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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
JANUARY 31, 2002
OR
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
1300 OAKBROOK DRIVE
NORCROSS, GEORGIA 30093
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 448-9008
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE, TOGETHER WITH PREFERRED SHARE PURCHASE RIGHTS
(Title of Class)
-----------------
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of the
registrant (based upon the closing price of the registrant's common stock on
April 12, 2002 of $2.35 per share) was $28.9 million. As of April 12, 2002,
12,301,479 shares of common stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER THE REGISTRANT'S FISCAL
YEAR ENDED JANUARY 31, 2002 ARE INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K.
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TABLE OF CONTENTS
Page
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PART I
Item 1 Business ..................................................................................................... 1
Item 2 Properties ................................................................................................... 14
Item 3 Legal Proceedings ............................................................................................ 14
Item 4 Submission of Matters to a Vote of Security Holders .......................................................... 14
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ........................................ 16
Item 6 Selected Consolidated Financial Data ......................................................................... 17
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ........................ 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk ................................................... 25
Item 8 Consolidated Financial Statements and Supplemental Data ...................................................... 25
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................... 25
PART III
Item 10 Directors and Executive Officers of the Registrant ........................................................... 26
Item 11 Executive Compensation ....................................................................................... 26
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............... 26
Item 13 Certain Relationships and Related Transactions ............................................................... 26
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .............................................. 27
i
PART I
ITEM 1. BUSINESS
OVERVIEW
T/R Systems designs, develops and markets innovative software and
hardware applications designed to help organizations manage, store, distribute
and produce digital documents. We offer three main digital document
applications:
- the MicroPress(R), our digital document production output
management system;
- Digital StoreFront(TM), our web-based print job submission,
management and control application; and
- M@estro(TM), our distributed output, workflow and device
management application.
In the latter half of the fourth quarter of fiscal 2002, we began
shipping to certain of our original equipment manufacturer, or OEM, resellers
the next generation of the MicroPress, the MicroPress X Series, which consists
of the MicroPress SX(TM), the MicroPress DX(TM) and the MicroPress MX(TM). The
MicroPress X Series is designed to make our flagship product, the MicroPress,
accessible to a broader range of customers and to simplify the sales process for
our OEM resellers. All three models of the MicroPress X Series provide powerful
make-ready functionality, which enables users to make job and print level
changes to print-ready files without native application software. During the
first half of fiscal 2003, we expect to introduce the X-Series to all of our OEM
resellers.
Also during fiscal 2002, we developed and began shipping Digital
StoreFront, which simplifies print job submission and proofing over the
Internet. Digital StoreFront allows print center customers to submit print jobs
directly to a print center, review proofs of their job and receive an order
confirmation and an estimate of the cost of the job over the Internet or a
network. Once a job is submitted, Digital StoreFront creates a job ticket and
can automatically route the job to a wide range of printing devices or systems
or hold the job for scheduling.
We also entered into additional OEM reseller relationships in fiscal
2002. During fiscal 2002, we announced new relationships with Canon Inc., Lanier
Worldwide, Inc., M.G.I. SA and Oce-USA, Inc., as well as an agreement with Xerox
Corporation, under which Xerox has a non-exclusive right to distribute M@estro
worldwide. Additionally, we continued to distribute our products through our
existing OEM reseller relationships with Hitachi Koki Imaging Solutions, Inc.,
IKON Office Solutions, Inc., Kyocera Mita America, Inc., Minolta Co., Ltd.,
Ricoh Corporation and Toshiba America Business Solutions, Inc., as well as
through our network of independent dealers.
T/R Systems was incorporated in Georgia in September 1991. Our
principal executive offices are located at 1300 Oakbrook Drive, Norcross,
Georgia 30093, and our telephone number at that address is (770) 448-9008.
INDUSTRY BACKGROUND
Historically, document output needs were met by costly stand-alone,
monochrome print devices based on analog technology that were dedicated to a
single print, copy or scan function and that produced output which had to be
distributed manually. Since the advent of digital document technologies and with
the proliferation of personal computers, desktop publishing software, digital
photography and network computing, documents are increasingly being managed in
digital formats. Faster processing speeds, expanded system memory and increased
storage capacity have combined with advanced software packages to enable complex
image processing and manipulation, distribution and production of digital
documents. These new digital technologies have improved control over the
document creation process, enabled documents to be produced more quickly and
efficiently, and led to increased demand for additional capabilities.
Additionally, advances in digital document technologies have resulted in an
increase in the use of digital print devices and growth in the typical number of
devices utilized within an organization. Finally, the proliferation of
Internet-based business processes has furthered the need to transfer and manage
documents over the Internet.
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These advances in digital document and computer technologies, as well
as Internet-based business processes, have resulted in a shift from the market
for simple document output produced by stand-alone devices to a more advanced
market for output management. Increasingly, users in organizations of all sizes
are looking for faster and more cost-effective methods of managing, storing,
distributing and producing digital documents and managing the devices used to
print those documents. These needs have created the output management market,
which involves the management of processes and printers/copiers used in the
production and distribution of documents.
The users of output management solutions include:
- corporate entities-- organizations as a whole, as well as
their in-house print shops and functional departments;
- educational institutions--primary, secondary and higher
education institutions, including colleges and universities;
- facilities management companies--service providers that manage
print operations for other entities;
- print-for-pay organizations--quick printers, printing service
bureaus, commercial printers and offset printers that provide
printing and/or copying services for outside entities;
- government entities--local, city, state and federal agencies,
as well as public utilities; and
- book publishers--organizations that provide publishing
services, including on-demand book publishing.
Within the output management market, requirements can vary depending on
the needs of the user and the requirements of specific jobs. Often, corporate
in-house print shops, facilities management companies, print-for-pay
organizations and book publishers require production output management
capabilities, which allow them to store, manage and print documents quickly and
in desired quantities. The requirements of these users can vary greatly
depending on production volumes and the number of print devices they utilize.
Certain customers are focused on distributed output management, which is the
ability to manage document distribution and workflow, as well as the print
devices used to produce hard copies of digital documents. The proliferation of
Internet-based business processes now requires many organizations to implement
Internet-based document management solutions, which allow them to manage,
control and track the transfer of documents over the Internet or a network,
including submitting jobs to production facilities. Finally, many users may have
multiple requirements, which could potentially include the need for production
output management, distributed output management and Internet-based document
management, or any combination of these capabilities, all within the same
environment.
T/R SYSTEMS' SOLUTION
T/R Systems' applications are uniquely positioned to address the needs
of customers throughout the output management market. Our applications enable
organizations to effectively manage the storage, distribution and production of
documents from creation, which could include the conversion of hard copy
documents to digital documents, to delivery, whether in hard copy or digital
format.
Production output management needs are met primarily by the MicroPress,
our digital document production output management system. The MicroPress uses
industry-standard open-architecture to provide a cost-effective, high-speed
digital document production system capable of producing complex, variable
length, color and monochrome images. The MicroPress X Series provides users a
broader range of options from a simple print management application to a
complete production output system. Our Digital StoreFront application simplifies
the process of submitting, tracking and routing documents and files over the
Internet or a network. M@estro provides organizations with the ability to manage
the distribution and workflow of documents over the Internet or a network, as
well as the ability to manage print devices on a network.
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T/R Systems' solution offers the following primary benefits:
Highly Functional. Our applications offer a high degree of
functionality in the areas of clustering, workflow management, job management
and document processing. Our clustering capabilities provide the ability to
distribute a document among multiple print devices and print at speeds several
times faster than a single device could produce independently, regardless of
page complexity or variability. The workflow management capabilities of our
applications enable a user to manage a document from creation in a native
application until final output, providing for smooth and efficient document
processing. The job management functionality in our products enables users to,
among other things, submit and track jobs over the Internet or a network and
provides the ability to route a job to a specific location or locations,
including archiving jobs. The document processing capabilities of our
applications allow for modifications to be made to a document after it is
submitted from its native application, including the insertion of variable data,
document merging, color calibration, electronic collation and imposition.
Scalable, Configurable and Customizable. Our applications are scalable,
configurable and customizable. Users of the MicroPress can add color, monochrome
or wide-format print devices, as well as additional distribution locations. The
MicroPress SX can route output to one to four print devices, while the
MicroPress DX can cluster two to four print devices and the MicroPress MX can
support up to twelve devices, including multiple clusters with up to eight
devices in a single cluster. Additionally, users can easily and cost-effectively
upgrade from an SX to a DX and from a DX to an MX. M@estro can manage up to 255
print devices and distribute output to destinations consisting of networked
print devices, the MicroPress, e-mail, network folders and FTP sites, which are
Internet or intranet locations designed specifically for uploading and
downloading files. Our products can also be customized to meet a user's specific
requirements. For example, each Digital StoreFront is customized during its
implementation to meet the workflow and business needs of each specific
customer. In addition, users of any of our applications can add our other
applications and increase functionality seamlessly, without having to replace
existing equipment and losing the value of their original investment.
Flexible and Reliable. Our applications allow users to manage,
distribute and produce documents of varying sizes and complexities across
multiple locations or to a single location regardless of whether that location
is a print device, network folder, e-mail address or FTP site. Additionally, the
MicroPress supports mission-critical print production applications by
recognizing available resources and automatically rerouting print jobs if
utilized print devices become inoperable, as well as by providing full error
recovery, thus ensuring that every page is printed.
Easy to Use. Our applications are designed for ease of managing
documents and workflow. We design our applications to require minimal training.
Additionally, the seamless integration of our applications with one another
provides for easy transition from the functions of one application to another.
Also, Digital StoreFront is designed so that, once implemented, users submitting
jobs to print providers can easily navigate the application without training,
and much of the processing of the job can be automated to increase a print
provider's efficiency. Finally, we provide user-friendly documentation, manuals
and online help.
OUR STRATEGY
T/R Systems' objective is to be the leading provider of digital
document applications. To achieve this objective, our strategy includes the
following key elements:
Maintain and Expand the Leadership Position of our Software
Functionality. We believe that we have established a leading position based on
the functionality of our clustering, web storefront and post-RIP document
processing technologies. Post-RIP document processing technologies permit the
processing of a document after it has been translated from the language of the
document's native application to the language of the printer using our RIP, or
raster image processor, software. Post-RIP processing provides for faster, more
efficient document processing. We will continue to leverage our product
development efforts by developing new, and improving existing, technologies to
provide users with the most advanced and robust digital document management,
distribution and production products available.
Leverage Our Distribution Relationships to Expand Our Business. As of
January 31, 2002, we distributed our products internationally through our OEM
reseller relationships with Hitachi, IKON, Kyocera Mita, Lanier, M.G.I.,
Minolta, Ricoh and Toshiba, and through a network of independent dealers.
Additionally, we have entered into a
3
development agreement with Canon and anticipate that Canon will begin
distributing our products late in the first quarter of fiscal 2003. Also during
the fiscal year ended January 31, 2002, we entered into agreements with Xerox,
under which Xerox has a non-exclusive right to distribute M@estro worldwide, and
Oce, for the development of connectivity of an Oce print device with the
MicroPress. Our intention is to continue to expand these OEM reseller
relationships and leverage their existing distribution infrastructures with
products like the MicroPress X Series, which allows us to reach the low-, mid-
and high-volume production output management customers of our OEM resellers,
while simplifying their selling process. Additionally, we intend to further
leverage our OEM resellers' established international distribution
infrastructures to expand the sales of our products outside North America,
specifically in Europe and Asia. Finally, as we develop new products, such as
Digital StoreFront, it is our intention to introduce them through our OEM
reseller channels to expand the exposure of these new products.
Develop New Applications and Features. As the market for digital
document technologies continues to evolve and expand, our intent is to continue
to add additional applications and functionality to existing applications, as
well as develop additional applications that will work in concert with our
existing applications, in order to maintain and expand our market position. T/R
Systems intends to continue to focus on the needs of users of its solutions, as
well as the evolution of the markets for digital document management and
distribution. For example, Digital StoreFront was developed largely in response
to feedback from customers, which led us to modify our existing e-Ticket(TM)
product to include an implementation of a customized web storefront and other
features to meet the specific needs of each customer. Our ability to continue to
introduce new applications and features that complement our existing products
will be critical to our future success.
Increase Sales Opportunities Through Product Integration. Our products
are designed to seamlessly integrate with each other to meet the complex output
management needs of our customers. The MicroPress, M@estro and Digital
StoreFront, or any combination of these products, can work in concert with one
another to improve and simplify an organization's ability to manage, store,
distribute and produce digital documents. The compatibility of our products with
one another allows us to market them as an integrated solution, which provides
the opportunity to increase sales to existing customers, as well as increase the
appeal of our products to potential customers.
Expand Internet Functionality. Our Digital StoreFront application
currently offers electronic job submission over the Internet or a network and
automatic processing of that job. We intend to continue to develop this and
other products for customers that require Internet-based document management
solutions.
