UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended FEBRUARY 28, 2001.
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: 000-24413
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TROY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0807798
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2331 SOUTH PULLMAN STREET
SANTA ANA, CALIFORNIA
(Address of principal executive offices) 92705
(Zip code)
(949) 250-3280
(Registrant's telephone number, including area code)
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 |_|
As of March 30, 2001, there were 10,921,032 shares of our common stock
outstanding.
TROY GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED FEBRUARY 28, 2001
INDEX
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PAGE NO.
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
February 28, 2001 and November 30, 2000...........................3
Consolidated Statements of Operations
for the Three Months ended February 28, 2001
and February 29, 2000.............................................4
Consolidated Statements of Cash Flows
for the Three Months ended February 28, 2001
and February 29, 2000.............................................5
Notes to Consolidated Financial Statements.....................6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings................................................16
Item 2. Changes in Securities and Use of Proceeds........................16
Item 3. Defaults Upon Senior Securities..................................16
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................16
2
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TROY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS FEBRUARY 28, NOVEMBER 30,
2001 2000
(Unaudited)
---------------- -----------------
Current assets:
Cash and cash equivalents.................................................. $ -- $ 2,090
Investment in available-for-sale securities................................ 11,436 9,953
Accounts receivable, less allowance for doubtful accounts of $604 and
$684, respectively..................................................... 9,568 10,480
Income tax refund receivable............................................... 988 476
Inventories................................................................ 8,106 6,242
Prepaid expenses and other................................................. 576 566
Deferred tax assets ...................................................... 1,313 1,313
---------------- -----------------
Total current assets.................................................. 31,987 31,120
Equipment and leasehold improvements, net..................................... 2,172 2,040
Other assets.................................................................. 9,152 9,415
---------------- -----------------
Total assets.......................................................... $ 43,311 $ 42,575
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks issued not yet presented for payment................................ $ 267 $ 855
Line of credit............................................................. 246 --
Current portion of long-term debt.......................................... 59 59
Accounts payable........................................................... 4,205 2,424
Accrued expenses........................................................... 2,356 2,659
Deferred service revenue................................................... 293 220
---------------- -----------------
Total current liabilities............................................. 7,426 6,217
---------------- -----------------
Long-term debt, net of current portion........................................ 255 272
---------------- -----------------
Deferred tax liabilities...................................................... 442 471
---------------- -----------------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000
shares, issued 2001 10,921,032 shares; and 2000 10,880,764 shares........ 109 109
Preferred stock, no par value, authorized 5,000,000 shares, issued none.... -- --
Additional paid-in capital................................................. 20,964 20,808
Retained earnings.......................................................... 14,115 14,698
---------------- -----------------
Total stockholders' equity............................................ 35,188 35,615
---------------- -----------------
Total liabilities and stockholders' equity............................ $ 43,311 $ 42,575
================ =================
See Notes to Consolidated Financial Statements.
3
TROY GROUP, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
------------------------------
FEBRUARY 28, FEBRUARY 29,
2001 2000
-------------- --------------
Net sales.......................................... $11,309 $14,030
Cost of goods sold................................. 6,856 7,334
-------------- --------------
Gross profit.................................. 4,453 6,696
-------------- --------------
Operating expenses:
Selling, general and administrative .......... 4,016 3,081
Research and development...................... 1,298 987
Amortization of intangible assets............. 320 160
-------------- --------------
Operating income (loss)................... (1,181) 2,468
Interest income.................................... 210 192
Interest expense................................... (19) (7)
-------------- --------------
Income (loss) before income taxes (credits)... (990) 2,653
Provision for income taxes (credits)............... (405) 1,035
-------------- --------------
Net income (loss)......................... $ (585) $ 1,618
============== ==============
Net income (loss) per share:
Basic ........................................ $ (.05) $ .15
============== ==============
Diluted....................................... $ (.05) $ .14
============== ==============
Weighted-average shares outstanding:
Basic ........................................ 10,921 10,698
============== ==============
Diluted....................................... 10,921 11,498
============== ==============
See Notes to Consolidated Financial Statements.
