FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
(Mark One) | ||||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended July 31, 2003 | ||||
OR | ||||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the transition period from _______________ to _______________ |
Commission file number: 0-29045.
T/R SYSTEMS, INC.
Georgia | 58-1958870 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1300 Oakbrook Drive
Norcross, Georgia,
30093
(770) 448-9008
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo | ||
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox | ||
As of September 15, 2003, 12,479,415 shares of common stock of the registrant were outstanding. |
TABLE OF CONTENTS
Page | ||||||||
PART I | ||||||||
Item 1 Unaudited Consolidated Financial Statements | 2 | |||||||
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | |||||||
Item 3 Quantitative and Qualitative Disclosures About Market Risk | 14 | |||||||
Item 4 Controls and Procedures | 14 | |||||||
PART II | ||||||||
Item 2 Changes in Securities and Use of Proceeds | 15 | |||||||
Item 4 Submission of Matters to a Vote of Security Holders | 15 | |||||||
Item 5 Other Information | 15 | |||||||
Item 6 Exhibits and Reports on Form 8-K | 16 |
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Item 1. Consolidated Financial Statements
T/R SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
July 31, | January 31, | |||||||||
2003 | 2003 | |||||||||
ASSETS | ||||||||||
Current Assets: | ||||||||||
Cash and cash equivalents | $ | 4,417 | $ | 6,542 | ||||||
Restricted cash | 447 | 612 | ||||||||
Receivables, net | 1,856 | 1,919 | ||||||||
Inventories, net | 2,106 | 2,180 | ||||||||
Prepaid expenses and other | 426 | 305 | ||||||||
Total current assets | 9,252 | 11,558 | ||||||||
Property and equipment, net | 2,775 | 3,737 | ||||||||
$ | 12,027 | $ | 15,295 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
Current Liabilities: | ||||||||||
Line of credit | $ | — | $ | 220 | ||||||
Accounts payable | 1,409 | 1,492 | ||||||||
Deferred revenue | 718 | 673 | ||||||||
Accrued salaries and wages | 686 | 932 | ||||||||
Other liabilities | 1,703 | 2,649 | ||||||||
Total current liabilities | 4,516 | 5,966 | ||||||||
Preferred stock, $0.01 par value, 12,000,000 shares authorized; 880,000 shares designated as Series A Junior Participating Preferred Stock, none issued or outstanding | — | — | ||||||||
Common stock, $0.01 par value, 88,000,000 shares authorized; 12,479,415 and 12,469,415 shares issued and outstanding, respectively | 124 | 124 | ||||||||
Additional paid-in capital | 43,669 | 43,664 | ||||||||
Accumulated deficit | (36,282 | ) | (34,459 | ) | ||||||
Total shareholders’ equity | 7,511 | 9,329 | ||||||||
$ | 12,027 | $ | 15,295 | |||||||
See notes to consolidated financial statements
2
T/R SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Three | For the Six | |||||||||||||||||
Months Ended | Months Ended | |||||||||||||||||
July 31, | July 31, | |||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenue | $ | 4,023 | $ | 3,921 | $ | 7,828 | $ | 7,183 | ||||||||||
Operating Expenses: | ||||||||||||||||||
Cost of imaging systems | 1,546 | 3,326 | 3,047 | 5,424 | ||||||||||||||
Research and development | 873 | 1,883 | 1,750 | 3,324 | ||||||||||||||
Sales and marketing | 1,929 | 3,662 | 3,965 | 6,001 | ||||||||||||||
General and administrative | 466 | 1,964 | 909 | 2,657 | ||||||||||||||
Total operating expenses | 4,814 | 10,835 | 9,671 | 17,406 | ||||||||||||||
Operating loss | (791 | ) | (6,914 | ) | (1,843 | ) | (10,223 | ) | ||||||||||
Interest income | 7 | 42 | 20 | 88 | ||||||||||||||
Loss before income taxes | (784 | ) | (6,872 | ) | (1,823 | ) | (10,135 | ) | ||||||||||
Income taxes | — | — | — | — | ||||||||||||||
Net loss | $ | (784 | ) | $ | (6,872 | ) | $ | (1,823 | ) | $ | (10,135 | ) | ||||||
Net loss per common share — Basic & Diluted | $ | (0.06 | ) | $ | (0.55 | ) | $ | (0.14 | ) | $ | (0.82 | ) | ||||||
See notes to consolidated financial statements
3
T/R SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six | ||||||||||||
Months Ended | ||||||||||||
July 31, | ||||||||||||
2003 | 2002 | |||||||||||
Operating Activities: | ||||||||||||
Net loss | $ | (1,823 | ) | $ | (10,135 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation | 802 | 2,465 | ||||||||||
Loss on sale of fixed assets | 5 | 207 | ||||||||||
Changes in assets and liabilities: | ||||||||||||
(Increase) decrease in receivables | (69 | ) | 814 | |||||||||
Decrease in inventories | 74 | 1,427 | ||||||||||
Increase in prepaid expenses and other | (121 | ) | (7 | ) | ||||||||
Decrease in accounts payable | (83 | ) | (823 | ) | ||||||||
Increase in deferred revenue | 45 | 142 | ||||||||||
(Decrease) increase in accrued salaries and wages | (246 | ) | 166 | |||||||||
(Decrease) increase in other liabilities | (646 | ) | 1,263 | |||||||||
Net cash used in operating activities | (2,062 | ) | (4,481 | ) | ||||||||
Investing Activities: | ||||||||||||
Proceeds from the sale of assets | 8 | 56 | ||||||||||
Purchases of property and equipment | (21 | ) | (159 | ) | ||||||||
Net cash used in operating activities | (13 | ) | (103 | ) | ||||||||
Financing Activities: | ||||||||||||
Repayment of line of credit | (220 | ) | — | |||||||||
