<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-88439
[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. Our common stock has been
approved for quotation on the Nasdaq National Market under the symbol TRSI.
------------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON
PAGE 4.
------------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price....................................... $10.00 $30,000,000
Underwriting discounts and commissions...................... $ 0.70 $ 2,100,000
Proceeds to T/R Systems..................................... $ 9.30 $26,784,000
Proceeds to the selling shareholder......................... $ 9.30 $ 1,116,000
</TABLE>
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 January 26, 2000
<PAGE> 2
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."
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
i
<PAGE> 4
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.
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 the U.S. market for print-on-demand
equipment, supplies and services to be approximately $6.1 billion in 1999 and
that it 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, the
United Kingdom and Germany.
1
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
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.... 11,733,234 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:
- 1,447,911 shares issuable under outstanding options at a weighted average
exercise price of $2.65 per share; and
- 904,286 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.
2
<PAGE> 6
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 and
our receipt of the net proceeds of the sale of those shares, after
deducting underwriting discounts and estimated offering expenses payable
by us.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED JANUARY 31, ENDED 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
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>
<TABLE>
<CAPTION>
OCTOBER 31, 1999
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,344 $29,115
Working capital............................................. 5,444 31,267
Total assets................................................ 10,067 35,838
Redeemable, convertible preferred stock..................... 15,059 --
Total shareholders' equity (deficit)........................ (8,781) 32,162
</TABLE>
3
<PAGE> 7
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.
4
<PAGE> 8
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. A competitor of Harlequin notified us in
December 1999 that the competitor believes some of the Harlequin software
licensed to us for use in color processing infringes that competitor's patents.
If the Harlequin software we license is found to infringe the competitor's
patents, we will be forced to seek an alternative color processing module, which
could harm our sales to potential customers seeking color capabilities.
5
<PAGE> 9
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 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.
6
<PAGE> 10
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.
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.
7
<PAGE> 11
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.
In December 1999, we were notified by a competitor of Harlequin that the
competitor is suing Harlequin for patent infringement for color processing
products licensed to us and others by Harlequin. While Harlequin has represented
to us that it has the rights to the products licensed to us, if Harlequin is not
successful in defending its rights, we could be subject to a claim by that
competitor.
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.
8
<PAGE> 12
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 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.
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 33.6% 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> 13
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> 14
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 $25.9 million. Our
calculation of the net proceeds is net of the underwriting discounts and
commissions and estimated offering expenses of $900,000 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> 15
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 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; 8,977,084 shares
designated:
Series A redeemable, convertible preferred stock;
4,799,999 shares designated, issued and outstanding,
actual; none issued or outstanding, pro forma and pro
forma as adjusted....................................... 4,789 -- --
Series B redeemable, convertible preferred stock;
2,961,585 shares designated, issued and outstanding,
actual; none issued or outstanding, pro forma and pro
forma as adjusted....................................... 7,538 -- --
Series C redeemable, convertible preferred stock;
1,215,500 shares designated, 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; 8,977,084
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 43,027
Deferred compensation..................................... (68) (68) (68)
Accumulated deficit....................................... (10,912) (10,912) (10,912)
-------- -------- -------
Total shareholders' equity (deficit).................. (8,781) 6,278 32,162
-------- -------- -------
Total capitalization............................... $ 6,339 $ 6,339 $32,162
======== ======== =======
</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.
Since October 31, 1999, we have granted options to purchase an additional
76,968 shares. Also, our option plan participants have exercised options to
purchase 234,693 shares.
12
<PAGE> 16
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 $32.2 million, or $2.80 per share. This amount represents an
immediate increase in pro forma net tangible book value of $2.07 per share to
existing stockholders and an immediate dilution of $7.20 per share to new
investors. The following table illustrates this dilution of net tangible book
value per share:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $10.00
Pro forma net tangible book value per share
as of October 31, 1999................................. $0.73
Increase per share attributable to new investors.......... 2.07
-----
Pro forma net tangible book value per share after the
offering.................................................. 2.80
------
Dilution per share to new investors......................... $ 7.20
======
</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
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 37.2% $ 1.99
New investors....................... 2,880,000 25.0 28,880,000 62.8 10.00
---------- ----- ----------- -----
Totals.................... 11,500,160 100.0% $46,016,000 100.0%
========== ===== =========== =====
</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> 17
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> 18
<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> 19
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> 20
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> 21
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, 1998.
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> 22
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> 23
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
20
<PAGE> 24
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.
21
<PAGE> 25
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
22
<PAGE> 26
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
23
<PAGE> 27
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 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
24
<PAGE> 28
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. Further, 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 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.
25
<PAGE> 29
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 been 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 February 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.