4
TROY GROUP, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
---------------------------------
FEBRUARY 28, FEBRUARY 29,
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net income (loss)....................................... $ (585) $ 1,618
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 510 344
Provision for doubtful accounts...................... -- 30
Deferred taxes....................................... (29) --
Accretion of investment discounts, net............... (140) (73)
Changes in working capital components,
net of effects from acquisition of companies
(Increase) decrease in:
Accounts receivable............................. 912 4,852
Income tax refund receivable.................... (512) --
Inventories..................................... (1,864) (814)
Prepaid expenses and other...................... (10) 30
Increase (decrease) in:
Accounts payable................................ 1,781 1,324
Accrued expenses................................ (303) (553)
Income taxes payable............................ -- 218
Deferred service revenue........................ 73 409
--------------- ---------------
Net cash provided by (used in) operating
activities...................................... (167) 7,385
--------------- ---------------
Cash flows from investing activities:
Acquisition of American Development, Inc................ -- (1,233)
Purchase of equipment and leasehold improvements........ (321) (125)
Purchase of available-for-sale securities............... (3,985) (10,700)
Redemption of available-for-sale securities............. 2,642 6,662
Increase in other assets................................ (58) (1,553)
--------------- ---------------
Net cash (used in) investing activities.............. (1,722) (6,949)
--------------- ---------------
Cash flows from financing activities:
Net borrowings on revolving line of credit.............. 246 --
Payments on notes payable............................... (17) (241)
Decrease in checks issued not presented for payment..... (588) --
Proceeds from issuance of common stock.................. 158 364
--------------- ---------------
Net cash provided by (used in) financing activities.. (201) 123
--------------- ---------------
Net increase (decrease) in cash and
cash equivalents ................................ (2,090) 559
Cash and cash equivalents, beginning of period............ 2,090 4,783
--------------- ---------------
Cash and cash equivalents, end of period.................. $ -- $ 5,342
=============== ===============
See Notes to Consolidated Financial Statements.
5
TROY GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months ended February 28,
2001 are not necessarily indicative of the results that may be expected for the
year ended November 30, 2001. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for its fiscal year ended November 30, 2000 (File No. 000-24413).
Certain reclassifications have been made to the February 29, 2000 consolidated
income statement to conform to the February 28, 2001 presentation with no effect
on net income or stockholders' equity.
NOTE 2. INVENTORIES
Inventories consisted of the following as of February 28, 2001 and November 30,
2000 (amounts in thousands):
FEBRUARY 28, 2001 NOVEMBER 30, 2000
----------------- -----------------
Raw materials...................... $5,715 $4,016
Work-in-process.................... 135 150
Finished goods..................... 2,256 2,076
----- -----
Total......................... $8,106 $6,242
===== =====
NOTE 3. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
As of February 28, 2001, the Company had approximately $11.4 million in
corporate debt securities with contractual maturity dates of up to one year,
which management has determined should be classified as available-for-sale.
Market values approximated carrying values. Accordingly, no unrealized gains or
losses were recorded at February 28, 2001. There were no gains or loss
recognized for the three months ended February 28, 2001 or February 29, 2000.
6
NOTE 4. STOCK OPTION AND STOCK WARRANT PLANS
During the three months ended February 28, 2001, the Company did not grant any
options to acquire shares of common stock. The following is a summary of total
outstanding options and stock warrants at February 28, 2001:
OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE
------------------------------------------------------- -----------------------------------
WEIGHTED-AVERAGE
RANGE OF WEIGHTED-AVERAGE REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER OF OPTIONS EXERCISE PRICE CONTRACTUAL LIFE NUMBER OF OPTIONS EXERCISE PRICE
--------------- ----------------- -------------- ---------------- ----------------- --------------
$3.50 106,666 $3.50 4.3 years 106,666 $3.50
$6.31 - 8.00 1,546,000 $7.09 8.5 years 552,750 $7.06
$13.16 - 14.25 25,000 $13.38 8.8 years -- --
---------- --------
1,677,666 659,416
At February 28, 2001, there were 1,145,000 shares remaining available for grant
under the Company's option plans.
NOTE 5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
THREE MONTHS ENDED
------------------
(amounts in thousands, except per share data)
FEBRUARY 28, 2001 FEBRUARY 29, 2000
----------------- -----------------
NUMERATOR FOR BASIC AND DILUTED NET INCOME PER
SHARE:
Net income (loss)................................ $(585) $1,618
====== ======
DENOMINATOR:
Denominator for basic net income (loss) per
share -- weighted-average shares outstanding..... 10,921 10,698
Effect of employee stock options and warrants.... -- 800
------ ------
Denominator for diluted net income (loss)
per share........................................ 10,921 11,498
====== ======
NET INCOME (LOSS) PER SHARE:
Basic............................................ ($.05) $0.15
====== =====
Diluted.......................................... ($.05) $0.14
====== =====
If the Company would have generated net income for the quarter ending February
28, 2001, then the denominator for diluted net income per share would have been
10,972,000 after adjusting the basic weighted-average shares outstanding by
51,000 shares for the effect of stock options and warrants.