Decrease in restricted cash | 165 | — | ||||||||||
Proceeds from the sale of common stock | 5 | 131 | ||||||||||
Net cash (used in) provided by investing activities | (50 | ) | 131 | |||||||||
Net decrease in cash and cash equivalents | (2,125 | ) | (4,453 | ) | ||||||||
Cash and Cash Equivalents: | ||||||||||||
Beginning of period | 6,542 | 13,026 | ||||||||||
End of period | $ | 4,417 | $ | 8,573 | ||||||||
Supplemental cash flow information: | ||||||||||||
Cash paid for income taxes | $ | — | $ | 7 | ||||||||
Cash paid for interest | $ | 1 | $ | 1 | ||||||||
Noncash investing activities: | ||||||||||||
Equipment received for payment of engineering fees | $ | 132 | $ | 930 | ||||||||
See notes to consolidated financial statements
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T/R SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited interim consolidated financial statements of T/R Systems, Inc., presented herein, have been prepared on the same basis as the audited consolidated financial statements contained in T/R Systems’ annual report on Form 10-K for the fiscal year ended January 31, 2003 and should be read in conjunction with those audited consolidated financial statements and the notes thereto. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly our financial position and the results of our operations and cash flows for the interim periods, have been made.
The preparation of these unaudited interim consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of July 31, 2003 and the reported amounts of revenue and expenses during the quarter then ended. Our actual results could differ from these estimates. Additionally, our results for the quarter ended July 31, 2003 are not necessarily indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of T/R Systems, Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.
Stock-Based Compensation— We account for compensation cost related to employee stock options based on the guidance in Accounting Principles Board, or APB, Opinion 25,Accounting for Stock Issued to Employees. In fiscal 1997, we adopted the disclosure requirements of Statement of Financial Accounting Standards, or 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. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts):
For the Three | For the Six | ||||||||||||||||
Months Ended | Months Ended | ||||||||||||||||
July 31, | July 31, | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net loss, as reported | $ | (784 | ) | $ | (6,872 | ) | $ | (1,823 | ) | $ | (10,135 | ) | |||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards | (412 | ) | (598 | ) | (814 | ) | (1,196 | ) | |||||||||
Pro forma net loss | $ | (1,196 | ) | $ | (7,470 | ) | $ | (2,637 | ) | $ | (11,331 | ) | |||||
Loss per share Basic – as reported | $ | (0.06 | ) | $ | (0.55 | ) | $ | (0.14 | ) | $ | (0.82 | ) | |||||
Basic – pro forma | (0.10 | ) | (0.60 | ) | (0.31 | ) | (0.91 | ) | |||||||||
Diluted – as reported | $ | (0.06 | ) | $ | (0.55 | ) | $ | (0.14 | ) | $ | (0.82 | ) | |||||
Diluted – pro forma | (0.10 | ) | (0.60 | ) | (0.31 | ) | (0.91 | ) | |||||||||
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We have estimated the fair value of options at the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions:
For the Three Months | For the Six Months | |||||||||||||||
Ended July 31, | Ended July 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Expected life (years) | 5.5 | 5.5 | 5.5 | 5.5 | ||||||||||||
Interest rate | 2.8 | % | 2.8 | % | 2.8 | % | 2.8 | % | ||||||||
Volatility | 118.5 | % | 114.3 | % | 111.3 | % | 119.9 | % | ||||||||
Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
2. New Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting for reorganization and similar costs and supersedes previous accounting guidance, principally Emerging Issues Task Force, or EITF, Issue No. 94-3,Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost should be recognized at the date of a company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognition of any future reorganization costs, as well as the amount recognized. The provisions of SFAS No. 146 are effective for reorganization activities initiated after December 31, 2002. We adopted this statement on January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such a guarantee. FIN 45 also requires additional disclosure about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 30, 2002 and the disclosure requirements are effective after December 15, 2002. Since the company did not have any material guarantees at July 31, 2003, the adoption of FIN 45 did not have a material impact on our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses consolidation by business enterprises of variable interest entities, which are entities that either (a) do not have equity investors with voting rights or (b) have equity investors that do not provide sufficient financial resources for the entity to support its activities. The provisions of FIN 46 are effective for the first interim or annual reporting period beginning after June 15, 2003 for existing variable interest entities created after January 31, 2003. We do not currently hold any interest in variable interest entities.
