarily due to an increase in revenue recognized under our OEM agreement
with Minolta. During the first quarter of fiscal 2000, we began shipping systems
to Minolta under their OEM agreement.
Gross margin decreased from 56.1% in the third quarter of fiscal 1998 to
45.6% in the fourth quarter of fiscal 1998. This decrease was primarily due to a
charge in cost of sales for the write-down in the value of some of our black and
white printers in the fourth quarter totaling $208,000. Additionally, this
decrease was due to fourth quarter fiscal 1998 results including systems sold to
Mita with a higher proportion of hardware than systems sold to Mita during the
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<PAGE> 27
third quarter. Systems sold to Mita in the first quarter of fiscal 1999 included
less hardware than those shipped in the fourth quarter of fiscal 1998, resulting
in improved margins from the fourth quarter of fiscal 1998 as compared to the
first quarter of fiscal 1999. We typically realize higher margins on software
than we do on the hardware we purchase from third-party manufacturers.
FLUCTUATIONS IN QUARTERLY RESULTS
T/R Systems' quarterly results of operations have fluctuated in the past
and we believe they will continue to do so in the future. Our future results of
operations will depend on many factors, including:
- changes in the average selling price of, and customer demand for, our
products;
- competitive market conditions, including price competition;
- the level of sales promotion activities, such as advertising, by us, our
OEM customers and our competitors;
- the general level of sales of printers and printer/copiers which connect
to our products;
- the cost and availability of components of our products;
- the mix of sales between our OEM customers and our dealer network;
- product configurations and the gross margin changes resulting from
variations in the proportion of hardware and software in systems sold;
- third-party funding of our development of technology to allow their print
devices to connect to our systems; and
- the pace of the shift to digital print technology.
Additionally, we anticipate that our operating expenses will continue to
increase. If our sales in any quarter do not also increase, our results of
operations for that quarter will be adversely affected. For these reasons, we
believe that quarter-to-quarter comparisons of our results of operations are not
necessarily meaningful and that you should not rely on our results of operations
in any particular quarter as necessarily indicative of future performance.
LIQUIDITY AND CAPITAL RESOURCES
From inception, we have funded our operations and investments in property
and equipment primarily through the private placement of preferred stock
totaling about $16.1 million. We have obtained additional funding through the
private placement of our common stock primarily with our founders, other
employees and private investors. To date, we have received $1.2 million through
the sale of common stock.
Net cash used in operating activities was $929,000 in fiscal 1999, $1.7
million in fiscal 1998 and $4.2 million in fiscal 1997. The decrease from fiscal
1998 to fiscal 1999 was primarily due to a decrease in the operating loss in
fiscal 1999. The decrease from fiscal 1997 to fiscal 1998 was also primarily due
to a decrease in the operating loss in fiscal 1998. However, the decrease in
fiscal 1998 was partially offset by an increase in accounts receivable due in
part to the timing of payments from Mita during the fourth quarter of fiscal
1998.
Net cash provided by operating activities was $681,000 for the nine months
ended October 31, 1999, as compared to net cash used in operating activities of
$483,000 for the nine
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<PAGE> 28
months ended October 31, 1998. The improvement in operating cash flow was
primarily due to our recording net income of $412,000 for the first nine months
of fiscal 2000 compared to a net loss of $352,000 for the first nine months of
fiscal 1999. Additionally, cash increased as a result of payments for customer
service plans and shipments to customers made during the nine months ended
October 31, 1999 for which the revenue recognition process was not complete. The
increase in cash due to increases in net income and deferred revenue were
partially offset by an increase in accounts receivable, due to an increase in
revenue, and a decrease in accounts payable, due to the timing of payments to
our vendors. At October 31, 1999, deferred revenue of $705,000 represented
amounts relating to the sale of printing systems and customer service plans for
which the revenue recognition process was not complete.
Net cash used for investing activities was $944,000 in fiscal 1999,
$619,000 in fiscal 1998 and $335,000 in fiscal 1997, reflecting purchases of
property and equipment. Cash spent on purchases of property and equipment was
$276,000 for the nine months ended October 31, 1999 and $791,000 for the nine
months ended October 31, 1998. Included in this fiscal 1999 total is spending on
equipment used in product development and for trade shows and demonstration
equipment for the MicroPress. The total for the nine months ended October 31,
1998 includes furniture and leasehold improvements purchased for our new office
space which we moved into during the first nine months of fiscal 1999. We
anticipate that we will spend about $400,000 for property and equipment
purchases during the fiscal year ending January 31, 2000.
In October 1997, we entered into a loan and security agreement with a
commercial bank. Under this agreement, we can borrow up to $3.0 million for
general working capital purposes under a revolving line of credit. The amount
available under this line is limited to the lesser of 80% of eligible accounts
receivable or $3.0 million less any letters of credit outstanding under the
agreement. At October 31, 1999, we had a $200,000 letter of credit outstanding
under the agreement and up to $1.6 million available under the line. Loans under
the line bear interest, payable monthly, at the bank's prime rate plus
three-quarters of one percent, 9.0% at October 31, 1999. The line expires in
October 2000. Additionally, in March 1998, the agreement was amended to provide
for an additional revolving line of credit of $250,000, which we had available
through December 1998 for the purchase of property and equipment. This
additional line bears interest at the bank's prime rate plus one and one-half
percent, 9.75% at October 31, 1999. At October 31, 1999, we had $113,000
outstanding under this additional line which is being repaid over 36 months. Our
assets, excluding intellectual property rights, are pledged as collateral under
both lines of credit. The agreement provides for covenants on the part of T/R
Systems, including the maintenance of a quick ratio, excluding deferred revenue,
of 1.5 to 1.0 and a minimum net worth, including preferred stock, of $4.5
million, as well as limitations on the incurrence of additional indebtedness and
the payment of cash dividends. As of October 31, 1999, we were in compliance
with all covenant requirements of the agreement.
Financing activities generated net cash of $312,000 in fiscal 1999 and $3.0
million in fiscal 1998 resulting primarily from the private placement of
preferred and common stock. Cash used in financing activities was $385,000 in
fiscal 1997. In fiscal 1997, we pledged $400,000 in cash as security on an
unused letter of credit. This restricted cash, which was reduced by $200,000 in
fiscal 1998, was held by us in a certificate of deposit. Financing activities
generated net cash of $973,000 million in the nine months ended October 31, 1999
as compared to $252,000 in the same period a year earlier. The increase was
primarily due to the private placement of 222,222 shares of series D preferred
stock at $4.50 per share in May 1999.
We believe that the net proceeds from the sale of our common stock in this
offering, together with our current cash and cash equivalents and cash generated
by operations, will be sufficient to meet our anticipated cash needs for working
capital, capital expenditures and
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<PAGE> 29
business expansion for at least the next twelve months. During or after this
period, if cash generated by operations is insufficient to satisfy our operating
requirements, we will be required to seek additional debt or equity financing.
There can be no assurance that we will be able to obtain any financing on terms
acceptable to us, if at all. If we sell additional equity securities, our
shareholders' holdings could be diluted.
Inflation has had no material impact on our operations to date.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field, and therefore these
systems may recognize a date ending in 00 as 1900 rather than the year 2000. As
a result, many companies' software and computer systems may need to be upgraded
or replaced to comply with year 2000 requirements. In assessing the effect of
the year 2000 issue on T/R Systems, we determined that we needed to evaluate
four general areas:
- supplier relationships;
- internal infrastructure;
- products sold to customers; and
- other third-party relationships.
Supplier Relationships. Our systems are built on the open architecture of
Microsoft Corporation's Windows NT, Intel Corporation microprocessors and
Harlequin's ScriptWorks. If these products are affected by the year 2000 issue,
our systems could be affected in ways which could seriously harm our business.
Additionally, we include in configurations of our systems print devices and
other hardware components purchased from third-party manufacturers. We purchase
our print devices primarily from one manufacturer. If this manufacturer is
affected by the year 2000 issue, our supply of these print devices could be
delayed or eliminated. We are relying on public statements from the suppliers of
software incorporated in our products and our supplier of print devices that
their operations and their products should not be significantly affected by the
year 2000 issue. If our manufacturers of other hardware components are affected
by the year 2000 issue, we believe that we could obtain these components from
other sources. However, we cannot assure you that our business will not be
disrupted if our hardware manufacturers do not provide products to us which are
year 2000 compliant.
Internal Infrastructure. The year 2000 issue could also affect our
internal systems. We have assessed our internal information technology systems,
including third-party software and hardware technology. We are relying on public
statements from the suppliers of these systems that their operations and their
products should not be significantly affected by the year 2000 issue. However,
we cannot assure you that our business will not be disrupted if these systems
are not year 2000 compliant. Additionally, we have rolled forward our internal
information technology systems to the year 2000 on a test basis. Based on the
results of these tests, we do not believe these systems will be affected by the
year 2000 issue. However, we may experience serious unanticipated problems and
costs caused by undetected errors and defects in the technology used in our
internal systems.
Products Sold to Customers. The software included in our systems does not
contain two digit date codes and therefore is generally unaffected by the year
2000 issue. However, our systems sold to OEMs, once shipped, are connected to
the OEM's print devices. If these
25
<PAGE> 30
devices are affected by the year 2000 issue, our sales to our OEM customers
could be harmed. We are relying on public statements from our OEM customers that
their operations and their print devices will not be significantly affected by
the year 2000 issue.
We do not currently have any information concerning the year 2000
compliance status of our customers. Our current or potential customers may incur
significant expenses to achieve year 2000 compliance. If our customers are not
year 2000 compliant, they may experience significant costs to remedy problems,
or they may face litigation costs. In either case, the year 2000 issue could
reduce or eliminate the budgets that current or potential customers could have
for purchases of our products and services. As a result, our sales could be
harmed.
Other Third-Party Relationships. We rely on outside vendors for utilities
and telecommunication services as well as other infrastructure services. We are
not capable of independently evaluating the year 2000 compliance of the systems
utilized to supply these services. We cannot assure you that these suppliers
will resolve any or all year 2000 issues with these systems before a material
disruption to our business occurs. Any failure of these parties to resolve year
2000 issues with their systems in a timely manner could harm our business.
We have not developed a contingency plan to address situations that may
result if we are unable to achieve year 2000 readiness of our critical
operations, and we do not plan to do so in the future. Any investigations we
have undertaken related to year 2000 issues have been funded from available
cash, and these costs have not be separately accounted for. To date, these costs
have not been significant.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is effective for all fiscal years beginning after
June 15, 2000. This statement establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts and for hedging activities. Under this statement, some contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. We intend to adopt this statement effective January 1, 2001. We do
not expect the adoption of this statement to have a significant impact on our
financial position or results of operations because we do not have significant
derivative activity.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, Modification of Statement of Position 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. This
statement requires recognition of revenue using the residual method when
vendor-specific objective evidence of fair value does not exist for one or more
of the delivered elements in an arrangement. Under the residual method, the
arrangement fee is recognized as follows:
- the total fair value of the undelivered elements, as indicated by
vendor-specific objective evidence, is deferred and subsequently
recognized based on the guidance in Statement of Position 97-2; and
- the difference between the total arrangement fee and the amount deferred
for the undelivered elements is recognized as revenue related to the
delivered elements.
We will adopt this statement in fiscal 2001 and do not expect its adoption to
have a material effect on revenue recognition.
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<PAGE> 31
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe our exposure to market rate fluctuations on our cash equivalents
are minor due to the short-term maturities of those investments, typically 90
days or less. We have market risk relating to borrowings under our credit
facility because the interest rates under the facility are variable. The fair
value of our borrowings at October 31, 1999 approximated $113,000. To date, we
have not entered any derivative instruments to manage interest rate exposure.
A significant portion of our revenue is derived from international
customers. However, all of our revenue is received in U.S. dollars. A
strengthening of the dollar could make our products less competitive in foreign
markets.
27
<PAGE> 32
BUSINESS
T/R SYSTEMS OVERVIEW
T/R Systems designs, develops and markets digital document processing and
printing systems, consisting of proprietary software and hardware, for the
print-on-demand market. Our highly functional product, the MicroPress Cluster
Printing System, manages multiple digital print devices provided by us or by
third parties as an integrated printing system. This system allows our customers
to flexibly and economically print desired quantities with minimum lead time.
Key MicroPress features include consistent color quality across multiple print
devices as well as the capability to simultaneously support color and black and
white digital printing devices and digital input.
We are a leading provider of digital document processing and printing
systems in the mid-range print-on-demand market. We define the mid-range
print-on-demand market as users with monthly print volumes of 100,000 to
1,000,000 black and white pages or 10,000 to 100,000 color pages. We initially
focused our sales and marketing efforts on organizations that provide printing
and copying services, and have expanded our focus to include service bureaus,
in-house print shops and corporate customers.
INDUSTRY BACKGROUND
The emergence of digital printing technologies is driving significant
changes in all sectors of the printing and publishing industry. Increasingly,
traditional printers, printing presses and copiers are being integrated with
computer, networking and data processing technologies. Among the sectors that
have experienced the most significant changes is the rapidly growing print-on-
demand market in which key customer requirements include the ability to store,
retrieve, manage and print documents quickly and in desired quantities. CAP
Ventures, Inc., a consulting and research firm focused on the print-on-demand
market, estimates that the U.S. market for print-on-demand equipment, supplies
and services will be approximately $6.1 billion in 1999 and will grow to
approximately $11.8 billion in 2003. The print-on-demand market is characterized
by a large number of printing providers. CAP Ventures estimates that, at
December 1998, the market in the United States consisted of approximately 66,000
commercial printers and corporate print shops and approximately 64,000 secondary
market establishments, including advertising agencies and commercial graphic art
firms.
Typical users of print-on-demand solutions require systems that allow them
to produce a wide variety of print outputs, including books, manuals,
newsletters and direct marketing materials. Examples of print-on-demand users
include:
- print-for-pay organizations -- quick printers, printing service bureaus,
commercial printers and offset printers that provide printing and/or
copying services for outside entities;
- educational institutions -- primary, secondary and higher education
institutions including community colleges and universities;
- government entities -- local, city, state and federal agencies as well as
public utilities;
- corporate entities -- in-house print shops and marketing, finance and
training departments;
- facilities management -- service providers that manage print operations
for other entities; and
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<PAGE> 33
- book publishers -- organizations that provide publishing services,
including on-demand book publishing.
Historically, the print-on-demand market relied on costly stand-alone,
monochrome devices based on analog technology and dedicated to a single print,
copy or scan function. Since the advent of desktop publishing in the mid-1980s,
the printing industry continues to undergo a widespread transition from analog
systems and processes to digital technologies. With the proliferation of
personal computers, desktop publishing software, digital photography and network
computing, documents are increasingly managed in digital formats. Faster
processor speeds, expanded system memory and increased storage capacity have
combined with advanced software packages to enable complex image processing,
color graphics manipulation and the layout, design and production of digital
documents. Additionally, desktop publishing and general word processing software
allow text, line art and graphics to be digitally integrated in a single
software application. These new digital technologies have improved control over
the document creation process and have enabled documents to be produced more
quickly without the assistance of special trade shops and other outside
services. In addition, the new capabilities offered by digital tools and
processes have contributed to increased customer demand for improved products
and services, including the ability to reliably produce high quality color
documents more quickly and easily, and the ability to produce smaller quantities
economically.
The trend toward advanced digital printing technologies has resulted in new
generations of printers and printing systems. Traditionally, users of
print-on-demand systems have had to choose between two options when selecting
digital printing systems. At the low end are desktop oriented workgroup printers
that may be attached to a network or operate as stand-alone devices, and
typically cost between $3,000 and $15,000. While these devices are relatively
inexpensive, they are often characterized by relatively limited performance and
functionality and do not incorporate digital document management capabilities.
At the high end are high-performance, expensive systems that typically cost
$250,000 or more. Though these systems offer more complete document finishing
and heavy media-handling capabilities, they require large monthly printing
volumes, often in excess of 1,000,000 black and white pages per month to justify
the high cost of acquisition and the significant ongoing maintenance costs.
These traditional solutions fail to adequately address the needs of the
mid-range segment of the print-on-demand market. The low-end products do not
provide the functionality or flexibility needed to meet the diverse and dynamic
requirements of end users. The high-end systems require large capital outlays
that make the traditional systems too expensive for many smaller end users.
These smaller end users are unable to afford the functionality and performance
that their clients increasingly demand. A large gap exists between the low-end
and high-end offerings where limited viable solutions exist. For this reason,
end users in the mid-range segment must make difficult trade-offs among
performance, functionality and price. Even at the high-end, many existing
solutions offer limited performance, including low data transfer speeds for
large color graphics and lengthy print and work flow time requirements from
document creation to output. Additionally, both low-end and high-end solutions
often fail to offer the reliability required for mission-critical print jobs or
the flexibility to provide cost-effective printing in both black and white and
color.
T/R SYSTEMS' SOLUTION
T/R Systems addresses the needs of the mid-range print-on-demand market by
providing a cost-effective, high speed digital document production system
capable of producing complex, short-run, color and black and white text and
images. The core of our solution is the
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<PAGE> 34
MicroPress, a server-based software and hardware system built on
industry-standard open-architecture technologies. Our solution offers the
following primary benefits:
Highly Functional. The MicroPress' proprietary cluster printing
architecture provides a wide range of production printing capabilities and
performance levels for digital document processing and printing. By enabling as
many as twelve print devices to be managed by a single server, the MicroPress
can distribute a document among multiple printers and print at speeds several
times faster than a single device could produce independently, regardless of
page complexity or variability. For example, a system with twelve print devices
can sustain document printing speeds of up to 624 black and white pages per
minute, compared to 62 pages per minute for a single printer. Our calibration
utilities ensure that all print devices within the system will print with
consistent color quality. Additionally, we offer document management features
generally not available even on high-end systems, including Internet-based job
submission and ticketing, document archiving, variable data printing, document
merging, electronic collation and imposition.
Cost-Effective. The MicroPress offers an economical solution for mid-range
users. Our proprietary cluster printing architecture allows the MicroPress to
offer features that are typically available only in high-end solutions at prices
that are significantly lower than those of high-end offerings.
Scalable and Configurable. The MicroPress is scalable and configurable,
permitting users to add color, black and white and wide format printers to meet
their changing needs. Up to eight print devices can be supported through direct
connections to a single MicroPress ClusterServer, which is the server that runs
our printing systems. By adding network connections, a single MicroPress
ClusterServer can support up to twelve print devices. Additionally, our use of
industry-standard open-architecture technologies allows existing users to
upgrade their systems without having to replace existing equipment and losing
the value of their original investment.
Integrated Mixed-Mode Capability. We believe the MicroPress is the only
commercially available printing system that supports the production of documents
that are color, black and white, wide format or a combination of all three with
a single system.
Flexible and Reliable. The MicroPress allows users to print a large job
across multiple attached print devices as well as run multiple jobs
simultaneously on different devices. The MicroPress supports mission-critical
printing applications by recognizing available resources and automatically
rerouting print jobs if any of the print devices become inoperable.
Easy to Use. Our software applications are designed to increase the ease
of managing documents and work flow. We designed the MicroPress to require
minimal training. In addition, we provide user-friendly documentation, manuals
and online help.
OUR STRATEGY
T/R Systems' objective is to be the leading provider of digital document
processing and printing systems for the mid-range segment of the print-on-demand
market. To achieve this objective, our strategy includes the following key
elements:
Maintain and Expand Our Leadership Position in the Print-on-Demand
Market. We believe that we have established a market leading position in the
mid-range of the print-on-demand market. We will continue to leverage our sales
and marketing and product development efforts throughout the print-on-demand
segment, including other commercial printers, corporate
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<PAGE> 35
print shops and secondary print establishments. We believe many end users in
this segment are seeking digital document production solutions that have the low
cost and high performance characteristics of the MicroPress.
Expand Distribution. We pursue a dual distribution strategy. Our products
were distributed through 57 independent domestic and international dealers and
75 Minolta-owned or affiliated North American dealers as of October 31, 1999.
Minolta also sells our products in Europe, Australia and South Africa. We
believe there are a number of cities both inside and outside the United States
that are not yet adequately represented by a dealer or that can sustain more
than one dealer. As a result, we are currently seeking to recruit new,
high-quality dealers. In addition, we intend to further build our distribution
channel by continuing to develop OEM distribution relationships with
manufacturers of digital printers and copiers. We have established OEM
agreements with Hitachi Koki Imaging Solutions, Inc., Minolta, Mita and Ricoh
Corporation, and are actively pursuing additional OEM customers.
Develop New Applications and Features. The MicroPress currently supports
devices from Mita, Minolta and Hewlett-Packard, as well as print devices
purchased from third parties and resold under our private label. We intend to
continue to develop multi-device management solutions for print-on-demand
applications through additional investment in research and development. We have
recently introduced new features that optimize the ability of customers to use
the Internet in their day-to-day printing operations and expanded service
offerings to increase customer loyalty. Through upgrades, which historically
have occurred about twice a year, we continually enhance the software
capabilities of the MicroPress to provide customers with market leading
features. We believe that we have achieved technology leadership in the
mid-range print-on-demand market and that continued innovation will be important
for us to maintain a leadership role and to meet increasingly complex customer
demands.
Expand Internet Functionality. We intend to add additional Internet
capabilities to the MicroPress through our upgrades. The MicroPress currently
offers full electronic job submission and ticketing over the Internet and a
proofing mechanism that allows electronic delivery of processed images. A
recently added product feature allows MicroPress users to interactively manage
the MicroPress and its associated work flow functionality from any browser at
any location. This feature gives multiple remote users the ability to
simultaneously modify different print jobs using a browser with Internet access.
Focus on Core Technologies and Build on Industry-Standard Open-Architecture
Technologies. We expect, on an ongoing basis, to use industry-standard
technologies such as Microsoft Windows NT server software, the latest Intel
Pentium microprocessors and Harlequin's ScriptWorks. We believe that utilizing
standards-based open systems enables us to bring new product features to market
more quickly and to permit functionality with a wide variety of computer
networks, devices and complementary software. In addition, this approach allows
us to quickly upgrade to next generation computer hardware and software systems,
allowing us to focus on developing the core technologies that differentiate our
products.
Further Develop International Sales. In fiscal 1999, T/R Systems generated
33.7% of its revenue from sales outside the United States. While we have
historically focused most of our sales efforts on customers inside the United
States, we are presently expanding our dealer network and adding sales personnel
overseas to pursue international opportunities. In addition, we believe
relationships with OEMs will enhance international sales through the OEMs'
established global distribution infrastructures.
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<PAGE> 36
PRODUCTS
T/R Systems' primary product line is the MicroPress Cluster Printing
System. The MicroPress combines T/R Systems' proprietary software and hardware
with industry-standard third-party software and hardware resold by T/R Systems
to provide a complete digital document printing and processing system. The
software offered with the MicroPress consists of standard software modules, an
extensive family of software add-ons called PowerPacks, and software utilities.
The base hardware offered with the MicroPress consists of the ClusterServer and
print devices sold by us or PrintLinks that connect to third-party print
devices. The list prices of our typical systems generally range from about
$50,000 to $150,000, depending on system configuration.
SOFTWARE
There are three standard software modules included in the ClusterServer
used to provide functionality for the MicroPress:
- MicroPress Spool. MicroPress Spool is the product name for our open
prepress interface, referred to as an OPI, spooler that streamlines the
document production workflow by shifting the burden of printing and image
management tasks from individual workstations to a central server. The
MicroPress Spool supports both Macintosh and PC platforms, thus
eliminating the need for special workstation software.
- MicroPress RIP. A RIP, or raster image processor, is the software that
translates the instructions for page printing into the actual pattern of
dots needed by the printer to display the page. The MicroPress RIP is a
fast, versatile and powerful application that translates a document
described using either PostScript or page description format, referred to
as PDF, languages and produces output on any number of devices, including
printers, computer screens, or files on disk. The MicroPress RIP combines
Harlequin RIP software with plug-ins developed by T/R Systems.
- MicroPress PrintStation Manager. MicroPress PrintStation Manager is the
product name for our software application that manages most of the
document processing on the MicroPress. Through this application, users
can establish print queues that help organize printing workflow into a
manageable process. Additionally, the PrintStation Manager provides the
functionality of a virtual printer that enables multiple print devices to
process documents as a single high-speed device. The PrintStation Manager
also provides easy access to and control of the value-added software
options offered by T/R Systems.
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The following table summarizes the base software functionality available
with the MicroPress:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INPUT DOCUMENT MANAGEMENT OUTPUT/STORAGE
- -------------------------------------------------------------------------------
<S> <C> <C>
- - publish - allow for remote job - print to a combination
network-accessible management through the of connected print
print clusters and Internet devices
queues
- preview post-RIP - automatically or
- - accept and RIP documents manually archive
PostScript-compatible documents
document files - modify pages for
continuous - move documents from one
- - create page thumbnails top-to-bottom layout print queue to
of various sizes another print queue
- manipulate the order of
- - create mirror or pages within a document - store documents in
reversed images of a network accessible or
document - automatically print removable storage
documents in duplex devices
- - batch RIP documents format
during off-peak - convert MicroPress
printing times - insert and delete pages formatted documents
from post-RIP documents into PDF
- - match document color
quality to industry - receive job status - connect to third-party
standard profiles notification through billing or
pager or e-mail authentication systems
- - compress color
documents up to 25 - adjust image brightness
times for storage and contrast levels
- merge multiple
documents created by
separate applications
- modify page or print
layout for optimum
performance, including
converting documents
into booklets
- apply discreet numbers
to pages based on the
user's direction
- apply variable data
elements to form
documents
- apply page- or
job-specific annotations
to a document for
searching
- -------------------------------------------------------------------------------
</TABLE>
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<PAGE> 38
In addition to the three standard modules, we offer the following software
options to increase functionality:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
SOFTWARE FUNCTION
- -----------------------------------------------------------------------------------
PowerPacks:
Color Control PowerPack - ensures consistent and accurate color document
output
Imaging PowerPack - provides post-RIP document manipulation
e-Ticket PowerPack - allows users to streamline the production process
through Internet job submission
Workflow Automation - enables users to automate complex, repetitive
PowerPack document production tasks
- -----------------------------------------------------------------------------------
Utilities:
OpenPrinter Connection - provides connection to networked printers
MicroPress RIP for PCL 5 - allows processing and preparation of black and
white printer control language, referred to as PCL,
files
TurboCharger - allows a job to be distributed to multiple
MicroPress RIPs on multiple servers for processing
- -----------------------------------------------------------------------------------
</TABLE>
PowerPacks
PowerPacks are document management and manipulation software add-ons which
can be installed with the MicroPress to optimize performance. The specific
PowerPacks offered are:
- Color Control PowerPack. This PowerPack ensures consistent color
quality. This option is required in configurations using color print
devices.
- Imaging PowerPack. This PowerPack provides a family of post-RIP document
manipulation features that enable users to alter a document's page
characteristics. These features include:
- image editing;
- text optical character recognition, referred to as OCR, which allows
users to save a document in any number of industry standard formats,
including hypertext markup language, referred to as HTML, and
Microsoft Word;
- conversion of tagged image file format files, referred to as TIFF
files, into the MicroPress post-RIP environment; and
- conversion of MicroPress post-RIP documents into TIFF files.
- e-Ticket PowerPack. This PowerPack enables MicroPress end users to
streamline the production process by receiving print jobs through the
Internet, email or removable media. Using this option, print buyers
submit jobs through a customized job ticket to a print provider using the
MicroPress. The job ticket includes all the specifications of the job as
well as all files for the job. This option allows the user to save a
RIPed job with any enhancements made on the MicroPress in a compressed
file format that can be easily sent back to a print buyer for on-screen
proofing before the job is printed.
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- Workflow Automation PowerPack. This PowerPack enables users to create
and run customized, document production scripts to fully automate complex
and repetitive document production tasks. Scripts are created using
industry-standard Microsoft Visual Basic scripting.
Utilities
Our software utilities provide users advanced control over document input,
output and storage. These utilities may be purchased individually with the
initial sale or after installation has occurred. Specific utilities available
include the following:
- OpenPrinter Connection. This utility provides an easy way for customers
to print to any 600 dots per inch black and white printer connected
through a standard network infrastructure. This is designed for use by
customers with investments in non-MicroPress supported print devices that
need the power of the MicroPress.
- MicroPress RIP for PCL 5. This utility allows the processing and
preparation of black and white PCL, a PostScript file format, files for
printing on any MicroPress ClusterServer or SatellitePress ClusterServer.
The MicroPress RIP for PCL 5 supports advanced batch or individual file
processing.
- TurboCharger. This powerful utility gives customers the ability to
direct a single job to multiple servers equipped with a MicroPress RIP to
simultaneously RIP distinct page ranges within the job and bring the job
back together in the MicroPress post-RIP application-independent
environment. This is designed for customers who need optimum RIP power,
such as those who produce lengthy direct mail.
HARDWARE
The following summarizes the server and other hardware available in various
configurations of the MicroPress:
Servers
- MicroPress ClusterServer. This is the core server for the MicroPress. It
is equipped to receive, RIP, manipulate, print and store files using our
proprietary standard software modules.
- SatellitePress ClusterServer. This server is designed for environments
requiring remote or distributed printing capabilities. It provides the
same functionality as the MicroPress ClusterServer except that it does
not have RIP capability. The SatellitePress ClusterServer is equipped to
receive, print and store all files already RIPed by a full MicroPress
ClusterServer or MultiRIP server. It can be upgraded to a full MicroPress
ClusterServer by adding MultiRIP software.
- MultiRIP Server. This server provides additional RIP capacity to
supplement a ClusterServer. The MultiRIP Server has the same computing
architecture and growth capabilities of a ClusterServer but is only
equipped to RIP files.
- MicroScan Server. This server has the same computing architecture and
growth capabilities of a ClusterServer but functions as a dedicated scan
server and is equipped to take the burden of scanning off a busy
ClusterServer.
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<PAGE> 40
Other Hardware
- PrintLinks. PrintLinks enable the MicroPress ClusterServer to interface
with supported digital printers and printer/copiers manufactured by third
parties. Our PrintLinks currently connect to the Minolta CF900, Minolta
CF910, Minolta CF911PE, Minolta Di520, Minolta Di620, Minolta Di620PE,
Mita Ci7500 and Mita Ci7600.
- PrintStations. We offer T/R Systems branded printers, known as
PrintStations, that can connect directly to the MicroPress ClusterServer.
PrintStations are high quality, durable devices that are ideal for
cluster printing environments. T/R Systems currently sells two 600 dots
per inch black and white PrintStations. The PrintStation 040 can print up
to 40 pages per minute using a bulk toner system. The PrintStation 024
can print up to 24 pages per minute utilizing a cartridge toner system.
- MicroScanner. The MicroScanner is a high-speed document scanner capable
of scanning up to 40 one-sided pages or 20 two-sided pages per minute.