Focus on Core Technologies and Build on Industry-Standard
Open-Architecture Technologies. Our expectation is to continue to use
industry-standard technologies, such as Microsoft(R) Windows(R) software, the
latest Intel(R) Pentium(R) processors and Global Graphics' ScriptWorks(R) raster
image processor, on an ongoing basis. Our belief is that utilizing
standards-based open systems enables us to bring new product features to market
more quickly and to permit functionality with a wide variety of computer
networks, devices and complementary software. In addition, this approach allows
us to quickly upgrade to next-generation computer hardware and software systems,
which then allows us to focus on developing the core technologies that
differentiate our products.
OUR PRODUCTS
T/R Systems offers three main digital document management, production
and distribution applications: the MicroPress, Digital StoreFront and M@estro.
Each of these stand-alone applications can be seamlessly integrated with our
other applications. The MicroPress, which is the foundation of our product
offerings, has historically accounted for the majority of our revenue. During
fiscal 2002, we introduced the MicroPress X Series, which consists of three
different models, designed to make the MicroPress accessible to a broader range
of customers. Digital StoreFront and M@estro were also introduced during fiscal
2002 and accounted for less than five percent of our revenue in fiscal 2002.
MicroPress
The MicroPress is a universal server providing digital document
production and job management. The MicroPress is a software and hardware
solution that is capable of managing multiple print devices as an integrated
document production system. Additionally, the MicroPress provides a seamless
interface between document creation and submission tools and the connected
output devices.
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In the latter half of the fourth quarter of fiscal 2002, we introduced
the MicroPress X Series in order to make the MicroPress a cost-effective
alternative for a broader range of customers and to simplify the selling
process. The MicroPress X Series consists of three models, the MicroPress SX,
the MicroPress DX and the MicroPress MX. The MicroPress SX drives up to four
black-and-white or color print devices while offering full make-ready
capabilities. The SX is tailored to meet the needs of organizations that have
low- to mid-volume production output requirements but that still require the
flexibility and functionality of a robust document production management system.
The MicroPress DX is designed for organizations with mid- to high-volume
production needs. With the DX, an organization can cluster two to four black and
white or color print devices, enabling it to parse large jobs across multiple
print devices, thus maximizing productivity. The DX offers full make-ready
functionality and can be easily and cost-effectively upgraded as an organization
expands its production requirements. The MicroPress MX is designed for mid- to
high-volume organizations with complex, mission-critical document output needs.
The MicroPress MX supports up to twelve black-and-white or color print devices
and provides advanced software functionality in a fully scalable production
output system.
The MicroPress comes equipped with software functionality that shifts
the burden of printing and image management tasks from an individual workstation
to a centralized server by RIPing the document and providing for additional
processing and management of the document in a post-RIP environment. The
software functionality offered by the MicroPress includes:
- Make-ready capabilities. All three models of the MicroPress X
Series come equipped with extensive make-ready capabilities
that enable users to make job- and page-level changes to a
file after it has been RIPed. The job-level make-ready
capabilities provide the ability to manipulate how a document
appears when printed, including the ability to merge pages
from separate files, insert, delete or replace pages, number
pages, impose the position of the print on the page and apply
variable information for job personalization. The ability to
manipulate individual pages within a document includes the
capability to cut, copy and paste page content, add lines,
arrows or objects to a page, clean and straighten pages and
reformat page content to accommodate punching, stapling or
other finishing options. Additionally, the MicroPress X Series
includes color management tools to ensure consistent and
accurate color on all pages and across multiple color print
devices.
- Mission-critical capabilities. The mission-critical
capabilities of the MicroPress include universal and cluster
printing, as well as error recovery capabilities. Universal
printing is the ability to route single or multiple jobs to
any number of disparate, connected print devices without
reprocessing the job for a specific print device. Cluster
printing is the ability to route one or more jobs to multiple
similar devices connected to the MicroPress and run those
devices as one high-speed device. Cluster printing
capabilities come standard on the MicroPress DX and the
MicroPress MX and are available as an option to the MicroPress
SX. The error recovery capabilities of the MicroPress X Series
include the ability to re-route a job to one or more connected
print devices if any connected print device becomes
inoperable, as well as the ability to recover non-printed
pages. Additionally, the MicroPress is capable of notifying
the user of certain events, including job initiation,
completion or failure.
- Additional functionality. In addition to the make-ready and
mission-critical capabilities of the MicroPress, the
MicroPress MX comes equipped with additional software
functionality including the ability to script jobs, the
ability to manipulate scanned input and the ability to control
jobs remotely over the Internet or a network. Job scripting,
which is done by our TRueScript(TM) software application, is
the ability to write a customized set of instructions to
process a job in the MicroPress and to save this set of
instructions for use on future jobs. TRueScript is also
available as an option for the MicroPress SX and the
MicroPress DX. The ability to manipulate scanned input is
provided by our MicroImager(TM) application. MicroImager
provides the ability to process, archive and distribute
scanned input from a compliant scanner. MicroImager is also
available as an option for the MicroPress SX and the
MicroPress DX. Finally, the MicroPress MX offers e-PSM, a
software application used to remotely access and control the
MicroPress over the Internet or a network.
The MicroPress connects to monochrome and color digital print devices
either by a direct connection or by a network connection. For a direct
connection, cabling and a T/R Systems Connectivity Kit, consisting of our
PrintLink(TM) and enabling software, are used to allow the MicroPress to
interface with supported third-party print devices. For a network connection,
enabling software is used to allow the MicroPress to interface with supported
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third-party print devices over a network. The MicroPress currently connects to
print devices from Canon, Hitachi, Kyocera Mita, Minolta, M.G.I., Oce, Ricoh,
Toshiba and Hewlett-Packard. Additionally, we currently offer two branded
third-party print devices: the PrintStation(TM) 040, a 40 page-per-minute
monochrome print device, and the PrintStation 070, a 70 page-per-minute
monochrome print device.
Digital StoreFront
Digital StoreFront is a fully automated web storefront application that
simplifies the process of submitting print jobs over the Internet. Digital
StoreFront allows for on-line proofing and automatic routing of a job to a print
device or production schedule to help maximize device utilization by the print
provider. Each Digital StoreFront is sold with a custom implementation, which
customizes the application to meet workflow, job-management and customer needs
of each print provider. Digital StoreFront is licensed, hosted and controlled by
the print provider, which allows them to further customize their storefront as
needed and enables them to maintain the confidentiality of their customers'
documents. Digital StoreFront's fully automated processes allow the customers of
print providers to submit files in their native format over the Internet. A
proof of the document is automatically prepared for the customer to review once
the job is submitted and an estimate of the cost of the job is provided
automatically. Once the customer's specifications for the job are received, a
job ticket is then prepared with all the details of the job and it can be
automatically queued into the print provider's workflow. Digital StoreFront can
automatically route files to any PDF or postscript-compliant printing system,
including the MicroPress. Optional features can be added to Digital StoreFront
to, among other things, allow for unique pricing for print jobs, provide an
on-line catalog, allow credit card billing, design business cards and integrate
Digital StoreFront with accounting and billing systems.
M@estro
M@estro provides distributed output management and device
administration and enables digital document distribution over the Internet or a
network. M@estro is configurable and scalable, providing for the management of
up to 255 print devices, as well as distribution of output to destinations
consisting of networked print devices, the MicroPress, e-mail, networked folders
and FTP sites. M@estro employs our patented cluster printing technology for the
distribution of documents across managed print devices. With M@estro, users can
manage print devices on their networks, monitor consumables levels on those
devices, establish custom workflows across the network, cluster multiple
network-connected print devices and manage document distribution routes.
M@estro is available as a stand-alone application or can be integrated
with our other applications to meet the diverse output management needs of
organizations of all sizes.
Other Products
In addition to these three core products, we offer a digital imaging
software application, MicroImager, which scans hard-copy documents into a
digital format and provides the ability to process, archive and distribute the
newly created digital documents to the appropriate destination. MicroImager,
when combined with a compliant scanner, can create digital documents from
scanned input that can be modified to ensure the quality of the presentation of
the new scanned document. Once the scanned document has been edited, it can be
distributed to destinations, such as print devices, document repositories, FTP
sites, e-mail or the MicroPress. MicroImager is sold as an add-on to the
MicroPress and M@estro, or as a stand-alone application.
MANUFACTURING
We outsource the manufacturing of many of the hardware components of
our products. These components include PrintLinks and the circuit boards
incorporated in our products. Additionally, we assemble customized servers for
the MicroPress. T/R Systems then integrates hardware components with internally
developed software to create the various configurations of the MicroPress. We
also resell complete printing devices and scanners purchased from third-party
manufacturers under our brand name as part of the MicroPress. Before shipping
products to customers, we test both the hardware and software to assure
successful integration.
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SALES AND MARKETING
In fiscal 2002, T/R Systems distributed the MicroPress, Digital
StoreFront and related products in North America and internationally through
distribution relationships with Hitachi, IKON, Kyocera Mita, Lanier, Minolta,
M.G.I., Ricoh and Toshiba, as well as through a network of independent dealers.
We actively seek to enter into, and continue to expand, OEM reseller
relationships with established printer and copier manufacturers. During fiscal
2002, we entered into new OEM relationships with Canon, Lanier, M.G.I. and Oce,
as well as with Xerox. These new relationships are in addition to our existing
relationships with Hitachi, IKON, Kyocera Mita, Minolta, Ricoh and Toshiba.
Hitachi and Minolta resell the MicroPress worldwide through their dealer
networks. IKON, Lanier and Ricoh currently sell our products in North America
and Europe. Our development and distribution agreement with Toshiba permits
Toshiba to resell the MicroPress connected to its print devices through its
dealer network in North and South America. Under our software development and
license agreement with Xerox, Xerox has a non-exclusive right to distribute
M@estro worldwide. Our agreement with Oce for the development of connectivity of
an Oce print device with the MicroPress contemplates distribution of this
product. Also during fiscal 2002, we entered into a development agreement with
Canon, and during the first quarter of fiscal 2003, entered into a distribution
agreement with Canon's subsidiary, Canon USA, Inc., under which Canon USA will
distribute the MicroPress connected to certain Canon print devices in the United
States. We anticipate that Canon USA will begin distributing the MicroPress
under this agreement late in the first quarter of fiscal 2003.
Our sales force consists of regional managers whose principal duties
are to facilitate and help close sales through the dealer channels of our OEM
resellers and through independent dealers. As of January 31, 2002, we had twelve
regional managers throughout the United States, one in Canada, one in France,
one in Germany and one in the United Kingdom.
Dealers sell our products to end users and service our products in
local geographical areas. In the United States, these dealers typically are:
- office products, computer and peripheral resellers;
- copier or graphic arts dealers; or
- independent service organizations that provide customized
software and hardware solutions and specialize in providing
services that cannot be obtained through product
manufacturers.
During fiscal 2002, Minolta accounted for 22.4% of our total revenue.
Sales shipped internationally were 30.0% of total revenue in fiscal
2002, 19.1% of total revenue in fiscal 2001 and 21.6% of total revenue in fiscal
2000. Sales shipped internationally to customers in any one country did not
exceed 10% of total revenue in any of the last three fiscal years, except that
sales shipped to customers in Japan represented 18.9% of our total revenue in
fiscal 2002. For additional information on our geographic segments, see note 10
of the notes to our consolidated financial statements included elsewhere in this
report.
As of January 31, 2002, we had a backlog of firm orders totaling
$45,000. These orders were filled in the first quarter of fiscal 2003. No such
backlog existed at January 31, 2001.
As of January 31, 2002, T/R Systems maintained a marketing organization
consisting of five people who are responsible for product management, market
research, branding, advertising, public relations, events, lead management and
channel marketing. We rely upon industry specific research and customer
interaction to assist in marketing planning. Market awareness is enhanced
through advertising, public relations and trade shows. Historically, a
cooperative marketing program has been offered to independent dealers to create
additional market awareness. Our belief is that our strategic alliances,
including our OEM reseller relationships, further enhance market awareness. In
addition, we intend to continue expanding market awareness of our products
through consistent promotion of our T/R Systems, MicroPress, Digital StoreFront
and M@estro brands in marketing events, advertising and public relations
activities.
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CUSTOMER SERVICE
T/R Systems provides an array of services to support and enhance our
products, including customer support, dealer and end-user training, installation
services, customized product implementations and product-related consulting. We
believe that providing quality customer support to our OEM resellers, dealers
and end users is critical to customer satisfaction. OEM resellers and
independent dealers are considered the primary support contact for end users,
with T/R Systems performing secondary support. We offer service plans, generally
for one to three years, that entitle end users to call our customer support
organization for assistance. We provide training for MicroPress users at our
training facilities and at users' locations. Each Digital StoreFront sale
includes an implementation, which customizes the application to meet workflow,
job-management and customer needs of each print provider. Our product-related
consulting services focus on providing customized software applications that
meet the needs of end users, including additional customization of Digital
StoreFront after implementation.
RESEARCH AND DEVELOPMENT
T/R Systems has devoted a significant amount of resources to research
and development. At January 31, 2002, over one-third of our employees were
employed in research and development. Research and development expenses were
$7.0 million for fiscal 2002, $5.1 million for fiscal 2001 and $3.5 million for
fiscal 2000.