7
NOTE 6. BUSINESS COMBINATIONS
AMERICAN DEVELOPMENT, INC.
On February 18, 2000, the Company acquired certain assets and assumed certain
liabilities of American Development, Inc., a software development company, in
exchange for 42,654 shares of $0.01 par value common stock, $1,179,000 in cash
and $54,000 in direct expenses. The total acquisition cost was $2,652,000,
including $330,000 recorded in connection with warrants issued to a consultant,
and was allocated as follows:
Current assets ...................................................................... $ 177,000
Equipment and leasehold improvements ................................................. 61,000
Other assets ......................................................................... 94,000
Intangible assets, including customer list, assembled
workforce, core technology and goodwill ........................................... 2,703,000
Current liabilities assumed .......................................................... (383,000)
------------
$2,652,000
============
The acquisition has been accounted for as a purchase and results of operations
of American Development, Inc. since the date of acquisition are included in the
Company's consolidated financial statements.
CABLENET TECHNOLOGIES
On May 9, 2000, the Company acquired North Carolina-based CableNet Technologies,
which specializes in printer enhancement and connectivity technology, in
exchange for 54,386 shares of $0.01 par value common stock, $1,945,000 in cash,
$62,000 in direct expenses and $306,000 recorded in connection with warrants
issued to a consultant. The total acquisition cost was $3,088,000 and was
allocated as follows:
Current assets ......................................................... $ 301,000
Equipment and leasehold improvements ................................... 17,000
Intangible assets, including customer list, assembled
workforce, core technology and goodwill.............................. 2,817,000
Current liabilities assumed............................................. (47,000)
--------------
$3,088,000
==============
The acquisition has been accounted for as a purchase and results of operations
of CableNet Technologies since the date of acquisition are included in the
Company's consolidated financial statements.
8
NOTE 6. BUSINESS COMBINATIONS, CONTINUED
Pro Forma consolidated results of operations for the three months ended February
28, 2000 as though American Development, Inc. and CableNet Technologies had been
acquired as of December 1, 1999 are as follows (amounts in thousands, except per
share data):
Sales........................................................... $ 14,530
=========
Net income...................................................... $ 1,584
-========
Net income per share:
Basic........................................................ $0.15
=====
Diluted...................................................... $0.14
=====
The above amounts reflect pro forma adjustments for amortization of intangibles
and number of shares outstanding. This pro forma financial information does not
purport to be indicative of the results of operations had the American
Development, Inc. and CableNet Technologies acquisition actually taken place at
the earlier date.
NOTE 7. SEGMENT INFORMATION
The following tables summarize revenues and net income (loss) by operating
segment and unallocated corporate for the three months ended February 28, 2001
and February 29, 2000:
THREE MONTHS ENDED
------------------
(amounts in thousands)
FEBRUARY 28, 2001 FEBRUARY 29, 2000
----------------- -----------------
Revenues:
Financial Payment Solutions............ $ 9,136 $ 9,716
Connectivity........................... 2,173 4,314
-------- ---------
$ 11,309 $ 14,030
======== =========
Net income (loss):
Financial Payment Solutions............ $ 604 $ 1,019
Connectivity........................... (513) 1,199
Unallocated Corporate.................. (676) (600)
--------- ----------
$ (585) $ 1,618
========= =========
9
NOTE 8. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information
THREE MONTHS ENDED
------------------
(amounts in thousands)
FEBRUARY 28, 2001 FEBRUARY 29, 2000
----------------- -----------------
Cash paid during the period for:
Interest........................................................... $ 18 $ 2
========= =========
Income taxes....................................................... $ 35 $ 787
========= =========
Supplemental schedule of noncash investing and financing activities
Purchase of American Development, Inc. in 2000:
Total purchase price............................................. $ -- $ 2,652
Less fair value of common stock and stock warrants issued in
connection with the acquisition.................................. -- 1,419
--------- ---------
Cash purchase price.............................................. $ -- $ 1,233
========= =========
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our Consolidated Financial Statements and related Notes included in this
report. This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform act of 1995. The statements contained
in this report that are not historical in nature, particularly those that
utilize terminology such as "may," "will," "should," "expects," "anticipates,"
"estimates," "believes" or "plans," or comparable terminology, are
forward-looking statements based on current expectations and assumptions.