The MicroScanner includes software that allows direct scanning and
printing of documents on a MicroPress or SatellitePress ClusterServer.
MANUFACTURING
We outsource the manufacturing of most of the hardware components of our
products. These components include the circuit boards incorporated in our
products, customized servers and PrintLinks. We then integrate hardware
components with our internally developed software to create the various
configurations of the MicroPress. We also purchase complete printing devices and
scanners from third-party manufacturers that we resell under our brand as part
of our systems. Before we ship products to customers, we test both the hardware
and software to assure successful integration.
SALES AND MARKETING
We distribute our products in North America and internationally through a
network of independent dealers and through our distribution relationship with
Minolta. We maintain a sales force consisting of regional managers whose
principal duties are to recruit high quality dealers in their territories and to
facilitate and help close sales through those dealers and through Minolta's
channel of dealers. As of October 31, 1999, we had eleven regional managers
throughout the United States, one in Canada and one in the United Kingdom.
Dealers sell our products to end users and service our products in a local
geographical area. In the United States, these dealers typically are:
- office products, computer and peripheral resellers;
- copier or graphic arts dealers; or
- independent service organizations providing customized software and
hardware solutions and specializing in providing services that cannot be
obtained through product manufacturers.
T/R Systems signed an OEM agreement with Mita in September 1997, allowing
Mita to resell the MicroPress in Japan. Mita discontinued orders of our systems
in June 1998 and subsequently entered into reorganization proceedings. Since
then, our sales to Mita have been negligible. In January 1999, we signed an OEM
agreement with Minolta, allowing Minolta to
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<PAGE> 41
resell the MicroPress worldwide through independent Minolta dealers as well as
through dealerships owned by Minolta. In April 1999, we executed a development
and distribution agreement with Hitachi. We are developing connectivity between
the MicroPress and Hitachi's print device and this agreement provides for
Hitachi's distribution of the finished product. We recently signed an agreement
with Ricoh Corporation to develop connectivity of Ricoh's print devices to our
MicroPress. This agreement will permit Ricoh to resell the MicroPress connected
to its print devices. We are also actively seeking to enter into distribution
agreements with other major print device manufacturers to access their dealer
networks both within the United States and internationally.
During fiscal 1997, Litho Development and Research accounted for 16.5% of
our revenue. During fiscal 1998 and 1999, Mita accounted for 19.0% and 14.1% of
our revenue. During the nine months ended October 31, 1999, Minolta accounted
for 39.1% of our revenue. No other customer accounted for more than 10% of our
revenue during any of those fiscal years or the nine month period.
Sales to international customers represented 44.2% of revenue in fiscal
1997, 33.6% of revenue in fiscal 1998 and 33.7% of revenue in fiscal 1999. Sales
to international customers in any region did not exceed 10% of revenue in any of
the last three fiscal years, except that sales to European customers represented
29.4% of revenue in fiscal 1997 and sales to Japanese customers represented
22.7% of revenue in fiscal 1998 and 33.7% of revenue in fiscal 1999.
As of October 31, 1999, T/R Systems maintained a marketing organization
consisting of ten people responsible for market research, branding, advertising,
public relations, events, strategic alliances, lead management and dealer
communications. We rely upon industry specific research and customer interaction
to assist in marketing planning. We create market awareness through advertising,
public relations and trade shows. In May 1999 we began to offer a cooperative
marketing program to independent dealers to create additional market awareness.
We believe that our strategic alliances, including OEM relationships, also
enhance market awareness. In addition, we intend to continue expanding market
awareness of our products through consistent promotion of our T/R Systems,
MicroPress, and Cluster Printing System brands in marketing events, advertising
and public relations activities. We have a telemarketing operation that
generates qualified leads for our dealers. Additionally, to improve dealer
effectiveness and loyalty, we conduct dealer training and other support
activities.
CUSTOMER SERVICE
We believe that providing quality customer support to end users, dealers
and OEM customers is critical to customer satisfaction. Dealers are considered
the primary support contact for end users, with T/R Systems performing secondary
support. We market a three-year service plan which entitles end users to call
our customer support organization for assistance. We also offer training for
MicroPress users at our offices and, for an additional fee, will provide
training at a user's location.
RESEARCH AND DEVELOPMENT
T/R Systems has devoted a significant amount of resources to research and
development. At October 31, 1999, over one-third of our employees were employed
in research and development. Research and development expenses were $2.6 million
for the nine months ended October 31, 1999 and $3.2 million for fiscal 1999,
$2.2 million for fiscal 1998 and $1.8 million for fiscal 1997.
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<PAGE> 42
We believe the markets for our products are characterized by rapid change
and that there are three factors critical to the success of our research and
development efforts:
- we must accelerate the rate of product line expansion in terms of device
connectivity and system features;
- we must continue to develop software applications and feature
enhancements that leverage performance gains realized through the release
of new generations of software and hardware; and
- we must attract and retain qualified technical professionals.
INTELLECTUAL PROPERTY
To be successful, we depend, in part, on proprietary technology in our
products. We rely on a combination of patent, copyright, trade secret and
trademark laws, nondisclosure and other contractual restrictions to protect our
proprietary rights. Trade secret and copyright laws provide only limited
protection of our software, documentation and other written materials. We hold
10 United States patents related to cluster printing and print engines and have
filed for additional patents. We have also taken the following measures to
protect our intellectual property and proprietary rights:
- we enter into confidentiality and nondisclosure agreements with our
employees, consultants and OEMs;
- we limit access to, and distribution of, our software and other
proprietary information; and
- we employ hardware security devices and unique key codes to limit
unauthorized use of our software.
Despite the efforts we take to protect of our intellectual property, we
cannot assure you that we will be able to protect it, and any failure to do so
could harm our business.
COMPETITION
T/R Systems' products compete with a variety of other digital document
production systems. Competition in the print-on-demand market is based primarily
on product performance and price as well as customer service. Some of our
competitors, such as Xerox Corporation, Canon, Inc. and International Business
Machines Corp., are substantially larger, with greater financial, technical,
marketing and other resources, more established sales channels, greater name
recognition and broader product lines than we have. Our present or future
competitors could introduce products with the same or greater capabilities than
ours. Further, these competitors have much greater financial resources than we
do that could enable them to price competing products at prices less than we
charge.
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<PAGE> 43
We categorize our competitors into the following four groups:
- the first group includes manufacturers such as Xerox and Canon,
which currently offer digital copiers that operate as printers
through the use of RIPs and controllers as well as host print
computers;
- the second group of competitors are the high-end electronic printing
system vendors, which are currently selling systems primarily to
commercial and large in-house printers;
- third, there are RIP and controller board providers, whose products
enable digital copiers to also function as printers. These companies
typically operate as OEMs to major, international printing equipment
companies; and
- the final group includes companies that have products with similar
features to our cluster printing system concept, including IBM.
We believe that none of our competitors are dominant in the industry.
Further, we do not believe that any of our competitors has a product that
currently offers all of the capabilities of the MicroPress and is competitively
priced. However, in the future, these or other competitors could develop similar
or more advanced products than ours.
EMPLOYEES
As of October 31, 1999, we had a total of 97 employees, substantially all
of whom are full-time. Of our employees, 35 were in research and development and
40 were in sales and marketing and technical support, with the remaining 22 in
operations, finance and administration. None of our employees is represented by
a labor union, and we have never experienced a work stoppage. We consider our
relations with our employees to be good.
FACILITIES
T/R Systems leases its principal facility, totaling approximately 52,000
square feet, in Norcross, Georgia under a lease expiring in March 2003. We also
lease office space in Brussels, Belgium and Hilversum, The Netherlands. We
anticipate that we will need additional space as our business expands and
believe that we will be able to obtain suitable space on commercially reasonable
terms as needed.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. We are not
currently engaged in any legal proceedings that we expect would have a material
adverse effect on our business, financial condition or results of operations.
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<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of T/R Systems, and their ages as of
October 31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael E. Kohlsdorf.............. 44 President, Chief Executive Officer and Director
E. Neal Tompkins.................. 55 Executive Vice President, Chief Technology Officer
and Director
Lyle W. Newkirk................... 47 Vice President, Chief Financial Officer, Secretary
and Treasurer
Charles K. Thackston.............. 43 Senior Vice President, Sales and Marketing
Michael W. Barry.................. 42 Senior Vice President, Development and Engineering
E. James White.................... 55 Senior Vice President, Operations
Andrew Nathan..................... 45 Vice President, OEM Sales
Jack N. Bartholmae................ 48 Vice President, Engineering
R. Dean Nolley.................... 38 Vice President, North American Sales
Charles H. Phipps................. 72 Chairman of the Board
C. Harold Gaffin.................. 60 Director
Philip T. Gianos.................. 49 Director
Francis A. Rowe................... 75 Director
</TABLE>
Michael E. Kohlsdorf has served as our president, chief executive officer
and a director since September 1996. From 1993 to September 1996, Mr. Kohlsdorf
held a variety of positions at Brock Control Systems, Inc., a sales automation
software company, now known as FirstWave Technologies, Inc., most recently
serving as president, chief operating officer and chief financial officer.
E. Neal Tompkins is a co-founder of T/R Systems and has served as a
director and our chief technology officer since our founding in September 1991.
Mr. Tompkins served as our president from September 1991 until September 1996,
and has served as our executive vice president since that date.
Lyle W. Newkirk joined us in September 1997 and has served as our vice
president, chief financial officer, secretary and treasurer since November 1997.
From 1992 to September 1997, Mr. Newkirk held various positions with Peachtree
Software, Inc., a maker of accounting software, which became a subsidiary of
Automatic Data Processing, Inc., most recently serving as vice president and
chief financial officer.
Charles K. Thackston has served as our senior vice president, sales and
marketing since September 1998. From December 1996 to September 1998, Mr.
Thackston served as our vice president, marketing. From April 1995 to December
1996, Mr. Thackston served as vice president of marketing and director of sales
operations at Brock. From 1988 to April 1995, Mr. Thackston held various
positions with Datalogix International, Inc., a maker of process manufacturing
software, most recently serving as vice president.
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<PAGE> 45
Michael W. Barry has served as our senior vice president, development and
engineering since August 1998. From July 1995 to August 1998, Mr. Barry served
as our vice president of systems development. Before that, he served as our
director of systems development from our founding in September 1991 until July
1995.
E. James White has served as our senior vice president, operations since
September 1999. From June 1995 to July 1999, Mr. White served as vice president,
operations at Checkmate Electronics, a manufacturer of payment automation
equipment. Before that, he was director of operations at Solectron Technology,
Inc., a manufacturer of printed circuit boards, from May 1993 to April 1995.
Andrew Nathan has served as our vice president, OEM sales since January
1999. From August 1997 to January 1999, Mr. Nathan served as our vice president,
sales. From 1994 until joining us, Mr. Nathan held various positions at First
Image Management, a data imaging, micrographics and electronic database
management company, which was a subsidiary of First Data Corporation, most
recently serving as senior vice president and general manager of the demand
publishing division.
Jack N. Bartholmae has served as our vice president, engineering since
November 1995 and as our director of engineering from April 1994 to November
1995. Before that, he served as our director of electrical engineering from our
founding in September 1991 until April 1994.
R. Dean Nolley has served as our vice president, North American sales since
January 1999. Before joining us, Mr. Nolley served as vice president of sales,
North America for Colorbus Inc., a maker of network print servers, from June
1997 until January 1999. From September 1996 until June 1997, Mr. Nolley owned
and operated Digital Imagination, a specialized sports imaging business. From
August 1983 to September 1996, Mr. Nolley held sales positions with Eastman
Kodak Company, a developer, manufacturer and marketer of imaging products.
Charles H. Phipps has served as chairman of the board and as a director
since 1994. Mr. Phipps has been a general partner of Sevin Rosen funds, a group
of venture capital funds, for twelve years.
C. Harold Gaffin has served as a director since 1994. Mr. Gaffin has been
the director, School of Printing Management and Sciences at the Rochester
Institute of Technology since 1994.
Philip T. Gianos has served as a director since February 1996. Since 1982,
Mr. Gianos has been a general partner of InterWest Partners, a group of venture
capital funds. Mr. Gianos currently serves as a director of Xilinx Inc. and Ramp
Networks, Inc.
Francis A. Rowe is a co-founder of T/R Systems and has served as a director
since our founding in September 1991 and as an executive from inception until
his retirement. Mr. Rowe served as our chief executive officer from our founding
in September 1991 until September 1996. Mr. Rowe retired in August 1997 from the
position of senior vice president.
Each director was elected under a shareholders' agreement among T/R Systems
and the holders of some series of our preferred stock. This agreement will not
continue in effect after this offering.
Officers are chosen by, and serve at the discretion of, the board of
directors. There are no family relationships among our directors and executive
officers.
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<PAGE> 46
CLASSIFICATION OF DIRECTORS
Before the closing of this offering, we will amend our bylaws to provide
for a staggered board of directors. The six directors comprising T/R Systems'
board of directors will be divided into three classes:
- Messrs. Rowe and Phipps will be designated as class I directors whose
initial term will expire at the annual meeting of shareholders to be held
in 2000;
- Messrs. Tompkins and Gianos will be designated as class II directors
whose initial term will expire at the annual meeting of shareholders to
be held in 2001; and
- Messrs. Kohlsdorf and Gaffin will be designated as class III directors
whose initial term will expire at the annual meeting of shareholders to
be held in 2002.
After their initial term following this offering, directors in each class will
serve for a term of three years. After our board becomes staggered, our
directors may be removed during their term only for cause and only by a majority
of the other directors or by a vote of shareholders holding 80% of our voting
power.
BOARD COMMITTEES
Our audit committee reviews our internal accounting procedures and consults
with and reviews the services provided by our independent public accountants.
The audit committee currently consists of Messrs. Gaffin and Phipps.
Our compensation committee reviews and recommends to the board of directors
the compensation and benefits of our executive officers and, together with the
board of directors, administers some of our stock option plans. The compensation
committee currently consists of Messrs. Gaffin and Gianos.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation for their services
as members of the board of directors. Mr. Gaffin is reimbursed for expenses
associated with attendance at meetings of the board of directors.
Following this offering, directors who are not executive officers of T/R
Systems will be paid $9,000 annually; additionally, directors who serve on any
committee will be paid another $3,000 annually. Directors will be reimbursed for
reasonable travel expenses. In addition, T/R Systems grants each outside
director an annual option to purchase up to 15,000 shares of our common stock,
which will vest over a three year term.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither of the members of our compensation committee was at any time during
fiscal 1999, or any other time, an officer or employee of T/R Systems. No member
of the compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
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EXECUTIVE COMPENSATION
The following table presents the compensation earned by our chief executive
officer and our other four most highly compensated executive officers whose
salary and bonus for the year ended January 31, 1999 were in excess of $100,000,
referred to as the named executive officers. All other compensation consists of
matching contributions to our 401(k) plan.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Michael E. Kohlsdorf............ 1999 $200,000 $33,333 -- $ 242
President and Chief Executive
Officer
E. Neal Tompkins................ 1999 150,000 25,000 -- 2,482
Executive Vice President and
Chief Technology Officer
Charles K. Thackston............ 1999 137,417 15,667 15,152 2,618
Senior Vice President, Sales
and Marketing
Michael W. Barry................ 1999 141,558 15,000 15,152 2,326
Senior Vice President,
Development and Engineering
Andrew Nathan................... 1999 120,000 36,000 -- --
Vice President, OEM Sales
</TABLE>
43
<PAGE> 48
OPTION GRANTS IN LAST FISCAL YEAR
The following table presents each grant of stock options made to each of
the named executive officers during the fiscal year ended January 31, 1999.
These options vest ratably over four years commencing on the first anniversary
of the date of grant and the exercise price per share of each option was equal
to the fair market value of the common stock on the date of grant, as determined
by our board of directors.
Potential realizable value is calculated assuming that the stock price on
the date of grant appreciates at the indicated rate compounded annually until
the option is exercised and sold on the last day of its term for the appreciated
stock price. The 5% and 10% assumed rates of appreciation are required by the
rules of the Securities and Exchange Commission and do not represent our
estimate or projection of the future common stock price. Based on an assumed
initial offering price of $9.00 per share, the actual appreciation exceeds these
values.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF EXERCISE ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS OR PRICE APPRECIATION FOR
UNDERLYING GRANTED TO BASE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ---------- ------------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Kohlsdorf....... -- -- -- -- -- --
E. Neal Tompkins........... -- -- -- -- -- --
Charles K. Thackston....... 15,152 9.4% $4.95 9/10/08 $47,169 $119,535
Michael W. Barry........... 15,152 9.4 4.95 11/17/08 47,169 119,535
Andrew Nathan.............. -- -- -- -- -- --
</TABLE>
OPTION EXERCISES AND YEAR END OPTION VALUES
The following table presents option exercises and the value realized from
those exercises during fiscal 1999, as well as unexercised options that were
held at the end of fiscal 1999 by each named executive officer. The value
realized represents the aggregate market value of the underlying securities on
the exercise date, as determined by the board of directors, minus the aggregate
exercise price paid for those shares. Also presented is the value of
in-the-money options, which represents the aggregate market value of the
underlying securities at fiscal year-end January 31, 1999, $4.95 per share, as
determined by the board of directors, minus the aggregate exercise price payable
for those shares.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT FY-END(#) AT FY-END($)
ACQUIRED ON REALIZED ----------------------------- ---------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael E.
Kohlsdorf............ -- -- 222,273 303,182 $915,765 $1,249,110
E. Neal Tompkins..... -- -- 107,878 28,485 444,457 117,358
Charles K.
Thackston.......... -- -- 45,454 72,728 187,270 237,213
Michael W. Barry..... 24,242 $105,877 81,362 54,396 360,005 162,443
Andrew Nathan........ -- -- 18,181 54,546 74,906 224,730
</TABLE>
44
<PAGE> 49
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Michael E. Kohlsdorf and E.
Neal Tompkins.
Under our agreement with Mr. Kohlsdorf, he is entitled to receive a base
salary and an annual bonus of up to 50% of his base salary dependent upon T/R
Systems achieving objectives approved by the board of directors. Mr. Kohlsdorf's
base salary is currently $225,000. Under his employment agreement, we granted
Mr. Kohlsdorf an option to purchase 363,636 shares of common stock at an
exercise price of $0.83 per share in September 1996. In November 1997, we
granted Mr. Kohlsdorf an option to purchase an additional 161,819 shares of
common stock also at an exercise price of $0.83 per share. If we terminate Mr.
Kohlsdorf's employment, all unvested options held by Mr. Kohlsdorf will continue
to vest for one year following his termination and he will be paid his base
salary for one year from the date of his termination.
Under Mr. Tompkins' employment agreement, he is entitled to receive a base
salary and an annual bonus which is determined based on our operating results,
and is entitled to participate in all of our benefit plans. Mr. Tompkins'
employment agreement had an initial term of five years, and is renewed annually
unless otherwise terminated. Under this employment agreement, Mr. Tompkins is
prohibited from competing, directly or indirectly, with the business of T/R
Systems in the United States, Europe and Japan. He is also generally prohibited
from soliciting employees or customers of T/R Systems during the term of the
agreement and for one year following the termination of the agreement. If we
terminate Mr. Tompkins' employment for breaches of the agreement, fraud or
misappropriation of our assets, we will pay his base salary through the last day
of the calendar month in which the termination occurs. In that case, Mr.
Tompkins is entitled to receive his performance-based bonus earned to date, but
all unvested stock options are forfeited. If we otherwise terminate Mr.
Tompkins' employment, all his options to purchase shares of our common stock
immediately vest.
STOCK OPTION PLANS
1992 Stock Option Plan, 1994 Stock Option Plan and 1995 Stock Option Plan
Our 1992 stock option plan was adopted by the board of directors in March
1992 and provides for issuance of 833,939 shares of common stock. Our 1994 stock
option plan was adopted by the board of directors in March 1994 and provides for
issuance of 378,182 shares of common stock. Our 1995 stock option plan was
adopted by the board of directors in January 1996. The board of directors
originally authorized 1,000,000 shares of common stock for issuance under the
1995 plan. In December 1997, the board of directors authorized an additional
606,061 shares, bringing the aggregate number of shares issuable under the 1995
plan to 1,606,061.
These plans provide for the grant of incentive stock options under Section
422 of the Internal Revenue Code and for the grant of nonqualified stock options
to officers and key employees of T/R Systems. Each plan provides that it will be
governed by a committee appointed by the board of directors consisting of three
or more members, or if no committee is appointed, by the board of directors.
Presently, the plans are administered by the compensation committee of the board
of directors.
The terms of the stock options granted under the plans may not exceed ten
years. The exercise price of options granted under the plans is determined by
the board of directors. The exercise price of incentive stock options granted
under the plans may not be less than the fair
45
<PAGE> 50
market value on the date the option is granted. The exercise price of
nonqualified stock options may not be less than 85% of the fair market value on
the date the option is granted.
Options granted under these plans vest at the rate specified in each option
agreement, which historically have specified vesting ratably over four years. No
stock option may be transferred by the participant other than by will or the
laws of descent and distribution. A participant whose relationship with T/R
Systems ceases for any reason other than discharge for cause, or for any reason
under the 1995 plan, may exercise options in the period determined to be
appropriate by the board of directors. Options may be exercised up to one year
from the date of a participant's termination as a result of disability.
The fair market value of the common stock at the date of the grant of
incentive stock options under any of these plans and options granted under any
other stock option plan may not exceed $100,000 in the first year that those
options can be exercised.
In the case of incentive stock options granted to a person who holds more
than 10% of the voting power of our stock, the exercise price of those options
cannot be lower than 110% of the fair market value of our common stock on the
date of grant. The term of incentive stock options granted to these shareholders
cannot exceed five years.
If any option issued under the plans lapses or terminates due to its terms,
due to an employee termination or as a result of repurchase by us, the shares
subject to that option will be available for future grant.
If a change of control of T/R Systems occurs, and the board of directors
does not determine before that change of control that acceleration of options
should not occur, each option granted under these plans more than six months
before the change of control will be immediately exercisable.
If a participant under the 1994 plan becomes employed by an entity in
direct competition with us, we have the right to purchase, at the current fair
market value, all shares of stock that the participant may have acquired under
the 1994 plan. We must exercise this right within ten days of learning of that
participant's subsequent employment.
As of October 31, 1999, options to purchase 1,610,181 shares of common
stock were outstanding under these plans and 59,739 shares of common stock
remained available for future grant. Assuming the closing of this offering, T/R
Systems does not intend to grant any additional options under these plans.
1999 Stock Option Plan
Our 1999 stock option plan was adopted by the board of directors on
September 23, 1999 and provides for issuance of 909,091 shares of common stock.
No options have been granted under this plan.
This plan provides for the grant of incentive stock options under Section
422 of the Internal Revenue Code, and for the grant of nonqualified stock
options to key employees and directors of T/R Systems. The plan provides that it
will be administered by the board of directors or a committee consisting of not
less than two of its members.
The terms of the stock options granted under the plan may not exceed ten
years, or five years in the case of incentive stock options granted to an
employee who owns more than 10% of the voting power of our stock. The exercise
price of options granted under the plan is
46
<PAGE> 51
determined by the board of directors. The exercise price of options granted
under the plan may not be less than the fair market value on the date the option
is granted.
Each grant will specify the periods of continuous service by the
participant that is necessary before the option or installments will become
exercisable and may provide for earlier exercise including, in the event of a
change of control of T/R Systems or similar event. Except as otherwise
determined by the board of directors, no option may be transferred by the
participant other than by will or the laws of descent and distribution.
To qualify as incentive stock options under the Internal Revenue Code, the
fair market value of the common stock that may be acquired from the exercise of
incentive stock options granted under the plan and options granted under any
other stock option plan during any calendar year may not exceed $100,000 in the
first year that those options can be exercised. In the case of incentive stock
options granted to a person who holds more than 10% of the voting power of our
stock, the exercise price of those options cannot be lower than 110% of the fair
market value of our common stock on the date of grant.
If any option issued under the plan expires or is canceled or terminates,
the shares subject to that option will be available for future grant. No
participant may be granted options for more than 303,030 shares in any calendar
year.
Options may be exercised by payment in cash or other consideration
acceptable to T/R Systems, by transfer of shares owned by the participant for at
least six months or a combination of those methods.
The plan provides that the board of directors may adjust the option price
and number of shares covered by outstanding options as a result of stock splits,
recapitalizations, mergers and similar events. In addition, the board of
directors may amend the plan from time to time, but if required by Nasdaq, any
amendment will be subject to shareholder approval. In no event will any
amendment which would impair the rights of a participant be made without the
participant's approval, nor will an amendment to increase the number of shares
available under the plan be made without shareholder approval. No options may be
granted under this plan after September 23, 2009, but awards granted before that
date may extend beyond it.
1994 Associates Stock Option Plan
Our 1994 associates stock option plan, referred to as the associates plan,
was adopted by the board of directors in October 1994. The board of directors
has authorized an aggregate of 30,303 shares of common stock for issuance under
the associates plan.
The associates plan provides for the grant of non-qualified stock options
to key associates of T/R Systems, including non-employee members of the board of
directors. The associates plan provides that it will be governed by the board of
directors.
The terms of the stock options granted under the associates plan may not
exceed ten years. The exercise price of options granted under the associates
plan is determined by the board of directors.
Options granted under the associates plan vest at the rate specified in
each participant's option agreement. No stock option may be transferred by the
participant other than by will or the laws of descent and distribution. A
participant whose relationship with T/R Systems ceases for any reason other than
death may exercise options within three months of the termination of
47
<PAGE> 52
the participant's relationship with T/R Systems. Options may be exercised up to
one year from the date of a participant's termination by T/R Systems as a result
of death.
If any option issued under the associates plan lapses or terminates due to
its terms, due to termination or as a result of repurchase of that option, the
shares subject to that option shall be available for future grant.
As of October 31, 1999, we had granted options to purchase 22,425 shares of
common stock under the associates plan and an additional 7,878 remained
available for future grant. Of the options granted, options to purchase 11,061
shares of common stock were outstanding and options to purchase 11,364 shares of
common stock had been exercised. The associates plan will terminate in October
2004 unless the board of directors takes action to terminate it sooner.
48
<PAGE> 53
RELATED PARTY TRANSACTIONS
Mr. Gaffin, one of our directors, received options to purchase 6,061 shares
of common stock at $.083 per share under the associates plan on December 4,
1997.
In connection with Mr. Rowe's retirement as an officer on August 31, 1997,
we accelerated vesting and extended the exercisability of options to purchase
113,939 shares of our common stock with an exercise price of $0.83 per share.
Mr. Rowe exercised these options in March 1998.
In connection with the sale of our series B preferred stock in January
1996, the purchasers were furnished with a business plan that contained some
assumptions of future performance which later proved to be inaccurate. In
consideration of the release of any potential claims by the purchasers, T/R
Systems amended the terms of the series B preferred stock so that it would
convert into common stock on the basis of 0.773 shares of common stock for each
share of series B preferred stock instead of on a 0.606-for-one basis. The
following directors and greater than 5% shareholders are beneficial owners of
our series B preferred stock:
- David J. Bellet and entities affiliated with Crown Advisors, Ltd., a
principal shareholder of T/R Systems, beneficially own 508,200 shares of
series B preferred stock.
- Entities affiliated with InterWest Management Partners V, L.P., a
principal shareholder of T/R Systems, beneficially own 1,176,475 shares
of Series B preferred stock. Philip T. Gianos, a director of T/R Systems,
is a general partner of the InterWest funds.
- Entities affiliated with Sevin Rosen Funds IV L.P., a principal
shareholder of T/R Systems, beneficially own 380,395 shares of series B
preferred stock. Charles H. Phipps, a director of T/R Systems, is a
general partner of Sevin Rosen Funds IV L.P.
- Noro-Moseley Partners II, L.P., a principal shareholder of T/R Systems,
beneficially owns 380,395 shares of series B preferred stock.
- Aperture Associates, L.P., a principal shareholder of T/R Systems,
beneficially owns 380,395 shares of series B preferred stock.
49
<PAGE> 54
PRINCIPAL AND SELLING SHAREHOLDERS
The following tables present information about the beneficial ownership of
our common stock as of October 31, 1999, as adjusted to reflect the sale of
shares of common stock in this offering, by:
- each of our directors;
- each named executive officer;
- all of our directors and executive officers as a group;
- each other person or group of affiliated persons, known to us to be the
beneficial owner of more than 5% of our common stock; and
- the selling shareholder.
Percentage of beneficial ownership is based on:
- 8,620,160 shares outstanding as of October 31, 1999; and
- 11,500,160 shares outstanding after completion of this offering.
All options exercisable within 60 days of October 31, 1999 are reported as
currently exercisable. The shares issuable under these options are treated as if
outstanding for computing the percentage ownership of the person holding these
options but are not treated as if outstanding for the purposes of computing the
percentage ownership of any other person.
This table assumes that the underwriters do not exercise their
over-allotment option. If the underwriters exercise the over-allotment option in
full, some of our shareholders will sell an additional 450,000 shares of common
stock. Information about these shareholders, their holdings and the number of
shares they would sell under these circumstances is included in the over-
allotment selling shareholder table below.
Except as otherwise indicated, the shareholders listed in the tables have
sole voting and investment powers over the common stock owned by them.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission. Unless otherwise specified, the address of each of the
individuals or entities named below is: c/o T/R Systems, Inc., 1300 Oakbrook
Drive, Norcross, Georgia 30093.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING NUMBER OF THE OFFERING
------------------- SHARES -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------ --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Charles H. Phipps(1)................ 1,551,380 18.0% -- 1,551,380 13.5%
Philip T. Gianos(2)................. 1,026,869 11.9 -- 1,026,869 8.9
Francis A. Rowe(3).................. 689,400 8.0 120,000 569,400 5.0
E. Neal Tompkins(4)................. 529,441 6.1 -- 529,441 4.6
Michael E. Kohlsdorf(5)............. 372,624 4.2 -- 372,629 3.1
Michael W. Barry(6)................. 160,451 1.8 -- 160,451 1.4
Charles K. Thackston(7)............. 75,000 0.9 -- 75,000 0.6
Andrew Nathan(8).................... 36,363 0.4 -- 36,363 0.3
C. Harold Gaffin(9)................. 18,179 0.2 -- 18,179 0.2
Directors and executive officers as
a group (13 persons)(10).......... 4,580,157 49.2 120,000 4,460,157 36.6
</TABLE>
50
<PAGE> 55
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING NUMBER OF THE OFFERING
------------------- SHARES -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------ --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
OTHER 5% SHAREHOLDERS
Entities affiliated with Sevin Rosen
Funds IV L.P.(1).................. 1,551,380 18.0% -- 1,551,380 13.5%
Noro-Moseley Partners II,
L.P.(11).......................... 1,393,537 16.2 -- 1,393,537 12.1
Aperture Associates, L.P.(12)....... 1,153,536 13.4 -- 1,153,536 10.0
Entities affiliated with InterWest
Management Partners V, L.P.(2).... 1,026,869 11.9 -- 1,026,869 8.9
Entities affiliated with Crown
Advisors, Ltd.(13)................ 620,503 7.2 -- 620,503 5.4
</TABLE>
- -------------------------
(1) Includes:
- 3,030 shares held by Sevin Rosen Bayless Management Co. Mr. Phipps is a
vice president and principal shareholder of Sevin Rosen Bayless; and
- 1,548,350 shares held by Sevin Rosen Funds IV L.P. Mr. Phipps is a
general partner of these funds. As a general partner, Mr. Phipps has
shared voting and dispositive power over these shares.