3. Balance Sheet Detail
July 31, | January 31, | |||||||
2003 | 2003 | |||||||
(In thousands) | ||||||||
Receivables: | ||||||||
Accounts receivable | $ | 1,963 | $ | 2,087 | ||||
Less allowance for doubtful accounts | 107 | 168 | ||||||
$ | 1,856 | $ | 1,919 | |||||
Inventories: | ||||||||
Components and supplies | $ | 1,649 | $ | 1,901 | ||||
Finished goods | 649 | 607 | ||||||
2,298 | 2,508 | |||||||
Less reserve for potential losses | 192 | 328 | ||||||
$ | 2,106 | $ | 2,180 | |||||
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4. Special Charges
During fiscal 2003, we implemented a restructuring plan designed to reduce operating costs and preserve cash. The restructuring plan resulted in our recording certain charges totaling $4.9 million during fiscal 2003. The following table summarizes restructuring charges through July 31, 2003 and activities related to accrued restructuring charges (in thousands):
Additions to | ||||||||||||||||||||
Reserve; | ||||||||||||||||||||
Balance | Charged to | Cash | Balance | |||||||||||||||||
1/31/03 | Expenses | Payments | Other (1) | 07/31/03 | ||||||||||||||||
Property and equipment disposal | $ | 92 | $ | — | $ | — | $ | (92 | ) | $ | — | |||||||||
Facility consolidation | 1,234 | — | (190 | ) | (300 | ) | 744 | |||||||||||||
Inventory reserve adjustment | 396 | — | — | (136 | ) | 260 | ||||||||||||||
Provision for doubtful accounts | 9 | — | — | (9 | ) | — | ||||||||||||||
Severance and related charges | 219 | — | (212 | ) | (7 | ) | — | |||||||||||||
Other | 63 | — | — | (55 | ) | 8 | ||||||||||||||
Total | $ | 2,013 | $ | — | $ | (402 | ) | $ | (599 | ) | $ | 1,012 | ||||||||
(1) | Amounts relate principally to the write off of property and equipment and to the disposal of inventory. |
5. Segment Information
We operate in one reportable segment, the output management market, and assess performance based on operating income. Revenue is summarized below (in thousands):
For the Three Months | For the Six Months | |||||||||||||||
Ended July 31, | Ended July 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Imaging systems | $ | 3,672 | $ | 3,671 | $ | 7,145 | $ | 6,419 | ||||||||
Services | 351 | 250 | 683 | 764 | ||||||||||||
Total | $ | 4,023 | $ | 3,921 | $ | 7,828 | $ | 7,183 | ||||||||
Imaging systems include software and hardware products for managing a document from creation to its final destination. Services include revenue from engineering services, customer service plans and other customer services, such as training and product-related consulting.
Revenue by geographic area is summarized below (in thousands):
For the Three Months | For the Six Months | |||||||||||||||
Ended July 31, | Ended July 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
United States | $ | 3,608 | $ | 3,202 | $ | 6,948 | $ | 5,780 | ||||||||
Asia | 8 | 120 | 54 | 244 | ||||||||||||
Europe | 248 | 108 | 490 | 385 | ||||||||||||
Canada | 159 | 485 | 336 | 760 | ||||||||||||
Other foreign countries | — | 6 | — | 14 | ||||||||||||
Total | $ | 4,023 | $ | 3,921 | $ | 7,828 | $ | 7,183 | ||||||||
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.
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6. Net Loss Per Common Share
The following table summarizes the computation of basic and diluted net loss per common share (in thousands, except per share data):
For the Three Months | For the Six Months | ||||||||||||||||
Ended July 31, | Ended July 31, | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
Numerator: | |||||||||||||||||
Net loss | $ | (784 | ) | $ | (6,872 | ) | $ | (1,823 | ) | $ | (10,135 | ) | |||||
Denominator: | |||||||||||||||||
Weighted average shares outstanding — Basic & Diluted | 12,470 | 12,400 | 12,469 | 12,352 | |||||||||||||
Net loss per common share — Basic & Diluted | $ | (0.06 | ) | $ | (0.55 | ) | $ | (0.14 | ) | $ | (0.82 | ) | |||||
7. Line of Credit
We have a $2.0 million secured revolving line of credit from a bank, which expires on December 31, 2003. Under the terms of the line of credit, we are allowed to borrow based on a percentage of our accounts receivable. There were no borrowings under this line of credit at July 31, 2003. All borrowings under the line of credit bear interest at prime plus 0.50% and are secured by our assets. The line of credit requires that we comply with various covenants, including a restriction on paying dividends, and financial ratio tests. As of June 30, 2003, and August 31, 2003, we were not in compliance with certain covenants associated with the line of credit. However, we subsequently received a waiver from the bank of the non-compliance.