The markets for our products are characterized by rapid change and we
believe that there are three factors that are critical to the success of our
research and development efforts. We must:
- accelerate the rate of product line expansion in terms of
device connectivity and system features;
- continue to develop software applications and feature
enhancements that leverage performance gains realized through
the release of new generations of software and hardware; and
- attract and retain qualified technical professionals.
INTELLECTUAL PROPERTY
To be successful, we depend, in part, on the proprietary technology in
our products. T/R Systems relies on a combination of patent, copyright, trade
secret and trademark laws, and nondisclosure and other contractual restrictions,
to protect our proprietary rights. Trade secret and copyright laws provide only
limited protection of our software, documentation and other written materials.
We hold 14 United States patents, two European patents and one patent in
Australia related to cluster printing and print engines and, as of January 31,
2002, had filed for an additional 16 patents in the United States and abroad
which have not yet been issued. In addition, to protect our intellectual
property and proprietary rights, we:
- enter into confidentiality and nondisclosure agreements with
our employees, consultants and OEM resellers;
- limit access to, and distribution of, our software and other
proprietary information; and
- employ hardware security devices and unique key codes to limit
unauthorized use of our software.
Despite the efforts taken to protect our intellectual property, we cannot assure
you that we will be able to do so. Any failure to protect our intellectual
property could harm our business.
COMPETITION
Our output management applications compete with a variety of other
digital document management and production solutions on various levels.
Competition for output management solutions is based primarily on product
performance, functionality, price and customer service. Some of our competitors
are substantially larger than we are, with greater financial, technical,
marketing and other resources, more established sales channels, greater name
recognition and broader product lines. Our present or future competitors could
introduce products with capabilities identical to or greater than ours. Further,
these competitors may have much greater financial resources than we do, which
could enable them to sell competing products at prices less than we charge.
8
Competition for the MicroPress can be categorized into the following
four groups:
- manufacturers such as Xerox, which currently offer digital
copiers that operate as printers through the use of RIPs and
controllers, as well as host print computers;
- high-end electronic printing system vendors that are currently
selling systems primarily to commercial and large in-house
printers;
- RIP and controller board providers, whose products enable
digital copiers to also function as printers, and which
typically operate as OEMs to major, international printing
equipment companies; and
- companies that have products with features similar to our
clustering concept.
At mid- to high-volume levels, the MicroPress MX and DX compete with
high-end digital printer/copiers using RIPs and controllers, commercial printing
systems and products with features similar to our clustering concept. At lower
volume levels, the MicroPress SX competes with RIP and controller providers. We
do not believe that any of these products offer the features and functionality
of the MicroPress X Series.
Digital StoreFront competes with similar available offerings primarily
based on functionality and price. The market is highly fragmented and there is
no one dominant competitor. Many of these similar offerings are sold as
Application Service Provider, or ASP, systems, in which the vendor hosts the
storefront for the print provider and charges a periodic or per-transaction fee.
T/R Systems believes Digital StoreFront has a competitive advantage over ASP
systems in that print providers license and host Digital StoreFront, which
enables them to modify their storefront as needed, better ensure the
confidentiality of their customers' information and eliminate transaction fees.
Additionally, we do not believe that any of these similar products, whether or
not based on an ASP system, offer the functionality and customizability at the
price that Digital StoreFront offers.
M@estro faces competition from some of the manufacturers of products
that the MicroPress currently competes against. Additionally, there are
currently software products from other manufacturers that offer device
management across a network. However, T/R Systems does not believe that any of
these products offer the full range of features and functionality that are
offered with M@estro.
We believe that none of our competitors is dominant in our market.
Further, we do not believe that any of our competitors have a competitively
priced product that currently offers all of the capabilities of our
applications. Additionally, we believe that none of our competitors provides a
solution as complete and fully integrated as we offer. However, in the future,
these or other competitors could develop similar or more advanced products than
ours.
EMPLOYEES
As of January 31, 2002, we had a total of 113 employees, substantially
all of whom were full-time. Of our employees, 39 were in research and
development, 35 were in sales and marketing and 17 were in customer services,
with the remaining 22 in operations, finance and administration. None of our
employees is represented by a labor union, and we have never experienced a work
stoppage. We consider our relations with our employees to be good.
RISK FACTORS
WE HAVE A HISTORY OF LOSSES, AND WE MAY NOT BE ABLE TO ACHIEVE OR MAINTAIN
PROFITABILITY.
During fiscal 2002, T/R Systems incurred an operating loss of $13.4
million. Although we had operating income of $2.5 million in fiscal 2001 and
$585,000 in fiscal 2000, prior to fiscal 2000, we incurred operating losses in
each fiscal year since our inception. We had an accumulated deficit of $19.7
million as of January 31, 2002, as a result of the fiscal 2002 loss and prior
years' losses. We may not be achieve or maintain profitability in the future.
Despite cost-saving measures taken in fiscal 2002, including reductions in
headcount, we continue to make significant investments in research and
development, sales and marketing and our operating infrastructure. If we do not
increase our revenue to a level that exceeds this spending, we will continue to
have operating losses. If our revenue does not grow sufficiently, we will need
time to further scale back expenses. If we are not able to react quickly enough
to unanticipated decreases in revenue, we will not be able to achieve
profitability.
9
OUR OPERATING RESULTS HAVE FLUCTUATED AND WE EXPECT THEM TO CONTINUE TO
FLUCTUATE, SO YOU SHOULD NOT RELY ON HISTORICAL OPERATING RESULTS AS AN
INDICATOR OF FUTURE PERFORMANCE.
Our operating results have fluctuated from quarter to quarter and year
to year in the past and we expect them to continue to fluctuate in the future.
For example, we reported operating income in the first three quarters of fiscal
2001 followed by operating losses in the final quarter of fiscal 2001 and in
each quarter of fiscal 2002. As a result, you should not rely on our historical
operating results as an indicator of future performance. We may experience
further fluctuations in our operating results because of:
- competitive market conditions for our current products;
- the level of acceptance of new products we introduce;
- the general level of sales of printer/copiers which connect to
our products;
- the cost and availability of components of our products;
- general economic conditions which impact the demand for
information technology equipment; and
- variations in the proportions of hardware and software in
systems we sell.
WE HAVE BEEN PUBLIC ONLY A SHORT PERIOD OF TIME AND OUR STOCK PRICE HAS BEEN AND
MAY CONTINUE TO BE VOLATILE.
Our initial public offering was completed in January 2000. Since then,
the market price of our common stock has been highly volatile and subject to
wide fluctuations. Additionally, in recent years, the stock market in general,
and the stock prices of technology companies in particular, have experienced
extreme price fluctuations, sometimes unrelated to their operating performance.
These market fluctuations may result in a material decline in the market price
of our common stock. In addition to these market fluctuations, there are many
factors that are likely to cause the price of our common stock to fluctuate,
including:
- fluctuations in our quarterly operating results;
- failure of our quarterly operating results to meet the
expectations of investors;
- announcements of technological innovations, new products or
significant agreements by us or our competitors;
- changes in stock market analysts' recommendations regarding
us; and
- future sales of significant amounts of our common stock.
SINCE MANY OF THE POTENTIAL END USERS IN OUR MARKET ARE SMALL BUSINESSES, IF
THEIR BUSINESSES FAIL OR THEY CANNOT OBTAIN THIRD-PARTY FINANCING, OUR SALES
WILL DECLINE.
Many of the potential end-user customers in our market are small
businesses and run a greater risk of business failure than large businesses,
particularly in a weak economy. If their businesses fail, we will lose potential
sales and our revenue may decrease. Further, if these customers are unable to
obtain acceptable third party financing, they may not purchase our products.
Some of our competitors are able to use their significant financial resources to
offer more attractive financing terms than the financing terms otherwise
available to purchase our products. These factors could limit or reduce our
customer base, causing our sales to suffer.
WE HAVE HISTORICALLY RELIED ON SALES OF ONE PRODUCT AND DO NOT HAVE AN ALTERNATE
SOURCE OF SIGNIFICANT AMOUNTS OF REVENUE IF DEMAND FOR THIS PRODUCT DECLINES.
To date, substantially all of our revenue has been generated from one
product, the MicroPress. If potential customers choose to purchase competing
products, we will lose a substantial amount of revenue. Further, our revenue may
be adversely impacted if our customers choose to defer their purchases of our
products. Additionally, this
10
product may not be profitable for other reasons, including pricing pressures or
manufacturing difficulties. If this product is not profitable, we will not be
profitable.
WE CANNOT BE SURE THAT ANY OF OUR NEW PRODUCTS WILL BE COMMERCIALLY SUCCESSFUL,
OR THAT SALES OF ONE PRODUCT WILL NOT NEGATIVELY IMPACT SALES OF ANOTHER.
In the past, we have introduced products that have not been
commercially successful. For example, in fiscal 2001, we introduced e-Ticket, an
Internet-based document submission and catalog application. During fiscal 2002,
we made available two new products, Digital StoreFront, a fully-automated web
storefront application that is designed to improve upon e-Ticket, and M@estro, a
software application providing distributed output management and device
management. Although these products are now commercially available, to date, our
sales of these products have not been significant. There can be no assurance
that these products will receive wide-scale commercial acceptance. Failure of
these products to achieve commercial acceptance may result in harm to our
reputation, increased costs or lost sales.
Additionally, during the fourth quarter of fiscal 2002, we began
shipping a new series of our flagship product, the MicroPress. We now ship the
MicroPress SX and the MicroPress DX, in addition to the MicroPress MX, which
replaces the previous version of the MicroPress. Although we have begun shipping
these products, our new MicroPress series may not be widely commercially
accepted. Additionally, sales of one model of the MicroPress may result in lost
sales of another model of the MicroPress. The average selling prices and margins
of the MicroPress SX and the MicroPress DX are substantially lower than those of
the MicroPress MX. If we lose sales of the MicroPress MX to the MicroPress SX or
the MicroPress DX, we will need to sell more units of the MicroPress SX and the
MicroPress DX in order to maintain our overall total revenue and operating
margin. In that case, if our unit volumes do not increase adequately to offset a
shift to the lower-priced, lower-margin models of the MicroPress, our total
revenue and overall operating results will be adversely impacted.
WE DERIVE AN INCREASINGLY LARGE PERCENTAGE OF OUR REVENUE FROM OUR OEM
RESELLERS, A LARGE PERCENTAGE OF WHICH IS DERIVED FROM A FEW OEM RESELLERS; A
LOSS OF ANY OF THESE RESELLERS WOULD REDUCE OUR REVENUE AND OUR RESULTS OF
OPERATIONS WOULD SUFFER.
Since fiscal 1998, our OEM resellers have represented a significant and
increasing portion of our revenue. In fiscal 2002, our largest OEM reseller
accounted for 22.4% of our total revenue, while sales to all of our OEM
resellers accounted for 64.2% of our revenue. Sales to our OEM resellers
accounted for 62.1% of our revenue in fiscal 2001 and 46.4% in fiscal 2000. If
we lose one of our OEM resellers or they decrease orders of our products, our
revenue will decline and our results of operations will suffer. An OEM reseller
could decrease its orders for our products if demand for its products declines
or it chooses to purchase a competitor's products.
BECAUSE OUR PRODUCTS DEPEND ON SOFTWARE LICENSED TO US BY THIRD PARTIES, ANY
LOSS OF ANY OF THESE LICENSES WOULD RESULT IN INCREASED COSTS AND PRODUCTION
DELAYS.
Our products depend on software licensed to us on a non-exclusive basis
by third parties. If those parties fail to continue to license their software to
us or to support their software, we would incur costs and experience delays of
at least several months in integrating alternate software into our products.
This would result in diversion of our research and development resources, delays
in production and could result in lost revenue and harm to our reputation. In
some instances, there are a limited number of suppliers of specialized software
and we could have difficulty in obtaining an alternate supplier.
NEW RELEASES BY OUR SOFTWARE SUPPLIERS OR THE DEVELOPMENT OF SUPERIOR SOFTWARE
BY THEIR COMPETITORS COULD RESULT IN DELAYS IN SHIPMENT OR LOSS OF REVENUE.
We may be required to expend significant time and resources to make our
systems compatible with new releases by our software suppliers, which could
result in product shipment and revenue recognition delays. In addition, if the
competitors of our suppliers develop superior software, our products may not
achieve market acceptance and we will lose revenue unless we obtain a license
for the superior software. We may not be able to obtain new software licenses on
commercially reasonable terms, or at all.
11
IF THIRD-PARTY SUPPLIERS OF EQUIPMENT FAIL TO DELIVER, WE COULD INCUR
SIGNIFICANT COSTS AND DELAYS IN PRODUCT SHIPMENT.
We purchase hardware, such as print devices and scanners, from
third-party manufacturers and resell it under our brand as part of our
applications. In addition, we outsource the manufacturing of some of the
hardware components of our products. If those third party manufacturers fail to
deliver these products or components, we would have to find alternate suppliers,
would incur significant development costs and could experience delays in product
shipments. Failure to find alternative suppliers of other components could
affect our product availability and sales. Additionally, since we purchase many
parts and components from manufacturers in Asia, instability in this region
could impact the pricing or availability of these products.