Mr. Phipps disclaims beneficial ownership of all of these shares except to
the extent of his pecuniary interest. The address of Mr. Phipps and the
Sevin Rosen funds is Two Galleria Tower, 13455 Noel Road, Suite 1670,
Dallas, Texas 75240.
(2) Consists of:
- 1,020,448 shares held by InterWest Partners V, L.P.; and
- 6,421 shares held by InterWest Investors V, L.P.
Mr. Gianos is a general partner of InterWest Management Partners V, L.P.,
the general partner of the above funds. As a general partner, Mr. Gianos
has shared voting and dispositive power over the shares held by these
funds. Mr. Gianos disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest. The address of Mr. Gianos and the
InterWest funds is 3000 Sand Hill Road, No. 3-255, Menlo Park, California
94025.
(3) Includes 659,097 shares held by Mr. Rowe and his wife as joint tenants. Mr.
Rowe has shared voting and dispositive power over these shares.
(4) Includes:
- 107,878 shares issuable upon exercise of options exercisable within 60
days of October 31, 1999;
- 9,090 shares held by Mr. Tompkins and his wife as joint tenants;
- 170,049 shares held by Mr. Tompkins' wife; and
- 30,303 shares held by Mr. Tompkins' daughter.
(5) Includes 334,242 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(6) Includes 99,241 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(7) Consists of 75,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(8) Consists of 36,363 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(9) Includes 6,818 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(10) Includes 692,432 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999. See also footnotes (1)
through (9) above.
(11) The address of Noro-Moseley is 9 North Parkway Square, 4200 Northside
Parkway, N.W., Atlanta, Georgia 30327.
(12) The address of Aperture Associates, L.P. is 505 Montgomery Street, 21st
Floor, San Francisco, California 94111.
(13) Includes:
- 151,913 shares held by Crown Trust and 48,484 shares held by Parson
Finance Limited. David F. Bellet is the chairman of these funds'
administrators;
51
<PAGE> 56
- 197,171 shares held by Crown Associates III, L.P., 94,000 shares held by
Crown Glynn Associates, L.P. and 72,727 shares held by Crown Growth
Partners, L.P. Mr. Bellet is a general partner of the general partners of
these entities;
- 6,060 shares held by roundtable Associates, L.L.C., of which Mr. Bellet
is a managing member; and
- 50,148 shares held by Mr. Bellet.
Except for the shares held directly by Mr. Bellet, he has shared voting and
dispositive power over the shares and disclaims beneficial ownership except
to the extent of his pecuniary interest. The address of each of Mr. Bellet
and the Crown entities is The Lincoln Building, Suite 3405, 60 East 42nd
Street, New York, New York 10165.
The following over-allotment selling shareholder table assumes that the
underwriters exercise their over-allotment option in full. If that happens, the
shareholders named below will be obligated to sell the number of shares
indicated below to the underwriters, and after the offering will beneficially
own the number of shares indicated below. We cannot assure you that the
underwriters will exercise this option.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING NUMBER OF THE OFFERING
------------------- SHARES -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------ --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
E. Neal Tompkins(1)................. 529,441 6.1% 27,081 502,360 4.3%
Michael E. Kohlsdorf(2)............. 372,624 4.2 27,081 345,543 2.9
Michael W. Barry(3)................. 160,451 1.8 8,124 152,327 1.3
Charles K. Thackston(4)............. 75,000 0.9 10,832 64,168 0.6
Jack N. Bartholmae(5)............... 96,967 1.1 5,416 91,551 0.8
OTHER 5% SHAREHOLDERS
Noro-Moseley Partners II, L.P.(6)... 1,393,537 16.2 216,647 1,176,890 10.2
OTHER SHAREHOLDERS
Family Investments, LLC............. 133,240 1.5 119,073 14,167 0.1
Donald F. Greene.................... 61,473 0.7 18,415 43,058 0.4
Keith J. Bradley.................... 58,179 0.7 5,416 52,763 0.5
James Bessen........................ 6,060 0.1 5,416 644 0.0
Gregory A. Chatham(7)............... 8,726 0.4 2,166 6,560 0.2
James W. O'Brien(8)................. 30,302 0.4 1,354 28,948 0.3
Ricky L. Berry(9)................... 2,424 0.2 271 2,153 0.1
Daniel Slayton(10).................. 136,866 1.6 2,708 134,158 1.2
--------
Total..................... 450,000
</TABLE>
- -------------------------
(1) Includes:
- 107,878 shares issuable upon exercise of options exercisable within 60
days of October 31, 1999;
- 9,090 shares held by Mr. Tompkins and his wife as joint tenants;
- 170,049 shares held by Mr. Tompkins' wife; and
- 30,303 shares held by Mr. Tompkins' daughter.
(2) Includes 334,242 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
52
<PAGE> 57
(3) Includes 99,241 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(4) Consists of 75,000 shares of common stock issuable upon exercise of
options exercisable within 60 days of October 31, 1999.
(5) Includes 18,181 shares of common stock issuable upon exercise of options
within 60 days of October 31, 1999.
(6) The address of Noro-Moseley is 9 North Parkway Square, 4200 Northside
Parkway, N.W., Atlanta, Georgia 30327.
(7) Includes 21,576 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(8) Includes 1,969 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(9) Includes 11,061 shares of common stock issuable upon exercise of options
exercisable within 60 days of October 31, 1999.
(10) Includes 109,745 shares held by Slayton & Associates, of which Mr. Slayton
is the sole shareholder.
53
<PAGE> 58
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of T/R Systems currently consists of
88,000,000 shares of common stock, and 12,000,000 shares of preferred stock
consisting of:
- 5,000,000 shares of series A preferred stock, 4,799,999 of which are
outstanding;
- 3,000,000 shares of series B preferred stock, 2,961,585 of which are
outstanding;
- 1,500,000 shares of series C preferred stock, 1,215,500 of which are
outstanding;
- 222,222 shares of series D preferred stock, all of which are outstanding;
and
- 2,277,778 shares of undesignated preferred stock.
Our stock was held of record by 118 shareholders on October 31, 1999.
Before the closing of this offering, our articles of incorporation and
bylaws will be amended and all of our outstanding shares of preferred stock will
be converted into common stock. The remainder of this section describes the
provisions of our articles of incorporation and bylaws as they will be amended
before closing, after giving effect to the conversion of our preferred stock
into common stock.
Upon the closing of the offering, the authorized capital stock of T/R
Systems will consist of:
- 88,000,000 shares of common stock; and
- 12,000,000 shares of preferred stock, of which 2,277,778 shares are
undesignated and remain available for issuance.
After giving effect to this offering and a proposed 1 for 1.65 reverse
stock split, and based upon our outstanding stock at October 31, 1999, there
will be 11,500,160 shares of common stock outstanding, excluding shares of
common stock reserved for issuance upon the exercise of options granted under
our stock option plans. All of these shares will be fully paid and
nonassessable. No shares of preferred stock will be outstanding at the closing
of this offering.
COMMON STOCK
Holders of common stock are entitled to one vote per share in all matters
to be voted upon by shareholders and do not have cumulative voting rights.
Subject to rights of any outstanding preferred stock, holders of common stock
are entitled to receive ratably any dividends that may be declared by the board
of directors out of legally available funds. Upon a liquidation, dissolution or
winding up of T/R Systems, holders of common stock are entitled to share ratably
in all assets remaining after payment of our debts and other liabilities and any
preference payments on any outstanding preferred stock.
Holders of common stock have no preemptive rights or other subscription
rights and no rights to convert their common stock into any other securities.
There are no redemption or sinking fund provisions applicable to the common
stock. All of the outstanding shares of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock which T/R Systems may issue in the future.
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<PAGE> 59
PREFERRED STOCK
Our board of directors is authorized, without any further vote or action by
the shareholders, to issue up to 2,277,778 shares of preferred stock in one or
more series and to fix, before issuance, the number of shares to be included in
any series. The board of directors can also designate the relative powers,
preferences and rights and qualifications, limitations or restrictions of all
shares of any series.
Our board of directors has the authority to determine any of the following
for each series:
- the number of shares of that series and the designation to distinguish
the shares of that series from any other series;
- the voting powers, and whether the voting powers are limited in series;
- the redemption provisions applicable to that series, including the
redemption price or prices to be paid;
- whether or not any dividends will be cumulative, the dividend rate of
that series, and the dates and preferences of dividends on that series;
- the rights of that series upon our voluntary or involuntary dissolution,
or upon any distribution of our assets;
- any provisions permitting the shares of that series to be converted into,
or exchanged for, shares of any other class or any other series of the
same or any other class of stock, or any other security, of T/R Systems
or any other corporation, and the prices or the applicable rates of
exchange;
- any right to subscribe for or to purchase any of our securities or those
of any other corporation;
- any provisions of a sinking fund applicable to that series; and
- any other relative, participating, optional or other special powers,
preferences, rights, qualifications, limitations or restrictions.
The issuance of preferred stock could adversely affect the rights of
holders of common stock. For example, the issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to holders
of common stock. In addition, any issuance could have the effect of delaying or
preventing a change in control of T/R Systems and could make the removal of our
present management more difficult. Upon the closing of this offering, there will
be no shares of preferred stock outstanding and we have no present plans to
issue shares of preferred stock.
ANTITAKEOVER EFFECTS OF GEORGIA LAW PROVISIONS
Fair Price Provisions
T/R Systems has elected in its bylaws to be subject to the fair price
provisions of the Georgia Business Corporation Code, referred to as the GBCC.
These provisions require that some business combinations between a Georgia
corporation and an interested shareholder or its affiliates be:
- unanimously approved by continuing directors who must constitute at least
three members of the board of directors at the time of the approval; or
55
<PAGE> 60
- recommended by at least two-thirds of the continuing directors and
approved by a majority of the votes entitled to be cast by holders of
voting shares, other than voting shares beneficially owned by the
interested shareholder, unless fair price criteria are met.
Business Combinations Under the Fair Price Provisions
For the purposes of these provisions, a business combination includes:
- any merger of T/R Systems or our subsidiaries;
- any share exchange;
- any sale, lease, transfer or other disposition of assets by us or any of
our subsidiaries in a transaction or series of transactions occurring
within a twelve-month period and having an aggregate book value equal to
10% or more of our net assets;
- the issuance or transfer by us or any of our subsidiaries of any equity
securities of T/R Systems or any subsidiary in a transaction or series of
transactions occurring within a twelve-month period and having an
aggregate market value of five percent or more of the total market value
of our outstanding stock, except through the exercise of warrants or
rights offered pro rata to all holders of our voting securities;
- the adoption of any plan or proposal for our liquidation or dissolution
in which anything other than cash will be received by an interested
shareholder or its affiliates; and
- any transaction or series of transactions occurring within a twelve-month
period which has the effect of increasing by 5% or more the proportionate
amount of shares of any class or series of equity securities of T/R
Systems or any of our subsidiaries that is beneficially owned by an
interested shareholder or its affiliates.
Interested Shareholders Under the Fair Price Provisions
An interested shareholder is defined by the GBCC to include:
- any person that, with its affiliates, beneficially owns or has the right
to own 10% or more of the outstanding voting power of a corporation; or
- any person that is an affiliate of the corporation and has, at any time
within the preceding two-year period, been the beneficial owner of 10% or
more of the voting power of the corporation.
Continuing Directors Under the Fair Price Provisions
A continuing director includes:
- any director who is not an affiliate or associate of an interested
shareholder or its affiliates and who was a director before the
shareholder becoming an interested shareholder; and
- any successor of that director who is not an affiliate or associate of an
interested shareholder or its affiliates and who is recommended or
elected by a majority of continuing directors.
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<PAGE> 61
When the Fair Price Provisions Do Not Apply
The fair price provisions do not restrict a business combination if:
- the aggregate amount of the cash, and fair market value of any non-cash
property, to be received per share by the shareholders in the business
combination is at least equal to the highest of:
- the highest per share price, including brokerage commissions, transfer
taxes and soliciting dealers' fees, paid by the interested shareholder
for any shares of the same class or series acquired by it within two
years before the public announcement of the business combination,
referred to as the announcement date, or in the transaction in which
it became an interested shareholder;
- the higher of the fair market value per share as determined on the
announcement date or the date on which the interested shareholder
first became an interested shareholder; or
- in the case of shares other than common shares, the highest amount per
share to which preferred shareholders are entitled in the event of
liquidation, dissolution or winding up of the corporation, but only if
the interested shareholder acquired the preferred shares within the
two-year period immediately before the announcement date; and
- shareholders receive cash or the form of consideration used in the past
by the interested shareholder to purchase the largest number of shares of
the same class or series.
In addition, during the period after the shareholder became an interested
shareholder and before the consummation of the business combination, without the
approval of a majority of the continuing directors, there generally may not have
been:
- a failure to declare and pay full dividends on the corporation's
outstanding preferred shares;
- a reduction in the annual rate of dividends paid on common shares, except
to reflect any subdivision of the shares;
- an increase in the annual rate of dividends to reflect any
reclassification of shares which has the effect of reducing the number of
outstanding shares; and
- more than a 1% increase in the interested shareholder's ownership of any
class or series of the corporation's shares in any twelve-month period.
An interested shareholder generally may not have received a direct or
indirect benefit, except proportionately as a shareholder, of any loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided by the corporation or its subsidiaries. The
fair price provisions do not apply if a shareholder has been an interested
shareholder for three years and has not increased its percentage interest in any
class or series of shares by more than 1% in any twelve-month period.
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<PAGE> 62
Business Combination Provisions
We have also elected in our bylaws to be subject to the business
combination provisions of the GBCC. These provisions generally prohibit business
combinations between a Georgia corporation with at least 100 beneficial owners
in Georgia and that meets other criteria, and an interested shareholder or its
affiliates for a period of five years after the shareholder becomes an
interested shareholder of the corporation. During that five-year period, these
provisions prohibit any business combination with an interested shareholder
unless:
- before the shareholder became an interested shareholder, the board of
directors approved either the business combination or the transaction by
which the shareholder became an interested shareholder;
- in the transaction that resulted in the shareholder becoming an
interested shareholder, the interested shareholder became the beneficial
owner of at least 90% of the outstanding voting stock of the corporation
which was not held by directors, officers, their affiliates, subsidiaries
or specified employee stock plans of the corporation; or
- after becoming an interested shareholder, that shareholder acquired
additional shares resulting in that shareholder owning at least 90% of
the outstanding voting stock of the corporation, excluding specified
shares, and the business combination is approved by a majority of voting
stock not held by the interested shareholder, directors, officers, their
affiliates, subsidiaries or specified employee stock plans of the
corporation.
Business Combinations
For the purposes of these provisions, a business combination includes:
- any merger or consolidation of T/R Systems or any of our subsidiaries;
- any sale, lease, transfer or other disposition of our assets or those of
any of our subsidiaries in a transaction or series of transactions having
an aggregate book value of 10% or more of our net assets;
- the issuance or transfer by us or any of our subsidiaries of any of our
or their equity securities in a transaction or series of transactions
having an aggregate market value of 5% or more of the total market value
of our outstanding stock, except through the exercise of warrants or
rights offered pro rata to all holders of voting securities, or the
exercise or conversion of securities outstanding before the shareholder
became an interested shareholder;
- the adoption of any plan or proposal for our liquidation or dissolution;
- any transaction which has the effect of increasing by 5% or more the
proportionate amount of shares of any class or series of our equity
securities which is beneficially owned by the interested shareholder or
its affiliates;
- other than in the ordinary course of business, the receipt by an
interested shareholder, except proportionally as a shareholder, of any
benefit from any loan, advance, guarantee, pledge, financial benefit, tax
credit or tax advantage from us; and
- any share exchange.
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<PAGE> 63
When the Business Combination Provisions Do Not Apply
The restrictions on business combinations do not apply to:
- any person who was an interested shareholder before the adoption of the
bylaw which made the provisions applicable to the corporation; or
- any person who becomes an interested shareholder inadvertently,
subsequently divests sufficient shares so that the shareholder ceases to
be an interested shareholder and would not, at any time within the
five-year period immediately before a business combination involving the
shareholder, have been an interested shareholder but for the inadvertent
acquisition.
ANTITAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND BYLAWS
Our charter and bylaws contain a number of provisions relating to corporate
governance and the rights of shareholders that could have a potential
anti-takeover effect. These provisions may delay or prevent a change of control
of T/R Systems. These provisions include:
- the classification of our board of directors into three classes, each
class serving for a staggered three-year term;
- the requirement that shareholders may remove directors only for cause and
only by the affirmative vote of at least 80% of our voting stock;
- the authority of our board of directors to issue series of preferred
stock with voting rights and other provisions as the board of directors
may determine;
- the requirement that shareholder action can be taken only at an annual or
special meeting of shareholders and prohibiting shareholder action by
written consent in lieu of a meeting;
- an advance notice procedure for shareholders to make nominations of
candidates for election as directors;
- the requirement that a special shareholders' meeting may only be called
by the chairman of the board or at the direction of the majority of the
board of directors, and not by shareholders; and
- a requirement that a vote of at least 80% of our voting stock is required
to amend provisions of the charter and bylaws relating to:
- the classification of the board of directors and removal of
directors;
- special meetings of shareholders and the order of business of
shareholder meetings;
- nominations of directors to fill vacancies or newly created
directorships; or
- the election to be subject to the fair price and business
combination provisions of the Georgia corporate laws.
These provisions have some anti-takeover effects and may discourage
proposals that could be viewed as favorable to shareholders. The description
above is intended only as a summary of the material provisions. You should refer
to our restated articles and bylaws, the forms of which have been filed as
exhibits to the registration statement filed in connection with this offering,
for a more complete description.
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<PAGE> 64
INDEMNIFICATION PROVISIONS
Our restated articles of incorporation will provide that a director will
not be liable to T/R Systems or our shareholders for claims arising from his
actions or inactions as a director, except to the extent otherwise required by
the GBCC.
Our articles of incorporation and bylaws will provide that we shall
indemnify our directors and officers to the fullest extent permitted by Georgia
law, and that this indemnification will not limit the availability of any other
remedies to these persons.
TRANSFER AGENT
The name and address of the transfer agent for our common stock is
Equiserve L.P., 150 Royall Street, Canton, Massachusetts 02021. Its telephone
number is (781) 575-3400.
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect the prevailing market price of our common stock and impair our
ability to raise equity capital in the future.
Upon the closing of this offering, we will have 11,613,190 outstanding
shares of common stock. Of these shares, the 3,000,000 shares sold in the
offering, plus any shares issued upon exercise of the underwriters'
over-allotment option, will be freely tradable without restriction under the
Securities Act, unless purchased by our affiliates. The term affiliate is
defined in Rule 144 under the Securities Act. In general, affiliates include
officers, directors or 10% shareholders.
The remaining 8,613,190 shares outstanding are restricted securities within
the meaning of Rule 144. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 under the Securities Act, which are summarized below.
Sales of restricted securities in the public market, or the availability of
these shares for sale, could adversely affect the market price of the common
stock.
Holders of 97.2% of the remaining 8,613,190 shares outstanding, including
all of our officers and directors, have entered into lock-up agreements which
generally provide that they will not offer, sell, contract to sell or grant any
option to purchase or transfer or dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 180 days after the date of this prospectus without the prior written consent
of BancBoston Robertson Stephens Inc.
Notwithstanding possible earlier eligibility for sale under the Securities
Act, shares subject to lock-up agreements will not be salable until these
agreements expire or are waived by BancBoston Robertson Stephens Inc. Taking
into account the lock-up agreements, and assuming BancBoston Robertson Stephens
Inc. does not release shareholders from these agreements, the following
restricted shares will be eligible for sale in the public market at the
following times:
- beginning on the date of this prospectus, approximately 208,550 shares
will be immediately available for sale in the public market;
- beginning 90 days after the date of this prospectus, approximately 35,906
shares will be eligible for sale, subject to volume, manner of sale and
other limitations under Rule 144;
- beginning 180 days after the date of this prospectus, approximately
8,105,268 shares will be eligible for sale, approximately 6,832,746 of
which will be subject to volume, manner of sale and other limitations
under Rule 144; and
- the remaining 263,466 shares will become eligible for sale under Rule 144
from time to time.
In general, under Rule 144 a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 116,000 shares immediately after the offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks immediately before the sale.
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<PAGE> 66
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about T/R
Systems.
Under Rule 144(k), a person who is not considered to have been our
affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Our employees, officers, directors or consultants who purchased shares
under a written compensatory plan or contract may be entitled to resell these
shares in reliance upon Rule 701. Rule 701 provides that affiliates may sell
their Rule 701 shares under Rule 144 without complying with the holding period
requirement and that non-affiliates may sell their shares in reliance on Rule
144 without complying with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this prospectus before selling
those shares.
In addition, we intend to file registration statements under the Securities
Act as promptly as possible after the effective date of this prospectus to
register shares to be issued under our employee benefit plans. As a result, any
options or rights exercised under any of our existing stock option plans after
the effectiveness of the registration statements will also be freely tradable in
the public market. However, shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise exempt under Rule 701. As of October
31, 1999 there were outstanding options for the purchase of 1,610,181 shares of
common stock, and options to purchase 816,948 of these shares were exercisable.
REGISTRATION RIGHTS
When we sold some of the series of our preferred stock, we entered into a
registration rights agreement granting some of our shareholders the right to
require us to file registration statements on up to eight occasions. The parties
to that agreement, who will hold an aggregate of 7,613,763 shares of our common
stock upon completion of this offering, are entitled to include their shares in
any of those registrations, subject to possible underwriter cutbacks. If we
propose to register any of our securities under the Securities Act at any time,
the holders of those shares are entitled to include their shares in our
registration, also subject to possible underwriter cutbacks.
In addition, under additional registration rights agreements with some of
our shareholders, if any of those holders hold more than 1% of our outstanding
common stock, they could also include shares in any registration, subject to
possible underwriter cutbacks. Giving effect to the closing of this offering,
under these additional registration agreements, a holder of 134,680 shares will
have these rights. We are generally required to bear the expenses of all
registrations, except underwriting discounts and commissions.
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<PAGE> 67
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and Raymond
James & Associates, Inc., have agreed with us and the selling shareholder,
subject to conditions in the underwriting agreement, to purchase from us and the
selling shareholder the number of shares of common stock listed opposite their
names below. The underwriters are committed to purchase and pay for all shares
if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc. .........................
U.S. Bancorp Piper Jaffray Inc. ............................
Raymond James & Associates, Inc. ...........................
---------
Total............................................. 3,000,000
=========
</TABLE>
The representatives have advised us and the selling shareholders that the
underwriters propose to offer the shares of common stock to the public at the
public offering price on the cover page of this prospectus. The underwriters may
sell shares to dealers at that price less a concession of not in excess of
$ per share, of which $ may be reallowed to other dealers.
After this offering, the public offering price, concession and reallowance to
dealers may be reduced by the representatives, but any reduction will not change
the amount of proceeds to be received by us or the selling shareholders. The
common stock is offered by the underwriters on the terms discussed in this
prospectus, subject to receipt and acceptance by them, and subject to their
right to reject any order.
Before this offering, there has been no public market for our common stock.
Consequently, the public offering price for the common stock offered by this
prospectus will be determined through negotiations among the representatives and
us. Among the factors considered in these negotiations will be prevailing market
conditions, our financial information, market valuations of other companies that
we and the representatives believe to be comparable to us, estimates of our
business potential and the present state of our development.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-Allotment Option
The shareholders identified in "Principal and Selling Shareholders" have
granted the underwriters an option, exercisable during the 30-day period after
the date of this prospectus, to purchase up to 450,000 additional shares of
common stock solely to cover any over-allotments, at the public offering price
less the underwriting discount on the cover page of this prospectus. If the
underwriters exercise their over-allotment option to purchase any of the
additional 450,000 shares of common stock, they have agreed, subject to
specified conditions, to purchase approximately the same percentage of these
additional shares as the number of shares to be purchased by each of them bears
to the total number of shares of common stock in this
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<PAGE> 68
offering. If purchased, these additional shares will be sold by the underwriters
on the same terms as those on which the shares offered in this offering are
being sold. The selling shareholders will be obligated to sell shares to the
underwriters to the extent the over-allotment option is exercised.
The following table summarizes the compensation to be paid to the
underwriters by T/R Systems and the selling shareholders:
<TABLE>
<CAPTION>
TOTAL
---------------------
WITHOUT WITH
OVER- OVER-
PER SHARE ALLOTMENT ALLOTMENT
--------- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by T/R
Systems.......................................... $ $ $
Underwriting discounts and commissions payable by the
selling shareholders.............................
</TABLE>
We estimate the expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will be
approximately $ .
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters, us and the selling shareholders against civil liabilities,
including liabilities under the Securities Act.
Lock-Up Agreements
Holders of 97.2% of our outstanding stock, including all of our officers
and directors, have signed lock up agreements with the underwriters. Under these
agreements, these parties have agreed, during the period of 180 days after the
date of this prospectus and subject to various exceptions, not to offer to sell,
contract to sell, or transfer any shares of common stock they own or later
acquire, other than shares purchased in the public markets. These agreements
contain similar terms for options or warrants to purchase any shares of common
stock, or any securities convertible into or exchangeable for shares of common
stock. However, BancBoston Robertson Stephens Inc. may, in its sole discretion
and at any time without notice, release any portion of the securities subject to
lock-up agreements. There are no existing agreements between the representatives
and any of our shareholders who have executed a lock-up agreement providing
consent to the sale of shares before the expiration of the lock-up period.
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of BancBoston Robertson Stephens Inc., consent
to the disposition of any shares held by stockholders subject to lock-up
agreements before the expiration of the lock-up period, or issue, sell, contract
to sell, or dispose of, any shares of common stock, any options or warrants to
purchase any shares of common stock or any securities convertible into,
exercisable for or exchangeable for shares of common stock. However, the
following are examples of exceptions to this agreement:
- our sale of shares in this offering;
- the issuance of our common stock upon the exercise of outstanding options
or warrants; and
- the issuance of options under existing stock option and incentive plans,
provided that those options do not vest before the expiration of the
lock-up period.
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Listing
We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol TRSI.
Stabilization
The representatives have advised us that, under Regulation M of the
Exchange Act, some persons participating in the offering may engage in any of
the following transactions:
- stabilizing bids, which are bids for the purchase of common stock on
behalf of the underwriters that are intended to fix or maintain the price
of the common stock;
- syndicate covering transactions, which are bids for the purchase of
common stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering; a short
position results when an underwriter sells more shares than it has
committed to purchase; and
- penalty bids, which are arrangements that permit the representatives to
reclaim the selling concession otherwise accruing to an underwriter or
syndicate member in connection with the offering if the common stock
originally sold by the underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction, and has not been
effectively placed by this underwriter or syndicate member.
These transactions may be effected on the Nasdaq National Market and, if
commenced, may be discontinued at any time.
Directed Share Program
At our request, the underwriters have reserved up to 180,000 shares of
common stock to be issued by us and offered for sale, at the initial public
offering price, to directors, officers, employees, business associates and
related persons of T/R Systems. The number of shares of common stock available
for sale to the general public will be reduced to the extent that these
individuals purchase all or a portion of these reserved shares. Any reserved
shares which are not purchased will be offered by the underwriters to the
general public on the same terms as the shares of common stock offered in this
offering.
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<PAGE> 70
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for T/R Systems by Jones, Day, Reavis & Pogue, Atlanta, Georgia. Hale and
Dorr LLP, Washington, D.C., is serving as legal counsel to the underwriters for
this offering.
EXPERTS
The financial statements as of January 31, 1998 and 1999 and for each of
the three years in the period ended January 31, 1999, included in this
prospectus and the related financial statement schedule included elsewhere in
the registration statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing in this prospectus
and elsewhere in the registration statement, and have been so included in
reliance upon the reports of the firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act to offer shares of our common
stock. This prospectus is only a part of the registration statement and does not
contain all of the information included in the registration statement. Further
information about T/R Systems and our common stock can be found in the
registration statement. The rules and regulations of the SEC allow us to omit
various information from the prospectus that is included in the registration
statement. Statements made in this prospectus about the contents of any
contract, agreement or other document are summaries. If we filed any of those
documents as exhibits to the registration statement, you may read the document
itself for a complete description of its terms.
The registration statement and the related exhibits and schedules filed by
us with the SEC can be inspected and copies obtained at prescribed rates from
the public reference facilities maintained by the SEC at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330.
The SEC also maintains a website that contains reports, proxy and
information statements and other information about registrants that file
electronically with the SEC, like T/R Systems, at http://www.sec.gov.
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<PAGE> 71
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of January 31, 1998 and 1999 and
(Unaudited) October 31, 1999.............................. F-3
Statements of Operations for the Years Ended January 31,
1997, 1998 and 1999 and (Unaudited) for the nine months
ended October 31, 1998 and 1999........................... F-4
Statements of Shareholders' Deficit for the Years Ended
January 31, 1997, 1998 and 1999 and (Unaudited) for the
nine months ended October 31, 1999........................ F-5
Statements of Cash Flows for the Years Ended January 31,
1997, 1998 and 1999 and (Unaudited) for the nine months
ended October 31, 1998 and 1999........................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 72
The financial statements included herein have been adjusted to give effect
to the anticipated 1:1.65 reverse stock split as described in Note 14 to the
financial statements. We expect to be in a position to render the following
audit report upon the effectiveness of such event assuming that from November 9,
1999, to the effective date of such event, no other events will have occurred
that would affect the accompanying financial statements or notes thereto.
Deloitte & Touche LLP
Atlanta, Georgia
November 29, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of T/R Systems, Inc.:
We have audited the accompanying balance sheets of T/R Systems, Inc. (the
"Company") as of January 31, 1998 and 1999 and the related statements of
operations, shareholders' deficit, and cash flows for each of the three years in
the period ended January 31, 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, such financial statements present fairly, in all material
respects, the financial position of the Company at January 31, 1998 and 1999 and
the results of its operations and its cash flows for each of the three years in
the period ended January 31, 1999 in conformity with generally accepted
accounting principles.