8. Subsequent Event
On September 3, 2003, T/R Systems and Electronics for Imaging, Inc., or EFI, jointly announced the signing of a merger agreement, pursuant to which EFI will acquire T/R Systems. The merger agreement provides that our shareholders will receive, in exchange for their shares of common stock at the closing of the transaction, approximately $21 million in cash, or $1.57 per share, subject to certain adjustments. The merger agreement must be approved by our shareholders and is subject to certain other customary conditions. The transaction is expected to close in the fourth calendar quarter of 2003. However, there can be no assurance that the transaction will be completed when expected, or at all.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and related notes thereto contained in T/R Systems’ annual report on Form 10-K for the fiscal year ended January 31, 2003. Results for the quarter ended July 31, 2003 are not necessarily indicative of the results to be expected for the fiscal year ending January 31, 2004.This discussion contains forward-looking statements that involve risks and uncertainties. These 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 those set forth under “Risk Factors” in Item I and elsewhere in our annual report on Form 10-K.
Critical Accounting Policies and Estimates
Revenue Recognition. Imaging systems revenue is recognized based on the guidance in the American Institute of Certified Public Accountants Statement of Position, or SOP, 97-2, Software Revenue Recognition, and SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition. We recognize revenue from imaging 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. Revenue from products requiring significant customization in order to meet the customer’s objectives, such as our Digital StoreFront™ application, is recognized upon completion of the required customization.
We recognize revenue from engineering service fees for development of technology typically related to the development of a connection between an original equipment manufacturer, or OEM, reseller’s print device and our products. Engineering service fees typically consist of a combination of cash payments and print devices or other equipment related to the development project, given to us by the OEM resellers in lieu of additional cash payments. The amount of revenue recognized is equal to the total of the market value of the print devices and other equipment and cash received. Engineering service fees are recognized on a percentage-of-completion basis based on the hours of work done on a project as a percent of the total estimated hours required to complete the project, which necessarily involves subjective judgment and may result in fluctuations in quarterly results.
Revenue from the sale of printing consumables is recognized upon shipment. Revenue from customer service plans is recognized ratably over the term of each plan, which is typically one to three years.
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 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.
Inventory/Inventory Valuation Reserves.Inventory is valued at the lower of cost or market. Cost is determined on the first-in, first-out basis. We provide for inventory obsolescence based upon assumptions about future demand for our products, market conditions and estimates of product life cycles. If future demand or market conditions are worse or product life cycles are shorter than we estimate, additional inventory write-downs may be required.
Income Taxes.T/R Systems records deferred tax assets as a result of:
• | net operating losses; | ||
• | differences between the basis of assets and liabilities for financial reporting purposes versus their basis for income tax purposes; | ||
• | tax benefits from the exercise of employee stock options; and | ||
• | other tax benefits. |
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After consultation with our independent accountants, we determine whether or not to establish a valuation allowance as an offset to our deferred tax assets. A valuation allowance is established when it is not likely that some or all of the tax asset balances will be realized within the foreseeable future. We consider principally our recent operating results in conjunction with other available evidence to determine if a valuation allowance is required.
At January 31, 2003 and 2002, net deferred tax assets were fully offset by a valuation allowance. In estimating the realization 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 believe that the future realization of our deferred tax assets is uncertain.
At January 31, 2003, we had approximately $29.8 million in federal income tax net operating loss carry forwards available to offset future income taxes payable which, if not utilized, expire beginning in 2016 through 2023. The utilization of these net operating loss carry forwards depends primarily on our achievement of taxable income in future years.