OUR MARKET IS EXTREMELY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE GREATER
MARKET PRESENCE AND RESOURCES THAN WE HAVE.
The market for our products is extremely competitive and we expect
competition to increase. Many of our existing and potential competitors have
longer operating histories, significantly greater resources and greater name
recognition than we have. As a result, these competitors may have an advantage
over us in gaining market acceptance, may respond more effectively to changes in
the market and may be able to devote greater resources to the development,
promotion, sale and support of their products. Increased competition could
result in a loss of revenue as a result of loss of market share and significant
price reductions, which would reduce our profits.
A SUBSTANTIAL PORTION OF OUR REVENUE IS DERIVED FROM INTERNATIONAL SALES, AND
THESE SALES ARE SUBJECT TO REGULATORY, POLITICAL AND CURRENCY EXCHANGE RATE
RISK.
Shipments to customers outside the United States represented 30.0% of
our total revenue in fiscal 2002. Our international revenue could decrease if
tariffs, duties or taxes increase the cost of doing business, or of our
products, in foreign countries. Our foreign product sales could be limited by
the imposition of government controls or political and economic instability,
which would result in lower revenues. We may also experience delays in receipt
of revenue or increased difficulties in collecting accounts receivable.
Additionally, our results of operations could be harmed by changes in
currency exchange rates. Currently, substantially all of our sales are
denominated in U.S. dollars. If the value of the U.S. dollar increases relative
to a particular foreign currency, our products could become relatively more
expensive. This could result in a reduction in our sales in a particular
country.
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE, AND IF WE FAIL TO
DEVELOP AND MARKET NEW TECHNOLOGIES RAPIDLY, OUR RESULTS OF OPERATIONS WILL
SUFFER.
Customers are continually demanding faster products with more software
features and our competitors are developing new technologies to meet these
demands. If we do not continually develop new technologies and improvements to
our existing technologies, we will not remain competitive and our sales and
results of operations will suffer.
The product life cycle is shortening as new technologies are marketed,
while development of new technologies requires an increasing amount of time and
money. We may experience delays in product development due to technological
constraints, which could result in lost sales. In addition, our cost to develop
the technologies may be so great that we cannot make a profit selling products
using these technologies. Finally, our competitors may develop technologies that
make our technologies obsolete or less attractive to potential customers, which
would also harm our sales.
12
IF OUR PRODUCTS CONTAIN DEFECTS, OUR SALES COULD SUFFER AND WE COULD HAVE
INCREASED COSTS WHICH WOULD HURT OUR RESULTS OF OPERATIONS.
Complex products like ours may contain defects or errors that can only
be detected when the product is in use. Despite extensive testing of our
products, we may release products into the market with undetected errors, which
could result in:
- loss or delay of revenue;
- loss of market share;
- diversion of research and development resources; or
- increased service and warranty costs.
In addition, if our products are not reliable, we may lose credibility with
existing and potential customers, which would result in lost sales.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS,
WHICH COULD HARM OUR COMPETITIVE POSITION, RESULTING IN DECREASED REVENUE.
Our success is based, in part, on our proprietary technology. If we
cannot protect our intellectual property and proprietary rights, we may not
remain competitive. Trade secret and copyright laws provide only limited
protection of our software, documentation and other written materials. We may
not be able to protect our rights if the patents for which we apply or have
applied are not granted or if our patents are challenged or invalidated.
Further, because we sell many of our products in foreign countries where
intellectual property laws are not well developed or are poorly enforced, we may
not be able to protect our proprietary technology in these countries.
A third party could reverse engineer our products, bypass hardware
security devices and obtain access to our software, or independently develop
similar software or proprietary information and use it to compete with us.
INFRINGEMENT CLAIMS BY THIRD PARTIES COULD BE COSTLY AND CAUSE PRODUCT SHIPMENT
DELAYS.
Third parties may file claims against us alleging infringement of their
patents, copyrights or other intellectual property rights. Regardless of its
merit, an infringement claim against us could:
- require significant management time and effort;
- result in costly litigation; or
- cause product shipment delays.
Further, any claims may require us to enter into royalty or licensing agreements
which may not be obtainable on terms acceptable to us.
OUR FAILURE TO RETAIN AND ATTRACT PERSONNEL COULD HARM OUR BUSINESS, OPERATIONS
AND PRODUCT DEVELOPMENT EFFORTS.
Our future success depends, in significant part, upon the continued
service of key personnel and our ability to attract, retain and motivate highly
qualified employees. In particular, the services of Michael E. Kohlsdorf, our
president and chief executive officer; E. Neal Tompkins, our executive vice
president and chief technology officer; and Michael W. Barry, our senior vice
president, development and engineering are critical to our business. If we lose
any of our key personnel, or fail to attract qualified new employees, our
business, operations and product development efforts would suffer. Although we
have employment agreements with Messrs. Kohlsdorf and Tompkins, these agreements
do not obligate them to remain in our employ. We do not have key man insurance
on any of our employees.
13
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
A number of the matters and subject areas discussed in this annual
report on Form 10-K that are not historical or current facts deal with potential
future circumstances and developments. The discussion of such matters and
subject areas is qualified by the inherent risks and uncertainties surrounding
future expectations generally, and also may materially differ from T/R Systems'
actual future experience involving any one or more of such matters and subject
areas. Such risks and uncertainties include those referred to above in the "Risk
Factors" section, as well as:
- the impact on our revenue of a general economic slowdown;
- changes in purchasing patterns by our OEM resellers and end
users;
- market acceptance of our technology and new product offerings;
- general economic conditions in new markets we are targeting or
where our OEM resellers are located; and
- other risks and uncertainties described form time to time in
our reports filed with the Securities and Exchange Commission.
These risk factors should be considered by investors when reviewing any
forward-looking statements contained in this annual report on Form 10-K, in any
of our public filings or press releases, or in any oral statements made by T/R
Systems or any of its officers or other persons acting on its behalf. The
important factors that could affect forward-looking statements are subject to
change. We undertake no obligation to update any forward-looking statements.
ITEM 2. PROPERTIES
T/R Systems leases its principal facility, totaling approximately
52,000 square feet, in Norcross, Georgia under a lease expiring in March 2008.
Additionally, we have a training and operations facility in approximately 59,000
square feet of warehouse and office space in Norcross, Georgia under a lease
that also expires in March 2008. We also leased office and training facilities
in Eidenhoven, The Netherlands, during fiscal 2001. In addition, we currently
lease office space in Dusseldorf, Germany and Orsay, France. We anticipate that
we will need additional space as our business expands and believe that we will
be able to obtain suitable space on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. We are not
currently engaged in any legal proceedings that we expect would have a material
adverse effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal 2002.
14
EXECUTIVE OFFICERS OF THE REGISTRANT
Michael E. Kohlsdorf, age 46, has served as our president, chief
executive officer and a director since September 1996. From 1993 to September
1996, Mr. Kohlsdorf held a variety of positions at Brock Control Systems, Inc.,
a sales automation software company, now known as FirstWave Technologies, Inc.,
most recently serving as president, chief operating officer and chief financial
officer.
E. Neal Tompkins, age 57, is a co-founder of T/R Systems and has served
as a director and our chief technology officer since our founding in September
1991. Mr. Tompkins served as our president from September 1991 until September
1996, and has served as our executive vice president since that date.
Lyle W. Newkirk, age 49, joined us in September 1997 and has served as
a senior vice president since May 2000, as well as serving as our chief
financial officer, secretary and treasurer since November 1997. From 1992 to
September 1997, Mr. Newkirk held various positions with Peachtree Software,
Inc., a maker of accounting software, which became a subsidiary of Automatic
Data Processing, Inc., a provider of technology-based outsourcing solutions,
most recently serving as vice president and chief financial officer.
Michael W. Barry, age 44, has served as our senior vice president,
development and engineering since August 1998. From July 1995 to August 1998,
Mr. Barry served as our vice president of systems development. Before that, he
served as our director of systems development from our founding in September
1991 until July 1995.
E. James White, age 58, has served as our senior vice president,
operations since September 1999. From June 1995 to July 1999, Mr. White served
as vice president, operations at Checkmate Electronics, a manufacturer of
payment automation equipment. Before that, he was director of operations at
Solectron Technology, Inc., a manufacturer of printed circuit boards, from May
1993 until April 1995.
Jack N. Bartholmae, age 50, has served as our vice president,
engineering since November 1995 and as our director of engineering from April
1994 to November 1995. Before that, he served as our director of electrical
engineering from our founding in September 1991 until April 1994.
Edward M. Gaughan, age 33, joined us in December 2000 as our vice
president, business development. Before joining us, Mr. Gaughan held various
management positions with Electronics for Imaging, Inc., a provider of network
printing software applications, from January 1996 to October 2000, most recently
serving as director, business development. Mr. Gaughan is the husband of Ms.
Gaughan, our vice president, marketing.
Katherine Munich Gaughan, age 34, joined us in August 2001 as our vice
president, marketing. Before joining us, Ms. Gaughan served as director of
marketing for Oce-USA, Inc., a provider of digital document management and
delivery technology, from March 1999 until August 2001. Before that, she served
as account manager/channel marketing manager for Electronics for Imaging, Inc.
from October 1994 to March 1999. Ms. Gaughan is the wife of Mr. Gaughan, our
vice president, business development.
Michael J. Knight, age 38, joined us in February 1998 and has served as
our vice president, professional services since May 2000. Prior to May 2000, Mr.
Knight served as our director of customer services. Before joining us, Mr.
Knight was the senior manager for the systems consulting group of BSG Alliance/
IT, Inc., now known as Per-Se Technologies, Inc., a provider of business
management services, from July 1995 to February 1998.
F. Nico van Heuven, age 53, joined us in October 1999 and has served as
our vice president and managing director, European operations since January
2002. Prior to January 2002, Mr. van Heuven served as our managing director of
European operations. Before joining us, Mr. van Heuven was manager,
international sales (export) with Epson Germany, a subsidiary of Epson
Corporation, a manufacturer of information-related equipment, from April 1998 to
September 1999. Prior to that, Mr. van Heuven was managing director for Kentek
Europe B.V., a subsidiary of Kentek Information Systems Inc., a manufacturer of
mid-range laser printers from January 1995 to March 1998.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common stock commenced public trading on January 26, 2000 on the
Nasdaq National Market under the symbol "TRSI." The high and low sales prices
for our common stock, as reported on the Nasdaq National Market, for the four
quarters of the fiscal years ended January 31, 2002 and 2001 were as follows:
For the Fiscal Year Ended January 31, 2002
------------------------------------------
Quarter
Ended High Low
----- ---- ---
April 30, 2001 $8.50 $3.60
July 31, 2001 5.30 2.78
October 31, 2001 3.64 1.79
January 31, 2002 4.00 1.80
For the Fiscal Year Ended January 31, 2001
------------------------------------------
Quarter
Ended High Low
----- ---- ---
April 30, 2000 $28.44 $11.44
July 31, 2000 21.88 5.94
October 31, 2000 16.50 5.63
January 31, 2001 10.00 5.25
As of April 12, 2002, there were approximately 125 holders of record of
our common stock.
DIVIDENDS
We have never paid cash dividends on our common stock. We currently
intend to retain our earnings to fund the development and growth of our
business. Further, our revolving line of credit does not allow us to declare or
pay any cash dividends. Therefore, we currently do not anticipate paying any
cash dividends on our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
We had no sales of unregistered securities during the fiscal year ended
January 31, 2002.
USE OF PROCEEDS
In connection with our initial public offering, the SEC declared our
registration statement on Form S-1 (file no. 333-88439) effective on January 25,
2000.
As of January 31, 2002, we had used $12.4 million of the net proceeds
from our initial public offering to fund our working capital and capital
expenditure needs. None of these payments was 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 $13.0 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.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes selected consolidated financial data as
of and for the five fiscal years ended January 31, 2002. You should read this
data in conjunction with Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the related notes.