Atlanta, Georgia
March 26, 1999
(May 17, 1999 as to the first paragraph of Note 9 and , 1999 as to
Note 14)
F-2
<PAGE> 73
T/R SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
------------------ --------------------
1999
1998 1999 1999 PRO FORMA
------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 3,527 $ 1,966 $ 3,344 $ 3,344
Restricted cash........................................... 200 200 200 200
Receivables, net of allowance of $175, $200, and $124,
respectively............................................ 2,369 2,592 2,972 2,972
Inventories, net.......................................... 1,116 1,810 2,361 2,361
Prepaid expenses and other................................ 203 191 295 295
------- -------- -------- --------
Total current assets................................ 7,415 6,759 9,172 9,172
Property and equipment, net................................. 769 1,011 895 895
------- -------- -------- --------
$ 8,184 $ 7,770 $ 10,067 $ 10,067
======= ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 1,511 $ 1,681 $ 1,576 $ 1,576
Deferred revenue.......................................... 65 159 705 705
Accrued salaries and wages................................ 344 574 850 850
Borrowing under line of credit............................ -- 27 -- --
Other liabilities......................................... 378 374 545 545
Current portion of long-term debt......................... -- 52 52 52
------- -------- -------- --------
Total current liabilities........................... 2,298 2,867 3,728 3,728
Deferred royalty revenue.................................... 625 -- -- --
Long-term debt, less current portion........................ -- 99 61 61
Commitments (Note 10)
Redeemable, convertible preferred stock:
$0.01 par value, 9,500,000 shares designated:
Series A redeemable, convertible preferred stock,
5,000,000 shares designated, 4,799,999 shares issued and
outstanding, liquidation preference of $4,800
(historical), none issued and outstanding (pro forma)... 4,773 4,782 4,789 --
Series B redeemable, convertible preferred stock,
3,000,000 shares designated, 2,961,585 shares issued and
outstanding, liquidation preference of $7,552
(historical), none issued and outstanding (pro forma)... 7,519 7,530 7,538 --
Series C redeemable, convertible preferred stock,
1,500,000 shares designated, 1,215,500 shares issued and
outstanding, liquidation preference of $2,735
(historical), none issued and outstanding (pro forma)... 2,728 2,730 2,732 --
Shareholders' Equity (Deficit):
Preferred stock, $0.01 par value, 12,000,000 shares
authorized, 9,500,000 shares designated as redeemable,
convertible preferred stock, 222,222 shares series D
convertible preferred stock designated, issued and
outstanding at October 31, 1999, liquidation preference
of $1,000 (historical), none issued and outstanding (pro
forma).................................................. -- -- 2 --
Common stock, $0.01 par value, 88,000,000 shares
authorized, 2,277,473, 2,496,920 and 2,551,247 shares
issued and outstanding (historical), 8,620,160 issued
and outstanding (pro forma)............................. 23 25 26 86
Additional paid-in capital................................ 1,044 1,154 2,171 17,172
Deferred compensation..................................... (125) (93) (68) (68)
Accumulated deficit....................................... (10,701) (11,324) (10,912) (10,912)
------- -------- -------- --------
Total shareholders' equity (deficit)................ (9,759) (10,238) (8,781) 6,278
------- -------- -------- --------
$ 8,184 $ 7,770 $ 10,067 $ 10,067
======= ======== ======== ========
</TABLE>
See notes to financial statements
F-3
<PAGE> 74
T/R SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
--------------------------- -----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue...................................... $ 4,036 $12,032 $15,847 $12,034 $15,704
Cost of sales................................ 3,387 6,107 6,579 5,041 6,662
------- ------- ------- ------- -------
Gross profit................................. 649 5,925 9,268 6,993 9,042
Operating Expenses:
Research and development................... 1,786 2,164 3,202 2,423 2,555
Sales and marketing........................ 2,185 3,542 4,891 3,532 4,668
General and administrative................. 1,011 1,623 1,708 1,285 1,488
------- ------- ------- ------- -------
Total operating expenses........... 4,982 7,329 9,801 7,240 8,711
------- ------- ------- ------- -------
Operating income (loss)...................... (4,333) (1,404) (533) (247) 331
Interest income, net......................... 213 186 150 135 81
Other expenses............................... -- -- (240) (240) --
------- ------- ------- ------- -------
Net income (loss)............................ $(4,120) $(1,218) $ (623) $ (352) $ 412
======= ======= ======= ======= =======
Net income (loss) per common share --Basic... $ (2.43) $ (0.60) $ (0.26) $ (0.15) $ 0.16
======= ======= ======= ======= =======
Net income (loss) per common
share -- Diluted........................... $ (2.43) $ (0.60) $ (0.26) $ (0.15) $ 0.04
======= ======= ======= ======= =======
Pro forma net income (loss) per common
share -- Basic (unaudited)................. $ (0.07) $ 0.05
======= =======
Pro forma net income (loss) per common
share -- Diluted (unaudited)............... $ (0.07) $ 0.04
======= =======
</TABLE>
See notes to financial statements
F-4
<PAGE> 75
T/R SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES D
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- --------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------ ------ ------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance -- January 31,
1996........................ 1,635 $16 $ 837 $ (5,363) $ (4,510)
Stock option exercises.... 189 2 13 15
Accretion of redeemable
convertible preferred
stock................... (20) (20)
Net loss.................. (4,120) (4,120)
----- --- ------ -------- --------
Balance -- January 31,
1997...................... 1,824 18 830 (9,483) (8,635)
Stock option exercises.... 453 5 106 111
Deferred compensation
related to stock
options................. 130 $(130) --
Amortization of deferred
compensation............ 5 5
Accretion of redeemable
convertible preferred
stock................... (22) (22)
Net loss.................. (1,218) (1,218)
----- --- ------ ----- -------- --------
Balance -- January 31,
1998...................... 2,277 23 1,044 (125) (10,701) (9,759)
Stock option exercises.... 220 2 132 134
Amortization of deferred
compensation............ 32 32
Accretion of redeemable
convertible preferred
stock................... (22) (22)
Net loss.................. (623) (623)
----- --- ------ ----- -------- --------
Balance -- January 31,
1999...................... 2,497 25 1,154 (93) (11,324) (10,238)
Issuance of series D
preferred stock at $4.50
per share, net of
issuance costs of $5.... 222 $2 993 995
Stock option exercises
(unaudited)............. 54 1 41 42
Amortization of deferred
compensation
(unaudited)............. 25 25
Accretion of redeemable
convertible preferred
stock (unaudited)....... (17) (17)
Net income (unaudited).... 412 412
--- -- ----- --- ------ ----- -------- --------
Balance -- October 31, 1999
(unaudited)............... 222 $2 2,551 $26 $2,171 $ (68) $(10,912) $ (8,781)
=== == ===== === ====== ===== ======== ========
</TABLE>
See notes to financial statements
F-5
<PAGE> 76
T/R SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JANUARY 31, OCTOBER 31,
--------------------------- ----------------
1997 1998 1999 1998 1999
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss).................................... $(4,120) $(1,218) $ (623) $ (352) $ 412
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation....................................... 251 537 702 536 392
Deferred compensation expense...................... -- 5 32 24 24
Changes in assets and liabilities:
Decrease (increase) in receivables.............. (82) (1,720) (223) 320 (379)
Decrease (increase) in inventories.............. 14 (420) (694) (695) (551)
Decrease (increase) in prepaid expenses and
other......................................... (81) (1) 12 (165) (104)
Increase (decrease) in accounts payable......... (160) 1,116 170 46 (104)
Increase (decrease) in deferred revenue......... -- 65 94 (319) 546
Increase in accrued salaries and wages.......... 65 209 230 53 276
Increase (decrease) in other liabilities........ 181 (43) (4) 56 169
Decrease in deferred royalty revenue............ (243) (246) (625) (625) --
------- ------- ------- ------- ------
Net cash provided by (used in) operating
activities.................................. (4,175) (1,716) (929) (483) 681
Investing Activities:
Purchases of property and equipment.................. (335) (619) (944) (791) (276)
Financing Activities:
Restricted cash...................................... (400) 200 -- -- --
Credit facility borrowings........................... -- -- 27 27 (27)
Proceeds on issuance of long term debt............... -- -- 156 97 --
Principal repayments on long term debt............... -- -- (5) -- (38)
Proceeds from sale of common stock................... 15 96 134 128 38
Proceeds from sale of series C preferred stock....... -- 2,741 -- -- --
Proceeds from sale of series D preferred stock....... -- -- -- -- 1,000
------- ------- ------- ------- ------
Net cash provided by (used in) financing
activities.................................. (385) 3,037 312 252 973
------- ------- ------- ------- ------
Net increase (decrease) in cash and cash equivalents... (4,895) 702 (1,561) (1,022) 1,378
Cash and Cash Equivalents:
Beginning of period.................................. 7,720 2,825 3,527 3,527 1,966
------- ------- ------- ------- ------
End of period........................................ $ 2,825 $ 3,527 $ 1,966 $ 2,505 $3,344
======= ======= ======= ======= ======
Cash paid for interest................................. $ -- $ -- $ 17 $ 5 $ 11
======= ======= ======= ======= ======
Supplemental Disclosure of Noncash Financing
Activities:
During the year ended January 31, 1998, T/R Systems
issued 24,242 shares of common stock in exchange
for 7,000 shares of series C preferred stock.
</TABLE>
See notes to financial statements
F-6
<PAGE> 77
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF OCTOBER 31, 1999 AND FOR THE NINE MONTHS ENDED OCTOBER 31,
1998 AND 1999 IS UNAUDITED)
1. NATURE OF BUSINESS
T/R Systems, Inc. was incorporated in Georgia in September 1991. We design,
develop, and market digital document processing and printing systems for the
print-on-demand market. We distribute our products in North America and
internationally through a network of independent dealers and through our
distribution relationship with Minolta Co., Ltd.
2. SIGNIFICANT ACCOUNTING POLICIES
Unaudited Pro Forma Balance Sheet -- Upon the closing of our initial public
offering, all outstanding shares of series A, series B, series C, and series D
convertible preferred stock will convert automatically into shares of our common
stock. The unaudited pro forma balance sheet as of October 31, 1999 gives effect
to this conversion as if it had occurred on October 31, 1999.
Cash and Cash Equivalents -- Cash equivalents are stated at cost, which
approximates market value, and include investments in a money market account and
commercial paper with original maturities of three months or less.
Revenue Recognition -- Printing system revenues are recognized based on the
guidance in American Institute of Certified Public Accountants Statement of
Position 97-2, Software Revenue Recognition. We recognize revenue from printing
systems when persuasive evidence of an arrangement exists, the system has been
shipped, the fee is fixed or determinable and collectibility of the fee is
probable. Under multiple element arrangements, we allocate revenue to the
various elements based on vendor-specific objective evidence of fair value. Our
products do not require significant customization. Before the February 1, 1998
effective date of SOP 97-2, we recognized revenue on printing systems upon
shipment. The adoption of SOP 97-2 had no effect on our accounting for revenue.
We recognize revenue from the sale of printing consumables upon shipment.
We recognize revenue from customer service plans ratably over the terms of
each plan, typically one to three years. Engineering service fees are recognized
as the services are rendered. Nonrefundable prepaid royalties are recognized as
revenue over the term of the royalty agreement based on the greater of actual
royalties earned or the straight-line method. Revenue from customer service
plans, engineering services and royalties individually have been less than 10%
of total revenues in all years and the nine months ended October 31, 1998 and
1999.
Research and Development Costs -- Research and development costs are
charged to expense when incurred. Software development costs are expensed as
incurred until technological feasibility is determined. To date, we have
expensed all software development costs.
Inventory -- Inventory is valued at the lower of cost or market. Cost is
determined on the first-in, first-out basis.
Property and Equipment -- Property and equipment is stated at cost.
Depreciation is computed on a straight-line basis over the estimated lives of
the assets, generally one and one-half to seven years.
F-7
<PAGE> 78
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Product Warranty -- We provide for estimated future warranty costs as
products are sold.
Income Taxes -- Deferred tax assets and liabilities are determined for
differences between the financial reporting basis and income tax basis of the
assets and liabilities that will result in taxable or deductible amounts in the
future, based on enacted tax rates applicable to the periods that the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Impairment of Long-Lived Assets -- Effective February 1, 1996, we adopted
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires that long-lived assets be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Any impairment losses are reported in the period that
the recognition criteria are first applied, based on the fair value of the
asset. Long-lived assets to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell. There was no impact on our financial
statements upon adoption of SFAS No. 121.
Stock-Based Compensation -- We account for compensation cost related to
employee stock options based on the guidance in Accounting Principles Board
Opinion 25, Accounting for Stock Issued to Employees. In fiscal 1997, we adopted
the disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. This statement established a fair-value based method of accounting
for compensation cost related to stock options and other forms of stock-based
compensation plans. The adoption of the recognition provisions related to
employee arrangements under SFAS No. 123 is optional; however, the pro forma
effects on operations had these recognition provisions been elected are required
to be disclosed in financial statements.
Net Income or Loss Per Common Share -- Net income or loss per common share
is computed based on the guidance in SFAS No. 128, Earnings Per Share. Basic net
income or loss per common share is computed by dividing net income or loss
available to common shareholders by the weighted average common shares
outstanding. Diluted net income or loss per common share is computed by dividing
net income or loss available to common shareholders by the weighted average
common shares outstanding plus the dilutive effect of stock options and
convertible preferred stock; see Note 13.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Comprehensive Income -- Effective February 1, 1998, we adopted SFAS No.
130, Reporting Comprehensive Income. This statement establishes standards for
reporting and display of comprehensive income and its components, including
revenues, expenses, gains, and losses in a full set of general purpose financial
statements. Because we have no components of other comprehensive income, the
adoption of this statement had no effect on our financial statements.
F-8
<PAGE> 79
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments -- The carrying value of our cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
notes payable approximate their fair values.
Unaudited Interim Financial Information -- The accompanying interim
financial statements are unaudited. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
These adjustments consist only of normal recurring entries. Operating results
for the nine months ended October 31, 1999 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period.
New Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is effective for all fiscal years beginning after June
15, 2000. This statement establishes accounting and reporting standards for
derivative instruments, including some derivative instruments embedded in other
contracts and for hedging activities. Under SFAS No. 133, some contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. We intend to adopt SFAS No. 133 effective February 1, 2001. Because
we hold no derivative financial instruments, the adoption of SFAS No. 133 is not
expected to have a significant impact on our financial position or results of
operations.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions. SOP 98-9
requires recognition of revenue using the residual method when vendor-specific
objective evidence of fair value does not exist for one or more of the delivered
elements in an arrangement. Under the residual method, the arrangement fee is
recognized as follows:
- the total fair value of the undelivered elements, as indicated by
vendor-specific objective evidence, is deferred and subsequently
recognized based on the guidance in the relevant sections of SOP 97-2;
and
- the difference between the total arrangement fee and the amount deferred
for the undelivered elements is recognized as revenue related to the
delivered elements.
We will adopt SOP 98-9 in fiscal 2001 and do not expect the adoption of SOP
98-9 to have a material effect on revenue recognition.
3. INVENTORIES
Inventories at January 31, 1998 and 1999 and October 31, 1999 consisted of
the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------- OCTOBER 31,
1998 1999 1999
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Components and supplies.......................... $1,393 $1,817 $1,994
Finished goods................................... 393 566 767
------ ------ ------
1,786 2,383 2,761
Less reserve for potential losses................ 670 573 400
------ ------ ------
$1,116 $1,810 $2,361
====== ====== ======
</TABLE>
F-9
<PAGE> 80
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment at January 31, 1998 and 1999 and October 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------- OCTOBER 31,
1998 1999 1999
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Furniture and fixtures........................... $ 59 $ 564 $ 625
Machinery and equipment.......................... 1,420 1,557 1,786
Leasehold improvements........................... 234 68 71
------ ------ ------
1,713 2,189 2,482
Less accumulated depreciation.................... 944 1,178 1,587
------ ------ ------
Property and equipment, net............ $ 769 $1,011 $ 895
====== ====== ======
</TABLE>
Depreciation expense was $251,000 in fiscal 1997, $537,000 in fiscal 1998,
$702,000 in fiscal 1999, $536,000 for the nine months ended October 31, 1998 and
$392,000 for the nine months ended October 31, 1999.
5. OTHER LIABILITIES
Other liabilities at January 31, 1998 and 1999 and October 31, 1999
consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31,
----------- OCTOBER 31,
1998 1999 1999
---- ---- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Professional services fees.......................... $ 78 $ 85 $ 62
Accrued sales and property taxes.................... 56 59 64
Accrued travel costs................................ 55 48 50
Accrued marketing programs.......................... -- -- 63
Accrued warranty.................................... 24 75 75
Other............................................... 165 107 231
---- ---- ----
$378 $374 $545
==== ==== ====
</TABLE>
F-10
<PAGE> 81
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Our deferred tax assets at January 31, 1998 and 1999 are summarized below:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 2,899 $ 3,141
Accounts receivable..................................... 66 79
Inventory............................................... 199 252
Property and equipment.................................. 391 162
Other assets............................................ 389 188
Accrued liabilities..................................... 92 146
Deferred revenue........................................ 237 5
Deferred rent........................................... 5 7
------- -------
4,278 3,980
Valuation allowance....................................... (4,278) (3,980)
------- -------
Net deferred taxes.............................. $ -- $ --
======= =======
</TABLE>
At January 31, 1998 and 1999, net deferred tax assets are fully offset by a
valuation allowance. In estimating the realizability of our deferred tax assets,
we consider both positive and negative evidence and give greater weight to
evidence that is objectively verifiable. Due to our cumulative losses, we
currently believe that the future realization of our deferred tax assets is
uncertain. The valuation allowance increased by $2,050,000 in fiscal 1997 and
$507,000 in fiscal 1998, and decreased by $298,000 in fiscal 1999.
As of January 31, 1999, we had about $8.2 million in tax net operating loss
carryforwards which, if not utilized, expire from 2007 through 2019. The
utilization of these net operating loss carryforwards and realization of tax
benefits in future years depends mainly upon the recognition of taxable income.
The utilization of $658,000 of these carryforwards is subject to annual
limitations of about $330,000 per year as a result of the change in ownership
provisions of the Internal Revenue Code. The limitation does not reduce the
total amount of net operating losses which we may take, but rather limits the
amount which we may use during a particular year. We expect that the completion
of our initial public offering will result in another change in ownership that
may result in additional limitations on the use of our net operating loss
carryforwards.
7. CREDIT FACILITY
We have a $3,000,000 secured revolving line of credit from a bank which
expires on October 14, 2000. At January 31, 1998, there were no borrowings
against this line of credit and at January 31, 1999 there were borrowings of
$27,000 against this line of credit. All borrowings under the line of credit
bear interest at prime plus 0.75%, which was 8.50% at January 31, 1999, and are
secured by our assets. This agreement requires the maintenance of various
covenants, including a restriction on paying dividends. We were in compliance
with these covenants at January 31, 1999 and October 31, 1999. The agreement
also provides for up to $200,000 in
F-11
<PAGE> 82
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
letters of credit. Any letters of credit issued reduce the amount available for
borrowing under the line. In April 1998, we issued a $250,000 letter of credit
under this facility in connection with an operating lease obligation. This
letter of credit is reduced annually by $50,000.
On March 31, 1998, we amended the credit agreement with the bank to provide
an additional line of credit in the amount of $250,000 for the purchase of
property and equipment. This line bears interest at the bank's prime rate plus
one and one-half percent, which was 9.00% at January 31, 1999. Borrowings under
this line are repayable over 36 months. At January 31, 1999, the outstanding
balance on this line was $151,000 of which $52,000 was classified as short-term.
Our ability to draw against this line expired in December 1998.
At January 31, 1999, we had an unused $200,000 letter of credit from a bank
under an additional credit facility which expires on January 11, 2000. As
security for the letter of credit, we are required to maintain a certificate of
deposit for $200,000. The certificate of deposit is classified as restricted
cash.
8. REDEEMABLE, CONVERTIBLE PREFERRED STOCK
We are authorized to issue up to 12,000,000 shares of preferred stock. We
have designated 5,000,000 shares as series A redeemable, convertible preferred
stock, 3,000,000 shares as series B redeemable, convertible preferred stock, and
1,500,000 shares as series C redeemable, convertible preferred stock. Through
August 1995, we issued 4,799,999 shares of series A preferred stock at $1.00 per
share. In January 1996, we issued 2,961,585 shares of series B preferred stock
at $2.55 per share. During March and June 1997, we issued a total of 1,222,222
shares of series C preferred stock at $2.25 per share.
Dividends on common shares require the approval of the holders of a
majority of the shares of each series of preferred stock and are payable only
after any preferred stock dividend requirements are satisfied.
The preferred shares are convertible into shares of common stock at any
time at the option of the holder. Conversion of the preferred shares into shares
of common stock is automatic upon approval of the holders of a majority of the
shares of each series of preferred stock or upon the closing of our initial
public offering. Subject to adjustment to prevent dilution, each share of series
A preferred stock converts into .606 shares of common stock, each share of
series B preferred stock converts into .773 shares of common stock, and each
share of series C preferred stock converts into .606 shares of common stock. In
the event of conversion, any accrued but unpaid dividends are payable in cash or
shares of common stock. Each share of preferred stock has voting rights on an
as-converted basis.
Series A, series B, and series C shares each have liquidation preferences
equal to $1.00, $2.55, and $2.25 per share. After payment of the preferred stock
liquidation preference, preferred shares participate with common shares based on
voting rights.
F-12
<PAGE> 83
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Upon the approval of the holders of two-thirds of the shares of each series
of preferred stock, series A, series B, and series C shares of preferred stock
are subject to mandatory redemption in two equal installments in 2001 and 2002.
The redemption price of each series A, series B, and series C share will be
equal to the greater of cost or appraised value. The preferred shares are not
recorded at redemption value due to the uncertainty of redemption at amounts
greater than their carrying value. Upon the closing of our initial public
offering, all shares of our preferred stock will automatically convert into
shares of our common stock.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TOTAL
-------- ------ ------ ------ ------ ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- January 31, 1996.............. 4,800 $4,755 2,962 $7,497 -- $ -- $12,252
Preferred stock accretion.............. -- 9 -- 11 -- -- 20
----- ------ ----- ------ ----- ------ -------
Balance January 31, 1997................. 4,800 4,764 2,962 7,508 -- -- 12,272
Issuance of series C preferred stock at
$2.25 per share in March and June
1997 for cash net of issuance
costs of $9.......................... -- -- -- -- 1,222 2,741 2,741
Redemption of series C shares.......... -- -- -- -- (7) (15) (15)
Preferred stock accretion.............. -- 9 -- 11 -- 2 22
----- ------ ----- ------ ----- ------ -------
Balance January 31, 1998................. 4,800 4,773 2,962 7,519 1,215 2,728 15,020
Preferred stock accretion.............. -- 9 -- 11 -- 2 22
----- ------ ----- ------ ----- ------ -------
Balance January 31, 1999................. 4,800 4,782 2,962 7,530 1,215 2,730 15,042
Preferred stock accretion
(unaudited).......................... -- 7 -- 8 -- 2 17
----- ------ ----- ------ ----- ------ -------
Balance -- October 31, 1999
(unaudited)............................ 4,800 $4,789 2,962 $7,538 1,215 $2,732 $15,059
===== ====== ===== ====== ===== ====== =======
</TABLE>
We netted the costs associated with the issuance of redeemable preferred
stock against the gross proceeds received and are accreting the carrying amount
of each series of preferred stock through a charge to additional paid-in
capital.
9. SHAREHOLDERS' DEFICIT
Preferred Stock -- We are authorized to issue up to 12,000,000 shares of
$0.01 par value preferred stock. We have designated 9,500,000 shares into three
series of redeemable, convertible preferred stock, as described in Note 8, and
222,222 shares as series D convertible preferred stock. On May 17, 1999, we
issued for cash 222,222 shares of series D preferred stock at $4.50 per share.
The series D shares do not have voting rights, are convertible at any time into
.606 shares of common stock and will automatically convert into common shares
upon the closing of our initial public offering. The series D shares do not have
mandatory redemption rights, but have a liquidation preference of $4.50 per
share. The liquidation preference is junior to our other series of preferred
stock.
Common Stock -- We are authorized to issue up to 17,000,000 shares of $0.01
par value voting common stock. On September 28, 1999, we increased the number of
authorized common shares to 88,000,000 shares. The financial statements reflect
this change on a retroactive basis.
Stock Option Plans -- We have stock option plans that provide for the
granting of stock options to officers, employees, and key persons to purchase up
to 3,727,273 shares of our common stock. The plans allow for the grant of both
incentive and nonqualified stock options.
F-13
<PAGE> 84
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The exercise price of the incentive stock options may not be less than fair
market value of the stock on the date of grant. Generally, these options are
exercisable ratably over four years and expire after ten years.
In October 1994, we established the 1994 associates stock option plan.
Under this plan, we may issue, to nonemployees who act in a role of a director,
consultant, or advisor, nonqualified options to purchase up to 30,303 shares of
our common stock. These options are exercisable immediately upon grant and
expire at the earlier of three months after the nonemployee ceases to be
associated with T/R Systems or ten years from the date of grant.
The following table presents the activity in the above plans:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------------------------------------------
1997 1998 1999
------------------ ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding as of
February 1....................... 1,412 $0.42 1,675 $0.58 1,591 $0.76
Granted.......................... 511 0.83 437 0.91 162 4.93
Exercised........................ (221) 0.19 (454) 0.25 (219) 0.61
Forfeited........................ (27) 0.53 (67) 0.47 (24) 5.41
----- ----- -----
Options outstanding as of
January 31..................... 1,675 0.58 1,591 0.76 1,510 1.16
===== ===== =====
Options exercisable as of
January 31..................... 749 0.40 564 0.66 703 0.72
===== ===== =====
Weighted-average fair value of
options granted during the
year........................... $0.14 $0.40 $0.44
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 31, 1999
----------------------
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
------ ---------
(SHARES IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Options outstanding as of February 1.................... 1,510 $1.16
Granted................................................. 184 8.81
Exercised............................................... (54) 0.80
Forfeited............................................... (29) 2.53
-----
Options outstanding as of October 31.................... 1,610 2.02
=====
Options exercisable as of October 31.................... 817 0.80
=====
Weighted-average fair value of options granted during
the period............................................ $1.09
=====
</TABLE>
F-14
<PAGE> 85
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
We have estimated the fair value of options at date of grant using the
Black-Scholes option pricing model using the following weighted-average
assumptions:
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS
JANUARY 31, ENDED
------------------ OCTOBER 31,
1997 1998 1999 1999
---- ---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected life (years).......................... 3.4 2.5 2.5 2.5
Interest rate.................................. 5.8% 5.6% 4.8% 5.4%
Volatility..................................... 0.0 0.0 0.0 0.0
Dividend yield................................. 0.0 0.0 0.0 0.0
</TABLE>
Had compensation for our stock option grants in fiscal 1997, 1998, and 1999
been determined based on grant-date fair value based on the guidance in SFAS No.
123, T/R Systems' net loss would have been $4,175,000 in fiscal 1997, $1,334,000
in fiscal 1998 and $696,000 in fiscal 1999. Net income would have been $338,000
for the nine months ended October 31, 1999. Basic and diluted net loss per share
would have been $2.46 in fiscal 1997, $0.66 in fiscal 1998, and $0.30 in fiscal
1999. Basic net income per share would have been $0.13 and diluted net income
per share would have been $0.03 for the nine months ended October 31, 1999.
Because SFAS No. 123 has not been applied to options granted before January 31,
1995, the resulting pro forma compensation cost may not be representative of
that expected in future years.
The following table summarizes information about stock options outstanding
at January 31, 1999:
<TABLE>
<CAPTION>
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF JANUARY 31, CONTRACTUAL EXERCISE JANUARY 31, EXERCISE
EXERCISE PRICES 1999 LIFE (YEARS) PRICE 1999 PRICE
- --------------- -------------- ------------ --------- -------------- ---------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.17 to $0.33....... 163 5.0 $0.28 145 $0.28
0.83................ 1,188 7.7 0.83 555 0.83
3.30................ 38 9.1 3.30 3 3.30
4.54 to 4.95........ 121 9.8 4.92 -- --
----- -----
0.17 to 4.95........ 1,510 7.6 1.16 703 0.72
===== =====
</TABLE>
During the year ended January 31, 1998, we recorded $130,000 in deferred
compensation representing the excess of the estimated market value of our common
stock over the exercise price of stock options granted at date of grant.
Deferred compensation is amortized over the vesting period of the stock options,
four years. Compensation expense related to stock options was $5,000 for fiscal
1998, $32,000 for fiscal 1999, and $24,000 for the nine months ended October 31,
1999.
In connection with the retirement of a director as an officer in August
1997, we accelerated the vesting and extended the exercise date of options to
purchase 113,939 shares of common stock. These options were granted in January
1996 with an exercise price of $0.83 per share. The acceleration of the options
did not result in additional compensation expense because the
F-15
<PAGE> 86
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
exercise price of the options was not less than the estimated market value of
our common stock at the time the options were modified.
10. COMMITMENTS
We lease existing office facilities and equipment under operating lease
agreements which expire through 2004. We have the option to renew the facility
lease for one five-year term at the expiration of the original term. The future
noncancelable minimum rent schedule for these leases is as follows:
<TABLE>
<CAPTION>
YEAR ENDING JANUARY 31, (IN THOUSANDS)
<S> <C>
2000........................................................ $ 356
2001........................................................ 367
2002........................................................ 377
2003........................................................ 348
2004 and thereafter......................................... 56
------
Total............................................. $1,504
======
</TABLE>
Rent expense was $112,000 for fiscal 1997, $143,000 for fiscal 1998, and
$364,000 for fiscal 1999. Rent expense was $236,000 for the nine months ended
October 31, 1998 and $290,000 for the nine months ended October 31, 1999.
During fiscal 1998, we adopted a plan to relocate our headquarters and
entered into negotiations to lease a new office facility. We entered into the
new lease in February 1998. We recorded a $180,000 charge in our fiscal 1998
financial statements for expected losses to be incurred under our existing
lease.
11. SEGMENT INFORMATION
We operate in one reportable segment, the print-on-demand market, and
assess performance based on operating income. Revenue is summarized below:
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED JANUARY 31, ENDED
-------------------------- OCTOBER 31,
1997 1998 1999 1999
------ ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Printing systems........................ $3,764 $11,627 $14,094 $14,839
Other................................... 272 405 1,753 865
------ ------- ------- -------
Total................................... $4,036 $12,032 $15,847 $15,704
====== ======= ======= =======
</TABLE>
Other revenue includes revenue from customer service plans, engineering services
and royalties.