Results of Operations
The following table presents our operating data as a percentage of revenue:
For the Three Months | For the Six Months | |||||||||||||||||
Ended July 31, | Ended July 31, | |||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
Operating expenses: | ||||||||||||||||||
Cost of imaging systems | 38.4 | 84.8 | 38.9 | 75.5 | ||||||||||||||
Research and development | 21.7 | 48.0 | 22.4 | 46.3 | ||||||||||||||
Sales and marketing | 47.9 | 93.4 | 50.7 | 83.5 | ||||||||||||||
General and administrative | 11.6 | 50.1 | 11.6 | 37.0 | ||||||||||||||
Total operating expenses | 119.6 | 276.3 | 123.6 | 242.3 | ||||||||||||||
Operating loss | (19.6 | ) | (176.3 | ) | (23.6 | ) | (142.3 | ) | ||||||||||
Interest income | 0.1 | 1.1 | 0.3 | 1.2 | ||||||||||||||
Loss before income taxes | (19.5 | ) | (175.2 | ) | (23.3 | ) | (141.1 | ) | ||||||||||
Income taxes | — | — | — | — | ||||||||||||||
Net loss | (19.5 | )% | (175.2 | )% | (23.3 | )% | (141.1 | )% | ||||||||||
Comparison of the Three Months Ended July 31, 2003 and 2002
Revenue.Revenue was $4.0 million in the quarter ended July 31, 2003, as compared to $3.9 million in the same quarter of the prior year. The increase of $102,000, or 2.6%, was due to an increase in service revenue. Service revenue increased $101,000, or 40.4%, from $250,000 in the quarter ended July 31, 2002 to $351,000 in the quarter ended July 31, 2003, primarily due to an increase in engineering service fees. The increase in engineering service fees, which are primarily derived from the development of new technology for the connection of additional print devices to the MicroPress®, was due to an increase in the number of connectivity projects between the two quarters. During the quarter ended July 31, 2002, we derived $50,000 from connectivity projects for both new and existing OEM resellers, most of which were completed during fiscal 2003. We derived $124,000 from connectivity projects during the quarter ended July 31, 2003.
Imaging systems revenue in the quarter ended July 31, 2003 was relatively unchanged compared to the quarter ended July 31, 2002. Imaging systems revenue through our OEM reseller channels increased $350,000, or 14.6%, from $2.4 million in the quarter ended July 31, 2002 to $2.8 million in the quarter ended July 31, 2003, while imaging systems revenue through independent resellers decreased $700,000. During the quarter ended July 31, 2002, we derived approximately $350,000 in imaging systems revenue from sales to an independent broker relating to liquidating old inventory. This was offset by a $300,000 increase in Digital Storefront revenue in the quarter ended July 31, 2003 compared to the same period last year.
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Revenue derived from shipments to customers outside the United States was $415,000, or 10.3% of revenue, in the quarter ended July 31, 2003, as compared to $719,000, or 18.3% of revenue, in the quarter ended July 31, 2002.
Operating Expenses.Operating expenses decreased $6.0 million, or 55.6%, from $10.8 million in the quarter ended July 31, 2002 to $4.8 million in the quarter ended July 31, 2003. Operating expenses as a percentage of revenue decreased to 119.6% from 276.3% primarily due to ongoing cost reduction activities including the restructuring plan implemented in fiscal 2003. We have reduced our number of employees by 24 people, or 23.3%, from July 31, 2002 to July 31, 2003. During the quarter ended July 31, 2002, we recorded $3.7 million in restructuring charges. The charges were mainly due to a consolidation of facilities in Norcross, Georgia and in Europe, the disposal or expected disposal of print engines, copiers, and other equipment due in part to the facilities consolidation, the write-down of inventory and accounts receivable, and severance for terminated employees. The facility consolidation in Norcross is the result of excess space at our operations and training center. In addition, as our sales channels have changed, we are able to operate with less inventory than in the past and have less need for warehouse space. Excluding these charges, operating expenses decreased $2.3 million in the quarter ended July 31, 2003 as compared to the quarter ended July 31, 2002.
Cost of Imaging Systems.Cost of imaging systems was $1.5 million, or 42.1% of imaging systems revenue, in the quarter ended July 31, 2003, as compared to $3.3 million, or 90.6% of imaging systems revenue, in the same quarter of the prior year. Excluding restructuring charges of $778,000 recorded in the quarter ended July 31,2002, cost of imaging systems decreased $1.0 million from the quarter ended July 31, 2002 to the quarter ended July 31, 2003. The decrease in cost of imaging systems as a percent of imaging systems revenue in the quarter ended July 31, 2003 over the quarter ended July 31, 2002 was primarily due to the transition to an OEM based revenue stream in which the products sold contain a lower amount of hardware, thus lowering the cost of the product. Also contributing to this decrease was the sale of obsolete inventory, primarily print devices, at or near its cost basis, during the quarter ended July 31, 2002. These sales were necessary to liquidate inventory that would not have been sold otherwise.
Research and Development.Research and development expenses decreased $1.0 million, or 53.6%, from $1.9 million in the quarter ended July 31, 2002 to $873,000 in the quarter ended July 31, 2003. Excluding a special charge recorded in July 2002 of $564,000, research and development expenses decreased $466,000 in the quarter ended July 31, 2003 compared to the same three-month period last year. This decrease was primarily due to a decrease in personnel-related expenses as a result of workforce reductions and other personnel attrition since fiscal 2002.