26
<PAGE> 30
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> 31
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 the U.S. market for print-on-demand equipment, supplies and
services to be approximately $6.1 billion in 1999 and that it 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
28
<PAGE> 32
- 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
29
<PAGE> 33
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
30
<PAGE> 34
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.
31
<PAGE> 35
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.
32
<PAGE> 36
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>
33
<PAGE> 37
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.
34
<PAGE> 38
- 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.
35
<PAGE> 39
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 January 18, 2000, we had twelve regional managers
throughout the United States, one in Canada, one in the United Kingdom and one
in Germany.
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
36
<PAGE> 40
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.
37
<PAGE> 41
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.
38
<PAGE> 42
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.
39
<PAGE> 43
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.
40
<PAGE> 44
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.
41
<PAGE> 45
CLASSIFICATION OF DIRECTORS
Our bylaws provide for a staggered board of directors. The six directors
comprising T/R Systems' board of directors are divided into three classes:
- Messrs. Rowe and Phipps are 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 are 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 are 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. 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.
42
<PAGE> 46
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> 47
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 the initial
offering price, 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> 48
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> 49
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 January 18, 2000, options to purchase 1,418,214 shares of common
stock were outstanding under these plans and 5,953 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.
As of January 18, 2000, options to purchase 15,000 shares 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> 50
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> 51
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 January 18, 2000, we had granted options to purchase 26,061 shares of
common stock under the associates plan and an additional 4,242 remained
available for future grant. Of the options granted, options to purchase 14,697
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> 52
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> 53
PRINCIPAL AND SELLING SHAREHOLDERS
The following tables present information about the beneficial ownership of
our common stock as of January 18, 2000, 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:
- 8,853,234 shares outstanding as of January 18, 2000; and
- 11,733,234 shares outstanding after completion of this offering.
All options exercisable within 60 days of January 18, 2000 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 17.5% -- 1,551,380 13.2%
Philip T. Gianos(2)................. 1,026,869 11.6 -- 1,026,869 8.8
Francis A. Rowe(3).................. 689,400 7.8 120,000 569,400 4.9
E. Neal Tompkins(4)................. 557,926 6.2 -- 557,926 4.7
Michael E. Kohlsdorf(5)............. 372,624 4.1 -- 372,624 3.1
Michael W. Barry(6)................. 166,512 1.9 -- 166,512 1.4
Charles K. Thackston(7)............. 75,000 0.8 -- 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).......... 4,632,127 49.2 120,000 4,512,127 36.7
</TABLE>
50
<PAGE> 54
<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 17.5% -- 1,551,380 13.2%
Noro-Moseley Partners II,
L.P.(11).......................... 1,393,537 15.7 -- 1,393,537 11.9
Aperture Associates, L.P.(12)....... 1,153,536 13.0 -- 1,153,536 9.8
Entities affiliated with InterWest
Management Partners V, L.P.(2).... 1,026,869 11.6 -- 1,026,869 8.8
Entities affiliated with Crown
Advisors, Ltd.(13)................ 620,503 7.0 -- 620,503 5.3
</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.
Mr. Gianos is a general partner of InterWest Management Partners V, L.P.,
the general partner of Interest Partners V, L.P. As a general partner, Mr.
Gianos has shared voting and dispositive power over the shares held by
these funds. Some of the general partners of InterWest Management Partners
are general partners of InterWest Investors. Mr. Gianos disclaims
beneficial ownership of all 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:
- 100,000 shares issuable upon exercise of options exercisable within 60
days of January 18, 2000;
- 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 234,242 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(6) Includes 102,878 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(7) Includes 37,728 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(8) Consists of 36,363 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(9) Includes 6,818 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(10) Includes 567,434 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000. 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> 55
- 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)................. 557,926 6.2% 27,081 530,845 4.5%
Michael E. Kohlsdorf(2)............. 372,624 4.1 27,081 345,543 2.9
Michael W. Barry(3)................. 166,512 1.9 8,124 158,388 1.3
Charles K. Thackston(4)............. 75,000 0.8 10,832 64,168 0.5
Jack N. Bartholmae(5)............... 103,028 1.2 5,416 97,612 0.8
OTHER 5% SHAREHOLDERS
Noro-Moseley Partners II, L.P.(6)... 1,393,537 15.7 216,647 1,176,890 10.0
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(7)................. 59,391 0.7 5,416 53,975 0.5
James Bessen........................ 6,060 0.1 5,416 644 0.0
Gregory A. Chatham(8)............... 30,302 0.3 2,166 28,136 0.2
James W. O'Brien(9)................. 33,029 0.4 1,354 31,675 0.3
Ricky L. Berry(10).................. 13,787 0.2 271 13,516 0.1
Daniel Slayton(11).................. 136,866 1.5 2,708 134,158 1.1
--------
Total..................... 450,000
</TABLE>
- -------------------------
(1) Includes:
- 100,000 shares issuable upon exercise of options exercisable within 60
days of January 18, 2000;
- 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 234,242 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
52
<PAGE> 56
(3) Includes 102,878 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(4) Includes 37,728 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(5) Includes 24,242 shares of common stock issuable upon exercise of options
within 60 days of January 18, 2000.