Various risks and uncertainties could cause actual results to differ
materially from those expressed in forward-looking statements. These risks and
uncertainties include the growth in acceptance of TROY's electronic payment
solutions by online brokerage firms, e-merchants and other bill payment
applications; the timely and successful development and integration of the
Bluetooth and other wireless standards; the market acceptance of products
incorporating wireless printing technologies; the ability to continue to develop
and market other e-commerce payment, networked payment and wireless and other
connectivity technologies; TROY's ability to refocus its management and
resources on these emerging technologies; the ability to hire and retain
qualified management, technology and other personnel; the impact of competition
from existing and new technologies and companies; the ability to identify and
assimilate acquired companies and technologies; the continued demand for printed
financial documents; and other factors .
We own or have rights to trademarks that we use in connection with the
sale of our products. Troy(R), eCheck Secure(TM), PrintraNet(TM), TROYmark(TM)
and StarACH(TM) are among the trademarks that we own.
BACKGROUND
We are a leading worldwide provider of financial payment solutions. Our
software, firmware and hardware solutions enable businesses to electronically
transmit and output financial payment information across computer networks and
the Internet.
Our products consist of financial payment solutions and connectivity
products that serve a wide variety of industries including e-commerce retailers,
online brokerages, telecommunications, financial services, insurance, computer
hardware, automotive, personnel and others.
Our financial payment solutions consist of e-commerce payment solutions
and networked computer payment solutions. Our e-commerce payment solutions
enable Internet merchants to accept payments from their customers' checking
accounts as an alternative to credit cards. Our networked computer payment
solutions include software, firmware, hardware and imaging supplies that enable
standard laser printers to print MICR lines, graphics, barcodes and forms and to
perform additional functions such as auditing, status checking and security.
Our connectivity products enhance the connectivity of devices that
transmit information over computer networks and the Internet.
11
OVERVIEW
Net sales are generated from the sale of our connectivity and financial
payment solutions and services. We recognize revenue from the sale of our
products when the goods are shipped to the customer and we recognize service
revenue over the period of the contract on a straight-line basis. In the three
months ended February 28, 2001 and the fiscal year ended November 30, 2000, a
reseller of our imaging supplies, Cannon IV Inc., accounted for 6.4% and 9.2%,
respectively, of our net sales, of which we believe a significant portion was
sold to a single customer. In addition, a reseller of our laser printers and
connectivity products, Comark, Inc. also sold products to this same customer
which accounted for 0.2% and 0.6%, respectively, of our net sales for the three
months ended February 28, 2001 and the fiscal year ended November 30, 2000. We
also sell our products directly to the significant customer of Cannon IV and
Comark. Direct sales to these resellers' significant customer were 0.0% and 0.3%
of our net sales for the three months ended February 28, 2001 and the fiscal
year ended November 30, 2000, respectively. We do not have a written or oral
contract with Cannon IV, Comark or their significant customer. All sales are
made through purchase orders.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information derived from our consolidated statements of operations expressed as
a percentage of net sales:
Three Months Ended
------------------------------------------
February 28, February 29,
2001 2000
------------- ------------
Net sales................................................ 100.0% 100.0%
Cost of goods sold....................................... 60.6 52.3
------------- ------------
Gross Profit............................................. 39.4 47.7
Selling, general and administrative expenses............. 35.5 22.0
Research and development expenses........................ 11.5 7.0
Amortization of intangible assets........................ 2.8 1.1
------------- ------------
Operating income (loss).................................. (10.4) 17.6
Interest income.......................................... 1.8 1.4
Interest expense......................................... (0.2) (0.1)
------------- ------------
Income (loss) before income taxes (credits) ............. (8.8) 18.9
Provision for income taxes (credits)..................... (3.6) 7.4
------------- ------------
Net income (loss)........................................ (5.2)% 11.5 %
============= ============
THREE MONTHS ENDED FEBRUARY 28, 2001 COMPARED TO THREE MONTHS ENDED FEBRUARY 29,
2000
NET SALES. Our net sales were $11.3 million for the three months ended
February 28, 2001, with $9.1 million attributable to financial payment solutions
and $2.2 million attributable to connectivity products and software. Net sales
in the three months ended February 28, 2001 decreased by $2.7 million, or 19.4%,
from $14.0 million in the three months ended February 29, 2000. This decrease in
net sales represents a $1.1 million decrease in sales of our laser printers,
impact printers, proprietary imaging supplies and services, a decrease of $2.0
million in sales of our connectivity products and software. These decreases were
partially offset by an increase of $0.4 million in sales of our electronic
payment solutions. Net sales were not significantly affected by price changes.