Sales and Marketing.Sales and marketing expenses for the quarter ended July 31, 2003 were $1.9 million, a decrease of $1.7 million, or 47.3%, from $3.7 million in the same quarter of the prior year. Excluding restructuring charges of $1,074,000 in the quarter ended July 31, 2002, sales and marketing expenses decreased $659,000 compared to the same period ended July 31, 2002. The decrease was primarily due to a decrease in personnel-related expenses, including travel, as a result of the workforce reductions and other attrition since the second quarter of fiscal 2003.
General and Administrative.General and administrative expenses in the quarter ended July 31, 2003 were $446,000 as compared to $2.0 million in the same quarter of the prior year. Excluding restructuring charges and provisions for doubtful accounts of $1,250,000 recorded in July 2002, general and administrative expenses decreased $248,000 compared to the same period ended July 31, 2002. The decrease was primarily due to reductions in personnel-related expenses as a result of the workforce reductions and other attrition during fiscal 2003.
Interest Income.Interest income decreased $35,000, or 83.3%, to $7,000 in the quarter ended July 31, 2003 from $42,000 in the same quarter of the prior year. The decrease was due to a decrease in the cash available for short-term investment during the quarter, as we used cash to fund our operations and capital expenditures, as well as lower market interest rates compared to the same quarter of the prior year.
Income Taxes.We did not record income taxes in the quarters ended July 31, 2003 and July 31, 2002 as a result of our net losses and due to the uncertainty over our ability to realize the tax benefits primarily as a result of our significant losses in recent years.
Net Loss and Net Loss per Share.We incurred a net loss of $784,000, or $0.06 per share, during the quarter ended July 31, 2003 as compared to a net loss of $6.9 million, or $0.55 per share, during the quarter ended July 31, 2002. As discussed above, no tax benefit was recognized during the quarters ended July 31, 2003 and July 31, 2002.
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Comparison of the Six Months Ended July 31, 2003 and 2002
Revenue.Revenue was $7.8 million in the six months ended July 31, 2003, as compared to $7.2 million in the same period last year. The increase in revenue of $645,000, or 9.0%, resulted primarily from an increase of $726,000 in sales of imaging systems and related products, partially offset by a decrease of $81,000 in service revenue. Imaging systems sales through our OEM reseller channels increased $1.6 million, or 39.3%, from the six months ended July 31, 2002 to the six months ended July 31, 2003. During this same period, revenue from independent reseller channels decreased $1.3 million. The decrease in sales through independent resellers was due in part to our continued shift in our sales strategy away from the independent reseller channel toward our OEM reseller channels.
Service revenue decreased $81,000, or 10.6%, from $764,000 in the six months ended July 31, 2002 to $683,000 in the six months ended July 31, 2003, reflecting fewer non-recurring engineering connectivity projects underway compared to the same period last year. This was partially offset by an increase in other service fees. Engineering service fees, which are primarily derived from the development of new technology for the connection of additional print devices to the MicroPress®, decreased as the number of connectivity projects between the two periods decreased. During the six months ended July 31, 2002, we derived $400,000 from connectivity projects for both new and existing OEM resellers, most of which were completed during fiscal 2003. We derived $266,000 from connectivity projects during the six months ended July 31, 2003.
We derived $880,000, or 11.2% of our revenue from shipments to customers outside the United States in the six months ended July 31, 2003, as compared to $1.4 million, or 19.5%, in the six months ended July 31, 2002. The decrease was primarily due to a decrease in engineering service fees from Asian customers.
Operating Expenses.Operating expenses decreased $7.7 million, or 44.4%, from $17.4 million for the six months ended July 31, 2002 to $9.7 million for the six months ended July 31, 2003. Operating expenses as a percentage of revenue decreased to 123.6% from 242.3% primarily due to the $3.7 million in restructuring charges previously described, in the six months ended July 31, 2002, as well as the increase in revenue between the two six month periods. Excluding these charges, operating expenses decreased $4.1 million in the six months ended July 31, 2003 as compared to the six months ended July 31, 2002.
Cost of Imaging Systems.Cost of imaging systems for the six months ended July 31, 2003 was $3.0 million, or 42.6% of imaging systems revenue, as compared to $5.4 million, or 84.5% of imaging systems revenue in the six months ended July 31, 2002. Excluding non-cash charges of $778,000 recorded in the six months ended July 31, 2002, cost of imaging systems decreased $1.6 million in the six months ended July 31, 2003 as compared to the six months ended July 31, 2002, for the reasons described above.
Research and Development.Research and development expenses decreased $1.6 million, or 47.4%, to $1.8 million in the six months ended July 31, 2003, as compared to $3.3 million in the six months ended July 31, 2002. Excluding restructuring charges recorded in July 2002 of $564,000, research and development expenses decreased $1.0 million compared to the same six-month period last year. This decrease was primarily due to a reduction in personnel-related expenses as a result of workforce reductions and other attrition since July 31, 2003.