FISCAL YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations Data:
Imaging systems ............................. $ 11,772 $ 27,093 $20,969 $ 14,094 $ 11,627
Services .................................... 5,846 5,153 1,353 1,753 405
-------- -------- ------- -------- --------
Total revenue ....................... 17,618 32,246 22,322 15,847 12,032
Operating expenses:
Cost of imaging systems ................... 9,141 12,166 9,487 6,579 6,107
Research and development .................. 7,042 5,078 3,488 3,202 2,164
Sales and marketing ....................... 10,923 9,418 6,599 4,891 3,542
General and administrative ................. 3,880 3,101 2,163 1,708 1,623
-------- -------- ------- -------- --------
Total operating expenses ............. 30,986 29,763 21,737 16,380 13,436
-------- -------- ------- -------- --------
Operating income (loss) ..................... (13,368) 2,483 585 (533) (1,404)
Interest income, net ........................ 673 1,622 117 150 186
Other expenses .............................. -- -- -- (240) --
-------- -------- ------- -------- --------
Income (loss) before provision (benefit)
for income taxes .................... (12,695) 4,105 702 (623) (1,218)
Provision (benefit) for income taxes ........ 2,672 (2,229) 25 -- --
-------- -------- ------- -------- --------
Net income (loss) ........................... $(15,367) $ 6,334 $ 677 $ (623) $ (1,218)
======== ======== ======= ======== ========
Net income (loss) per common share - Basic . $ (1.25) $ 0.53 $ 0.25 $ (0.26) $ (0.60)
======== ======== ======= ======== ========
Weighted average shares outstanding - Basic . 12,257 12,008 2,641 2,444 2,052
======== ======== ======= ======== ========
Net income (loss) per common share - Diluted $ (1.25) $ 0.49 $ 0.07 $ (0.26) $ (0.60)
======== ======== ======= ======== ========
Weighted average shares outstanding - Diluted 12,257 12,886 9,861 2,444 2,052
======== ======== ======= ======== ========
JANUARY 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- ------- -------- --------
(IN THOUSANDS)
Balance Sheet Data:
Cash and cash equivalents ................... $ 13,026 $ 26,194 $27,314 $ 1,966 $ 3,527
Working capital ............................. 17,575 33,535 31,191 3,892 5,117
Total assets ................................ 28,488 45,391 37,172 7,770 8,184
Redeemable, convertible preferred stock ..... -- -- -- 15,042 15,020
Total shareholders' equity (deficit) ........ 23,975 39,196 32,249 (10,238) (9,759)
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the related notes. This discussion
contains forward-looking statements that involve risks and uncertainties. The
statements relate to future events or our future financial performance. In many
cases, you can identify forward-looking statements by the use of words such as
may, will, should, expects, plans, anticipates, believes, estimates, predicts,
potential or continue, or the negative of these terms or other comparable
terminology. Our actual results could be materially different from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under "Risk Factors" in Item 1 of this annual
report on Form 10-K and elsewhere in this report.
OVERVIEW
T/R Systems was founded in 1991 as an engineering services company
providing consulting services to the printing, copying and multimedia markets.
In 1993, we began development of our own products and in 1995, we introduced the
MicroPress, our digital document production management system. Since 1995, we
have continually improved the MicroPress by adding software functionality and
device connectivity.
Historically, we have derived our revenue primarily from the sale of
imaging systems and related add-on software and hardware for the management,
distribution and production of digital documents. Additionally, we receive or
have received revenue from:
- engineering services for the development of technology;
- the sale of consumable products, such as toner, and
replacement parts that support our systems;
- customer service plans;
- fees for other customer services, such as training and
product-related consulting; and
- royalties for previously licensed technology.
We distribute our products in North America and internationally through
distribution relationships with Hitachi, IKON, Kyocera Mita, Lanier, M.G.I.,
Minolta, Ricoh and Toshiba, as well as through a network of independent dealers.
We first sold products under the OEM agreements with Hitachi and Minolta in
fiscal 2000. We began selling products under our OEM agreements with IKON, Ricoh
and Toshiba in fiscal 2001. We began selling products under our OEM agreements
with Lanier and M.G.I. in fiscal 2002. Additionally, we have entered into a
development agreement with Canon and anticipate that Canon will begin
distributing our products late in the first quarter of fiscal 2003. Also, during
the fiscal year ended January 31, 2002, we entered into an agreement with Xerox
under which Xerox has a non-exclusive right to distribute M@estro worldwide. We
also entered into an agreement with Oce for the development of connectivity of
an Oce print device with the MicroPress. In 1997, we signed an OEM agreement
with Mita Industrial Co., Ltd. allowing Mita to resell the MicroPress in Japan.
In August 2000, we amended that agreement with its successor company, Kyocera
Mita, and began shipping products to Kyocera Mita in October 2000.
Sales shipped internationally were $5.3 million, or 30.0% of revenue,
in fiscal 2002. We expect that sales shipped internationally will continue to
represent a significant portion of our revenue. Currently, substantially all of
our sales are denominated in U.S. dollars. If the value of the U.S. dollar
increases relative to a particular foreign currency, our products could become
relatively more expensive, which could result in a reduction in our sales in a
particular country.
18
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 engineering service fees for development of technology
typically related to the development of a connection between an 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. Nonrefundable prepaid
royalties are recognized as revenue over the term of the royalty agreement based
on the greater of actual royalties earned or the straight-line method. Revenue
from royalties, which is included in service revenue, has been less than 10% of
total revenue in each of our last three fiscal 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
subsequent to our public offering; and
- other tax benefits.
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.
Before the fourth quarter of fiscal 2001, we had established and
maintained a valuation allowance to offset our deferred tax assets. During the
fourth quarter of fiscal 2001, our history of profitability in the previous
twelve quarters, combined with our then estimated future profitability, was
considered by us to be persuasive evidence that the valuation allowance was not
necessary. Therefore, we reversed the entire allowance and recorded a $2.4
million deferred income tax benefit in our results of operations. However, due
principally to the significant losses in fiscal
19
2002, and in the absence of other persuasive evidence, we reestablished a
valuation allowance against our deferred tax assets resulting in a deferred tax
expense of $7.2 million in the fourth quarter of fiscal 2002.
At January 31, 2002, we had approximately $5.5 million in federal
income tax net operating loss carryforwards available to offset future income
taxes payables, which, if not utilized, expire beginning in 2016. We expect that
we will maintain our valuation allowance against our entire deferred tax asset
throughout fiscal 2003 although we will review the valuation allowance each
quarter.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents our consolidated operating data as a
percentage of total revenue.
FISCAL YEAR ENDED
JANUARY 31,
-----------------------------------------
2002 2001 2000
------- ------- -------
Imaging systems .................................. 66.8% 84.0% 93.9%
Services ......................................... 33.2 16.0 6.1
------- ------- -------
Total revenue ............................ 100.0 100.0 100.0
Operating expenses:
Cost of imaging systems ........................ 51.9 37.7 42.5
Research and development ....................... 40.0 15.8 15.6
Sales and marketing ............................ 62.0 29.2 29.6
General and administrative ..................... 22.0 9.6 9.7
------- ------- -------
Total operating expenses ............... 175.9 92.3 97.4
------- ------- -------
Operating income (loss) .......................... (75.9) 7.7 2.6
Interest income, net ............................. 3.8 5.0 0.5
------- ------- -------
Income (loss) before taxes ....................... (72.1) 12.7 3.1
Provision (benefit) for income taxes ............. 15.2 (6.9) 0.1
------- ------- -------
Net income (loss) ................................ (87.3)% 19.6% 3.0%
======= ======= =======
COMPARISON OF FISCAL YEARS ENDED JANUARY 31, 2002, 2001 AND 2000
Total Revenue. Revenue was $17.6 million in fiscal 2002, $32.2 million
in fiscal 2001 and $22.3 million in fiscal 2000. The decrease in revenue of
$14.6 million, or 45.4%, from fiscal 2001 to fiscal 2002 was due to a decrease
in imaging systems revenue. The increase in fiscal 2001 revenue over fiscal 2000
revenue of $9.9 million, or 44.5%, was due primarily to an increase in imaging
systems revenue. Also contributing to the increase was an increase in
engineering services revenue.
Imaging systems revenue is derived from the shipment of digital
document management and production systems, as well as software, hardware and
consumables related to those systems. Our imaging systems revenue decreased
$15.3 million, or 56.5%, from $27.1 million in fiscal 2001 to $11.8 million in
fiscal 2002. The decrease was the result of decreased orders from our OEM
resellers as well as our independent resellers. The increase in imaging systems
revenue from fiscal 2000 to fiscal 2001 of $6.1 million, or 29.2%, from $21.0
million in fiscal 2000 to $27.1 million in fiscal 2001 was due to shipments of
products under our new OEM reseller relationships in fiscal 2001. During fiscal
2001, we shipped products to IKON, Ricoh and Toshiba in addition to Hitachi and
Minolta, both of which also purchased products in fiscal 2000.
We recognize services revenue primarily from engineering service fees,
customer service plans, training and product-related consulting. Additionally,
included in services revenue in fiscal 2000 was revenue from royalties for
licensed technology. During fiscal 2002, services revenue increased $693,000 to
$5.8 million, due to an increase in engineering service fees for developing
interfaces with additional print devices of new and existing OEM resellers to
the MicroPress. The increase in engineering service fees of $833,000 was
partially offset by decreases in other services revenue. Services revenue
increased $3.8 million from $1.4 million in fiscal 2000 to $5.2 million in
fiscal 2001, primarily due to an increase in engineering service fees. The
remaining increase was primarily due to increases in revenue from customer
service plans and maintenance agreements with our OEM resellers.
20
During fiscal 2002, we derived $5.3 million, or 30.0%, of our total
revenue from sales shipped internationally. This compares to $6.2 million, or
19.1% of total revenue, in fiscal 2001 and $4.8 million, or 21.6% of total
revenue, in fiscal 2000. Revenue from sales shipped internationally decreased
from fiscal 2001 to fiscal 2002 due to a decrease in shipments to Canada and
Europe. Revenue from sales shipped internationally increased in fiscal 2001 over
fiscal 2000 primarily as a result of increased international sales through our
OEM reseller relationships. However, revenue from sales shipped internationally
as a percent of total revenue decreased as domestic revenue grew at a faster
rate than international revenue in fiscal 2001 due to greater focus on the
domestic market both by our OEM resellers and us through our independent
resellers, as well as our more established domestic distribution infrastructure.
Revenue from sales shipped internationally was derived from sales in Asia,
Europe and Canada in fiscal 2002, fiscal 2001 and fiscal 2000. Fiscal 2002
revenue from sales to Asia represented 19.5% of total revenue. No other region
represented more than 10% of revenue in any of the three fiscal years.
Operating Expenses. Operating expenses were $31.0 million, or 175.9% of
total revenue, in fiscal 2002, as compared to $29.8 million, or 92.3% of total
revenue, in fiscal 2001 and $21.7 million, or 97.4% of total revenue, in fiscal
2000. As a result of our decreased revenue and the continued global economic
weakness in fiscal 2002, we reduced our number of employees by 40 people, or
26.1%, from August 1, 2001 to January 31, 2002. The overall reduction was
achieved through workforce reductions in August and November along with other
attrition. The cost reductions will not be fully reflected in our operating
results until the first quarter of fiscal 2003. We anticipate that our operating
expenses will be lower than the same period of last fiscal year at least for the
first half of fiscal 2003 as a result of these headcount reductions and other
cost saving measures.
Cost of Imaging Systems. Cost of imaging systems consists primarily of
third party hardware, principally servers, print devices, board components,
finished boards and consumables, and third-party software, as well as labor and
overhead. Cost of imaging systems was $9.1 million, or 77.7% of imaging systems
revenue, in fiscal 2002 as compared to $12.2 million, or 44.9% of imaging
systems revenue, in fiscal 2001 and $9.5 million, or 45.2% of imaging systems
revenue, in fiscal 2000. The increase as a percent of imaging systems revenue in
fiscal 2002 over fiscal 2001 was due to the following:
- during fiscal 2002, we recorded non-recurring charges of $1.3
million in cost of imaging systems for the write down of print
devices and other hardware components in inventory to their
net realizable value, as compared to $182,000 during fiscal
2001;
- the labor and overhead components of cost of imaging systems
increased as a percentage of imaging systems revenue primarily
due to a decrease in imaging systems revenue; and
- imaging systems revenue from sales to our OEM resellers
decreased as a percentage of total imaging systems revenue.
Systems sold to our OEM resellers have lower levels of
hardware content, and thus carry a lower cost of sales, than
systems sold to our independent resellers.
Cost of imaging systems as a percent of imaging systems revenue decreased in
fiscal 2001 as compared to fiscal 2000 due to an increase in OEM imaging systems
revenue as a percent of total imaging systems revenue. The impact of the
increase in OEM revenue as a percent of total revenue in fiscal 2001 was
partially offset by an increase in the cost of imaging systems as a percent of
imaging systems revenue sold through our independent resellers, as well as an
increase in labor and overhead in our product assembly operations.
Research and Development. Research and development expenses consist
primarily of employee salaries and benefits, equipment depreciation, software
and hardware supplies used in product development and an allocation of overhead.
Research and development costs are expensed as incurred. Research and
development expenses were $7.0 million in fiscal 2002, $5.1 million in fiscal
2001 and $3.5 million in fiscal 2000. Research and development expenses
represented 40.0% of total revenue in fiscal 2002, 15.8% of total revenue in
fiscal 2001 and 15.6% of total revenue in fiscal 2000. Research and development
expenses increased approximately $2.0 million, or 38.7%, from fiscal 2001 to
fiscal 2002, due in part to an increase in personnel-related expenses of
$756,000 resulting from the hiring of additional research and development
personnel during fiscal 2001 and the first quarter of fiscal 2002 to assist in
the further development of our products. Also contributing to the increase was
an increase of $734,000 in depreciation expense and $295,000 in certain
project-related expenses, due primarily to the addition of equipment for the
development and testing of connectivity of new print devices to our products.