(6) The address of Noro-Moseley is 9 North Parkway Square, 4200 Northside
Parkway, N.W., Atlanta, Georgia 30327.
(7) Includes 1,212 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(8) Includes 21,576 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(9) Includes 2,727 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(10) Includes 11,363 shares of common stock issuable upon exercise of options
exercisable within 60 days of January 18, 2000.
(11) Includes 109,745 shares held by Slayton & Associates, of which Mr. Slayton
is the sole shareholder.
53
<PAGE> 57
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:
- 4,799,999 shares of series A preferred stock, all of which are
outstanding;
- 2,961,585 shares of series B preferred stock, all of which are
outstanding;
- 1,215,500 shares of series C preferred stock, all of which are
outstanding;
- 222,222 shares of series D preferred stock, all of which are outstanding;
and
- 2,800,694 shares of undesignated preferred stock.
Our stock was held of record by 128 shareholders on January 18, 2000.
Before the closing of this offering, 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
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 2,800,694 shares are
undesignated and remain available for issuance.
After giving effect to this offering and based upon our outstanding stock,
there will be 11,733,234 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.
54
<PAGE> 58
PREFERRED STOCK
Our board of directors is authorized, without any further vote or action by
the shareholders, to issue up to 2,800,694 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 any
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> 59
- 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.
56
<PAGE> 60
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.
57
<PAGE> 61
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.
58
<PAGE> 62
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, which have been filed as exhibits to the
registration statement filed in connection with this offering, for a more
complete description.
59
<PAGE> 63
INDEMNIFICATION PROVISIONS
Our restated articles of incorporation 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 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 AND REGISTRAR
The name and address of the transfer agent and registrar for our common
stock is Equiserve L.P., 150 Royall Street, Canton, Massachusetts 02021. Its
telephone number is (781) 575-3400.
60
<PAGE> 64
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 11,733,234 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 8,733,234 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 8,733,234 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 FleetBoston 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 FleetBoston Robertson Stephens Inc. Taking
into account the lock-up agreements, and assuming FleetBoston 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 208,549 shares
will be immediately available for sale in the public market;
- beginning 90 days after the date of this prospectus, approximately 38,330
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
8,222,889 shares will be eligible for sale, approximately 6,950,367 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 117,300 shares immediately after the offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks immediately before the sale.
61
<PAGE> 65
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 January
18, 2000, there were outstanding options for the purchase of 1,447,911 shares of
common stock, and options to purchase 749,335 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 7,833,912 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.
62
<PAGE> 66
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston 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>
FleetBoston Robertson Stephens Inc. ........................ 1,500,000
U.S. Bancorp Piper Jaffray Inc. ............................ 900,000
Raymond James & Associates, Inc. ........................... 600,000
---------
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 $0.42
per share, of which $0.10 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 has been determined through negotiations among the representatives
and us. Among the factors considered in these negotiations were 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
63
<PAGE> 67
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....................................... $0.70 $2,016,000 $2,016,000
Underwriting discounts and commissions payable by
the selling shareholders.......................... 0.70 84,000 399,000
</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 $900,000.
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, FleetBoston 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 FleetBoston Robertson Stephens Inc.,
consent to the disposition of any shares held by shareholders 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.
64
<PAGE> 68
Listing
Our common stock has been 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.
65
<PAGE> 69
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.
66
<PAGE> 70
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> 71
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.
Deloitte & Touche LLP
Atlanta, Georgia
March 26, 1999
(May 17, 1999 as to the first paragraph of Note 9 and January 20, 2000 as to
Note 14)
F-2
<PAGE> 72
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, 8,977,084 shares designated:
Series A redeemable, convertible preferred stock,
4,799,999 shares designated, 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,
2,961,585 shares designated, 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,
1,215,500 shares designated, 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, 8,977,084 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> 73
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> 74
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> 75
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> 76
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> 77
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> 78
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> 79
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> 80
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> 81
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 4,799,999 shares as series A redeemable, convertible preferred
stock, 2,961,585 shares as series B redeemable, convertible preferred stock, and
1,215,500 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> 82
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 8,977,084 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 were 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> 83
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> 84
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> 85
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> 86
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> 87
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 January 20, 2000, 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> 88
[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 FEBRUARY 20, 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.
