T/R SYSTEMS INC - 10-Q Quarterly Report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(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, 2002

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.

(Exact name of registrant as specified in its charter)


Georgia		58-1958870

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1300 Oakbrook Drive
Norcross, Georgia

(Address of principal executive offices)

30093

(Zip Code)

(770) 448-9008

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

As of September 13, 2002, 12,460,915 shares of common stock of the registrant were outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 2. Changes in Securities and Use of Proceeds
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
Section 906 Certification of the CEO and CFO

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		15
Item 4	Controls and Procedures		15
PART II
Item 2	Changes in Securities and Use of Proceeds		16
Item 4	Submission of Matters to a Vote of Security Holders		16
Item 5	Other Information		17
Item 6	Exhibits and Reports on Form 8-K		17

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

T/R SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)


			July 31,			January 31,
			2002			2002

ASSETS
Current Assets:
	Cash and cash equivalents		$	8,573		$	13,026
	Receivables, net			2,923			4,667
	Inventories, net			2,681			4,108
	Prepaid expenses and other			294			287

		Total current assets		14,471			22,088
Property and equipment, net				4,761			6,400

			$	19,232		$	28,488

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$	1,563		$	2,386
	Deferred revenue			598			456
	Accrued salaries and wages			1,049			883
	Other liabilities			2,051			788

		Total current liabilities		5,261			4,513
Shareholders’ Equity:
	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; 12,460,915 and 12,295,903 shares issued and outstanding, respectively			125			123
	Additional paid-in capital			43,661			43,532
	Accumulated deficit			(29,815	)		(19,680	)

		Total shareholders’ equity		13,971			23,975

			$	19,232		$	28,488

See notes to consolidated financial statements

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,

			2002			2001			2002			2001

Revenue			$	3,921		$	5,565		$	7,183		$	11,459
Operating Expenses:
	Cost of imaging systems			3,326			2,083			5,424			4,816
	Research and development			1,883			1,736			3,324			3,446
	Sales and marketing			3,662			2,735			6,001			5,738
	General and administrative			1,964			974			2,657			2,078

		Total operating expenses		10,835			7,528			17,406			16,078

Operating loss				(6,914	)		(1,963	)		(10,223	)		(4,619	)
Interest income				42			184			88			462

Loss before income tax benefit				(6,872	)		(1,779	)		(10,135	)		(4,157	)
Income tax benefit				—			(632	)		—			(1,488	)

Net loss			$	(6,872	)	$	(1,147	)	$	(10,135	)	$	(2,669	)
Net loss per common share — Basic & Diluted			$	(0.55	)	$	(0.09	)	$	(0.82	)	$	(0.22	)

See notes to consolidated financial statements

T/R SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


					For the Six
					Months Ended
					July 31,

					2002			2001

Operating Activities:
	Net loss				$	(10,135	)	$	(2,669	)
	Adjustments to reconcile net loss to net cash used in operating activities:
			Depreciation			2,465			957
			Deferred compensation expense			—			16
			Loss on sale of fixed assets			207			—
			Changes in assets and liabilities:
				Decrease (increase) in receivables		814			(2,069	)
				Decrease in inventories		1,427			283
				Increase in prepaid expenses and other assets		(7	)		(265	)
				Increase in deferred income taxes		—			(1,497	)
				Decrease in accounts payable		(823	)		(513	)
				Increase (decrease) in deferred revenue		142			(191	)
				Increase (decrease) in accrued salaries and wages		166			(370	)
				Increase (decrease) in other liabilities		1,263			(148	)

				Net cash used in operating activities		(4,481	)		(6,466	)
Investing Activities:
		Proceeds from sale of assets				56			—
		Purchases of property and equipment				(159	)		(711	)

Net cash used in financing activities						(103	)		(711	)
Financing Activities:
		Proceeds from sale of common stock				131			70