Research and development expenses increased $1.6 million from fiscal 2000 to
fiscal 2001 primarily due to a $1.3 million increase in personnel-
21
related expenses as a result of hiring additional research and development
personnel to assist in the development of the new series of the MicroPress, as
well as the development of new products, such as M@estro. The remaining increase
was primarily due to an increase in depreciation expense of $184,000 on print
devices used to develop connectivity with the MicroPress. We believe that
research and development spending will decrease in the near term as a result of
cost-saving measures taken in the second half of fiscal 2002, including
reductions in headcount.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries and benefits, sales commissions, trade show costs,
advertising, technical support and travel-related expenses. Sales and marketing
expenses were $10.9 million in fiscal 2002, or 62.0% of total revenue. These
expenses were $9.4 million, or 29.2% of total revenue in fiscal 2001, and $6.6
million, or 29.6% of total revenue, in fiscal 2000. The increase from fiscal
2001 to fiscal 2002 was primarily due to an increase in personnel-related
expenses of $799,000 as a result of the hiring of additional sales and technical
support personnel during fiscal 2001 and the first quarter of fiscal 2002 to
support the anticipated growth of our business. Additionally, depreciation and
other facilities-related expenses increased by $527,000, primarily due to the
expansion of our training and product demonstration facilities during the second
half of fiscal 2001 to support the expected growth in our business. The increase
from fiscal 2000 to fiscal 2001 was primarily due to an increase in
personnel-related expenses of $2.3 million as a result of increases in our sales
force, as well as increases in our support and training personnel. The remaining
increase in fiscal 2001 was due to increases in trade show expenses,
facilities-related expenses and outside services. We believe that spending on
sales and marketing will decrease in the near term as a result of cost-saving
measures taken in the second half of fiscal 2002, including reductions in
headcount.
General and Administrative. General and administrative expenses include
employee salaries and benefits, professional service fees and employee
recruiting expenses. General and administrative expenses were $3.9 million in
fiscal 2002 compared to $3.1 million in fiscal 2001 and $2.2 million in fiscal
2000. The increase from fiscal 2001 to fiscal 2002 of $779,000, or 25.1%, was
due to an increase in our provision for doubtful accounts. During fiscal 2002,
we incurred expenses of $893,000 due to an increase in our provision for
doubtful accounts due to our concerns about the ultimate collectibility of sales
to certain of our independent resellers. The provision for doubtful accounts was
$140,000 in fiscal 2001. The increase in general and administrative expense of
$938,000, or 43.4%, from fiscal 2000 to fiscal 2001 was primarily due to
increases in expenses related to being a publicly-traded company of $342,000 and
increases in salaries and benefits expenses of $291,000. We believe that our
general and administrative expenses will decrease in the near term as a result
of cost-saving measures taken in the second half of fiscal 2002, including
reductions in headcount.
Interest Income, Net. Interest income, net, was $673,000 in fiscal
2002, $1.6 million in fiscal 2001 and $117,000 in fiscal 2000. The decrease in
interest income during fiscal 2002 was due to a decrease in cash available for
short-term investments during the year, as we used cash to fund our operations
and capital expenditures, and to a drop in interest rates from the prior year.
The increase in interest income in fiscal 2001 from fiscal 2000 was due to an
increase in the funds available for short-term investments as a result of our
initial public offering. Upon completion of our initial public offering in
January 2000, we received $25.4 million in cash, net of underwriting discounts,
commissions and other offering costs.
Income Tax Expense (Benefit). In fiscal 2002, we recorded income tax
expense of $2.7 million, resulting from the recognition of a valuation allowance
for the balance of our deferred tax assets at January 31, 2002 of $7.2 million
net of tax benefits recorded at our effective tax rate as a result of losses
during fiscal 2002. In fiscal 2001, we recognized a $2.2 million benefit for
income taxes, which included the recognition of $2.4 million in deferred income
tax assets offset by a $198,000 current provision for alternative minimum income
taxes. The deferred income tax benefit represents the remainder of our net
operating losses for income taxes and other deferred income tax assets, which
had previously been fully offset by a valuation allowance. In fiscal 2000, we
recorded a current provision for alternative minimum income taxes of $25,000.
Net Income (Loss) and Net Income (Loss) per Share. We recorded a net
loss of $15.4 million in fiscal 2002 versus net income of $6.3 million in fiscal
2001 and $677,000 in fiscal 2000. We recognized a diluted loss per share of
$1.25 per share in fiscal 2002 as compared to diluted earnings per share of
$0.49 per share in fiscal 2001 and $0.07 per share in fiscal 2000. As discussed
above, the fiscal 2002 net loss and the fiscal 2001 net income included
significant non-recurring tax adjustments and the fiscal 2000 net income only
included alternative minimum income taxes. The following table calculates pro
forma net income (loss) and pro forma net income (loss) per share by applying a
tax rate of 36% to actual income (loss) before income tax expense (benefit) in
order to compare earnings for the three fiscal years excluding the impact of the
tax adjustments recorded in fiscal 2002 and fiscal 2001. The tax
22
rate of 36% is an estimate of our fully-taxed effective tax rate. These pro
forma numbers are not intended to be indicative of future operating results.
FISCAL YEAR ENDED JANUARY 31,
--------------------------------------
2002 2001 2000
-------- ------- ------
PRO FORMA INFORMATION:
Income (loss) before income tax expense (benefit) ................... $(12,695) $ 4,105 $ 702
Pro forma income tax expense (benefit) ............................... (4,570) 1,478 253
-------- ------- ------
Pro forma net income (loss) .......................................... $ (8,125) $ 2,627 $ 449
======== ======= ======
Pro forma net income (loss) per common share -
Diluted ................................................ $ (0.66) $ 0.20 $ 0.05
======== ======= ======
Weighted average shares outstanding - Diluted ........................ 12,257 12,886 9,861
======== ======= ======
LIQUIDITY AND CAPITAL RESOURCES
From inception, we have funded our operations and investments in
property and equipment primarily through the sale of equity securities. In
January 2000, we completed our initial public offering and received $25.4
million in cash, net of underwriting discounts, commissions and other offering
costs.
Prior to our initial public offering, we funded our operations
primarily through the private placement of preferred stock totaling about $16.1
million. We also obtained additional funding through the private placement of
our common stock primarily with our founders, other employees and private
investors. Prior to our initial public offering, we received $1.2 million
through the sale of common stock. During fiscal 2002 and fiscal 2001, we
received $630,000 from the sale of common stock under our employee stock plans.
We had no other sales of stock during fiscal 2002 or fiscal 2001.
Net cash used in operating activities in fiscal 2002 was $11.3 million
as compared to net cash provided by operating activities in fiscal 2001 of $2.0
million and net cash used in operating activities of $1.1 million in fiscal
2000. Net cash used in operating activities in fiscal 2002 was the result of the
net loss of $15.4 million in fiscal 2002. Net cash provided by operating
activities was the result of $6.3 million of net income recorded in fiscal 2001,
offset by increases in receivables and inventories as a result of the increase
in our sales and cost of imaging systems during fiscal 2001. Net cash used in
operating activities increased in fiscal 2000 as a result of increases in
receivables and inventories.
Net cash used for investing activities was $2.2 million is fiscal 2002,
$3.0 million in fiscal 2001 and $570,000 in fiscal 2000, reflecting purchases of
property and equipment. The decrease in purchases of property and equipment from
fiscal 2001 to fiscal 2002 was primarily the result of fiscal 2001 spending on
leasehold improvements and equipment for a newly leased operations and training
center in Norcross, Georgia, and for the expansion of office space in our main
office building. The remaining decrease was the result of the curtailment of
purchases of property and equipment in fiscal 2002 due in part to the decrease
in our number of employees. In addition to our purchases of property and
equipment in fiscal 2002, we capitalized $2.4 million in print devices received
from our OEM resellers for partial payment of engineering service fees. We
capitalized $863,000 worth of such equipment in fiscal 2001. We anticipate that
we will continue spending on capital expenditures consistent with our growth in
operations, infrastructure and personnel, although we have no plans for
significant expenditures related to the expansion of our facilities in the
current fiscal year.
We have a $5.0 million secured revolving line of credit from a bank,
which expires on October 15, 2002. There were no borrowings against this line of
credit at January 31, 2002 or 2001. 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 the maintenance of various covenants, including a restriction on paying
dividends. We were in compliance with these covenants at January 31, 2002. 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. In April
1998, we issued a $250,000 letter of credit under this facility in connection
with an operating lease obligation. This letter of credit is reduced annually by
$50,000.
23
At January 31, 2001, we had an unused $200,000 letter of credit from a
bank under an additional credit facility. Both the letter of credit and that
additional credit facility expired on January 10, 2002. As security for the
letter of credit, we were required to maintain a certificate of deposit for
$200,000. The certificate of deposit was classified as restricted cash at
January 31, 2001.
Net cash provided by financing activities was $318,000 in fiscal 2002
as compared to net cash used in financing activities of $81,000 in fiscal 2002
and net cash provided by financing activities of $27.0 million in fiscal 2000.
The net cash provided by financing activities in fiscal 2002 represented the
proceeds from sales of common stock through our employee stock plans as well as
a decrease in restricted cash used to secure a letter of credit, which expired
in fiscal 2002. The net cash used in fiscal 2001 was the result of the
settlement of a bank overdraft outstanding at the beginning of the fiscal year
along with the payment of additional costs from our initial public offering in
fiscal 2000. These uses of cash in fiscal 2001 were offset by the proceeds from
the sales of our common stock through our employee stock plans. Fiscal 2000
financing activities include our initial public offering, as well as the private
placement of 222,222 shares of series D preferred stock at $4.50 per share in
May 1999.
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
foreseeable future. However, if cash generated by operations is insufficient to
satisfy our operating requirements or if we determine to acquire any technology,
we may be required to raise additional funds, through either debt or equity
financings. There can be no assurance that we will be able to obtain any
financing on terms acceptable to us, if at all.
Inflation has had no material impact on our operations to date.
T/R Systems, Inc. has two wholly-owned foreign subsidiaries, T/R
Systems Canada Inc. and T/R Systems (Holland) B.V., which we maintain for
regulatory and tax compliance in foreign jurisdictions. The results of
operations, cash flows and balance sheets of these subsidiaries are consolidated
in our financial statements and all significant intercompany transactions and
balances are eliminated in consolidation. We have no other subsidiaries which
are not consolidated, nor do we have any structured-finance or other
special-purpose entities. Additionally, we did not enter into any significant
off-balance sheet arrangements or transactions during any of the fiscal years
discussed herein.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. Subsequently,
SFAS No. 133 was amended by SFAS No. 137 and No. 138 and, as amended, is
effective for all fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including some derivative instruments embedded in other contracts, and for
hedging activities. Under SFAS No. 133, some contracts that were not formerly
considered derivatives may now meet the definition of a derivative. We adopted
SFAS No. 133, as amended, effective February 1, 2001. The adoption of this
statement did not have a significant impact on our financial position or results
of operations because we do not have any significant derivative instruments or
hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin, or SAB, No.
101, Revenue Recognition in Financial Statements. SAB No. 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101, as amended by SAB No. 101B, is
effective beginning in the fourth quarter of fiscal years beginning after
December 15, 1999. We adopted SAB No. 101, as amended, in the fourth fiscal
quarter of fiscal 2001. The effect of the adoption of SAB No. 101 was not
material.
In July 2001, the Financial Accounting Standards Board issued 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 initiated after June 30, 2001 and indicates that the
use of the pooling-of-interests method of accounting is no longer allowed. 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. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The
24
new standards are not expected to have an impact on our consolidated financial
statements because we have not entered into any business combinations and do not
have any assets covered by SFAS No. 142.
In August 2001, the Financial Accounting Standards Board 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 APB Opinion No.
30. SFAS No. 144 is effective beginning February 1, 2002 for the first quarter
of fiscal 2003, and is not expected to have a material impact on our
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe our exposure to market rate fluctuations on our cash
equivalents is minor due to the short-term maturities of those investments,
typically 90 days or less. We have market risk relating to borrowings under our
credit facility because the interest rates under the facility are variable.
However, as of January 31, 2002, we had no borrowings under our revolving credit
facility. To date, we have not entered into any derivative instruments to manage
interest rate exposure or any other exposures.
A significant portion of our revenue is derived from sales shipped
internationally. Currently, substantially all of our sales shipped
internationally are denominated in U.S. dollars. If the value of the U.S. dollar
increases relative to a particular foreign currency, our products could become
relatively more expensive, which could result in a reduction in our sales in a
particular country.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information with respect to this item is contained in our audited
consolidated financial statements presented elsewhere is this annual report on
Form 10-K as indicated on the index to the audited consolidated financial
statements below.