F-16
<PAGE> 87
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue by geographic area is summarized below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JANUARY 31, ENDED
-------------------------- OCTOBER 31,
1997 1998 1999 1999
------ ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United States.......................... $2,251 $ 7,990 $10,978 $11,980
Asia................................... 327 2,735 3,395 664
Europe................................. 1,185 702 1,047 1,497
Other foreign countries................ 273 605 427 1,563
------ ------- ------- -------
Total.................................. $4,036 $12,032 $15,847 $15,704
====== ======= ======= =======
</TABLE>
Revenue by geographic area is based on where we ship our products.
Substantially all of our long-lived assets are located in the United States.
One customer in each period accounted for 16.5%, 19.0%, 14.1%, and 39.1% of
revenue for each corresponding year ended January 31, 1997, 1998 and 1999, and
the nine month period ended October 31, 1999. One customer in each corresponding
period accounted for 46.3%, 6.9%, and 12.7% of total receivables at January 31,
1998 and 1999, and October 31, 1999.
12. EMPLOYEE RETIREMENT SAVING PLAN
We have a pretax saving plan under Section 401(k) of the Internal Revenue
Code for all eligible U.S. employees. Under the plan, eligible employees are
able to contribute up to 15% of their compensation, not to exceed the maximum
IRS deferral amount. Our discretionary contribution is determined by our board
of directors. Currently, we match 50% of each participant's contribution, up to
6% of the participant's compensation. Our contributions vest with each employee
ratably over four years beginning after the employee's first full year of
service. We contributed to the plan $7,000 during fiscal 1998, $69,000 during
fiscal 1999, and $79,000 during the nine months ended October 31, 1999.
F-17
<PAGE> 88
T/R SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. NET INCOME OR LOSS PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income or loss per common share:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JANUARY 31, ENDED OCTOBER 31,
-------------------------------------- ----------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
-------------------------- --------- ---------------- ---------
1997 1998 1999 1999 1998 1999 1999
------- ------- ------ --------- ------ ------- ---------
(UNAUDITED)
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)..................... $(4,120) $(1,218) $ (623) $ (623) $ (352) $ 412 $ 412
Accretion on redeemable preferred
stock............................... (20) (22) (22) -- (17) (17) --
------- ------- ------ ------- ------ ------- -------
Net income (loss) applicable to common
shareholders -- Basic............... (4,140) (1,240) (645) (623) (369) 395 412
Add back accretion on redeemable
preferred stock..................... -- -- -- -- -- 17 --
------- ------- ------ ------- ------ ------- -------
Net income (loss) applicable to common
shareholders -- Diluted............. $(4,140) $(1,240) $ (645) $ (623) $ (369) $ 412 $ 412
======= ======= ====== ======= ====== ======= =======
Denominator:
Weighted average shares outstanding... 1,702 2,052 2,444 2,444 2,429 2,532 2,532
Conversion of preferred stock......... -- -- -- 5,934 -- -- 6,017
------- ------- ------ ------- ------ ------- -------
Total -- Basic........................ 1,702 2,052 2,444 8,378 2,429 2,532 8,549
Conversion of preferred stock......... -- -- -- -- -- 6,017 --
Effect of outstanding stock options... -- -- -- -- -- 1,151 1,151
------- ------- ------ ------- ------ ------- -------
Total -- Diluted...................... 1,702 2,052 2,444 8,378 2,429 9,700 9,700
======= ======= ====== ======= ====== ======= =======
Net income (loss) per common share --
Basic................................. $ (2.43) $ (0.60) $(0.26) $ (0.07) $(0.15) $ 0.16 $ 0.05
======= ======= ====== ======= ====== ======= =======
Net income (loss) per common share --
Diluted............................... $ (2.43) $ (0.60) $(0.26) $ (0.07) $(0.15) $ 0.04 $ 0.04
======= ======= ====== ======= ====== ======= =======
</TABLE>
The pro forma share amounts assume the conversion of all outstanding shares
of convertible preferred stock, which will take place upon completion of our
initial public offering, as if the conversion had occurred at the beginning of
the periods presented or the date of issuance if later.
For the years ended January 31, 1997, 1998, and 1999 and the nine month
period ended October 31, 1998 and 1999, the historical diluted computations
exclude the effects of all stock options and shares of convertible preferred
stock which were antidilutive. At each corresponding period ended January 31,
1997, 1998 and 1999, and October 31, 1998 and 1999, common shares issuable under
these arrangements were 6,872,000, 7,525,000, 7,444,000, 7,363,000 and 159,691.
14. REVERSE STOCK SPLIT
On , we completed a 1 for 1.65 reverse split of our
common shares. All common share and per share information included in these
financial statements has been retroactively adjusted to give effect to the
reverse stock split.
F-18
<PAGE> 89
[GRAPHICS]
Graphics on inside back cover -- text "the MicroPress(R) offers a complete
family of software applications that streamline document processing and
manipulation activities for print-on-demand applications." Representation of a
MicroPress ClusterServer and console with sample screen shots. There is a line
showing ten print devices connected to the ClusterServer picture and the word
"MicroPress."
[TR SYSTEMS LOGO]
UNTIL , 2000, WHICH IS 25 DAYS AFTER THE DATE OF THIS
PROSPECTUS, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WHEN SELLING THEIR PREVIOUSLY UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE THESE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The fees and expenses in connection with the issuance and distribution of
the Common Stock to be registered are as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ------
<S> <C>
SEC registration fee........................................ $11,510
NASD fee.................................................... 4,640
Blue sky fees and expenses.................................. *
Printing expenses........................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent fees......................................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ------------------------
* To be supplied by amendment.
The foregoing items, except the SEC registration fee and NASD fee, are
estimated. All such fees and expenses will be paid by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Company's Articles of Incorporation provides that to the
extent allowable pursuant to Sections 14-2-202(b)(4) and (b)(5) of the Georgia
Business Corporation Code (the "Georgia Code"), as such provisions exist from
time to time, no directors of the Company shall be personally liable to the
Company or its shareholders for any breach of duty of care or other duty as a
director. The Company's Articles of Incorporation further provide that in
discharging the duties of their respective positions and in determining what is
believed to be in the best interests of the Company, the Board of Directors,
committees of the Board of Directors, and individual directors, in addition to
considering the effects of any action on the Company or its shareholders, may
consider the interests of the employees, customers, suppliers, and creditors of
the Company and its subsidiaries, the communities in which offices or other
establishments of the Company and its subsidiaries are located, and all other
factors such directors consider pertinent, provided, however, that this
provision shall be deemed solely to grant discretionary authority to the
directors and shall not be deemed to provide to any constituency any right to be
considered.
Article XV, Section 1 of the Company's Bylaws provides that the Company
shall indemnify each person who was or is a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action or inaction in an official
capacity or in any other capacity while serving as a director, officer, employee
or agent, shall be
II-1
<PAGE> 91
indemnified and held harmless by the Company to the fullest extent permitted by
the laws of Georgia, as the same exist from time to time, against all costs,
charges, expenses, liabilities and losses (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as otherwise provided, the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Company. The right to indemnification conferred by
Article XV of the Company's Bylaws is a contract right and includes the right to
be paid by the Company the expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Georgia Code
requires, the payment of such expenses incurred by a director or officer in his
or her capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Company of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified.
The Georgia Code provides that a company may indemnify an individual who
was or is a party to a proceeding because he is or was a director or officer
against liability incurred in the proceeding if he acted in a manner he believed
in good faith to be in or not opposed to the best interests of the company, and,
in the case of any criminal proceeding, he had no reasonable cause to believe
his conduct unlawful. The termination of a proceeding by judgment, order,
settlement, conviction, or a plea of nolo contendere or its equivalent is not,
of itself, determinative that the director or officer did not meet the standard
of conduct set forth in the Georgia Code. However, no indemnification shall be
made of an officer or director in connection with a proceeding by or in the
right of the company in which the director or officer was adjudged liable to the
company or in connection with any other proceeding in which he was adjudged
liable on the basis that personal benefit was improperly received by him.
Indemnification in connection with a proceeding by or in the right of the
company is limited to reasonable expenses incurred in connection with the
proceeding.
The Georgia Code further provides that a company shall not indemnify an
officer or director unless authorized in the specific case upon a determination
that indemnification of the director or officer is permissible in the
circumstances because he has met the applicable standard of conduct set forth
above and prescribes the persons who may make such determination.
To the extent that a director or officer has been successful, on the merits
or otherwise, in defense of any proceeding to which he was a party or in defense
of any claim, issue or matter therein, he shall be indemnified against
reasonable expenses (including attorneys' fees) incurred by him in connection
therewith. The Company shall pay for the reasonable expenses incurred by a
director or officer who is a party to a proceeding in advance of the final
disposition of the proceeding if the director or officer furnishes the Company
notice as required under that director's or officer's indemnification agreement,
if one exists, a written affirmation of his good faith belief that he has met
the standard of conduct set forth above, and the director or officer furnishes
the Company a written undertaking, executed personally or on his behalf, to
repay any advances if it is ultimately determined that he is not entitled to
indemnification by the Company as authorized in Article XV of the Company's
Bylaws.
II-2
<PAGE> 92
The Company has entered into agreements dated March 4, 1994 with E. Neal
Tompkins, Charles H. Phipps and Francis A. Rowe, directors of the Company, which
obligate the Company to indemnify each such director to the fullest extent
permitted by Georgia law if such director acted in a manner he believed in good
faith to be in or not opposed to the best interests of the Company, or in any
criminal action, if such director had no reasonable cause to believe his conduct
giving rise to such action was unlawful (the "Indemnification Agreements"). The
right to indemnification under the Indemnification Agreements is in addition to,
and not in lieu of, any other rights to indemnification such directors may have.
Pursuant to the terms of the Indemnification Agreements, for the purposes of
pursuing his rights to indemnification, the director must submit a sworn
statement of a request for indemnification to the Company and shall present to
the Company reasonable evidence of all expenses for which payment is requested.
Pursuant to Article XV, Section 4 of the Company's Bylaws, the Company may
maintain insurance, at its expense, to protect itself and any director, officer,
employee or agent of the Company or another corporation, partnership, joint
venture, trust or other enterprise, against any expense, liability or loss,
whether or not the Company would have the power to indemnify such person against
such expense, liability or loss under the Georgia Code. The Company maintains
insurance for its directors and officers of $5,000,000.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We have sold the securities listed below without registration under the Act
since September 1, 1996.
(a) On March 31, 1997, we sold an aggregate of 1,111,111 shares of our
Series C Preferred Stock for an aggregate purchase price of $2,500,000.
Such stock was sold to 14 investors who were believed to be "accredited
investors" as defined in Regulation D promulgated under the Securities Act
based upon their representations.
(b) On June 20, 1997, we sold 111,111 shares of our Series C Preferred
Stock to a corporation for a purchase price of $250,000. Such corporation
was believed to be an "accredited investor" as defined in Regulation D
promulgated under the Securities Act based upon its representations.
(c) On May 17, 1999, we sold 222,222 shares of our Series D Preferred
Stock to a corporation for a purchase price of $999,999. Such corporation
was believed to be an "accredited investor" as defined in Regulation D
promulgated under the Securities Act based upon its representations.
(d) An aggregate of 1,170,687 shares of common stock have been
acquired upon exercise of stock options granted under our option plans for
purchase prices ranging from $0.17 to $4.54 per share.
No underwriter was involved in any of the above sales of securities. All of
the above securities were issued in reliance on the private offering exemption
set forth in Section 4(2) of the Securities Act and Regulation D, except for the
securities identified in item (d), which were issued in reliance on Rule 701
promulgated under the Securities Act.
II-3
<PAGE> 93
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
<C> <C> <S>
1.1** -- Form of Underwriting Agreement
3.1** -- Articles of Incorporation of T/R Systems, Inc.
3.2** -- Amended and Restated Bylaws of T/R Systems, Inc.
3.3 -- Form of Second Restated Articles of Incorporation of T/R
Systems, Inc.
3.4 -- Form of Restated Bylaws of T/R Systems, Inc.
4.1** -- Second Amended and Restated Registration Rights Agreement
dated March 31, 1997 among the Company and the shareholders
named therein, as amended by First Amendment to Stock
Purchase Agreement, Second Amended and Restated
Shareholders' Agreement and Second Amended and Restated
Registration Rights Agreement, dated June 20, 1997 among the
Company and the Shareholders named therein
4.2** -- Registration Rights Agreement dated June 29, 1998 among the
Company and the Shareholders named therein
4.3** -- 1999 Registration Rights Agreement, dated September 10,
1999, by and among the Company and the Shareholders named
therein
5.1 -- Form of Opinion of Jones, Day, Reavis & Pogue re: legality
10.1** -- T/R Systems, Inc. 1992 Stock Option Plan
10.2** -- T/R Systems, Inc. 1994 Stock Option Plan
10.3** -- T/R Systems, Inc. 1994 Associates Stock Option Plan
10.4** -- T/R Systems, Inc. 1995 Stock Option Plan
10.5** -- T/R Systems, Inc. 1999 Stock Option Plan
10.6** -- Loan and Security Agreement, dated as of October 17, 1997 by
and between Silicon Valley Bank and T/R Systems, Inc., as
amended by Loan Modification Agreement, dated as of March
31, 1998 by and between T/R Systems, Inc. and Silicon Valley
Bank, as further amended by Second Loan Modification
Agreement, dated as of October 16, 1998 by and between T/R
Systems, Inc. and Silicon Valley Bank, as further amended by
Third Loan Modification Agreement, dated as of January 18,
1999 by and between T/R Systems, Inc. and Silicon Valley
Bank, and as further amended by Letter Agreement, dated as
of February 2, 1999
10.7** -- Letter Agreement with Mike Kohlsdorf, dated September 6,
1996, as amended by Letter Agreement with Mike Kohlsdorf,
dated December 17, 1997
10.8** -- Employment Agreement, dated as of September 1, 1992 by and
between T/R Systems, Inc. and E. Neal Tompkins
10.9** -- Indemnification Agreement, dated as of March 4, 1994, by and
between T/R Systems, Inc. and E. Neal Tompkins
10.10** -- Indemnification Agreement, dated as of March 4, 1994, by and
between T/R Systems, Inc. and Francis A. Rowe
</TABLE>
II-4
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
<C> <C> <S>
10.11** -- Indemnification Agreement, dated as of March 4, 1994, by and
between T/R Systems, Inc. and Charles H. Phipps
10.12+** -- Reseller Agreement, dated as of September 18, 1997, by and
between T/R Systems, Inc. and Mita Industrial Co., Ltd., as
amended by First Addendum to Reseller Agreement, dated as of
September 17, 1998, by and between T/R Systems, Inc. and
Mita Industrial Co., Ltd.
10.13+** -- Supply Agreement, dated as of January 28, 1999, by and
between Minolta Co., Ltd. and T/R Systems, Inc.
10.14+** -- Agreement, dated as of April 1, 1999, by and between Hitachi
Koki Imaging Solutions, Inc. and T/R Systems, Inc.
10.15+** -- Agreement, dated as of September 1, 1999, by and between
Ricoh Corporation and T/R Systems, Inc.
10.16** -- Fourth Loan Modification Agreement, dated as of October 15,
1999, by and between T/R Systems, Inc. and Silicon Valley
Bank
23.1 -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit
5.1)
23.2 -- Consent and Report of Deloitte & Touche LLP
24.1** -- Power of Attorney
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
27.3 -- Financial Data Schedule (for SEC use only)
27.4 -- Financial Data Schedule (for SEC use only)
27.5 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
+ Confidential treatment has been requested with respect to portions of this
exhibit
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
II-5
<PAGE> 95
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to its registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on December 17, 1999.
T/R SYSTEMS, INC.
By: /s/ Michael E. Kohlsdorf
--------------------------------------
Michael E. Kohlsdorf
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Michael E. Kohlsdorf President and Chief Executive December 17, 1999
- --------------------------------------------- Officer (Principal Executive
Michael E. Kohlsdorf Officer)
/s/ Lyle W. Newkirk Vice President, Chief December 17, 1999
- --------------------------------------------- Financial Officer, Secretary
Lyle W. Newkirk and Treasurer (Principal
Financial Officer and
Principal Accounting
Officer)
* Director
- ---------------------------------------------
Charles H. Phipps
* Director
- ---------------------------------------------
C. Harold Gaffin
* Director
- ---------------------------------------------
Philip T. Gianos
* Director
- ---------------------------------------------
Francis A. Rowe
* Director
- ---------------------------------------------
E. Neal Tompkins
*By: /s/ Michael E. Kohlsdorf December 17, 1999
--------------------------------------
Michael E. Kohlsdorf
As Attorney-in-Fact
*By: /s/ Lyle W. Newkirk December 17, 1999
--------------------------------------
Lyle W. Newkirk
As Attorney-in-Fact
</TABLE>
II-7
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
<C> <C> <S>
1.1** -- Form of Underwriting Agreement
3.1** -- Articles of Incorporation of T/R Systems, Inc.
3.2** -- Amended and Restated Bylaws of T/R Systems, Inc.
3.3 -- Form of Second Restated Articles of Incorporation of T/R
Systems, Inc.
3.4 -- Form of Restated Bylaws of T/R Systems Inc.
4.1** -- Second Amended and Restated Registration Rights Agreement,
dated March 31, 1997 among the Company and the shareholders
named therein, as amended by First Amendment to Stock
Purchase Agreement, Second Amended and Restated
Shareholders' Agreement and Second Amended and Restated
Registration Rights Agreement, dated June 20, 1997 among the
Company and the Shareholders named therein
4.2** -- Registration Rights Agreement dated June 29, 1998 among the
Company and the shareholders named therein
4.3** -- 1999 Registration Rights Agreement dated September 10, 1999,
by and among the Company and the Shareholders named therein
5.1 -- Form of Opinion of Jones, Day, Reavis & Pogue re: legality
10.1** -- T/R Systems, Inc. 1992 Stock Option Plan
10.2** -- T/R Systems, Inc. 1994 Stock Option Plan
10.3** -- T/R Systems, Inc. 1994 Associates Stock Option Plan
10.4** -- T/R Systems, Inc. 1995 Stock Option Plan
10.5** -- T/R Systems, Inc. 1999 Stock Option Plan
10.6** -- Loan and Security Agreement, dated as of October 17, 1997 by
and between Silicon Valley Bank and T/R Systems, Inc., as
amended by Loan Modification Agreement, dated as of March
31, 1998 by and between T/R Systems, Inc. and Silicon Valley
Bank, as further amended by Second Loan Modification
Agreement, dated as of October 16, 1998 by and between T/R
Systems, Inc. and Silicon Valley Bank, as further amended by
Third Loan Modification Agreement, dated as of January 18,
1999 by and between T/R Systems, Inc. and Silicon Valley
Bank, and as further amended by Letter Agreement, dated as
of February 2, 1999
10.7** -- Letter Agreement with Mike Kohlsdorf, dated September 6,
1996, as amended by Letter Agreement with Mike Kohlsdorf,
dated December 17, 1997
10.8** -- Employment Agreement, dated as of September 1, 1992 by and
between T/R Systems, Inc. and E. Neal Tompkins
10.9** -- Indemnification Agreement, dated as of March 4, 1994, by and
between T/R Systems, Inc. and E. Neal Tompkins
10.10** -- Indemnification Agreement, dated as of March 4, 1994, by and
between T/R Systems, Inc. and Francis A. Rowe
10.11** -- Indemnification Agreement, dated as of March 4, 1994, by and
between T/R Systems, Inc. and Charles H. Phipps
10.12+** -- Reseller Agreement, dated as of September 18, 1997, by and
between T/R Systems, Inc. and Mita Industrial Co., Ltd., as
amended by First Addendum to Reseller Agreement, dated as of
September 17, 1998, by and between T/R Systems, Inc. and
Mita Industrial Co., Ltd.
10.13+** -- Supply Agreement, dated as of January 28, 1999, by and
between Minolta Co., Ltd. and T/R Systems, Inc.
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------
<C> <C> <S>
10.14+** -- Agreement, dated as of April 1, 1999, by and between Hitachi
Koki Imaging Solutions, Inc. and T/R Systems, Inc.
10.15+** -- Agreement, dated as of September 1, 1999, by and between
Ricoh Corporation and T/R Systems, Inc.
10.16** -- Fourth Loan Modification Agreement, dated as of October 15,
1999, by and between T/R Systems, Inc. and Silicon Valley
Bank.
23.1 -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit
5.1)
23.2 -- Consent and Report of Deloitte & Touche LLP
24.1** -- Power of Attorney
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
27.3 -- Financial Data Schedule (for SEC use only)
27.4 -- Financial Data Schedule (for SEC use only)
27.5 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
+ Confidential treatment has been requested with respect to portions of this
exhibit
* To be filed by amendment
** Previously filed
<PAGE> 99
SCHEDULE II
T/R SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS(1) PERIOD
- -------------------------------------- ---------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended January 31, 1999 allowance $175 $ 25 -- $ -- $200
for doubtful accounts
Year ended January 31, 1998 allowance 82 175 -- (82) 175
for doubtful accounts
Year ended January 31, 1997 allowance -- 106 -- (24) 82
for doubtful accounts
Year ended January 31, 1999 allowance 670 132 -- (229) 573
for inventory obsolescence
Year ended January 31, 1998 allowance 336 504 -- (170) 670
for inventory obsolescence
Year ended January 31, 1997 allowance -- 336 -- -- 336
for inventory obsolescence
</TABLE>
- ---------------
(1) Deductions represent write-offs to the respective reserve accounts.
S-1
<PAGE> 1
EXHIBIT 3.3
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
T/R SYSTEMS, INC.
T/R Systems, Inc., a corporation organized and existing under and by
virtue of the Georgia Business Corporation Code (the "Code"), hereby submits the
following Second Amended and Restated Articles of Incorporation pursuant to
Section 14-2-1007 of the Code, which Second Amended and Restated Articles of
Incorporation contain amendments to the Articles of Incorporation of T/R
Systems, Inc. requiring shareholder approval, and were duly approved by the
shareholders of T/R Systems in accordance with the provisions of Section
14-2-1003 of the Code on January ____, 2000.
I
The name of the corporation is "T/R Systems, Inc."
II
SECTION 1. Authorized Capital Stock. The corporation shall be
authorized to issue one hundred million (100,000,000) shares of stock, divided
into eighty-eight million (88,000,000) shares of capital stock, one cent ($0.01)
par value per share, to be designated as "Common Stock", and twelve million
(12,000,000) shares of preferred stock, one cent ($0.01) par value per share
("Preferred Stock"), of which (i) four million seven hundred ninety-nine
thousand nine hundred and ninety-nine (4,799,999) shares of preferred stock
shall be designated as "Series A Preferred Stock," (ii) two million nine hundred
sixty-one thousand five hundred eighty-five (2,961,585) shares of preferred
stock shall be designated as "Series B Preferred Stock," (iii) one million two
hundred fifteen thousand five hundred (1,215,500) shares of preferred stock
shall be designated as "Series C Preferred Stock"; (iv) two hundred twenty-two
thousand two hundred twenty-two (222,222) shares of preferred stock shall be
designated as "Series D Preferred Stock"; with the shares of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock having the terms,
preferences, privileges and restrictions set forth on Exhibit A attached to
these Second Restated Articles of Incorporation (and thereby made a part hereof)
and the shares of Series D Preferred Stock having the terms, preferences,
privileges and restrictions set forth on Exhibit B attached to these Second
Amended and Restated Articles of Incorporation (and thereby made a part hereof);
and (v) two million eight hundred thousand six hundred ninety-four (2,800,694)
shares of preferred stock to be issued in one or more series, in the manner
provided below.
The Board of Directors is hereby authorized to issue the shares of
undesignated Preferred Stock in such series and to fix from time to time before
issuance the number of shares to be included in any series and the designation,
relative powers, preferences and rights and qualifications, limitations or
restrictions of all shares of such series. The authority of the Board of
Directors with respect to each series shall include, without limiting the
generality of the foregoing, the determination of any or all of the following:
<PAGE> 2
(a) the number of shares of any series and the designation to
distinguish the shares of such series from the shares of all other
series;
(b) the voting powers, if any, and whether such voting powers
are full or limited in such series;
(c) the redemption provisions, if any, applicable to such
series, including the redemption price or prices to be paid;
(d) whether dividends, if any, shall be cumulative or
noncumulative, the dividend rate of such series, and the dates and
preferences of dividends on such series;
(e) the rights of such series upon the voluntary or involuntary
dissolution of, or upon any distribution of the assets of, the
corporation;
(f) the provisions, if any, pursuant to which the shares of
such series are convertible into, or exchangeable for, shares of any
other class or classes or of any other series of the same or any other
class or classes of stock of the corporation or any other corporation,
and the price or prices or the rates of exchange applicable thereto;
(g) the right, if any, to subscribe for or to purchase any
securities of the corporation or any other corporation;
(h) the provisions, if any, of a sinking fund applicable to
such series; and
(i) any other relative, participating, optional or other
special powers, preferences, rights, qualifications, limitations or
restrictions thereof;
all as shall be determined from time to time by the Board of Directors and
stated in the resolution or resolutions providing for the issuance of such
Preferred Stock (a "Preferred Stock Designation").
SECTION 2. Voting Entitlement. A holder of Common Stock shall be
entitled to one (1) vote on each matter submitted to a vote at a meeting of
shareholders for each share of the Common Stock held of record by such holder as
of the record date for such meeting. Except as may be provided by applicable
law, in these Second Amended and Restated Articles of Incorporation or by the
Board of Directors in a Preferred Stock Designation, the Common Stock shall have
the exclusive right to vote for the election of directors and for all other
purposes, and holders of Preferred Stock shall not be entitled to receive notice
of any meeting of shareholders at which they are not entitled to vote.
III
The Board of Directors shall have the power to make, amend and repeal
the Bylaws of the corporation. Any Bylaws made by the Board of Directors under
the powers conferred hereby may be amended or repealed by the Board of Directors
(except as specified in any such Bylaw so made or amended) or by the
shareholders in the manner provided in the Bylaws of the corporation. The
corporation may in its Bylaws confer powers upon its Board of Directors in
addition to the foregoing
2
<PAGE> 3
and in addition to the powers and authorities expressly conferred upon the Board
of Directors by applicable law.
IV
Any action required or permitted to be taken by the shareholders of the
corporation must be effected at a duly called annual or special meeting of
shareholders of the corporation. Special meetings of shareholders of the
corporation may be called only by the Chairman of the Board of Directors, and
shall be called by the Chairman of the Board of Directors or the Secretary
within 10 days after receipt of the written request of a majority of the total
number of Directors which the corporation would have if there were no vacancies.
At any annual meeting or special meeting of shareholders of the corporation,
only such business shall be conducted or considered as shall have been brought
before such meeting in the manner provided in the Bylaws of the corporation.
Notwithstanding anything contained in these Second Restated Articles of
Incorporation to the contrary, unless otherwise required by applicable law, the
affirmative vote of at least 80% of the voting power of the then outstanding
shares of Common Stock and outstanding shares of Preferred Stock voting
together, to the extent that the outstanding shares of Preferred Stock are
afforded voting rights and powers generally equal to the voting rights and
powers of shares of Common Stock (such holders of such 80% voting power herein
the "Requisite Holders"), shall be required to amend or repeal, or adopt any
provision inconsistent with this Article IV.
V
SECTION 1. Number, Election and Terms of Directors. The number of the
directors of the corporation shall not be less than 3 nor more than 15 and shall
be fixed from time to time in the manner described in the Bylaws.
The directors shall be classified with respect to the time for which
they severally hold office into three classes, as nearly equal in number as
possible, designated Class I, Class II and Class III. The directors first
appointed to Class I shall hold office for a term expiring at the annual meeting
of shareholders to be held in 2000; the directors first appointed to Class II
shall hold office for a term expiring at the annual meeting of shareholders to
be held in 2001; and the directors first appointed to Class III shall hold
office for a term expiring at the annual meeting of shareholders to be held in
2002; with the members of each class to hold office until their successors are
elected and qualified. Unless otherwise required by applicable law, at each
succeeding annual meeting of the shareholders of the corporation, the successors
of the class of directors whose term expires at that meeting shall be elected by
a plurality vote of all votes cast at such meeting (giving effect to the
provisions of Article II, Section 2) to hold office for a term expiring at the
annual meeting of shareholders held in the third year following the year of
their election. Notwithstanding the foregoing, if at the time of any annual
meeting of shareholders, the corporation is prohibited by applicable law from
having a classified Board of Directors, all of the directors shall be elected at
such annual meeting for a one-year term only. If at the time of any subsequent
annual meeting of shareholders the corporation is no longer prohibited by
applicable law from having a classified Board of Directors, the Board of
Directors shall again be classified in accordance with the first sentence of
this paragraph, and at such annual meeting directors initially shall be elected
to serve in Class I, Class II or Class III to hold office for a term expiring at
the first, second or third succeeding annual meeting of the shareholders,
3
<PAGE> 4
respectively; thereafter, successors to each Class shall be elected in
accordance with the third sentence of this paragraph; such classified Board of
directors at all times being subject to the immediately preceding sentence of
this paragraph. Elections of directors need not be by written ballot unless
requested by the Chairman of the Board of Directors or by the holders of a
majority of the voting power of the then outstanding shares of Common Stock and
outstanding shares of Preferred Stock voting together, to the extent that the
outstanding shares of Preferred Stock are afforded voting rights and powers
generally equal to the voting rights and powers of shares of Common Stock,
voting in accordance with the provisions of Article II, Section 2, present in
person or represented by proxy at a meeting of the shareholders at which
directors are to be elected.
SECTION 2. Nomination of Director Candidates. Advance notice of
shareholder nominations for the election of directors shall be given in the
manner provided in the Bylaws of the corporation.
SECTION 3. Newly Created Directorships and Vacancies. Unless otherwise
required by applicable law, newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled solely by the affirmative vote of a majority of the remaining
directors then in office, even though they may constitute less than a quorum of
the Board of Directors, or by a sole remaining director. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of an incumbent director.
SECTION 4. Removal. Unless otherwise required by applicable law, any
director may be removed from office by the shareholders only for cause and only
in the manner provided in this Section 4 of Article V. At any annual meeting or
special meeting of the shareholders of the corporation, the notice of which
shall state that the removal of a director or directors is among the purposes of
the meeting, the affirmative vote of at least the Requisite Holders, may remove
such director or directors for cause.
SECTION 5. Amendment, Repeal, Etc. Notwithstanding anything contained
in these Second Amended and Restated Articles of Incorporation to the contrary,
unless otherwise required by applicable law, the affirmative vote of at least
the Requisite Holders shall be required to amend or repeal, or adopt any
provision inconsistent with, this Article V.
