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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, 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.

(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
 
    Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
    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          

1

 

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

4

 

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 )
 
    
     
     
     
 

5

 

     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  
 
    
     
 

6

 

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  
 
    
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