Page
----
Independent Auditors' Report ........................................................ F-2
Consolidated Balance Sheets as of
January 31, 2002 and 2001 ...................................................... F-3
Consolidated Statements of Operations for the
Years Ended January 31, 2002, 2001 and 2000 ..................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended January 31, 2002, 2001 and 2000 .................................... F-5
Consolidated Statements of Cash Flows for the
Years Ended January 31, 2002, 2001 and 2000 ..................................... F-6
Notes to Consolidated Financial Statements .......................................... F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in Part I of this annual report on Form 10-K under the
caption "Executive Officers of the Registrant" is incorporated by reference
herein. The information required by this item with respect to directors and
Section 16(a) reporting is incorporated by reference to the information under
the captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement for the 2002
Annual Meeting of Shareholders to be filed with the SEC (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information under the captions "Election of Directors - Director
Compensation" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of Form 10-K:
(1) Consolidated Financial Statements
The information required by this item is included on
pages F-1 through F-16 of this annual report on Form
10-K as specified in the index on page F-1.
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
No additional financial statement schedules are
required to be presented.
(3) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 -- Restated Articles of Incorporation of T/R Systems,
Inc. (incorporated by reference to Exhibit 3.1 to the
Company's annual report on Form 10-K for the year
ended January 31, 2001)
3.1.1 -- Certificate of Designation, Preferences and Rights of
Series A Junior Participating Preferred Stock of T/R
Systems, Inc. (incorporated by reference to Exhibit
3.1.1 to the Company's annual report on Form 10-K for
the year ended January 31, 2001)
3.2 -- Amended and Restated Bylaws of T/R Systems, Inc.
(incorporated by reference to Exhibit 3.2 to the
Company's registration statement on Form S-1, File
No. 333-88439)
4.1 -- Second Amended and Restated Registration Rights
Agreement, dated March 31, 1997, among the Company
and the Shareholders named therein, as amended by
First Amendment to Stock Purchase Agreement, Second
Amended and Restated Shareholders' Agreement and
Second Amended and Restated Registration Rights
Agreement, dated June 20, 1997, among the Company and
the Shareholders named therein (incorporated by
reference to Exhibit 4.1 to the Company's
registration statement on Form S-1, File No.
333-88439)
4.2 -- Registration Rights Agreement, dated June 29, 1998,
among the Company and the Shareholders named therein
(incorporated by reference to Exhibit 4.2 to the
Company's registration statement on Form S-1, File
No. 333-88439)
4.3 -- 1999 Registration Rights Agreement, dated September
10, 1999, by and among the Company and the
Shareholders named therein (incorporated by reference
to Exhibit 4.3 to the Company's registration
statement on Form S-1, File No. 333-88439)
4.4 -- Rights Agreement, dated as of November 9, 2000, by
and between T/R Systems, Inc. and EquiServe Trust
Company, N. A., as rights agent (incorporated by
reference to Exhibit 4.1 to the Company's
registration statement on Form 8-A, File No.
000-29045)
10.1* -- T/R Systems, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit 4 to the
Company's registration statement on Form S-8, File
No. 333-36910)
10.2* -- T/R Systems, Inc. 1994 Stock Option Plan
(incorporated by reference to Exhibit 4 to the
Company's registration statement on Form S-8, File
No. 333-36918)
10.3* -- T/R Systems, Inc. 1994 Associates Stock Option Plan
(incorporated by reference to Exhibit 4 to the
Company's registration statement on Form S-8, File
No. 333-63012)
10.4* -- T/R Systems, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 4 to the
Company's registration statement on Form S-8, File
No. 333-36934)
10.5* -- T/R Systems, Inc. 1999 Stock Option Plan
(incorporated by reference to Exhibit 4 to the
Company's registration statement on Form S-8, File
No. 333-63022)
27
10.6 -- Loan and Security Agreement, dated as of October 17,
1997, by and between Silicon Valley Bank and T/R
Systems, Inc., as amended by Loan Modification
Agreement, dated as of March 31, 1998, by and between
T/R Systems, Inc. and Silicon Valley Bank, as further
amended by Second Loan Modification Agreement, dated
as of October 16, 1998, by and between T/R Systems,
Inc. and Silicon Valley Bank, as further amended by
Third Loan Modification Agreement, dated as of
January 18, 1999, by and between T/R Systems, Inc.
and Silicon Valley Bank, and as further amended by
Letter Agreement, dated as of February 2, 1999
(incorporated by reference to Exhibit 10.6 to the
Company's registration statement on Form S-1, File
No. 333-88439)
10.7* -- Letter Agreement with Mike Kohlsdorf, dated September
6, 1996, as amended by Letter Agreement with Mike
Kohlsdorf, dated December 17, 1997 (incorporated by
reference to Exhibit 10.7 to the Company's
registration statement on Form S-1, File No.
333-88439)
10.8* -- Employment Agreement, dated as of September 1, 1992,
by and between T/R Systems, Inc. and E. Neal Tompkins
(incorporated by reference to Exhibit 10.8 to the
Company's registration statement on Form S-1, File
No. 333-88439)
10.9 -- Indemnification Agreement, dated as of March 4, 1994,
by and between T/R Systems, Inc. and E. Neal Tompkins
(incorporated by reference to Exhibit 10.9 to the
Company's registration statement on Form S-1, File
No. 333-88439)
10.11 -- Indemnification Agreement, dated as of March 4, 1994,
by and between T/R Systems, Inc. and Charles H.
Phipps (incorporated by reference to Exhibit 10.11 to
the Company's registration statement on Form S-1,
File No. 333-88439)
10.12+ -- Reseller Agreement, dated as of September 18, 1997,
by and between T/R Systems, Inc. and Mita Industrial
Co., Ltd., as amended by First Addendum to Reseller
Agreement, dated as of September 17, 1998, by and
between T/R Systems, Inc. and Mita Industrial Co.,
Ltd. (incorporated by reference to Exhibit 10.12 to
the Company's registration statement on Form S-1,
File No. 333-88439)
10.13+ -- Supply Agreement, dated as of January 28, 1999, by
and between Minolta Co., Ltd. and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.13 to the
Company's registration statement on Form S-1, File
No. 333-88439)
10.14+ -- Agreement, dated as of April 1, 1999, by and between
Hitachi Koki Imaging Solutions, Inc. and T/R Systems,
Inc. (incorporated by reference to Exhibit 10.14 to
the Company's registration statement on Form S-1,
File No. 333-88439)
10.15+ -- Agreement, dated as of September 1, 1999, by and
between Ricoh Corporation and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.15 to the
Company's registration statement on Form S-1, File
No. 333-88439)
10.16 -- Fourth Loan Modification Agreement, dated as of
October 15, 1999, by and between T/R Systems, Inc.
and Silicon Valley Bank (incorporated by reference to
Exhibit 10.16 to the Company's registration statement
on Form S-1, File No. 333-88439)
10.17+ -- Master Assembly and Distribution Agreement, dated as
of February 19, 2000, by and between Toshiba America
Business Solutions, Inc. and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.17 to the
Company's annual report on Form 10-K for the year
ended January 31, 2000)
10.18+ -- Master Assembly and Distribution Agreement, dated
July 27, 2000, by and between IKON Office Solutions,
Inc. and T/R Systems, Inc. (incorporated by reference
to Exhibit 10.18 to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 2000)
10.19+ -- Second Addendum to Reseller Agreement, dated as of
August 1, 2000, by and between T/R Systems, Inc. and
Kyocera Mita Corporation (formerly Mita Industrial
Co., Ltd.) (incorporated by reference to Exhibit
10.19 to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 2000)
10.20 -- Loan Modification Agreement, dated as of October 11,
2000, by and between Silicon Valley Bank and T/R
Systems, Inc. (incorporated by reference to Exhibit
10.20 to the Company's quarterly report on Form 10-Q
for the quarter ended October 31, 2000)
10.21 -- Loan Modification Agreement, dated as of December 19,
2000, by and between Silicon Valley Bank and T/R
Systems, Inc. (incorporated by reference to Exhibit
10.21 to the Company's annual
28
report on Form 10-K for the year ended January 31,
2001)
10.22+ -- Master Development Agreement, dated as of April 10,
2000 (signed January 2001), by and between Minolta
Co., Ltd. and T/R Systems, Inc. (incorporated by
reference to Exhibit 10.22 to the Company's annual
report on Form 10-K for the year ended January 31,
2001)
10.22.1+ -- Addendum to Master Development Agreement, dated as of
April 10, 2000 (signed January 2001), by and between
Minolta Co., Ltd. and T/R Systems, Inc. (incorporated
by reference to Exhibit 10.22.1 to the Company's
annual report on Form 10-K for the year ended January
31, 2001)
10.22.2+ -- Addendum to Master Development Agreement, dated as of
November 20, 2000 (signed January 2001), by and
between Minolta Co., Ltd. and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.22.2 to the
Company's annual report on Form 10-K for the year
ended January 31, 2001)
10.22.3+ -- Addendum to Master Development Agreement, dated as of
November 20, 2000 (signed January 2001), by and
between Minolta Co., Ltd. and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.22.3 to the
Company's annual report on Form 10-K for the year
ended January 31, 2001)
10.23+ -- Master Assembly and Distribution Agreement, dated
January 31, 2001, by and between Kyocera Mita America
and T/R Systems, Inc. (incorporated by reference to
Exhibit 10.23 to the Company's annual report on Form
10-K for the year ended January 31, 2001)
10.24+ -- Software Development and License Agreement, dated
July 31, 2001, by and between Xerox Corporation and
T/R Systems, Inc. (incorporated by reference to
Exhibit 10.24 to the Company's quarterly report on
Form 10-Q for the quarter ended July 31, 2001)
10.25+ -- Software & Hardware Development Agreement, effective
as of January 1, 2001 (signed August 2001), by and
between Canon Inc. and T/R Systems, Inc.
(incorporated by reference to Exhibit 10.25 to the
Company's quarterly report on Form 10-Q for the
quarter ended October 31, 2001)
10.26 -- Loan Modification Agreement, dated as of January 8,
2002, by and between Silicon Valley Bank and T/R
Systems, Inc.
21.1 -- Subsidiaries of the registrant (incorporated by
reference to Exhibit 21.1 to the Company's annual
report on Form 10-K for the year ended January 31,
2001)
23.1 -- Consent of Deloitte & Touche LLP
- ----------
+ Confidential treatment has been requested with respect to portions of
this exhibit
* Management agreement or compensatory plan
(b) Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended January
31, 2002.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Norcross, State of Georgia, on April 16, 2002.
T/R SYSTEMS, INC.
By: /s/ Michael E. Kohlsdorf
-------------------------------------
Michael E. Kohlsdorf
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael E. Kohldorf President and Chief Executive Officer (Principal April 16, 2002
----------------------------------- Executive Officer)
Michael E. Kohlsdorf
/s/ Lyle W. Newkirk Senior Vice President, Chief Financial Officer, April 16, 2002
----------------------------------- Secretary and Treasurer (Principal Financial Officer
Lyle W. Newkirk and Principal Accounting Officer)
/s/ Charles H. Phipps Director April 16, 2002
-----------------------------------
Charles H. Phipps
/s/ C. Harold Gaffin Director April 16, 2002
-----------------------------------
C. Harold Gaffin
/s/ Philip T. Gianos Director April 16, 2002
-----------------------------------
Philip T. Gianos
/s/ Kevin J. McGarity Director April 16, 2002
-----------------------------------
Kevin J. McGarity
/s/ Barbara A. Pellow Director April 16, 2002
-----------------------------------
Barbara A. Pellow
/s/ Peter S. Sealey Director April 16, 2002
-----------------------------------
Peter S. Sealey
/s/ E. Neal Tompkins Director April 16, 2002
-----------------------------------
E. Neal Tompkins
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report........................................ F-2
Consolidated Balance Sheets as of
January 31, 2002 and 2001 ...................................... F-3
Consolidated Statements of Operations for the
Years Ended January 31, 2002, 2001 and 2000..................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the
Years Ended January 31, 2002, 2001 and 2000..................... F-5
Consolidated Statements of Cash Flows for the
Years Ended January 31, 2002, 2001 and 2000..................... F-6
Notes to Consolidated Financial Statements.......................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of T/R Systems, Inc.:
We have audited the accompanying consolidated balance sheets of T/R Systems,
Inc. and subsidiaries (the "Company") as of January 31, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the three years in the period ended January 31, 2002.