VI
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the corporation, the
Board of Directors, committees of the Board of Directors, and individual
directors, in addition to considering the effects of any action on the
corporation or its shareholders, may consider the interests of employees,
customers, suppliers and creditors of the corporation and its subsidiaries, the
communities in which offices or other establishments of the corporation and its
subsidiaries are located, and all other factors such directors deem pertinent;
provided, however, that this Article VI shall be deemed solely to grant
discretionary
4
<PAGE> 5
authority to the directors and shall not be deemed to provide to any
constituency any right to be considered.
VII
A director of the corporation shall not be liable to the corporation or
its shareholders for or with respect to any acts or omissions in the performance
of his duties as a director, except to the extent such exemption from liability
or limitation thereof is not permitted under the Georgia Business Corporation
Code as currently in effect or as the same may be hereafter amended or under any
other applicable law currently or hereafter in effect. No amendment,
modification or repeal of this Article shall adversely affect any right or
protection of a director that exists at the time of such amendment,
modification, or repeal.
VIII
Each individual who is or was a director or officer of the corporation
or who, while a director or officer of the corporation, is or was serving at the
request of the Board of Directors or an officer of the corporation as an
employee or agent of the corporation or as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including the heirs, executors, administrators or estate of such
person), shall be indemnified by the corporation to the fullest extent permitted
by the Georgia Business Corporation Code or any other applicable laws as
presently or hereafter in effect. The right to indemnification granted by this
Article VIII shall include the right to be paid in advance expenses incurred in
defending a proceeding. The corporation may, by action of the Board of
Directors, provide indemnification to other employees and agents of the
corporation with the same scope and effect as the foregoing indemnification of
directors and officers. The right of indemnification provided in this Article
VIII shall not be exclusive of any other rights to which any person seeking
indemnification may otherwise be entitled, and shall be applicable to matters
otherwise within its scope irrespective of whether such matters arose or arise
before or after the adoption of this Article VIII. Without limiting the
generality or the effect of the foregoing, but subject to the limitations of the
Georgia Business Corporation Code, the corporation may adopt Bylaws, or enter
into one or more agreements with any person, which provide for indemnification
greater or different than that provided in this Article VIII. No amendment,
modification or repeal of this Article shall adversely affect any right or
protection of a director, officer, employee or agent that exists at the time of
such amendment, modification or repeal.
IX
Any issued and outstanding shares of stock of the corporation which are
repurchased by the corporation shall become treasury shares, which shall be held
in treasury by the corporation until resold or retired and canceled in the
discretion of the Board of Directors. Any treasury shares which are retired and
canceled shall constitute authorized but unissued shares.
5
<PAGE> 6
IN WITNESS WHEREOF, the corporation has caused these Second Amended and
Restated Articles of Incorporation of T/R Systems, Inc. to be executed, the
corporate seal affixed and the foregoing to be attested, all by duly authorized
officers of the corporation on the ____ day of January, 2000.
[CORPORATE SEAL] T/R SYSTEMS, INC.
By:
---------------------------------
Michael E. Kohlsdorf,
President
Attest by:
- ----------------------------------
Lyle W. Newkirk,
Secretary
6
<PAGE> 7
EXHIBIT A
DESIGNATIONS OF PREFERENCES,
LIMITATIONS, AND RELATIVE RIGHTS OF
SERIES A, SERIES B AND SERIES C
PREFERRED STOCK OF T/R SYSTEMS, INC.
"Board of Directors" shall mean the board of directors of the
Corporation.
"Common Stock" shall mean the common stock, $0.01 par value per share,
of the Corporation.
"Conversion Rate" with respect to the Series A Preferred Stock, the
Series B Preferred Stock, and the Series C Preferred Stock shall have the
respective meanings provided in Subsection (d)(3) hereof.
"Corporation" shall mean T/R Systems, Inc., a Georgia corporation.
"Original Series A Issue Date" shall mean March 4, 1994.
"Original Series B Issue Date" shall mean January 31, 1996.
"Original Series C Issue Date" shall mean March 31, 1997.
"Preferred Stock" shall mean the Series A Preferred Stock, the Series B
Preferred Stock, and the Series C Preferred Stock designated hereby,
collectively, or any combination of such shares.
"Restatement Date" shall mean the effective date of the Corporation's
Second Restated Articles of Incorporation to which this Exhibit A is appended
and made a part of.
"Series A Conversion Price" shall have the meaning provided in
Subsection (d)(7) hereof.
"Series B Conversion Price" shall have the meaning provided in
Subsection (d)(7) hereof.
"Series C Conversion Price" shall have the meaning provided in
Subsection (d)(7) hereof.
"Series A Invested Amount" per share shall mean $1.00 (as adjusted for
changes in the Series A Preferred Stock by stock split, stock dividend, or the
like occurring after the Original Series A Issue Date).
"Series B Invested Amount" per share shall mean $2.55 (as adjusted for
changes in the Series B Preferred Stock by stock split, stock dividend, or the
like occurring after the Original Series B Issue Date).
A-1
<PAGE> 8
"Series C Invested Amount" per share shall mean $2.25 (as adjusted for
changes in the Series C Preferred Stock by stock split, stock dividend, or the
like occurring after the Original Series C Issue Date).
"Series A Preferred Stock" shall mean the 4,799,999 shares of Series A
Preferred Stock, $0.01 par value per share, hereby designated.
"Series B Preferred Stock" shall mean the 2,961,585 shares of Series B
Preferred Stock, $0.01 par value per share, hereby designated.
"Series C Preferred Stock" shall mean the 1,215,500 shares of Series C
Preferred Stock, $0.01 par value per share, hereby designated.
"Series C Purchase Agreement" shall mean that certain Stock Purchase
Agreement to be dated March 31, 1997, among the Corporation; Interwest Partners
V, L.P.; Interwest Investors V; Harvey B. Cash Self-Directed IRA; Crown
Associates III; Crown Glynn Associates; The Crown Trust; Sevin Rosen Fund IV
L.P.; Noro-Moseley Partners II, L.P.; Aperture Associates, L.P.; David Michael
Hockett; Dietrich R. Erdmann; Stanford University; Michael E. Kohlsdorf and
Michael C. Daly; pursuant to which the initial issuance of shares of Series C
Preferred Stock is to occur.
The relative preferences, powers, limitations and rights granted to and
imposed upon the Preferred Stock are as follows:
(a) Dividend Rights. No holder of Preferred Stock shall be entitled to
receive any dividend thereon unless declared by the Board of Directors of the
Corporation. Without the prior written consent of the holders of a majority of
the outstanding shares of Series A Preferred Stock, the holders of a majority of
the outstanding shares of Series B Preferred Stock, and the holders of a
majority of the outstanding shares of Series C Preferred Stock, each voting as
separate classes, no dividends shall be paid with respect to the Common Stock of
the Corporation at any time as, and for so long as, at least two million
(2,000,000) shares of any of the Preferred Stock remain outstanding (such number
to be adjusted for any stock dividends, combinations or splits with respect to
shares of each such series occurring after the Original Issue Date of such
series). Notwithstanding the foregoing, no dividend may be paid or declared with
respect to the Common Stock until all dividends declared, if any, on all
outstanding shares of the Preferred Stock have been set apart and paid, and (ii)
no dividend may be paid or declared with respect to any of the Series A
Preferred Stock, the Series B Preferred Stock, or the Series C Preferred Stock
unless dividends are being paid simultaneously with respect to each of the other
series of Preferred Stock. In the event that any funds declared by the Board of
Directors to be distributed as dividends to the holders of Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock are insufficient to
permit the payment to such holders of the full amount of their respective
dividends, such funds shall be distributed ratably among the holders of all
three series of Preferred Stock in proportion to the aggregate dollar amount
that such holders would otherwise be entitled to receive.
(b) Liquidation Rights. In the event of liquidation, dissolution or
winding up of the Corporation, or a "Sale or Merger" (defined below), unless, in
the case of a Sale or Merger, the holders of a majority of the outstanding
shares of Series A Preferred Stock, the holders of a majority
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of the outstanding shares of Series B Preferred Stock and the holders of a
majority of the outstanding shares of Series C Preferred Stock, voting as
separate classes, have all elected to exclude such Sale or Merger from the
application of this Section (b) (in which case this Section (b) shall not apply
to such transaction), the holders of the outstanding shares of the Preferred
Stock shall be entitled to receive in exchange for and in redemption of their
Preferred Stock, prior and in preference to the holders of Common Stock and the
holders of any other class or series of stock of the Corporation ranking junior
to the Preferred Stock by reason of their ownership thereof, (i) in the case of
a liquidation, dissolution or winding up of the Corporation, from any funds
legally available for distribution to shareholders, and (ii) in the case of a
Sale or Merger to which this Section (b) applies, from the net proceeds
therefrom (defined for these purposes to mean the proceeds, whether cash,
securities or property, available for distribution to shareholders or payable to
the shareholders by reason of the Sale or Merger): (x) an amount per share of
Series A Preferred Stock equal to the Series A Invested Amount, an amount per
share of Series B Preferred Stock equal to the Series B Invested Amount, and an
amount per share of Series C Preferred Stock equal to the Series C Invested
Amount (adjusted for any subdivisions or combinations of each such Series of
Preferred Stock), (y) all declared but unpaid dividends on such share, if any;
plus (z) that portion of such funds or proceeds remaining after payment or
setting aside for payment of the amounts described in subparagraphs (x) and (y)
above equal to a fraction, the numerator of which is the number of votes to
which the holder of such share of Preferred Stock is entitled by virtue of
holding such share and the denominator of which is the aggregate of the number
of votes to which all holders of Preferred Stock and Common Stock and any other
class or series of stock of the Corporation the holders of which are entitled to
vote generally in respect of the election of the directors of the Corporation
and as to matters generally that are voted on by shareholders of the
Corporation, are entitled by virtue of holding shares of Common Stock and/or
Preferred Stock or such other capital stock of the Corporation.
For purposes of this Section (b), a "Sale or Merger" of the Corporation
shall mean: (i) the merger or consolidation of the Corporation into or with
another corporation in which the shareholders of the Corporation immediately
preceding such merger or consolidation (solely by virtue of their shares or
other securities of the Corporation) shall own less than fifty percent (50%) of
the voting securities of the surviving corporation or (ii) the sale, transfer or
lease (but not including a transfer or lease by pledge or mortgage to a bona
fide lender) of all or substantially all of the assets of the Corporation.
All the preferential amounts to be paid to the holders of the Preferred
Stock under this Section (b) shall be paid or set apart for payment before the
payment or setting apart for payment of any amount for, or the distribution of
any assets of the Corporation to, the holders of the Common Stock or any class
or series of stock of the Corporation ranking junior to the Preferred Stock in
connection with a liquidation, dissolution or winding up, or a Sale or Merger as
to which this Section (b) applies. If the assets or surplus funds to be
distributed to the holders of the Preferred Stock are insufficient to permit the
payment to such holders of their full preferential amount, the assets and
surplus funds legally available for distribution shall be distributed ratably
among the holders of all three series of Preferred Stock in proportion to the
aggregate dollar amount that would be payable in full on liquidation to such
holders.
(c) Voting Rights. The holder of each share of Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such share of Preferred
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Stock would be convertible as of the record date for the vote or consent of
shareholders with respect to a conversion at the option of the holder thereof,
under the circumstances described in Section (d)(1) hereof on and shall
otherwise have voting rights and powers equal to the voting rights and powers of
the Common Stock. With respect to the election of directors, the holders of
Preferred Stock shall vote together with the holders of Common Stock to elect
the members of the Board of Directors. Each holder of a share of the Preferred
Stock shall be entitled to receive the same prior notice of any shareholders'
meeting as provided to the holders of Common Stock in accordance with the Bylaws
of the Corporation, as well as prior notice of all shareholder actions to be
taken by legally available means in lieu of meeting, and shall vote with holders
of the Common Stock upon any matter submitted to a vote of shareholders, except
those matters required by law, or by the terms hereof, to be submitted to a
class vote of the holders of Preferred Stock or to be submitted to a vote of the
holders of the Series A Preferred Stock, the holders of the Series B Preferred
Stock or the holders of the Series C Preferred Stock as a series. Fractional
votes shall not, however, be permitted, and any fractions shall be disregarded
in computing voting rights.
(d) Conversion. The holders of each series of the Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(1) Optional. Each share of Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of the Corporation or any
transfer agent for the Preferred Stock, into Common Stock. The number
of shares of Common Stock to which a holder of Preferred Stock shall be
entitled upon such optional conversion shall be the product obtained by
multiplying the Conversion Rate of such series of Preferred Stock
(determined as provided in Section (d)(3) below) by the number of
shares of Preferred Stock being converted. Such conversion shall be
deemed to have been made immediately prior to the close of business on
the date of the surrender of the shares of Preferred Stock to be
converted in accordance with the procedures described in Section (d)(4)
below. The Corporation shall pay to the holder thereof promptly
following such surrender all declared or accrued but unpaid dividends
on the shares of Preferred Stock so converted to, and including, the
date of such conversion; provided, however, that the Corporation may,
at its option, in lieu of making a full cash payment of all such
declared but unpaid dividends, make payment thereof in that number of
whole shares of Common Stock calculated by dividing the total of such
declared but unpaid dividends due such holder by the fair market value
per share of the Common Stock, as determined in good faith by the
Corporation's Board of Directors.
(2) Automatic.
(A) Should the holders of at least a majority of the
then outstanding shares of the Series A Preferred Stock, the holders of
at least a majority of the then outstanding shares of Series B
Preferred Stock, and the holders of at least a majority of the then
outstanding shares of Series C Preferred Stock, all voting as separate
classes, so elect, by delivery of written notice or notices to the
Corporation, then each and every outstanding share of Preferred Stock
shall automatically be converted into Common Stock at the then
effective Conversion Rate with respect to each series of Preferred
Stock. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of
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receipt of the last written notice described above necessary to effect
such approval, and the Corporation shall pay all declared but unpaid
dividends on the outstanding shares of Preferred Stock (if any) to each
holder thereof to and including the date of such conversion; provided
that the Corporation may, at its option, in lieu of making a full cash
payment of all such declared but unpaid dividends, make payment thereof
in that number of whole shares of Common Stock calculated by dividing
the total of such declared but unpaid dividends due such holder by the
fair market value per share of the Common Stock, as determined in good
faith by the Board of Directors. Such conversion shall be automatic,
without need for any further action by the holders of shares of the
Preferred Stock and regardless of whether the certificates representing
such shares are surrendered to the Corporation or its transfer agent;
provided, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion or to pay the dividends payable upon such conversion unless
certificates evidencing such shares of the Preferred Stock are
surrendered to the Corporation in accordance with the procedures
described in Subsection (d)(4) below. Upon the conversion of the
Preferred Stock pursuant to this Subsection (d)(2)(A), the Corporation
shall promptly send written notice thereof, by registered or certified
mail, return receipt requested and postage prepaid, by hand delivery or
by overnight delivery, to each holder of record of such Preferred Stock
at his or its address then shown on the records of the Corporation,
which notice shall state that certificates evidencing shares of
Preferred Stock must be surrendered at the office of the Corporation
(or of its transfer agent for the Common Stock, if applicable) in the
manner described in Subsection (d)(4) below.
(B) The Corporation shall notify each holder of
Preferred Stock at least ninety (90) days prior to the anticipated
effective date of a registration statement filed by the Corporation
under the Securities Act of 1933, as amended, covering the underwritten
offer and sale of Common Stock to the public at a public offering price
of not less than eight dollars ($8.00) per share (which price shall be
appropriately adjusted for any stock splits, stock dividends,
recapitalizations or similar events) and having aggregate net proceeds
to the Corporation of not less than fifteen million dollars
($15,000,000) (such offering being referred to hereafter as a
"Qualified Public Offering"). Upon the closing of, but effective
immediately prior to, the first sale in a Qualified Public Offering,
each and every share of outstanding Preferred Stock held by all holders
of Preferred Stock shall automatically be converted into Common Stock
at the then effective Conversion Rate applicable to each series;
provided that such conversion shall be conditioned upon the Corporation
paying all declared but unpaid dividends on the outstanding Preferred
Stock to each holder, if any, to and including the date of such
conversion; provided, further, that the Corporation may, at its option,
in lieu of making a full cash payment of any such declared but unpaid
dividends, make payment thereof in that number of whole shares of
Common Stock calculated by dividing the total of such declared and
unpaid dividends due such holder by the offering price per share in the
Qualified Public Offering. Such conversion shall be automatic, without
need for any further action by the holders of shares of Preferred Stock
and regardless of whether the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided,
however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion unless certificates evidencing such shares of Preferred
Stock so converted are surrendered to the Corporation in accordance
with the procedures described in Subsection (d)(4) below. Upon the
conversion of the Preferred
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Stock pursuant to this Subsection (d)(2)(B), the Corporation shall
promptly send written notice thereof, by registered or certified mail,
return receipt requested and postage prepaid, by hand delivery or by
overnight delivery, to each holder of record of Preferred Stock at his
or its address then shown on the records of the Corporation, which
notice shall state that certificates evidencing shares of Preferred
Stock must be surrendered at the office of the Corporation (or of its
transfer agent for the Common Stock, if applicable) in the manner
described in Subsection (d)(4) below.
(C) In the event that, and each and every time as,
the Board of Directors, acting by the vote required by Section 1.4(b)
of the Series C Purchase Agreement, calls for an Additional Financing
(as such term is defined in such section) and any then existing holder
of shares of Preferred Stock who is a party to the Series C Purchase
Agreement fails to purchase all of such holder's portion (defined in
such section) of the number or amount of securities to be issued, so as
to provide the Corporation with funds in the amount of the required
financing, then a portion (defined below) of the shares of Preferred
Stock held by such non-participating holder immediately prior to the
date on which the Additional Financing is to be made shall
automatically convert into shares of Common Stock, effective as of the
closing date set by the Board of Directors for such financing.
For purposes of this Subsection (d)(2)(C), the
portion of the shares of Preferred Stock held by a holder who fails to
participate fully in an Additional Financing as described above, as
such shares are constituted immediately prior to the proposed date of
such financing, that is subject to automatic conversion under this
Subsection (d)(2)(C) shall equal a fraction, the numerator of which is
the difference between such holder's portion of such financing (in
dollars) offered to such holder pursuant to Section 1.4(b) of the
Series C Purchase Agreement and the purchase price of the debt or
equity securities of the Corporation issued to effect such financing
that are actually purchased by such holder, and the denominator of
which is such holder's portion of such financing (in dollars).
Upon any conversion described in this Subsection
(d)(2)(C), all declared but unpaid dividends with respect to the shares
to be converted shall be paid, a notice of the conversion shall be
given to the holder thereof, and the certificates representing the
shares to be converted shall be surrendered, all in accordance with the
terms of Subsection (d)(2)(A) above with respect to an automatic
conversion.
(D) No fractional shares of Common Stock shall be
issued upon conversion of Preferred Stock, and any shares of Preferred
Stock surrendered for conversion that would otherwise result in a
fractional share of Common Stock shall be redeemed at the then
effective Series A Conversion Price, Series B Conversion Price, or
Series C Conversion Price, per share, as applicable, payable as
promptly as possible when funds are legally available therefor.
(3) Conversion Rates. Subject to the provisions of this
Section (d), including the conversion formula specified in Section
(d)(2)(B) with respect to a conversion by virtue of a Qualified Public
Offering, the conversion rate in effect at any time with respect to the
Series A Preferred Stock, the Series B Preferred Stock and Series C
Preferred Stock (a "Conversion Rate") shall be determined as follows:
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The Conversion Rate for the Series A Preferred Stock shall be
the quotient obtained by dividing $1.00 by the Series A
Conversion Price, as provided in Subsection (d)(7) hereof. The
Conversion Rate for the Series B Preferred Stock shall be the
quotient obtained by dividing $2.55 by the Series B Conversion
Price, as provided in Subsection (d)(7) hereof. The Conversion
Rate for the Series C Preferred Stock shall be the quotient
obtained by dividing $2.25 by the Series C Conversion Price,
as provided in Subsection (d)(7) hereof. The Conversion Rates
as of the Restatement Date are .6060, .7727 and .6060 for the
Series A Preferred Stock, Series B Preferred Stock and Series
C Preferred Stock, respectively.
(4) Mechanics of Conversion. Before any holder of Preferred
Stock shall be entitled to receive certificates representing the shares
of Common Stock into which shares of Preferred Stock are converted in
accordance with Subsections (d)(1) or (d)(2) above, and any dividends
to be paid thereunder, such holder shall surrender the certificate or
certificates for such shares of Preferred Stock, duly endorsed, at the
office of the Corporation or of any transfer agent for the Preferred
Stock, and shall give written notice to the Corporation at such office
of the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued, if different from
the name shown on the books and records of the Corporation. Said
conversion notice shall also contain such representations as may
reasonably be required by the Corporation to the effect that the shares
to be received upon conversion are not being acquired and will not be
transferred in any way that might violate the then applicable laws. The
Corporation shall, as soon as practicable thereafter and in no event
later than thirty (30) days after the delivery of said certificates,
issue and deliver at such office to such holder of Preferred Stock, or
to the nominee or nominees of such holder as provided in such notice, a
certificate or certificates for the number of shares of Common Stock to
which such holder shall be entitled as aforesaid, together with all
dividends, if any, to be paid with respect to the Preferred Stock
converted. The person or persons entitled to receive the shares of
Common Stock issuable upon a conversion pursuant to Subsections (d)(1)
or (d)(2) shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of the effective date of
conversion specified in such section. All certificates issued upon the
exercise or occurrence of the conversion shall contain a legend
governing restrictions upon such shares imposed by law or agreement of
the holder or his or its predecessors.
(5) Adjustment for Subdivisions or Combinations of Common
Stock. In the event the Corporation at any time or from time to time
after the Restatement Date effects a subdivision or combination of the
outstanding Common Stock into a greater or lesser number of shares
without a proportionate and corresponding subdivision or combination of
the outstanding Preferred Stock, then and in each such event the Series
A Conversion Price, the Series B Conversion Price and the Series C
Conversion Price and the corresponding Conversion Rate of each such
price shall be increased or decreased proportionately.
(6) Adjustments for Dividends, Distributions and Common Stock
Equivalents. In the event the Corporation at any time or from time to
time after the Restatement Date shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in additional shares
of Common Stock or
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other securities or rights convertible into or entitling the holder
thereof to receive additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment of any
consideration by such holder of such Common Stock Equivalents or the
additional shares of Common Stock, and without a proportionate and
corresponding dividend or other distribution to holders of Preferred
Stock, then and in each such event the maximum number of shares (as set
forth in the instrument relating thereto without regard to any
provisions contained therein for subsequent adjustment of such number)
of Common Stock issuable in payment of such dividend or distribution or
upon conversion or exercise of such Common Stock Equivalents shall be
deemed, for purposes of this Subsection (d)(6), to be issued and
outstanding as of the time of such issuance or, in the event such a
record date shall have been fixed, as of the close of business on such
record date. In each such event the effective Series A Conversion
Price, the Series B Conversion Price, and the Series C Conversion Price
shall each be decreased (and their respective corresponding Conversion
Rates increased) as of the time of such issuance or, in the event such
a record date shall have been fixed, as of the close of business on
such record date, by multiplying each such Conversion Price by a
fraction,
(A) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding or deemed to be issued
and outstanding immediately prior to the time of such issuance or the
close of business on such record date; and
(B) the denominator of which shall be the total
number of shares of Common Stock (x) issued and outstanding or deemed
pursuant to the terms hereof to be issued and outstanding (not
including any shares described in clause (y) immediately below),
immediately prior to the time of such issuance or the close of business
on such record date, plus (y) the number of shares of Common Stock
issuable in payment of such dividend or distribution or upon conversion
or exercise of such Common Stock Equivalents;
provided, however, that (i) if such record date shall have been fixed
and such dividend is not fully paid or if such distribution is not
fully made on the date fixed therefor, the Series A Conversion Price,
the Series B Conversion Price, and the Series C Conversion Price shall
each be recomputed accordingly as of the close of business on such
record date and thereafter the Series A Conversion Price, the Series B
Conversion Price and the Series C Conversion Price (and their
respective corresponding Conversion Rates) shall be adjusted pursuant
to this Subsection (d)(6) as of the time of actual payment of such
dividends or distributions; or (ii) if such Common Stock Equivalents
provide, with the passage of time or otherwise, for any decrease in the
number of shares of Common Stock issuable upon conversion or exercise
thereof (or upon the occurrence of a record date with respect thereto),
the Series A Conversion Price, the Series B Conversion Price, and the
Series C Conversion Price (and their respective corresponding
Conversion Rates) computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall each, upon any such decrease becoming
effective, be recomputed to reflect such decrease insofar as it affects
the rights of conversion or exercise of the Common Stock Equivalents
then outstanding; or (iii) upon the expiration of any rights of
conversion or exercise under any unexercised Common Stock Equivalents,
each of the Series A Conversion Price, the Series B Conversion Price,
and the Series C Conversion Price (and their
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respective corresponding Conversion Rates) computed upon the original
issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon
such expiration, be recomputed as if the only additional shares of
Common Stock issued were the shares of such stock, if any, actually
issued upon the conversion or exercise of such Common Stock
Equivalents; or (iv) in the event of issuance of Common Stock
Equivalents that expire by their terms not more than sixty (60) days
after the date of issuance thereof, no adjustments of the Series A
Conversion Price, the Series B Conversion Price, or the Series C
Conversion Price (or such Conversion Rates) shall be made until the
expiration or exercise of all such Common Stock Equivalents, whereupon
such adjustment shall be made in the manner provided in this Subsection
(d)(6).
(7) Adjustment of Conversion Price for Diluting Issues. Except
as otherwise adjusted as provided herein, the "Series A Conversion
Price" shall be $1.65. Except as otherwise adjusted as provided herein,
the "Series B Conversion Price" shall be $3.30. Except as otherwise
adjusted as provided herein, the "Series C Conversion Price" shall be
$3.7125. The Series A Conversion Price, the Series B Conversion Price,
and the Series C Conversion Price shall hereinafter be referred to
collectively as the "Conversion Prices" and individually as a
"Conversion Price." Except as otherwise provided in this Subsection
(d)(7), in the event, and each time after the Restatement Date as, the
Corporation sells or issues any Common Stock or Common Stock
Equivalents, at a per share consideration (as defined below) less than
any of the Series A Conversion Price, the Series B Conversion Price,
and the Series C Conversion Price then in effect, then any such
Conversion Price that is higher than the per share consideration for
which the Corporation sold or issued Common Stock or Common Stock
Equivalents shall be adjusted as provided in paragraphs (A), (B), (C)
and (F) hereof, and the Conversion Rate corresponding to such
Conversion Price shall be appropriately adjusted. For purposes of the
foregoing, the per share consideration with respect to the sale or
issuance of a share of Common Stock shall be the price per share
received by the Corporation, prior to the payment of any expenses,
commissions, discounts and other applicable costs. With respect to the
sale or issuance of Common Stock Equivalents that are convertible into
or exchangeable for Common Stock without further consideration, the per
share consideration shall be determined by dividing the maximum number
of shares (as set forth in the instrument relating thereto without
regard to any provisions contained therein for subsequent adjustment of
such number) of Common Stock issuable with respect to such Common Stock
Equivalents into the aggregate consideration received by the
Corporation upon the sale or issuance of such Common Stock Equivalents.
With respect to the issuance of other Common Stock Equivalents, the per
share consideration shall be determined by dividing the maximum number
of shares (as set forth in the instrument relating thereto without
regard to any provisions contained therein for subsequent adjustment of
such number) of Common Stock issuable with respect to such Common Stock
Equivalents into the aggregate consideration received by the
Corporation upon the sale or issuance of such Common Stock Equivalents
plus the total consideration receivable by the Corporation upon the
conversion or exercise of such Common Stock Equivalents. The issuance
of Common Stock or Common Stock Equivalents for no consideration shall
be deemed to be an issuance at a per share consideration of $.01. In
connection with the sale or issuance of Common Stock and/or Common
Stock Equivalents for non-cash consideration, the amount
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of consideration shall be determined by the Board of Directors of the
Corporation in good faith.
As used herein, "Additional Shares of Common Stock" shall mean
either shares of Common Stock issued subsequent to the Restatement Date
or, with respect to the issuance of Common Stock Equivalents, the
maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for
subsequent adjustment of such number) of Common Stock issuable in
exchange for, upon conversion of, or upon exercise of such Common Stock
Equivalents.
(A) Upon each issuance of Common Stock subsequent to
the Restatement Date, for a per share consideration less than any of
the Series A Conversion Price, the Series B Conversion Price, and the
Series C Conversion Price in effect on the date of such issuance, such
Conversion Price as in effect on such date shall be adjusted by
multiplying it by a fraction:
(x) the numerator of which shall be the
number of shares of Common Stock deemed outstanding
(as defined below) immediately prior to the issuance
of such Additional Shares of Common Stock plus the
number of shares of Common Stock that the aggregate
net consideration received by the Corporation for the
total number of such Additional Shares of Common
Stock so issued would purchase at the Conversion
Price then in effect; and
(y) the denominator of which shall be the
number of shares of Common Stock deemed outstanding
(as defined below) immediately prior to the issuance
of such Additional Shares of Common Stock plus the
number of shares of Common Stock so issued.
For the purposes of this Subsection (d)(7)(A), the number of shares of Common
Stock deemed to be outstanding as of a given date shall be the sum of (i) the
number of shares of Common Stock actually outstanding, (ii) the number of shares
of Common Stock into which the then outstanding shares of Preferred Stock could
be converted if fully converted on the day immediately preceding the given date,
and (iii) the number of shares of Common Stock which could be obtained through
the exercise or conversion of all other rights, options and convertible
securities on the day immediately preceding the given date.
(B) Subsequent to the Restatement Date upon each
issuance of Common Stock Equivalents, exchangeable without further
consideration into Common Stock, for a per share consideration less
than any of the Series A Conversion Price, the Series B Conversion
Price, and the Series C Conversion Price in effect on the date of such
issuance, such Conversion Price as in effect on such date shall be
adjusted as in paragraph (A) of this Subsection (d)(7) on the basis
that the Additional Shares of Common Stock are to be treated as having
been issued on the date of issuance of the Common Stock Equivalents,
and the aggregate consideration received by the Corporation for such
Common Stock Equivalents shall be deemed to have been received for such
Additional Shares of Common Stock.
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(C) Subsequent to the Restatement Date upon each
issuance of Common Stock Equivalents other than those described in
paragraph (B) of this Subsection (d)(7), for a per share consideration
less than any of the Series A Conversion Price, the Series B Conversion
Price, and the Series C Conversion Price in effect on the date of such
issuance, such Conversion Price as in effect on such date shall be
adjusted as in paragraph (A) of this Subsection (d)(7) on the basis
that the Additional Shares of Common Stock are to be treated as having
been issued on the date of issuance of such Common Stock Equivalents,
and the aggregate consideration received and receivable by the
Corporation on conversion or exercise of such Common Stock Equivalents
shall be deemed to have been received for such Additional Shares of
Common Stock.