Sales and Marketing.Sales and marketing expenses decreased by $2.0 million, or 33.9%, from $6.0 million for the six months ended July 31, 2002 to $4.0 million for the six months ended July 31, 2003. Excluding restructuring charges of $1,074,000 in the six months ended July 31, 2002, sales and marketing expenses decreased $1.0 million compared to the same period ended July 31, 2002. This decrease was primarily due to a decrease in personnel-related and travel-related expenses as a result of the workforce reductions made since July 31, 2003.
General and Administrative.Our general and administrative expenses decreased by $1.7 million, or 65.8%, from $2.7 million in the six months ended July 31, 2002 to $909,000 in the six months ended July 31, 2003. Excluding restructuring charges and provisions for doubtful accounts of $1,250,000 recorded in July 2002, general and administrative expenses were $498,000 lower than the six months ended July 31, 2002. This decrease is a result of reduction in personnel and travel expenses as a result of the workforce reduction made since July 31, 2002 and a decrease in professional fees.
Interest Income.Interest income decreased $68,000 to $20,000 for the six months ended July 31, 2003 from $88,000 for the six months ended July 31, 2002. The decrease was due to a decrease in the cash available for short-term investment during the period, as we used cash to fund our operations and capital expenditures, and a decrease in interest rates compared to the same period in the prior year.
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Income Taxes.We did not record income taxes in the six months ended July 31, 2003 and July 31, 2002 as a result of our net losses and due to the uncertainty over our ability to realize the tax benefits primarily as a result of our significant losses in recent years.
Net Loss and Net Loss per Share.We recorded a net loss of $1.8 million, or $0.14 per share, during the six months ended July 31, 2003 as compared to a net loss of $10.1 million, or $0.82 per share, during the six months ended July 31, 2002. As discussed above, no tax benefit was recognized during the six months ended July 31, 2003 and July 31, 2002.
Liquidity and Capital Resources
Cash and cash equivalents were $4.9 million at July 31, 2003, down from $7.2 million at January 31, 2003. Included in these amounts were restricted cash of $447,000 at July 31, 2003 and $612,000 at January 31, 2003.
Net cash used in operating activities was $2.1 million in the six months ended July 31, 2003, as compared to $4.5 million in the six months ended July 31, 2002. Cash used in operating activities during the six months ended July 31, 2003 was primarily due to our net loss for the period. Net cash used in investing activities, which consisted of purchases of property and equipment, was $13,000 for the six months ended July 31, 2003 and $103,000 for the six months ended July 31, 2002. Additionally, we received equipment with a value totaling $132,000 during the six months ended July 31, 2003 and $930,000 during the six months ended July 31, 2002 as payment of engineering fees. Thus, net total additions to property and equipment were $145,000 for the six months ended July 31, 2003 and $1.0 million for the six months ended July 31, 2002. Net cash used in financing activities was $50,000 for the six months ended July 31, 2003 as compared to net cash provided by financing activities of $74,000 in the six months ended July 31, 2002. The net cash used in activities in the six months ended July 31, 2003 represented proceeds to pay off our borrowings on the line of credit, a decrease in restricted cash and proceeds from the sale of stock through our employee stock purchase plan. Cash provided by financing activities in the six months ended July 31, 2002 consisted of proceeds from the sale of stock through stock option exercises and purchases under the employee stock purchase plan.
We have a $2.0 million secured revolving line of credit from a bank, which expires on December 31, 2003. Under the terms of the line of credit, we are allowed to borrow based on a percentage of our accounts receivable. There were no borrowings under this line of credit at July 31, 2003. All borrowings under the line of credit bear interest at prime plus 0.50% and are secured by our assets. The line of credit requires that we comply with various covenants, including a restriction on paying dividends, and financial ratio tests. As of June 30, 2003 and August 31, 2003, we were not in compliance with certain covenants associated with the line of credit. However, we subsequently received a waiver from the bank of the non-compliance. The agreement also provides for up to $500,000 in letters of credit. Any letters of credit issued reduce the amount available for borrowing under the line.
We believe that 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 business expansion for the current fiscal year. However, if cash generated by operations is insufficient to satisfy our operating requirements, we may be required to raise additional funds, through either debt or equity financings, or further reduce our operations. There can be no assurance that we will be able to obtain any financing on terms acceptable to us, if at all.
Inflation had no material impact on our operations during the six months ended July 31, 2003.
Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting for reorganization and similar costs and supersedes previous accounting guidance, principally Emerging Issues Task Force, or EITF, Issue No. 94-3,Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost should be recognized at the date of a company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognition of any future reorganization costs, as well as the amount recognized. The provisions of SFAS No. 146 are effective for reorganization activities initiated after December 31, 2002. We adopted this statement on January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such a
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guarantee. FIN 45 also requires additional disclosure about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 30, 2002 and the disclosure requirements are effective after December 15, 2002. Since the company did not have any material guarantees at July 31, 2003, the adoption of FIN 45 did not have a material impact on our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 addresses consolidation by business enterprises of variable interest entities, which are entities that either (a) do not have equity investors with voting rights or (b) have equity investors that do not provide sufficient financial resources for the entity to support its activities. The provisions of FIN 46 are effective for the first interim or annual reporting period beginning after June 15, 2003 for existing variable interest entities created after January 31, 2003. We do not currently hold any interest in variable interest entities.