The decrease in our net sales for the three months ended February 28, 2001, as
compared to net sales for the three months ended February 29, 2000, can be
attributed to a $1.9 million non-recurring software licensing sale in the first
quarter of
12
2000 as well as the implementation of our strategy to shift our focus away from
our established financial payment solutions and toward our electronic payment
solutions and wireless printing opportunities. In connection with our shift in
focus, we may continue to license our software technology to third parties as we
consider appropriate. To the extent that our mix of revenue sources continues to
shift toward sales of connectivity products and technology licensing, our net
sales could vary from historical patterns.
COST OF GOODS SOLD. Cost of goods sold decreased by $478,000 or 6.5% to
$6.9 million in the three months ended February 28, 2001 from $7.3 million in
the three months ended February 29, 2000. This decrease was primarily due to
decreased net sales. Cost of goods sold as a percentage of net sales increased
to 60.6% in the three months ended February 28, 2001 from 52.3% in the three
months ended February 29, 2000. In connection with our shift in focus, we may
enter into agreements to license technology from other companies. As a result of
these agreements, cost of goods sold could vary from historical patterns.
GROSS PROFIT. As a result of the above factors, gross profit decreased
by $2.2 million to $4.5 million in the three months ended February 28, 2001 from
$6.7 million in the three months ended February 29, 2000. Gross profit as a
percentage of net sales decreased to 39.4% in the three months ended February
28, 2001 from 47.7% in the three months ended February 29, 2000. This decrease
was also primarily due to a software licensing sale in the three months ended
February 29, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $935,000 or 30.3% to $4.0 million in the
three months ended February 28, 2001 from $3.1 million in the three months ended
February 29, 2000. This increase was due primarily to additional operating
expenses of $270,000 as a result of our acquisitions, an increase of $665,000
due to increases in personnel, promotions and other expenses. Selling, general
and administrative expenses as a percentage of net sales increased to 35.5% in
the three months ended February 28, 2001 from 22.0% in the three months ended
February 29, 2000, due to our acquisition strategy and our associated growth
requirements. In connection with our shift in focus, we intend to continue to
invest in marketing expenditures, substantially increase the size of the sales
force, and add technical resources as required. As a result of these
expenditures and hiring initiatives, we expect selling, general and
administrative expenses to continue to exceed historical levels. This
forward-looking statement will be impacted by the timing and amount of these
expenditures, our ability to attract and retain sales and marketing personnel
and the associated costs of such personnel, and the success of our marketing
efforts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $311,000 or 31.5% to $1.3 million in the three months ended
February 28, 2001 from $1.0 million in the three months ended February 29, 2000.
Of this increase, $171,000 was due to additional research and development
expenses as a result of our acquisitions. Research and development expenses as a
percentage of net sales was 11.5% in the three months ended February 28, 2001
and 7.0% in the three months ended February 29, 2000. In connection with our
growth initiatives and efforts to develop new wireless printing technologies, we
expect research and development expenses to continue to exceed historical levels
as we add additional personnel and incur additional related costs. This
forward-looking statement will be impacted by the timing and amount of
additional research and development expenditures and our ability to attract and
retain research and development personnel and the associated costs of such
personnel.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased by $160,000 or 100.0% to $320,000 in the three months
13
ended February 28, 2001 from $160,000 in the three months ended February 29,
2000. This increase was the result of increases in the intangible assets
associated with our acquisitions.
OPERATING INCOME (LOSS). As a result of the above factors, operating
income decreased by $3.6 million or 147.9% to $1.2 million loss in the three
months ended February 28, 2001 from $2.5 million in the three months ended
February 29, 2000. Operating income as a percentage of net sales decreased to
(10.4)% in the three months ended February 28, 2001 from 17.6% in the three
months ended February 29, 2000.
INTEREST INCOME. Interest income increased by $18,000 to $210,000 in
the three months ended February 28, 2001 from $192,000 in the three months ended
February 29, 2000. This income was due to our investment of proceeds from our
initial public offering.
INTEREST EXPENSE. Interest expense increased by $12,000 to $19,000 in
the three months ended February 28, 2001 from $7,000 in the three months ended
February 29, 2000. This increase was due to increased borrowings under our line
of credit.