(D) Once any Additional Shares of Common Stock have
been treated as having been issued for the purpose of this Subsection
(d)(7), they shall be treated as issued and outstanding shares of
Common Stock whenever any subsequent calculations must be made pursuant
hereto; provided that on the expiration of any options, warrants or
rights to purchase Additional Shares of Common Stock, the termination
of any rights to convert or exchange for Additional Shares of Common
Stock, or the expiration of any options or rights related to such
convertible or exchangeable securities on account of which an
adjustment in any of the Series A Conversion Price, the Series B
Conversion Price, and the Series C Conversion Price has been made
previously pursuant to this Subsection (d)(7), such Conversion Price
shall forthwith be readjusted to such Conversion Price as would have
obtained had the adjustment made upon the issuance of such options,
warrants, rights, securities or options or rights related to such
securities been made upon the basis of the issuance of only the number
of shares of Common Stock actually issued upon the exercise of such
options, warrants or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to
such securities.
(E) The foregoing notwithstanding, no adjustment of
the Series A Conversion Price, the Series B Conversion Price, or the
Series C Conversion Price or its corresponding Conversion Rate shall be
made as a result of the issuance of:
(v) any shares of Common Stock upon the
conversion of shares of Preferred Stock;
(w) any shares of Common Stock pursuant to
which the Series A Conversion Price, the Series B
Conversion Price, or the Series C Conversion Price
and its respective corresponding Conversion Rate is
adjusted under Subsection (5) or (6) of this Section
(d);
(x) any shares of Common Stock issued
pursuant to the exchange, conversion or exercise of
any Common Stock Equivalents that have previously
been incorporated into computations hereunder on the
date when such Common Stock Equivalents were issued;
(y) up to 1,540,728 shares of Common Stock
(which number shall be appropriately adjusted for any
stock splits, stock dividends, recapitalizations
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or similar events) reserved for issuance pursuant to
stock options granted prior to the Original Series C
Issue Date to employees and a director of the
Corporation; or
(z) up to 134,576, or such higher number as
is approved by the Board of Directors after the
Original Series C Issue Date, shares of Common Stock
(which number shall be appropriately adjusted for any
stock splits, stock dividends, recapitalizations or
similar events), issued pursuant to options, warrants
or rights that may be granted in the future to
purchase shares of Common Stock, issuable to
employees, directors, officers or consultants of the
Corporation or any subsidiary thereof pursuant to
bona fide employee stock option plans created in
accordance with Section 422 of the Internal Revenue
Code of 1986, as amended, or similar subsequent
legislation or pursuant to a non-statutory stock
option plan or non-statutory stock option agreements
with terms substantially similar to such statutory
plan or plans, provided that any such non-statutory
stock option plan or agreements shall provide that
any options thereunder not be granted at an exercise
price of less than the fair market value of the stock
into which they are exercisable (which description is
intended to include the Corporation's 1995 Stock
Option Plan).
(8) De Minimis Adjustments. No adjustment to the Series A
Conversion Price, the Series B Conversion Price, or the Series C
Conversion Price (and, thereby, to its corresponding Conversion Rate)
shall be made if such adjustment would result in a change in such
Conversion Price of less than $.01. Any adjustment of less than $.01
that is not made shall be carried forward and shall be made at the time
of and together with any subsequent adjustment that, on a cumulative
basis, amounts to an adjustment of $.01 or more in such Conversion
Price.
(9) No Impairment. Except as provided in Section (f) hereof,
the Corporation shall not, by amendment of its Articles of
Incorporation or Bylaws or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder
by the Corporation, but shall at all times in good faith assist in the
carrying out of all the provisions of this Section (d) and in the
taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the holders of the Preferred Stock
against impairment.
(10) Certificate as to Adjustments. Upon the occurrence of
each adjustment or readjustment of any of the Series A Conversion
Price, the Series B Conversion Price, and the Series C Conversion Price
pursuant to this Section (d), the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the
terms hereof and cause independent public accountants selected by the
Corporation to verify such computation and prepare and furnish to each
holder of Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of Preferred Stock, furnish
or cause to be furnished to such holder a like certificate
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<PAGE> 19
setting forth (i) such adjustments and readjustments, (ii) the
respective Conversion Rates of the Series A Preferred Stock, the Series
B Preferred Stock and the Series C Preferred Stock, as applicable, at
that time in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property that at that time would be
received upon the conversion of each of the Series A Preferred Stock,
the Series B Preferred Stock, and the Series C Preferred Stock.
(11) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities other
than Preferred Stock for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, any
Common Stock Equivalents or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Corporation
shall mail to each holder of Preferred Stock, at least twenty (20) days
prior to the date specified therein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend,
distribution or rights, and the amount and character of such dividend,
distribution or rights.
(12) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose
of effecting the conversion of the shares of the Preferred Stock such
number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the
Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall be insufficient to effect the
conversion of all then outstanding shares of Preferred Stock, the
Corporation shall take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
(e) Redemption of Preferred Stock. In the event that the holders of the
outstanding shares of the Series A Preferred Stock, voting separately as a
class, the holders of the outstanding shares of the Series B Preferred Stock,
voting separately as a class, and the holders of the outstanding shares of the
Series C Preferred Stock, voting separately as a class, have each, by a vote of
at least two-thirds (66-2/3%) of the total number of shares of such series
outstanding, elected to cause a redemption of the outstanding shares of
Preferred Stock, then such holders (the "Electing Holders") shall so notify the
Corporation by delivery of written notice or notices to the Corporation prior to
December 4, 2000. The Corporation on March 4, 2001 shall redeem one-half (1/2)
of all the then outstanding shares of Preferred Stock by paying the Redemption
Price (defined below) with respect to each series together with all unpaid
dividends thereon to and including the date of redemption, and the Corporation
on March 4, 2002 shall redeem the remaining shares of Preferred Stock then
outstanding by paying the Redemption Price with respect to each series together
with all unpaid dividends thereon to and including the date of redemption.
The price paid for the redeemed shares of the Series A Preferred Stock
(the "Series A Redemption Price") shall be the greater of the Series A Invested
Amount per share or the Appraised Value thereof as of the date of the request
for redemption. The price paid for the redeemed shares of the Series B Preferred
Stock (the "Series B Redemption Price") shall be the greater of the Series
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<PAGE> 20
B Invested Amount per share or the Appraised Value thereof as of the date of the
request for redemption. The price paid for the redeemed shares of the Series C
Preferred Stock (the "Series C Redemption Price") shall be the greater of the
Series C Invested Amount per share or the Appraised Value thereof as of the date
of the request for redemption. The Appraised Value per share of each series
shall be established by the Board of Directors in good faith following such
request for redemption, and each Electing Holder shall be notified in writing of
such value at least eighty (80) days prior to the first scheduled redemption.
If, however, any Electing Holder or Holders shall give the Corporation written
notice at least sixty (60) days prior to the first scheduled redemption that he,
it or they disagree with the value placed upon the shares of such series, then
the Electing Holders and the Corporation shall attempt to agree upon an
Appraised Value per share of such series. Should the Electing Holders and the
Corporation be unable to agree during the twenty (20)-day period immediately
following the giving of the written notice of such disagreement as to the
Appraised Value without the employment of appraisers, then they shall each
select an appraiser experienced in the business of evaluating or appraising the
market value of stock. The appraisers so selected (the "Initial Appraisers")
shall, on or prior to the first scheduled redemption, appraise such shares to be
redeemed as of the date of the first scheduled redemption. The appraisers shall
not discount the shares of the Series A Preferred Stock, the Series B Preferred
Stock, or the Series C Preferred Stock for minority ownership interest or
illiquidity. If the difference between the lowest and the highest of the
resulting appraisals is not greater than ten percent (10%) of the highest
appraisal, then the average of the appraisals shall be deemed the Appraised
Value; otherwise, the Initial Appraisers shall select an additional appraiser
(the "Additional Appraiser"), who shall be experienced in a manner similar to
the Initial Appraisers. If they fail to select such Additional Appraiser as
provided above, then either the Electing Holders or the Corporation may apply,
after written notice to the other, to any judge of any court of general
jurisdiction for the appointment of such Additional Appraiser. The Additional
Appraiser shall then choose from the values determined by the Initial Appraisers
the value that the Additional Appraiser considers closest to the market value of
the Preferred Stock in question, and such value shall be the Appraised Value.
The Additional Appraiser shall forthwith give written notice of his
determination to the Corporation and the Electing Holders. Each party shall pay
the expenses and fees of the appraiser selected by him or it, and the party who
selected the Initial Appraiser whose value determination was rejected by the
Additional Appraiser shall pay all the expenses and fees of the Additional
Appraiser.
On or before the date of a scheduled redemption, each holder of shares
required to be redeemed shall surrender the certificate representing such shares
to the Corporation and shall receive payment of the Redemption Price therefor in
cash. If less than all the shares represented by a surrendered certificate are
redeemed, the Corporation shall issue a new certificate representing the
unredeemed shares.
The right to redemption established by this Section (e) shall be deemed
absolute and vested upon the occurrence of the conditions specified herein;
however, actual redemption under this Section (e) shall be subject to the legal
availability of funds and, to the extent delayed, shall occur as soon thereafter
as and when funds are legally available therefor, with interest at the per annum
rate announced by Wachovia Bank of Georgia, N.A. as its prime lending rate plus
two percent (2%) per annum for the period of each delay.
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<PAGE> 21
(f) Protective Provisions.
(1) Actions Requiring Majority Approval of Preferred Stock
Voting as Single Class. In addition to any other rights provided by
law, so long as no less than 2,000,000 shares (such number to be
adjusted for any stock dividends, combinations or splits following the
Restatement Date with respect to such shares) of any of the Preferred
Stock are then outstanding, except where the vote or written consent of
the holders of a greater number of shares is required by law or by the
Articles of Incorporation, without first obtaining the affirmative vote
or written consent of the holders of a majority of the total number of
shares of Preferred Stock outstanding, voting together as a single
class on an as-if converted basis (as provided in Section (c) hereof),
the Corporation shall not:
(A) except pursuant to the stock option or employee
stock ownership plans or restricted stock agreements or other contracts
with, or in exercise of any right of first refusal of, the Corporation
upon a proposed transfer, purchase, redeem or otherwise acquire for
value any shares of any class of its capital stock or cause or permit
any Employee Stock Ownership Plan as defined in ss. 4975(e)(7) of the
Internal Revenue Code of 1986, as amended, or other employee stock
ownership plan to purchase shares of any class of its capital stock;
(B) create, incur, assume or suffer to exist any
mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or security title of a
conditional vendor) of any nature (other than ad valorem taxes), upon
or with respect to any of its or any subsidiary's properties or notes
receivable, other than such mortgages, deeds, pledges, liens, security
interests, charges and encumbrances as presently exist and those
approved hereafter unanimously by the Board of Directors;
(C) assume, guarantee, endorse or otherwise become
directly or contingently liable for any obligation or indebtedness
other than such liabilities as presently exist or are incurred in the
ordinary course of business;
(D) sell, assign, lease or otherwise dispose of any
of its assets, including its receivables, other than in the ordinary
course of business;
(E) make any loan or advance to any employee of the
Corporation or any subsidiary thereof except (i) the payment of
salaries (which, in the case of officers, shall be approved in advance
by the Board of Directors), (ii) advances for reasonable travel
expenses in connection with the Corporation's business, (iii) the
acceptance of promissory notes approved in advance by the Board of
Directors given for the purchase of the Corporation's capital stock,
and (iv) loans to officers approved in advance by the Board of
Directors;
(F) own, or permit any subsidiary of the Corporation
to own, any stock or other securities of any corporation, partnership,
association or other form of business entity except the securities of
wholly owned subsidiaries of the Corporation or such subsidiary; or
(G) amend the provisions of this Subsection (f)(1).
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<PAGE> 22
(2) Actions Requiring Separate Series Super-Majority Approval
of Preferred Stock. In addition to any other rights provided by law, so
long as any shares of the Preferred Stock shall be outstanding, except
where the vote or written consent of the holders of a greater number of
shares is required by law or by the Articles of Incorporation, without
first obtaining the affirmative vote or written consent of the holders
of at least two-thirds (66 2/3%) of the total number of shares of the
affected series of Preferred Stock outstanding, voting as a separate
class, the Corporation shall not:
(A) amend or repeal any provision of, or add any
provision to, the Corporation's Articles of Incorporation or Bylaws, or
file any certificate of designations, preferences, limitations and
relative rights of any series of preferred stock, if such action would
alter or change the preferences, rights, privileges or powers of, or
restrictions provided for the benefit of (except the relative priority
on a liquidation, dissolution or winding up or a Sale or Merger), such
series of Preferred Stock;
(B) increase or decrease the authorized number of
shares of such series Preferred Stock; or
(C) amend the provisions of this Subsection (f)(2).
(3) Separate Series Approval of Merger or Reorganization. In
addition to any other rights provided by law, so long as no less than
2,000,000 shares (such number to be adjusted for any stock dividends,
combinations or splits with respect to such shares occurring after the
Restatement Date) of any of the Preferred Stock are then outstanding,
except where the vote or written consent of the holders of a greater
number of shares is required by law or by the Articles of
Incorporation, without first obtaining the affirmative vote or written
consent of the holders of a majority of the shares of Series A
Preferred Stock outstanding, the holders of a majority of the shares of
Series B Preferred Stock outstanding, and the holders of a majority of
the shares of Series C Preferred Stock outstanding, voting as separate
classes, the Corporation shall not:
(A) enter into any agreement, commitment or plan
regarding a Sale or Merger (as defined in Section (b) hereof); or
(B) amend the provisions of this subsection (f)(3).
(g) Notices. Any notice required by the provisions hereof to be given
to the holders of shares of Preferred Stock shall be deemed given on the third
business day following (and not including) the date on which such notice is
deposited in the United States Mail, first-class, postage prepaid, and addressed
to each holder of record at his address appearing on the books of the
Corporation.
(h) Filing of Purchase Agreement. The Series C Purchase Agreement shall
be kept on file at the principal office of the Corporation for inspection by any
shareholder of the Corporation or other person having a proper business purpose.
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<PAGE> 23
EXHIBIT B
DESIGNATIONS OF PREFERENCES, LIMITATIONS,
AND RELATIVE RIGHTS OF SERIES D
PREFERRED STOCK OF T/R SYSTEMS, INC.
The relative preferences, powers, limitations and rights granted to and
imposed upon the Series D Preferred are as follows:
(a) Designation of the Shares. There shall be shares of preferred stock
designated as "Series D Preferred Stock." Each share of such series shall be
referred to herein as a "Series D Share." The authorized number of such Series D
Shares is two hundred twenty-two thousand two hundred twenty-two (222,222).
(b) Dividends. The holders of record of the Series D Preferred Stock
shall be entitled to receive, when and if declared by the Board, out of funds
legally available therefor, dividends paid in cash, stock or otherwise. When
dividends become so payable, the Board shall declare such dividends and cause
them to be paid, to the full extent of any funds legally available therefor. In
the event that the Corporation shall pay on the Corporation's common stock, par
value $.01 per share (the "Common Stock"), any dividend whether in cash,
property or otherwise, the Corporation shall pay a dividend on the Series D
Shares in an amount per share which is equal to that which holders of the Series
D Shares would have been entitled had they converted such shares into Common
Stock immediately prior to the payment of such dividend.
(c) Liquidation Preference. In the event of any liquidation,
dissolution or winding-up of the Corporation, either voluntary or involuntary (a
"Liquidation"), the holders of shares of the Series D Preferred Stock then
issued and outstanding shall be entitled to be paid out of the assets of the
Corporation available for distribution to its shareholders, whether from
capital, surplus or earnings, before any payment shall be made to the holders of
shares of the Common Stock but after and junior to any payment as shall be
required to be made to the holders of shares of Series Preferred Stock pursuant
to the preferences, rights and designations of such Series Preferred Stock, an
amount equal to four dollars and fifty cents ($4.50) per share, which sum is
subject to appropriate adjustment for any stock split, reverse stock split,
stock dividend or similar event in respect of the Series D Preferred Stock. If,
upon any Liquidation of the Corporation, the assets of the Corporation available
for distribution to its shareholders shall be insufficient to pay the holders of
shares of the Series D Preferred Stock and the holders of any other series of
Preferred Stock of the Corporation with a liquidation preference equal to the
liquidation preference of the Series D Preferred Stock the full amounts to which
they shall respectively be entitled, the holders of shares of the Series D
Preferred Stock and the holders of any other series of Preferred Stock of the
Corporation with a liquidation preference equal to the liquidation preference of
the Series D Preferred Stock shall receive all of the assets of the Corporation
available for distribution and each such holder of shares of the Series D
Preferred Stock and the holders of any other series of Preferred Stock of the
Corporation with a
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<PAGE> 24
liquidation preference equal to the liquidation preference of the Series D
Preferred Stock shall share ratably in any distribution in accordance with the
amounts due such shareholders. After payment shall have been made to the holders
of shares of the Series D Preferred Stock of the full amount to which they shall
be entitled, as aforesaid, the holders of shares of the Series D Preferred Stock
shall be entitled to no further distributions thereon and the holders of shares
of the Common Stock and of shares of any other series of stock of the
Corporation shall be entitled to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available for
distribution to its shareholders.
A merger or consolidation of the Corporation with or into any other
corporation, or a sale, lease, exchange, or transfer of all or any part of the
assets of the Corporation which shall not in fact result in the liquidation (in
whole or in part) of the Corporation and the distribution of its assets to its
shareholders shall not be deemed to be a voluntary or involuntary liquidation
(in whole or in part), dissolution, or winding-up of the Corporation.
(d) Conversion of Series D Preferred Stock. The holders of Series D
Preferred Stock shall have the following conversion rights:
(1) Optional. Each share of Series D Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Corporation or any transfer agent
for the Series D Preferred Stock, into Common Stock at the initial conversion
rate of six hundred and six thousandths (0.606) fully paid and nonassessable
shares of Common Stock for each share of Series D Preferred Stock, subject,
however, to the adjustments described below. (The number of shares of Common
Stock into which a share of Series D Preferred Stock may be converted is
hereinafter referred to as the "Conversion Rate.") Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of the surrender of the shares of Series D Preferred Stock to be converted in
accordance with the procedures described below. The Corporation shall pay to the
holder thereof promptly following such surrender all declared or accrued but
unpaid dividends on the shares of Series D Preferred Stock so converted to, and
including, the date of such conversion; provided, however, that the Corporation
may, at its option, in lieu of making a full cash payment of all such declared
or accrued but unpaid dividends, make payment thereof in that number of whole
shares of Common Stock calculated by dividing the total of such declared or
accrued but unpaid dividends due such holder by the fair market value per share
of the Common Stock, as determined in good faith by the Corporation's Board of
Directors.
(2) Automatic.
(A) The Corporation shall notify each holder of Series D
Preferred Stock at least ninety (90) days prior to the anticipated
effective date of a registration statement filed by the Corporation
under the federal Securities Act of 1933, as amended, covering the
underwritten offer and sale of Common Stock to the public (such
offering being referred to hereafter as an "Initial Public Offering").
Upon the closing of, but effective immediately prior to, the first sale
in an Initial Public Offering, each and every share of outstanding
Series D Preferred Stock held by all holders of Series D Preferred
Stock shall automatically be converted into Common Stock, at the then
effective Conversion Rate; provided that such conversion shall be
conditioned upon the Corporation paying all declared or accrued but
unpaid dividends on
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<PAGE> 25
the outstanding Series D Preferred Stock to each holder to and
including the date of such conversion; provided, further, that the
Corporation may, at its option, in lieu of making a full cash payment
of all such declared or accrued but unpaid dividends, make payment
thereof in that number of whole shares of Common Stock calculated by
dividing the total of such declared or accrued and unpaid dividends due
such holder by the offering price per share in the Initial Public
Offering. Such conversion shall be automatic, without need for any
further action by the holders of shares of Series D Preferred Stock and
regardless of whether the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided,
however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion unless certificates evidencing such shares of Series D
Preferred Stock so converted are surrendered to the Corporation in
accordance with the procedures described in Subsection (D)(3) below.
Upon the conversion of the Series D Preferred Stock pursuant to this
Subsection (D)(2)(A), the Corporation shall promptly send written
notice thereof, by registered or certified mail, return receipt
requested and postage prepaid, by hand delivery or by overnight
delivery, to each holder of record of Series D Preferred Stock at his
or its address then shown on the records of the Corporation, which
notice shall state that certificates evidencing shares of Series D
Preferred Stock must be surrendered at the office of the Corporation
(or of its transfer agent for the Common Stock, if applicable) in the
manner described in Subsection (D)(3) below.
(B) Immediately prior to the closing date of an agreement, in
which the Corporation is a party, regarding a Sale or Merger (as
defined herein) of the Corporation, each and every share of outstanding
Series D Preferred Stock held by all holders of Series D Preferred
Stock shall automatically be converted into Common Stock, at the then
effective Conversion Rate; provided that such conversion shall be
conditioned upon the Corporation paying all declared or accrued but
unpaid dividends on the outstanding Series D Preferred Stock to each
holder to and including the date of such conversion; provided, further,
that the Corporation may, at its option, in lieu of making a full cash
payment of all such declared or accrued but unpaid dividends, make
payment thereof in that number of whole shares of Common Stock
calculated by dividing the total of such declared or accrued and unpaid
dividends due such holder by the fair market value per share of the
Common Stock, as determined in good faith by the Corporation's Board of
Directors. Such conversion shall be automatic, without need for any
further action by the holders of shares of Series D Preferred Stock and
regardless of whether the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided,
however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion unless certificates evidencing such shares of Series D
Preferred Stock so converted are surrendered to the Corporation in
accordance with the procedures described in Subsection (D)(3) below.
Upon the conversion of the Series D Preferred Stock pursuant to this
Subsection (D)(2)(B), the Corporation shall promptly send written
notice thereof, by registered or certified mail, return receipt
requested and postage prepaid, by hand delivery or by overnight
delivery, to each holder of record of Series D Preferred Stock at his
or its address then shown on the records of the Corporation, which
notice shall state that certificates evidencing shares of Series D
Preferred Stock must be surrendered at the office of the Corporation
(or of its transfer agent for the Common Stock, if applicable) in the
manner described in Subsection (D)(3) below.
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<PAGE> 26
For purposes of these designations, a "Sale or Merger" shall mean any of the
following:
(i) the merger, reorganization or consolidation of
the Corporation or such subsidiary or subsidiaries of the
Corporation the assets of which constitute all or
substantially all the assets of the business of the
Corporation and its subsidiaries taken as a whole into or with
another corporation in which the shareholders of the
Corporation or such subsidiaries immediately preceding such
merger, reorganization or consolidation (solely by virtue of
their shares or other securities of the Corporation or such
subsidiaries) shall own less than fifty percent (50%) of the
voting securities of the surviving corporation;
(ii) the sale, transfer or lease (but not including a
transfer or lease by pledge or mortgage to a bona fide
lender), whether in a single transaction or pursuant to a
series of related transactions, of all or substantially all
the assets of the Corporation, whether pursuant to a single
transaction or a series of related transactions or plan (which
assets shall include for these purposes fifty percent (50%) or
more of the outstanding voting interests of such of the
Corporation's subsidiaries the assets of which constitute all
or substantially all the assets of the Corporation and its
subsidiaries taken as a whole); or
(iii) the sale, transfer or lease (but not including
a transfer or lease by pledge or mortgage to a bona fide
lender), whether in a single transaction or pursuant to a
series of related transactions, of all or substantially all
the assets of such of the Corporation's subsidiaries the
assets of which constitute all or substantially all of the
assets of the Corporation and such subsidiaries taken as a
whole.
(C) No fractional shares of Common Stock shall be issued upon
conversion of Series D Preferred Stock, and any shares of Series D
Preferred Stock surrendered for conversion that would otherwise result
in a fractional share of Common Stock shall be redeemed at the then
effective Conversion Price per share, payable as promptly as possible
when funds are legally available therefor.
(3) Mechanics of Conversion. Before any holder of Series D
Preferred Stock shall be entitled to receive certificates representing the
shares of Common Stock into which shares of Series D Preferred Stock are
converted in accordance with Subsections (D)(1) or (D)(2) above, and any
dividends to be paid thereunder, such holder shall surrender the certificate or
certificates for such shares of Series D Preferred Stock, duly endorsed, at the
office of the Corporation or of any transfer agent for the Series D Preferred
Stock, and shall give written notice to the Corporation at such office of the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued, if different from the name shown on the
books and records of the Corporation. Said conversion notice shall also contain
such representations as may reasonably be required by the Corporation to the
effect that the shares to be received upon conversion are not being acquired and
will not be transferred in any way that might violate the then applicable laws.
The Corporation shall, as soon as practicable thereafter and in no event later
than five (5) business days after the delivery of said certificates, issue and
deliver at such office to such holder of Series D Preferred Stock, or to the
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<PAGE> 27
nominee or nominees of such holder as provided in such notice, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid, together with all dividends, if any, to be paid with
respect to the Series D Preferred Stock converted. The person or persons
entitled to receive the shares of Common Stock issuable upon a conversion
pursuant to Subsections (D)(1) or (D)(2) shall be treated for all purposes as
the record holder or holders of such shares of Common Stock as of the effective
date of conversion specified in such section. All certificates issued upon the
exercise or occurrence of the conversion shall contain a legend governing
restrictions upon such shares imposed by law or agreement of the holder or his
or its predecessors.
(4) Reservation of Stock Issuable Upon Conversion. The
Corporation shall reserve and keep available out of its authorized but unissued
shares of Common Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Series D Preferred Stock; provided, however, that there is available such
number of authorized shares of Common Stock after assuming and giving effect to
the conversion of any outstanding convertible preferred shares of other series
and the exercise of all options which are exercisable into Common Stock, as
shall permit conversion of all then outstanding shares of Series D Preferred
Stock.
(5) Adjustment to Conversion Price.
(A) If, subsequent to the Restatement Date (defined
below) and prior to the conversion of all shares of Series D Preferred
Stock, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, or other similar event, the Conversion
Price shall be proportionately reduced, or if the number of outstanding
shares of Common Stock is decreased by a combination or
reclassification of shares, or other similar event, the Conversion
Price shall be proportionately increased. "Restatement Date" as used
herein shall mean the effective date of the Corporation's Second
Restated Articles of Incorporation to which this Exhibit B is appended
and made a part of.
(B) If, subsequent to the Restatement Date and prior
to the conversion of all shares of Series D Preferred Stock, there
shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event that does not
constitute a Sale or Merger as defined above, as a result of which
shares of Common Stock of the Corporation shall be changed into the
same or a different number of shares of the same or another class or
classes of stock or securities of the Corporation or another entity,
then the holders of Series D Preferred Stock shall thereafter have the
right to purchase and receive upon conversion of shares of Series D
Preferred Stock, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore issuable upon conversion, such shares of stock and/or
securities as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore
purchasable and receivable upon the conversion of shares of Series D
Preferred Stock held by such holders had such merger, consolidation,
exchange of shares, recapitalization or reorganization not taken place,
and in any such case appropriate provisions shall be made with respect
to the rights and interests of the holders of the Series D Preferred
Stock to the end that the provisions hereof (including, without
limitation, provisions for adjustment of the Conversion Price and of
the number of shares issuable upon conversion of
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<PAGE> 28
the Series D Preferred Stock) shall thereafter be applicable, as nearly
as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the exercise hereof. The Corporation shall
not effect any transaction described in this subsection unless the
resulting successor or acquiring entity (if not the Corporation)
assumes by written instrument and obligation to deliver to the holders
of the Series D Preferred Stock such shares of stock and/or securities
as, in accordance with the foregoing provisions, the holders of the
Series D Preferred Stock may be entitled to purchase.
(C) If any adjustment under this subsection would
create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon
conversion be the next higher number of shares.
(e) Voting. The holders of Series D Preferred Stock shall not have
voting rights. However, the shares of Common Stock into which the Series D
Preferred Stock is convertible shall, upon issuance, have all of the same voting
rights as other issued and outstanding shares of Common Stock of the
Corporation.
(f) Status of Converted Stock. In the event any shares of Series D
Preferred Stock shall be converted as contemplated by this designation, the
shares so converted shall be canceled, shall return to the status of authorized
but unissued Preferred Stock of no designated class or series, and shall not be
issuable by the Corporation as Series D Preferred Stock.
B-6
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EXHIBIT 3.4
RESTATED BYLAWS
OF
T/R SYSTEMS, INC.
ARTICLE 1.
OFFICES
The Corporation shall maintain at all times a registered office in the
State of Georgia and a registered agent at that address, but may have other
offices located within or without the State of Georgia as the Board of Directors
may determine.
ARTICLE 2.
MEETINGS OF SHAREHOLDERS
2.1 Place and Time of Meetings. All meetings of the shareholders shall
be held at such time and at such place, within or without the State of Georgia,
as may be designated by the Board of Directors or, in the absence of a
designation by the Board of Directors, by the Chairman of the Board of
Directors, the President or the Secretary, and stated in the notice of the
meeting. The Chairman of the Board of Directors may postpone and reschedule any
previously scheduled annual or special meeting of the shareholders of the
Corporation.
2.2 Annual Meeting. An annual meeting of the shareholders shall be held
at such date, time and place as shall be designated from time to time by the
Board of Directors, at which meeting the shareholders shall elect by a plurality
vote the Directors to succeed those whose terms expire and shall transact such
other business as may be properly brought before the meeting in accordance with
Section 2.10 of these Bylaws.
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2.3 Special Meetings. Special meetings of the shareholders may be
called only as provided in this Section 2.3. Special meetings may be called by
the Chairman of the Board of Directors, and shall be called by the Chairman of
the Board of Directors or the Secretary within 10 days after receipt of the
written request of a majority of the total number of Directors which the
Corporation would have if there were no vacancies (the "Whole Board"). Any such
request by a majority of the Whole Board shall be sent to the Chairman of the
Board of Directors and the Secretary and shall state the purpose or purposes of
the proposed meeting. At a special meeting of shareholders, only such business
shall be conducted or considered as shall have been stated in the notice of the
meeting given by or at the direction of the Board of Directors.