Item 3. 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, which are 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. However, as of July 31, 2003, we had no borrowings outstanding under our revolving credit facility. To date, we have not entered into any derivative instruments to manage interest rate exposure.
A portion of our revenue is derived from sales to international customers. Currently, substantially all of our sales to international customers are denominated in U.S. dollars. The only exception to this is sales to certain OEM customers denominated in euros. To date, the revenue derived from these euro-denominated sales has been immaterial and we have not entered into any foreign exchange contracts to hedge currency fluctuations due to the immateriality of the revenue related to these euro-denominated sales. 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 those particular countries.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of T/R Systems’ management, including the company’s chief executive officer along with the company’s chief financial officer, of the effectiveness of the design and operation of the company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the company’s chief executive officer along with the company’s chief financial officer concluded that the company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in the company’s periodic SEC filings as of July 31, 2003. There has been no change in the company’s internal control over financial reporting that occurred during the quarter ended July 31, 2003 that has materially affected, or is reasonably likely to materially affect T/R Systems’ internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) | Inapplicable. | ||
(b) | Inapplicable. | ||
(c) | Inapplicable. | ||
(d) | In connection with our initial public offering, the Securities and Exchange Commission declared our registration statement on Form S-1 (file no. 333-88439) effective on January 25, 2000. | ||
As of July 31, 2003 we had used $20.5 million of the net proceeds from our initial public offering to fund our working capital and capital expenditure needs. None of these payments were made to any of our directors, officers or their associates, holders of 10% or more of our equity securities or any other affiliate of T/R Systems. We have invested the remaining $4.9 million of the net offering proceeds in government securities, money market mutual funds and certificates of deposit, all with original maturities of 90 days or less, as well as interest-bearing checking accounts. |
Item 4. Submission of Matters to a Vote of Security Holders
On May 22, 2003, we held our annual meeting of shareholders. Set forth below is information regarding the matters submitted for a vote of shareholders at the annual meeting, as well as the number of votes cast for or withheld from each nominee.
I. | Proposal to elect three directors as class I directors to serve a three-year term expiring at the annual meeting of the shareholders in 2006: |
Name | Votes For | Votes Withheld | ||||||
Joseph R. Chinnici | 11,289,058 | 53,059 | ||||||
Kevin J. McGarity | 11,289,058 | 53,059 | ||||||
Charles H. Phipps | 11,186,128 | 155,989 |
The following are the names and terms of office of the directors whose terms continued after the Meeting: Phillip T. Gianos and E. Neal Tompkins are class II directors whose term will expire at the annual meeting of the shareholders in 2004, and C. Harold Gaffin, Michael E. Kohlsdorf and Barbara A. Pellow are class III directors whose term will expire at the annual meeting of the shareholders in 2005.
Item 5. Other Information
On September 3, 2003, T/R Systems and Electronics for Imaging, Inc., or EFI, jointly announced the signing of a merger agreement, pursuant to which EFI will acquire T/R Systems. It is expected that our shareholders will receive, in exchange for their shares common stock at the closing of the transaction, approximately $21 million in cash, or $1.57 per share, subject to certain adjustments. The merger agreement must be approved by our shareholders and is subject to certain other customary conditions. The transaction is expected to close in the fourth calendar quarter of 2003. However, there can be no assurance that the transaction will be completed when expected, or at all.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit | ||
Number | Description of Exhibit | |
4.5 | Amendment No. 1 to Rights Agreement, dated as of September 2, 2003, by and between T/R Systems, Inc. and Equiserve Trust Company, N.A. as rights agent. | |
31 | Rule 13a-14(a)/15d-14(a) Certifications. | |
32 | Section 1350 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | Reports on Form 8-K | |
Current Report on Form 8-K dated and filed on May 27, 2003, furnishing, under Item 9, a press release that announced certain financial and operating results for the first quarter of 2003. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
T/R Systems, Inc. | ||
September 10, 2003 | /s/ Lyle W. Newkirk Lyle W. Newkirk Senior Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
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EXHIBIT INDEX
Exhibit | ||
Number | Description of Exhibit | |
4.5 | Amendment No. 1 to Rights Agreement, dated as of September 2, 2003, by and between T/R Systems, Inc. and Equiserve Trust Company, N.A. as rights agent. | |
31 | Rule 13a-14(a)/15d-14(a) Certifications. | |
32 | Section 1350 Certifications. |
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