INCOME TAXES. Income taxes decreased to a $405,000 tax credit in the
three months ended February 28, 2001 from a $1.0 million expense in the three
months ended February 29, 2000. This decrease is a result of decreased income
before income taxes. Income taxes (credits) as a percentage of pretax income
(loss) increased to 41% in the three months ended February 28, 2001 from 39% in
the three months ended February 29, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering in July, 1999, our primary source
of liquidity was through cash generated from operations and borrowings under our
revolving credit facility and term loans.
Cash flows used by operating activities were $167,000 in the three
months ended February 28, 2001 compared to $7.4 million provided by operating
activities in the three months ended February 29, 2000. This decrease was due
primarily to an increase in inventories and the income tax receivable and a
decrease in accrued expenses, partially offset by a decrease in accounts
receivable and an increase in accounts payable. The accounts receivable decrease
resulted primarily from collections. The increase in inventories resulted
primarily from purchases of printers in anticipation of model changes and
anticipated sales of connectivity and wireless products.
Cash flows used in investing activities were $1.7 million in the three
months ended February 28, 2001 compared to $6.9 million used in the three months
ended February 29, 2000. Included in cash flows used in investing activities in
the three months ended February 28, 2001 was $1.3 million in net purchases of
available-for-sale securities. In connection with split-dollar life insurance
arrangements with our majority shareholders, we have agreed to pay the
underlying life insurance premiums as a condition of continued employment.
Annual premiums on these policies are approximately $428,000 per year.
Cash flows used by financing activities were $201,000 in the three
months ended February 28, 2001 compared to cash flows provided by financing
activities of $123,000 in the three months ended February 29, 2000.
We currently have a $5.0 million general line of credit and a $10.0
million acquisition line of credit with Comerica Bank - California. Both lines
of credit are secured by substantially all of our assets
14
and are subject to certain financial covenants. In connection with the general
line of credit agreement, we have a $650,000 standby letter of credit sublimit
agreement of which $80,000 was outstanding at February 28, 2001. $246,000 was
outstanding against the general line of credit on February 28, 2001 and no
borrowings were outstanding against the acquisition line of credit. As of
February 28, 2001 $4,674,000 was available under the general line of credit and
all $10.0 million was available under the acquisition line of credit. The
acquisition line of credit expires on October 1, 2001. The general line of
credit has no expiration date.
We believe that cash generated by operating activities, the net
proceeds from our initial public offering and funds available under our credit
facility will be sufficient to finance our operating activities for at least the
next 12 months. To the extent that the funds generated from these sources are
insufficient to finance our operating activities, we would need to raise
additional funds through public or private financing. We cannot assure you that
additional financing will be available on terms favorable to us, or at all.
In March 2001, Troy established a stock repurchase program under which
Troy's common stock, with an aggregate market value up to $4.0 million, may be
acquired in the open market. As of April 11, 2001, Troy has purchased
approximately 45,000 shares of common stock in the open market, at an average
price of $3.27 per share, under the stock repurchase program. Approximately $3.8
million remains available for future common stock repurchases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or
to future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, exchange rates, commodity prices, equity prices and
other market changes. Market risk is attributed to all market sensitive
financial instruments, including long term debt.
We do not utilize derivative financial instruments. Accordingly, our
exposure to market risk is through our investments in available-for-sale
securities and our bank debt which bears interest at variable rates.
Available-for-sale securities consist of corporate debt securities.
Approximately all of these securities have contractual maturity dates of up to
one year. At February 28, 2001, market values approximated carrying values. Due
to the short-term maturities of these securities, management believes that there
is no significant market risk. At February 28, 2001, we had approximately $11.4
million in cash, cash equivalents and investments in available-for-sale
securities, and, accordingly, a sustained decrease in the rate of interest
earned of 1% would cause a decrease in the amount of interest earned of
$114,000. The bank debt is a revolving line of credit. All borrowings bear
interest based upon the reference rate per annum as announced by the bank (8.5%
at February 28, 2001) less .25%. At February 28, 2001, there was $246,000
outstanding under the line of credit agreement and, accordingly, a sustained
increase in the reference rate of 1% would cause an increase in the amount of
interest expense of $2,000.
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PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit
Number DESCRIPTION
-------- -----------
None.
(b) Reports On Form 8-K
-------------------
None.
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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.
TROY GROUP, INC.
/s/ Patrick J. Dirk
April 16, 2001 -------------------------------------------------
Patrick J. Dirk
Chairman, President and Chief Executive Officer
/s/ Del L. Conrad
-------------------------------------------------
Del L. Conrad
Chief Financial Officer
17