2.4 Notice of Meeting. Written notice of every meeting of the
shareholders, stating the place, day, and hour of the meeting, and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting to each shareholder of record entitled to vote at such
meeting. Written notice shall be given personally, by mail, by private courier,
by facsimile transmission, or by telegraph, teletype or other form of wire or
wireless communication. If mailed, notice shall be deemed to be delivered when
deposited in the United States mail with first-class postage thereon prepaid,
addressed to the shareholder at his address as it appears on the stock transfer
books of the Corporation. When a meeting of the shareholders is adjourned to
another place, date or time, by the holders of a majority of the voting power of
the voting shares represented at a meeting, whether or not a quorum is present,
notice need not be given of the adjourned meeting if the date, time, and place
to which the meeting is adjourned are announced at the meeting at which the
adjournment is
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taken; provided, however, if the Board is required to fix a new record date
pursuant to Section 7.5(a) of these Bylaws, notice must be given to persons who
are shareholders as of the new record date. At an adjourned meeting at which a
quorum is present or represented, any business that could have been transacted
at the meeting originally called may be transacted.
2.5 Waiver of Notice. Notice of a meeting need not be given to any
shareholder who signs a waiver of notice, in person or by proxy, either before
or after the date and time stated in the notice. Waiver must be in writing and
delivered to the Corporation for inclusion in the minutes or for filing with the
corporate records. Attendance of a shareholder at a meeting, either in person or
by proxy, shall of itself constitute waiver of notice and waiver of any and all
objections to: (1) lack of notice or defective notice of a meeting, unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting; and (2) consideration at the meeting of a
particular matter that is not within the purpose or purposes described in the
meeting notice, unless the shareholder objects to considering the matter when it
is presented. Neither the business transacted nor the purpose of the meeting
need be specified in the waiver, except that any waiver by a shareholder of the
notice of a meeting of shareholders with respect to an amendment of the Articles
of Incorporation, a plan of merger or share exchange, a sale of assets, or any
other action which would entitle the shareholder to dissent and obtain payment
for his shares shall not be effective unless: (a) prior to execution of the
waiver, the shareholder is furnished with the same material required to be sent
to the shareholder in a notice of the meeting, including notice of any
applicable dissenters' rights; or (b) the waiver expressly waives the right to
receive the materials required to be furnished.
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2.6 Inspectors. The Board of Directors shall appoint one or more
inspectors of election to act as judges of the voting and to determine those
entitled to vote at any meeting of the shareholders, or any adjournment thereof,
in advance of such meeting, but if the Board of Directors fails to make such
appointment(s) or if an appointee fails to serve, the presiding officer of the
meeting of the shareholders may appoint one or more inspectors (or substitute
inspectors) to act at the meeting.
2.7 Quorum. Except as may be provided in the Articles of Incorporation,
a majority of the votes entitled to be cast on a matter by the voting group,
represented in person or by proxy, shall constitute a quorum of that voting
group for action on that matter. Once a share is represented at a meeting for
any purpose other than solely to object to holding the meeting or transacting
business at the meeting, it is deemed present for quorum purposes for the
remainder of the meeting and for any adjournment of that meeting unless a new
record date is or must be set for the adjourned meeting.
2.8 Voting. Except as provided in the Articles of Incorporation or as
otherwise provided by law, each outstanding share of Common Stock shall be
entitled to one vote on each matter submitted to a vote at a meeting of the
shareholders. The vote upon any question brought before a meeting of the
shareholders may be by voice vote, unless otherwise required by the Articles of
Incorporation or these Bylaws or unless the presiding officer or the holders of
a majority of the voting power of the then outstanding shares of all classes of
stock entitled to vote thereon present in person or by proxy at such meeting
shall determine otherwise. Every vote taken by written ballot shall be counted
by the inspector(s) of election. Except as provided in these Bylaws, the
Articles of Incorporation or by law, if a quorum exists, action on a matter
(other than the election of Directors) by a voting group is approved if the
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votes cast within the voting group favoring the action exceed the votes cast
opposing the action. Directors shall be elected at the annual meeting by a
plurality of the votes cast by shares entitled to vote in the election.
2.9 Proxies. A shareholder may vote his shares in person or by proxy. A
shareholder may appoint a proxy by executing a writing which authorizes another
person or persons to vote or otherwise act on the shareholder's behalf.
Execution may be accomplished by any reasonable means, including facsimile
transmission. A proxy is effective when received by the inspector of elections
and is valid for eleven (11) months from the date of its execution, unless a
longer period is expressly provided in the appointment form. An appointment of
proxy is revocable by a shareholder unless the appointment form conspicuously
states that it is irrevocable and the appointment is coupled with an interest.
2.10 Order of Business.
(a) The Chairman of the Board of Directors, or such officer of
the Corporation designated by a majority of the Whole Board (as such term is
defined in Section 2.3 of these Bylaws), shall call meetings of the shareholders
of the Corporation to order and shall act as presiding officer thereof. Unless
otherwise determined by the Board of Directors prior to the meeting, the
presiding officer of the meeting of the shareholders shall determine the order
of business and shall have the authority in his sole discretion to regulate the
conduct of any such meeting, including, without limitation, by imposing
restrictions on the persons (other than shareholders of the Corporation or their
duly appointed proxies) who may attend any such shareholders' meeting and by
determining the circumstances in which any person attending any such meeting may
make a statement or ask questions at any such meeting
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wherein the presiding officer, in his sole discretion, determines such person
has unduly disrupted or is likely to disrupt the proceedings thereat.
(b) At an annual meeting of the shareholders, only such
business shall be conducted or considered as shall have been properly brought
before the meeting. To be properly brought before an annual meeting, business
must be (i) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors, (ii) otherwise properly
brought before the meeting by or at the direction of a majority of the Whole
Board, or (iii) otherwise properly requested to be brought before the meeting by
a shareholder of the Corporation.
(c) For business to be properly requested to be brought before
an annual meeting by a shareholder of the Corporation, the shareholder (i) must
be a shareholder of record at the time of the giving of the notice for such
annual meeting provided for in the Bylaws of this Corporation, (ii) must be
entitled to vote at such meeting, and (iii) must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation (i) in the case of the annual
meeting to be held in 2000, on or before February 15, 2000, and (ii) in all
subsequent years, on or before 45 days before the date on which the Corporation
first mailed its notice for the prior year's annual meeting; provided, however,
that in the event that the date of the annual meeting is changed by more than 30
days from the date of the previous year's annual meeting, the Board of Directors
shall determine the date by which a shareholder's notice must be received in
order to be timely. A shareholder's notice to the Secretary shall set forth as
to each matter the shareholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before
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the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the shareholder proposing such business and the beneficial owner, if any, on
whose behalf the proposal is made, (iii) the class and number of shares of the
Corporation that are owned beneficially and of record by the shareholder
proposing such business and by the beneficial owner, if any, on whose behalf the
proposal is made, and (iv) any material interest of such shareholder proposing
such business and the beneficial owner, if any, on whose behalf the proposal is
made, in such business. Notwithstanding anything in this Section 2.10 to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 2.10. The presiding
officer of the annual meeting shall, if the facts warrant, determine that
business was not properly brought before the meeting in accordance with the
procedures prescribed in this Section 2.10 and, if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing
provisions of this Section 2.10, a shareholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder with respect to the matters set forth in
this Section 2.10. For purposes of this Section 2.10 and Section 3.5 of these
Bylaws, "public announcement" shall mean disclosure (i) in a press release
reported by the Dow Jones News Service, Associated Press or comparable national
news service, (ii) in a document publicly filed by the Corporation with the
Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, or (iii) in shareholder
correspondence or a shareholder report. Nothing in this Bylaw shall be deemed to
affect any rights of shareholders to request inclusion of proposals in the
Corporation's
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proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of
1934, as amended, including, but not limited to, the time periods specified to
exercise such rights.
ARTICLE 3.
DIRECTORS
3.1 Powers. The business and affairs of the Corporation shall be
managed under the direction of its Board of Directors, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by law or by the Articles of Incorporation directed or required to be exercised
or done by the shareholders.
3.2 Number, Qualification and Term of Office. The authorized number of
Directors may be determined from time to time only by a vote of a majority of
the Whole Board (as defined in Section 2.3 of these Bylaws) or by the
affirmative vote of the holders of at least 66-2/3% of the voting power of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of Directors, voting together as a single class, but
in no case shall the number of Directors be fewer than 3 or more than 15. The
Directors shall be natural persons of the age of eighteen (18) years or older,
but need not be residents of the State of Georgia or hold shares of stock in the
Corporation. The Directors shall be classified with respect to the time for
which they severally hold office into three classes, as nearly equal in number
as possible, designated Class I, Class II and Class III. The Directors first
appointed to Class I shall hold office for a term expiring at the annual meeting
of shareholders to be held in 2000; the Directors first appointed to Class II
shall hold office for a term expiring at the annual meeting of shareholders to
be held in 2001; and the Directors first appointed to Class III shall hold
office for a term expiring at the annual meeting of shareholders to be held in
2002, with the members of each class to hold office until their
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successors are elected and qualified. At each succeeding annual meeting of the
shareholders of the Corporation, the successors of the class of Directors whose
term expires at that meeting shall be elected by plurality vote of all votes
cast at such meeting to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their election.
3.3 Vacancies and Newly Created Directorships. Newly created
directorships resulting from any increase in the number of Directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled solely by the
affirmative vote of a majority of the remaining Directors then in office, even
though less than a quorum of the Board of Directors, or by a sole remaining
Director. Any Director elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the class of Directors in
which the new directorship was created or the vacancy occurred and until such
Director's successor shall have been elected and qualified. No decrease in the
number of Directors constituting the Board of Directors shall shorten the term
of an incumbent Director. A vacancy that will occur at a specific later date
(including but not limited to a resignation that specifies a later date) may be
filled before the vacancy occurs, but the new Director may not take office until
the vacancy occurs.
3.4 Removal of Directors. Any or all of the Directors of the
Corporation may be removed with cause by the affirmative vote of the holders of
at least 80% of the voting power of the then outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of Directors,
voting together as a single class. A Director may be removed by the shareholders
only at a meeting called for the purpose of removing him, and the meeting
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notice must state that the purpose, or one of the purposes, of the meeting is
removal of the Director.
3.5 Nominations of Directors; Election. Only persons who are nominated
in accordance with the following procedures shall be eligible for election as
Directors of the Corporation. Nominations of persons for election as Directors
of the Corporation may be made by (i) the Board of Directors or a committee
appointed by the Board of Directors, or (ii) any person who is a shareholder of
record at the time of giving of notice for the meeting provided for in these
Bylaws, who is entitled to vote for the election of Directors and who complies
with the procedures set forth in this Section 3.5. All nominations by
shareholders shall be made pursuant to timely notice in proper written form to
the Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporation: (i) in the case of an annual meeting (x) to be held in 2000, on or
before February 15, 2000, and (y) to be held in all subsequent years, on or
before 45 days before the date on which the Corporation first mailed its notice
for the prior year's annual meeting; provided, however, that in the event that
the date of the annual meeting is changed by more than 30 days from the date of
the previous year's annual meeting; the Board of Directors shall determine the
date by which a shareholder's notice must be received in order to be timely; and
(ii) in the case of a special meeting at which Directors are to be elected, not
later than the close of business on the 10th day following the day on which
public announcement is first made of the date of the meeting. To be in proper
written form, such shareholder's notice shall set forth or include (i) the name
and address, as they appear on the Corporation's books, of the shareholder
giving the notice and of the beneficial owner, if any, on whose behalf the
nomination is made; (ii) a representation that the shareholder
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giving the notice is a holder of record of stock of the Corporation entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting
to nominate the person or persons specified in the notice; (iii) the class and
number of shares of stock of the Corporation owned beneficially and of record by
the shareholder giving the notice and by the beneficial owner, if any, on whose
behalf the nomination is made; (iv) a description of all arrangements or
understandings between or among any of (A) the shareholder giving the notice,
(B) the beneficial owner on whose behalf the notice is given, (C) each nominee,
and (D) any other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by the shareholder giving the
notice; (v) such other information regarding each nominee proposed by the
shareholder giving the notice as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (vi) the signed consent of each nominee to serve as a
Director of the Corporation if so elected. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
Director shall furnish to the Secretary of the Corporation that information
required to be set forth in a shareholder's notice of nomination which pertains
to the nominee. The presiding officer of the meeting for election of Directors
shall, if the facts warrant, determine that a nomination was not made in
accordance with the procedures prescribed by this Section 3.5, and if he should
so determine, he shall so declare to the meeting and the defective nomination
shall be disregarded. Notwithstanding the foregoing provisions of this Section
3.5, a shareholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section 3.5.
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3.6 Resignation. Any Director may resign at any time by giving written
notice of his resignation to the Board of Directors, the Chairman of the Board
of Directors or the Corporation.
3.7 Compensation. The Board of Directors may establish the compensation
for, and reimbursement of the expenses of, Directors for membership on the Board
of Directors and on committees of the Board of Directors, attendance at meetings
of the Board of Directors or committees of the Board of Directors, and for other
services by Directors to the Corporation.
3.8 Interested Director Transactions. An interested Director is one who
is a party to a contract or transaction with the Corporation or who is an
officer or Director of, or has a financial interest in, another corporation,
partnership, association, or other entity which is a party to a contract or
transaction with the Corporation. Transactions involving such a Director shall
be governed by Section 14-2-860, et seq., of the Georgia Business Corporation
Code, as the same may be amended.
ARTICLE 4.
MEETINGS OF THE BOARD
4.1 Regular Meetings. Regular meetings of the Board of Directors may be
held without notice immediately after the annual meeting of the shareholders and
at such other time and place either within or without the State of Georgia as
shall from time to time be determined by the Board of Directors.
4.2 Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors or the President, on one day's
written notice to each Director by whom such notice is not waived. Notice shall
be given personally, by mail,
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by private courier, by facsimile transmission, or by telegraph, teletype or
other form of wire or wireless communication, and need not describe the business
to be transacted at, or the purpose of, the special meeting. Special meetings of
the Board of Directors may be held at such time and place either within or
without the State of Georgia as is determined by the Board of Directors or
specified in the notice of any such meeting.
4.3 Waiver of Notice. A Director may waive any notice either before or
after the date and time stated in the notice. Such a waiver must be in writing,
signed by the Director and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. Attendance of a Director at a
meeting shall constitute a waiver of notice of that meeting unless the Director
at the beginning of the meeting (or promptly upon arrival) objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
4.4 Quorum. A quorum of the Board of Directors consists of a majority
of the number of Directors then in office. If a quorum is present, the acts of a
majority of the Directors in attendance shall be the acts of the Board of
Directors. A Director who is present at a meeting of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless:
(a) that Director objects at the beginning of the meeting (or promptly upon
arrival) to holding the meeting or to transacting business at the meeting; (b)
the dissent or abstention of that Director from the action taken is entered into
the minutes of the meeting; or (c) that Director delivers written notice of
dissent or abstention to the presiding officer of the meeting before, or to the
Corporation immediately after, adjournment of the meeting. The right of dissent
is not available to a Director who votes in favor of an action taken.
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4.5 Adjournment. A meeting of the Board of Directors may be adjourned
by a majority of the Directors present, whether or not a quorum exists. Notice
of the time and the place of the adjourned meeting and of the business to be
transacted thereat, other than by announcement at the meeting at which the
adjournment is taken, shall not be necessary. At an adjourned meeting at which a
quorum is present, any business may be transacted which could have been
transacted at the meeting originally called.
4.6 Participation in Meetings Other Than in Person. Members of the
Board of Directors may participate in a meeting of the Board by any means of
communication by which all persons participating in the meeting can hear each
other. Participation in a meeting in such manner shall constitute presence in
person at such meeting.
4.7 Rules. The Board of Directors may adopt rules and regulations that
are not inconsistent with law or these Bylaws for the conduct of their meetings
and the management of the affairs of the Corporation.
ARTICLE 5.
COMMITTEES
5.1 Formation and Powers. The Board of Directors, by resolution passed
by a majority of the Whole Board (as defined in Section 2.3 of these Bylaws),
may create one or more committees and appoint members of the Board of Directors
to serve thereon. Each committee shall have such lawfully delegable powers and
duties as the Board of Directors may confer. However, a committee shall not have
the power to: (i) approve or propose to shareholders action that the Georgia
Business Corporation Code requires to be approved by shareholders; (ii) fill
vacancies on the Board of Directors or on any of its committees; (iii) amend the
Articles of Incorporation pursuant to Section 14-2-1002 of the Georgia Business
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Corporation Code, as it may hereafter be amended; (iv) adopt, amend or repeal
these Bylaws; or (v) approve a plan of merger not requiring shareholder
approval. Any committee or committees so designated by the Board of Directors
shall have such name or names as may be determined from time to time by
resolution adopted by the Board of Directors. Unless otherwise prescribed by the
Board of Directors, a majority of the members of the committee shall constitute
a quorum for the transaction of business, and the act of a majority of the
members present at a meeting at which there is a quorum shall be the act of such
committee. Each committee shall prescribe its own rules for calling and holding
meetings and its method of procedure, subject to any rules prescribed by the
Board of Directors or by applicable law, and shall keep a written record of all
actions taken by it.
5.2 Removal. The Board of Directors shall have power at any time to
remove any member of any committee, with or without cause, to fill vacancies on
any committee, and to dissolve any committee.
ARTICLE 6.
OFFICERS
6.1 Generally. The officers of the Company shall be elected by the
Board of Directors and shall consist of a Chief Executive Officer, a President,
a Secretary, and a Treasurer. The Board of Directors may also choose any or all
of the following: a Controller, one or more Vice Presidents (who may be given
particular designations with respect to authority, function, or seniority), and
such other officers as the Board of Directors may from time to time determine.
Notwithstanding the foregoing, by specific action the Board of Directors may
authorize the Chairman of the Board of Directors to appoint any person to any
office other than Chief Executive Officer, President, Secretary, or Treasurer.
Any number
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of offices may be held by the same person. Any of the offices may be left vacant
from time to time as the Board of Directors may determine. In the case of the
absence or disability of any officer of the Company or for any other reason
deemed sufficient by a majority of the Board of Directors, the Board of
Directors may delegate the absent or disabled officer's powers or duties to any
other officer or to any Director.
6.2 Compensation. The compensation of all officers and agents of the
Company who are also Directors of the Company shall be fixed by the Board of
Directors or by a committee of the Board of Directors. The Board of Directors
may fix, or delegate the power to fix, the compensation of other officers and
agents of the Company to an officer of the Company.
6.3 Succession. The officers of the Company will hold office until
their successors are elected and qualified. Any officer may be removed at any
time by the affirmative vote of a majority of the Whole Board. Any vacancy
occurring in any office of the Company may be filled by the Board of Directors
or by the Chairman of the Board of Directors as provided in Section 6.1 of these
Bylaws.
6.4 Authority and Duties. Each of the officers of the Corporation shall
have such authority and shall perform such duties as are customarily incident to
their respective offices, or as may be specified from time to time by the Board
of Directors.
6.5 Interested Officer Transactions. An interested officer is one who
is a party to a contract or transaction with the Corporation or who is an
officer or Director of, or has a financial interest in, another corporation,
partnership, association, or other entity which is a party to a contract or
transaction with the Corporation. Transactions involving such an
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officer shall be governed by Section 14-2-864 of the Georgia Business
Corporation Code, as the same may be amended.
ARTICLE 7.
CAPITAL STOCK
7.1 Certificates. The interest of each shareholder may be evidenced by
a certificate or certificates representing shares of stock of the Corporation,
which shall be in such form as the Board of Directors may from time to time
adopt, shall be numbered and shall be entered in the books of the Corporation as
they are issued. Each share certificate shall state, on its face, the name of
the Corporation and that it is organized under the laws of Georgia, the name of
the person to whom it is issued, and the number and class of shares and the
designation of the series, if any, that the certificate represents. Also, each
certificate may bear the seal of the Corporation or a facsimile thereof and
shall be signed, either manually or in facsimile, by any one of the following:
the President, the Secretary or an Assistant Secretary, or other officer
designated by the Board of Directors for such purpose. If the certificate is
signed in facsimile, it must be countersigned by a transfer agent or registered
by a registrar other than the Corporation itself or an employee of the
Corporation. The transfer agent or registrar may sign either manually or by
facsimile.
7.2 Transfers. Upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue, or to cause its transfer agent to issue, a
new certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
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7.3 Lost, Stolen or Destroyed Certificates. The Secretary may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact, satisfactory
to the Secretary, by the person claiming the certificate of stock to be lost,
stolen or destroyed. As a condition precedent to the issuance of a new
certificate or certificates, the Secretary may require the owners of such lost,
stolen or destroyed certificate or certificates to give the Corporation a bond
in such sum and with such surety or sureties as the Secretary may direct as
indemnity against any claims that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed or the
issuance of the new certificate.
7.4 Certificateless Shares. The Board of Directors of the Corporation
may authorize the issuance of some or all of the shares of stock, of any or all
of its classes or series, without certificates. Within a reasonable time after
the issue or transfer of the shares without certificates, the Corporation shall
send the shareholder to whom a share is to be issued a written statement
specifying the name of the Corporation, that the Corporation is organized under
the laws of Georgia, the name of the person to whom the shares are issued or
transferred, the number and class of shares and the designation of the series,
if any, that the certificate represents, and any applicable restriction on the
transfer of such shares.
7.5 Record Dates.
(a) In order that the Corporation may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to take any other action, the Board of Directors
shall in advance fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the
18
<PAGE> 19
Board of Directors, and which record date shall not be more than 70 days before
the date of such meeting. If no record date is fixed, the record date for
determining shareholders entitled to notice of or to vote at any meeting of
shareholders shall be the close of business on the day before the first notice
is delivered to shareholders. A determination of shareholders of record entitled
to notice of or to vote at a meeting of the shareholders shall apply to any
adjournment of the meeting; provided, however, if the meeting is adjourned to a
date more than 120 days after the date fixed for the original meeting, the Board
of Directors shall fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the
shareholders entitled to receive payment of any dividend or other distribution,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall not be more than 70 days prior to such payment. If
no record date is fixed, the record date for determining shareholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors authorizes the distribution.
(c) The Corporation shall be entitled to treat the person in
whose name any share of its stock is registered as the owner thereof for all
purposes, and shall not be bound to recognize any equitable or other claim to,
or interest in, such share on the part of any other person, whether or not the
Corporation shall have notice thereof, except as expressly provided by
applicable law.
19
<PAGE> 20
ARTICLE 8.
MISCELLANEOUS
8.1 Amendments. Notwithstanding anything contained in the Corporation's
Articles of Incorporation to the contrary, unless otherwise required by
applicable law, Sections 2.3 (Special Meetings), 2.10 (Order of Business), 3.2
(Number, Qualification and Term of Office), 3.3 (Vacancies and Newly Created
Directorships), 3.4 (Removal of Directors), 3.5 (Nominations of Directors;
Election), 8.8 (Fair Price Requirements) and 8.9 (Business Combinations with
Interested Shareholders) of these Bylaws shall not be amended or repealed by the
shareholders, and no provision inconsistent therewith shall be adopted by the
shareholders, without the affirmative vote of the holders of at least 80% of the
voting power of the then outstanding shares of Common Stock and outstanding
shares of preferred stock voting together, to the extent the outstanding shares
of preferred stock are afforded voting rights and powers generally equal to the
voting rights and powers of shares of Common Stock
8.2 Inspection of Books.
(a) A shareholder may inspect and copy, during regular business
hours at the Corporation's principal office, the following if he gives the
Corporation written notice of his demand at least five (5) business days prior
to the requested date of inspection: (1) the Corporation's Articles of
Incorporation and all amendments to them currently in effect; (2) the
Corporation's Bylaws and all amendments to them currently in effect; (3)
resolutions adopted by either the shareholders or Board of Directors increasing
or decreasing the number of Directors, or the classification of Directors, if
any (4) resolutions adopted by the Board of
20
<PAGE> 21
Directors creating one or more classes or series of shares, and fixing their
relative rights, preferences, and limitations, if shares issued pursuant to
those resolutions are outstanding; (5) the minutes of all shareholders'
meetings, executed waivers of notice of meetings, and executed written consents
evidencing all action taken by shareholders without a meeting, for the previous
three years; (6) all written communications to shareholders generally within the
previous three years and the financial statements required to be made available
to the shareholders for the previous three years under Section 14-2-1620 of the
Georgia Business Corporation Code; (7) a list of the names and business
addresses of its current Directors and officers; and (8) the Corporation's most
recent annual registration delivered to the Secretary of State under Section
14-2-1622 of the Georgia Business Corporation Code.
(b) To the extent provided below, a shareholder may inspect
and copy, during regular business hours at a reasonable location specified by
the Corporation (1) excerpts from minutes of any meeting of the Board of
Directors, records of any action of a committee of the Board of Directors while
acting in place of the Board of Directors on behalf of the Corporation, minutes
of any meeting of the shareholders, and records of action taken by the
shareholders or Board of Directors without a meeting, to the extent not subject
to inspection under Section 8.1(a); (2) accounting records of the Corporation;
and (3) the record of shareholders. A shareholder may inspect these records of
the Corporation only if: (i) his demand is made in good faith and for a proper
purpose that is reasonably relevant to his legitimate interest as a shareholder;
(ii) he describes with reasonable particularity his purpose and the records he
desires to inspect; (iii) the records are directly connected with his purpose;
(iv) the records are to be used only for the stated purpose; and (v) the
shareholder owns more than two percent (2%) of the outstanding shares of the
Corporation.
21
<PAGE> 22
8.3 Seal. The corporate seal shall be in such form as the Board of
Directors may from time to time determine. In the event that it is inconvenient
at any time to use the corporate seal of the Corporation, the words "Seal" or
"Corporate Seal" enclosed in parentheses or scroll shall be deemed the corporate
seal of the Corporation.
8.4 Checks, Notes, Drafts, Etc. Checks, notes, drafts, acceptances,
bills of exchange, and other orders or obligations for the payment of money
shall be signed by such officer or officers or person or persons as the Board of
Directors by resolution shall from time to time designate.
8.5 Fiscal Year. The fiscal year of the Corporation shall be fixed from
time to time by the Board of Directors.
8.6 Reliance upon Books, Reports and Records. Each Director, each
member of a committee designated by the Board of Directors, and each officer of
the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon such information, opinions, reports or
statements, including financial statements and other financial data, prepared or
presented to the Corporation by: (i) any of the Corporation's officers or
employees who the Director reasonably believes to be reliable and competent in
the matters presented; (ii) legal counsel, public accountants, investment
bankers or other persons as to matters the Director reasonably believes are
within the person's professional or expert competence; or (iii) committees of
the Board of Directors of which he is not a member if the Director reasonably
believes the committee merits confidence.
8.7 Time Periods. In applying any provision of these Bylaws that
requires that an act be done or not be done a specified number of days prior to
an event, or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be
22
<PAGE> 23
used, the day of the doing of the act shall be excluded, and the day of the
event shall be included, unless otherwise provided herein.
8.8 Fair Price Requirements. The Corporation shall be governed by all
of the requirements of Part 2 of Article 11 of the Georgia Business Corporation
Code.
8.9 Business Combinations with Interested Shareholders. The
Corporation shall be governed by all of the requirements of Part 3 of Article 11
of the Georgia Business Corporation Code.
8.10 Indemnification. Each person who is or was or had agreed to become
a Director or officer of the Corporation, or each such person who is or was
serving or who had agreed to serve at the request of the Board of Directors or
an officer of the Corporation as an employee or agent of the Corporation or as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (including the heirs, executors,
administrators or estate of such person), shall be indemnified by the
Corporation to the fullest extent permitted by the Georgia Business Corporation
Code or any other applicable laws as presently or hereafter in effect. The right
to indemnification granted by this Section 8.10 shall include the right to be
paid in advance expenses incurred in defending a proceeding. The Corporation
may, by action of the Board of Directors, provide indemnification to other
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of Directors and officers. The right of
indemnification provided in this Section 8.10 shall not be exclusive of any
other rights to which any person seeking indemnification may otherwise be
entitled, and shall be applicable to matters otherwise within its scope
irrespective of whether such matters arose or arise before or after the adoption
of this Section 8.10. Without limiting the generality or the effect of the
23
<PAGE> 24
foregoing, the Corporation may enter into one or more agreements with any
person, which provide for indemnification greater or different than that
provided in this Section 8.10. No amendment, modification or repeal of this
Article shall adversely affect any right or protection of a Director, officer,
employee or agent that exists at the time of such amendment, modification or
repeal.
24
<PAGE> 1
EXHIBIT 5.1
JONES, DAY, REAVIS & POGUE
303 Peachtree Street, N.E.
3500 SunTrust Plaza
Atlanta, Georgia 30308
January ____, 2000
T/R Systems, Inc.
1300 Oakbroook Parkway
Norcross, Georgia 30093
Re: Registration Statement on Form S-1 relating to the
issuance of up to 3,450,000 shares of T/R Systems,
Inc.
Ladies and Gentlemen:
We are acting as counsel to T/R Systems, Inc., a Georgia corporation
(the "Company"), in connection with the issuance and sale by the Company of up
to 2,880,000 shares of common stock, par value $0.01 per share ("Common Stock")
(the "Company Shares") and the sale by certain selling shareholders (the
"Selling Shareholders") of up to 570,000 shares of Common Stock (the
"Shareholder Shares") as contemplated by the Company's Registration Statement on
Form S-1, File No. 333-88439 (as amended, the "Registration Statement").
As counsel for the Company, we have examined such documents, records
and matters of law as we have deemed necessary for purposes of this opinion.
We have assumed, without independent verification, the genuineness and
authorization of all signatures and the conformity to the originals of all
copies submitted to us or inspected by us as certified, conformed or photostatic
copies. Based on such examination, we are of the opinion that: (i) the Company
Shares are duly authorized and, when issued and delivered to the underwriters
against payment therefor as contemplated by the Registration Statement, will be
validly issued, fully paid and nonassessable, and (ii) the Shareholder Shares
were duly authorized and validly issued by the Company, and are fully paid and
nonassessable.
In rendering the foregoing opinion, our examination of matters of law
has been limited to the laws of the State of Georgia and the federal laws of the
United States of America, as in effect on the date hereof.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us in the Prospectus under the
caption Legal Matters.
Very truly yours,
JONES, DAY, REAVIS & POGUE
<PAGE> 1
EXHIBIT 23.2
The financial statements and independent auditors' report referred to in the
following consent and report on schedule give effect to the anticipated 1:1.65
reverse stock split as described in Note 14 to the financial statements. The
following independent auditors' consent and report on schedule is in the form
that will be furnished by Deloitte & Touche LLP upon the consummation of the
reverse stock split described in Note 14 to the financial statements assuming
that no other material events occur that would affect the accompanying
financial statements or require disclosure therein.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
December 17, 1999
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Shareholders of T/R Systems, Inc.:
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-88439 of T/R Systems, Inc. on Form S-1 of our report dated March 26, 1999
(May 17, 1999 as to the first paragraph of Note 9 and ____, 1999 as to Note 14),
appearing in the Prospectus, which is a part of this Registration Statement, and
to the references to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of T/R Systems, Inc., listed in
Item 16. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Atlanta, Georgia
December , 1999
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