Net cash provided by financing activities						131			70

Net decrease in cash and cash equivalents						(4,453	)		(7,107	)
Cash and Cash Equivalents:
	Beginning of period					13,026			26,394

	End of period				$	8,573		$	19,287

Supplemental cash flow information:
	Cash paid for income taxes				$	7		$	54

	Cash paid for interest				$	1		$	—

Noncash investing activities:
	Equipment received for payment of engineering fees				$	930		$	2,327

See notes to consolidated financial statements

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 in this quarterly report 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, 2002 and should be read in conjunction with those audited consolidated financial statements and the related notes. 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, 2002 and the reported amounts of revenue and expenses during the quarter and six months then ended. Our actual results could differ from these estimates. Additionally, results for the three and six months ended July 31, 2002 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.

2. New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations and no longer allows the use of the pooling-of-interests method of accounting. SFAS No. 142 requires that, upon adoption, amortization of goodwill will cease and, instead, the carrying value of goodwill will be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The adoption of these standards did not have an impact on our consolidated financial statements because we have not entered into any business combinations and we do not have any assets covered by SFAS No. 142.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. SFAS No. 143 applies to legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, development and/or normal operation of a long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002; however, early adoption is encouraged. The adoption of this statement is not expected to have a significant impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 and Accounting Principles Board, or APB, Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for recognition and measurement of the impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also retains the requirement of APB Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting requirement to a component of an entity that either has been disposed of or is classified as held for sale. We adopted SFAS No. 144 effective February 1, 2002. The adoption of this statement did not have a significant impact on our financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds and amends certain previous standards related primarily to debt and leases. The most substantive amendment requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of SFAS No. 145 related to the rescission of SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, are effective for financial statements issued for fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to the

rescission of SFAS No. 13, Accounting for Leases, are effective for transactions occurring after May 15, 2002. All other provisions of SFAS No. 145 are effective for financial statements issued on or after May 15, 2002. The adoption of this statement is not expected to have a significant impact on our financial position or results of operations.

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 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 94-3, a liability for an exit cost was recognized at the date of the company’s commitment to the 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. The adoption of this statement is not expected to have a significant impact on our financial position or results of operations.

3. Balance Sheet Detail


	July 31,		January 31,
	2002		2002

	(In thousands)
Receivables:
Accounts receivable	$	3,432	$	5,056
Less allowance for doubtful accounts		509		389

	$	2,923	$	4,667

Inventories:
Components and supplies	$	2,495	$	3,715
Finished goods		766		1,355

		3,261		5,070
Less reserve for potential losses		580		962

	$	2,681	$	4,108

4. Special Charges

During the quarter ended July 31, 2002, we implemented a restructuring plan designed to reduce operating costs and preserve cash. The restructuring plan resulted in our recording certain charges totaling $3.7 million. No cash payments were made related to these charges during the quarter ended July 31, 2002. The following table summarizes these charges (in thousands):


Property and equipment disposal	$	1,395
Facility consolidation		812
Inventory reserve adjustment		648
Provision for doubtful accounts		350
Severance and related charges		153
Other		308

Total	$	3,666

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,

	2002		2001		2002		2001

Imaging systems	$	3,671	$	3,384	$	6,419	$	7,401
Services		250		2,181		764		4,058

Total	$	3,921	$	5,565	$	7,183	$	11,459

Imaging systems include software and hardware products for managing a document from creation to its final destination. Services include 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,

	2002		2001		2002		2001

United States	$	3,202	$	3,781	$	5,780	$	7,645
Asia		120		1,410		244		2,533
Europe		108		260		385		1,059
Canada		485		111		760		214
Other foreign countries		6		3		14		8

Total	$	3,921	$	5,565	$	7,183	$	11,459

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.

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,

		2002			2001			2002			2001

Numerator:
	Net loss	$	(6,872	)	$	(1,147	)	$	(10,135	)	$	(2,669	)
Denominator:

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