Our audits also included the financial statement schedule listed at Item 14 of
this annual report on Form 10-K. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at January
31, 2002 and 2001, and the results of its operations and its cash flows for each
of the three years in the period ended January 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 25, 2002
F-2
T/R SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JANUARY 31,
---------------------------
2002 2001
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents ............................................... $ 13,026 $ 26,194
Restricted cash ......................................................... -- 200
Receivables, net of allowance of $389 and $300, respectively ............ 4,667 7,074
Inventories, net ........................................................ 4,108 4,817
Deferred income taxes ................................................... -- 944
Prepaid expenses and other .............................................. 287 501
-------- --------
Total current assets .............................................. 22,088 39,730
Property and equipment, net ............................................... 6,400 3,979
Deferred income taxes ..................................................... -- 1,682
-------- --------
$ 28,488 $ 45,391
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................................ $ 2,386 $ 2,992
Deferred revenue ........................................................ 456 803
Accrued salaries and wages .............................................. 883 1,485
Income taxes payable .................................................... 78 50
Other liabilities ....................................................... 710 865
-------- --------
Total current liabilities ......................................... 4,513 6,195
Commitments (Note 9)
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,
12,295,903 and 12,214,634 shares issued and outstanding,
respectively........................................................... 123 122
Additional paid-in capital .............................................. 43,532 43,415
Deferred compensation ................................................... -- (28)
Accumulated deficit ..................................................... (19,680) (4,313)
-------- --------
Total shareholders' equity ........................................ 23,975 39,196
-------- --------
$ 28,488 $ 45,391
======== ========
See notes to consolidated financial statements
F-3
T/R SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JANUARY 31,
----------------------------------------------
2002 2001 2000
-------- -------- --------
Imaging systems ...................................... $ 11,772 $ 27,093 $ 20,969
Services ............................................. 5,846 5,153 1,353
-------- -------- --------
Total revenue ................................ 17,618 32,246 22,322
Operating expenses:
Cost of imaging systems ............................ 9,141 12,166 9,487
Research and development ........................... 7,042 5,078 3,488
Sales and marketing ................................ 10,923 9,418 6,599
General and administrative ......................... 3,880 3,101 2,163
-------- -------- --------
Total operating expenses ..................... 30,986 29,763 21,737
-------- -------- --------
Operating income (loss) .............................. (13,368) 2,483 585
Interest income, net ................................. 673 1,622 117
-------- -------- --------
Income (loss) before provision (benefit)
for income taxes ............................. (12,695) 4,105 702
Provision (benefit) for income taxes ................. 2,672 (2,229) 25
-------- -------- --------
Net income (loss) .................................... $(15,367) $ 6,334 $ 677
======== ======== ========
Net income (loss) per common share-- Basic ........... $ (1.25) $ 0.53 $ 0.25
======== ======== ========
Net income (loss) per common share-- Diluted ......... $ (1.25 $ 0.49 $ 0.07
======== ======== ========
See notes to consolidated financial statements
F-4
T/R SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SERIES D
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ----------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
------- ------ -------- ------- ----------- ------------ ----------- --------
Balance -- January 31, 1999........ 2,497 $ 25 $ 1,154 $(93) $ (11,324) $(10,238)
Issuance of series D
preferred stock at $4.50
per share, net of
issuance costs of $5........... 222 $ 2 993 995
Stock option exercises........... 288 3 202 205
Accretion of redeemable
convertible preferred
stock.......................... (22) (22)
Issuance of common stock
in initial public offering,
net of offering costs of
$3,265......................... 2,880 29 25,506 25,535
Conversion of preferred
stock to common................ (222) (2) 6,068 60 15,006 15,064
Amortization of deferred
compensation................... 33 33
Net income....................... 677 677
---- ---- ------- ----- -------- ----- --------- --------
Balance -- January 31, 2000 ....... -- -- 11,733 117 42,839 (60) (10,647) 32,249
Stock option exercises........... 471 5 438 443
Employee stock purchase
plan exercises................. 11 -- 69 69
Tax benefit from the
exercise of stock options...... 200 200
Additional offering costs of
initial public offering........ (131) (131)
Amortization of deferred
compensation................... 32 32
Net income....................... 6,334 6,334
---- ---- ------- ----- -------- ----- --------- --------
Balance -- January 31, 2001 ....... -- -- 12,215 122 43,415 (28) (4,313) 39,196
Stock option exercises........... 57 1 55 56
Employee stock purchase
plan exercises................. 24 -- 62 62
Amortization of deferred
compensation................... 28 28
Net loss......................... (15,367) (15,367)
---- ---- ------- ----- -------- ----- --------- --------
Balance -- January 31, 2002 ....... -- $ -- 12,296 $ 123 $ 43,532 $ -- $ (19,680) $ 23,975
==== ==== ======= ===== ======== ===== ========= ========
See notes to consolidated financial statements
F-5
T/R SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JANUARY 31,
----------------------------------------------
2002 2001 2000
-------- -------- --------
Operating Activities:
Net income (loss) ............................................. $(15,367) $ 6,334 $ 677
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation ............................................... 2,197 949 523
Deferred compensation expense .............................. 28 32 33
Changes in assets and liabilities:
Decrease (increase) in receivables ...................... 12 (3,278) (2,067)
Decrease (increase) in inventories ...................... 709 (1,338) (1,656)
Decrease (increase) in prepaid expenses
and other assets ......................................... 214 (26) (284)
Decrease (increase) in deferred income tax assets ....... 2,626 (2,426) --
(Decrease) increase in accounts payable ................. (606) 1,721 (410)
(Decrease) increase in deferred revenue ................. (347) (224) 868
(Decrease) increase in accrued salaries and wages ....... (602) 97 814
(Decrease) increase in other liabilities ................ (127) 140 401
-------- -------- --------
Net cash (used in) provided by operating activities ............. (11,263) 1,981 (1,101)
Investing Activities:
Purchases of property and equipment .......................... (2,223) (3,020) (570)
Financing Activities:
Decrease in restricted cash .................................. 200 -- --
Other short-term borrowings .................................. -- -- (27)
Principal repayments on long term debt ....................... -- -- (151)
(Decrease) increase in bank overdrafts ....................... -- (462) 462
Proceeds from sale of common stock ........................... 118 512 205
(Costs of) proceeds from initial public offering ............. -- (131) 25,535
Proceeds from sale of series D preferred stock ............... -- -- 995
-------- -------- --------
Net cash provided by (used in) financing activities ............. 318 (81) 27,019
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ............ (13,168) (1,120) 25,348
Cash and Cash Equivalents:
Beginning of year ............................................. 26,194 27,314 1,966
-------- -------- --------
End of year ................................................... $ 13,026 $ 26,194 $ 27,314
======== ======== ========
Cash paid for interest .......................................... $ -- $ -- $ 14
======== ======== ========
Cash paid for income taxes ...................................... $ 83 $ 173 $ --
======== ======== ========
Supplemental Disclosure of Non-cash Investing
Activities:
Equipment received for payment of engineering fees ............ $ 2,395 $ 863 $ --
======== ======== ========
See notes to consolidated financial statements
F-6
T/R SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
T/R Systems, Inc. was incorporated in Georgia in September 1991. We
design, develop and market innovative software and hardware applications
designed to help organizations manage, store, distribute and produce digital
documents. We distribute our products in the United States and internationally
primarily through distribution relationships with Hitachi Koki Imaging
Solutions, Inc., IKON Office Solutions, Inc., Kyocera Mita America, Inc., Lanier
Worldwide, Inc., M.G.I. SA, Minolta Co., Ltd., Ricoh Corporation, Toshiba
America Business Solutions, Inc. and Xerox Corporation, as well as through our
network of independent dealers.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- 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.
Cash and Cash Equivalents -- Cash equivalents are stated at cost, which
approximates market value, and include investments in a money market account and
government securities with original maturities of three months or less.
Revenue Recognition -- Imaging systems revenue is recognized based on
the guidance in 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
customers' objectives, such as our Digital StoreFront application, is recognized
upon completion of the required customization.
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. We recognize revenue from the
sale of printing consumables upon shipment. We recognize revenue from customer
service plans ratably over the term of each plan, which is typically one to
three years. Nonrefundable prepaid royalties are recognized as revenue over the
term of the royalty agreement based on the greater of actual royalties earned or
the straight-line method. Revenue from royalties, which is included in service
revenue, has been less than 10% of total revenue in each of the last three
fiscal years.
Receivables, Net -- Receivables, net include unbilled engineering
service fees of $2.1 million at January 31, 2002 and $1.4 million at January 31,
2001. The revenue recognition process for these nonrecurring engineering fees
was complete, but we could not bill the customers due to contractual terms.
Research and Development Costs -- Research and development costs are
charged to expense when incurred. Software development costs are expensed as
incurred until technological feasibility is determined. To date, we have
expensed all software development costs.
Inventory -- Inventory is valued at the lower of cost or market. Cost
is determined on the first-in, first-out basis.
Property and Equipment -- Property and equipment is stated at cost.
Depreciation is computed on a straight-line basis over the estimated lives of
the assets, which are generally one and one-half to seven years. Leasehold
improvements are amortized over the lesser of useful life or the remaining lease
term.
Product Warranty -- We provide for estimated future warranty costs as
products are sold.
Accounts Payable -- Accounts Payable are valued at cost.
F-7
Income Taxes -- Deferred tax assets and liabilities are determined for
differences between the financial reporting basis and income tax basis of the
assets and liabilities that will result in taxable or deductible amounts in the
future, based on enacted tax rates applicable to the periods in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Impairment of Long-Lived Assets -- Long-lived assets are reviewed for
impairment when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Any impairment losses are reported in
the period that the recognition criteria are first applied, based on the fair
value of the asset. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value less cost to sell.
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, Statement No. 123, Accounting for Stock-Based Compensation.
This statement established a fair-value based method of accounting for
compensation cost related to stock options and other forms of stock-based
compensation plans. The adoption of the recognition provisions related to
employee arrangements under SFAS No. 123 is optional; however, the pro forma
effects on operations had these recognition provisions been elected are required
to be disclosed in financial statements.
Net Income or Loss Per Common Share -- Net income or loss per common
share is computed based on the guidance in SFAS No. 128, Earnings Per Share.
Basic net income or loss per common share is computed by dividing net income or
loss available to common shareholders by the weighted average common shares
outstanding. Diluted net income or loss per common share is computed by dividing
net income or loss available to common shareholders by the weighted average
common shares outstanding plus the dilutive effect of stock options and
convertible preferred stock; see note 12.
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Comprehensive Income -- We report comprehensive income in accordance
with SFAS No. 130, Reporting Comprehensive Income. This statement establishes
standards for reporting and displaying comprehensive income and its components,
including revenues, expenses, gains and losses in a full set of general purpose
financial statements.
Fair Value of Financial Instruments -- The carrying value of our cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate their fair values, due to the short-term nature of these
instruments.
New Accounting Pronouncements-- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. Subsequently, SFAS No. 133 was amended by SFAS No. 137 and
No. 138 and, as amended, is effective for all fiscal years beginning after June
15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including some derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS No. 133, some contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. We adopted SFAS No. 133, as amended, effective February 1, 2001. The
adoption of this statement did not have a significant impact on our financial
position or results of operations because we do not have any significant
derivative instruments.
In December 1999, the Securities and Exchange Commission, or SEC,
issued Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in
Financial Statements. SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. SAB No. 101, as amended by SAB No. 101B, is effective beginning in the
fourth quarter of fiscal years beginning after December 15, 1999. We adopted SAB
No. 101, as amended, in the fourth quarter of fiscal 2001 and have determined
that the effect of SAB No. 101 is not material.
In July 2001, the Financial Accounting Standards Board issued 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 initiated after June 30, 2001 and indicates that the
use of the
F-8
pooling-of-interests method of accounting is no longer allowed. 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. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. The new standards are not expected to 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 Financial Accounting Standards Board 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 APB Opinion No.
30. SFAS No. 144 is effective beginning February 1, 2002 for the first quarter
of fiscal 2003, and is not expected to have a material impact on our
consolidated financial statements.
Reclassifications - Certain amounts in fiscal 2001 and fiscal 2000 have
been reclassified to conform to the fiscal 2002 financial statement
presentation.
3. INVENTORIES
Inventories at January 31, 2002 and 2001 consisted of the following:
JANUARY 31,
----------------------
2002 2001
------ ------
(IN THOUSANDS)
Components and supplies ................. 3,715 $3,980
Finished goods .......................... 1,355 1,336
------ ------
5,070 5,316
Less reserve for potential losses ....... 962 499
------ ------
$4,108 $4,817
====== ======
4. PROPERTY AND EQUIPMENT
Property and equipment at January 31, 2002 and 2001 consisted of the
following:
JANUARY 31,
------------------------
2002 2001
------- -------
(IN THOUSANDS)
Furniture and fixtures .................. $ 1,462 $ 1,253
Equipment and software .................. 7,878 4,281
Leasehold improvements .................. 1,202 1,088
------- -------
10,542 6,622
Less accumulated depreciation ........... 4,142 2,643
------- -------
$ 6,400 $ 3,979
======= =======
Depreciation expense was $2,197,000 in fiscal 2002, $949,000 in fiscal
2001 and $523,000 in fiscal 2000.
F-9
5. INCOME TAXES
Income (loss) before income taxes for the years ended January 31, 2002,
2001 and 2000 consisted of the following:
YEAR ENDED JANUARY 31,
-----------------------------------------
2002 2001 2000
-------- ------ ------
(IN THOUSANDS)
Domestic ............................................. $(12,776) $4,059 $ 673
Foreign .............................................. 81 46 29
-------- ------ ------
Income (loss) before income taxes .................... $(12,695) $4,105 $ 702
======== ====== ======
Provision (benefit) for income taxes for the years ended January 31,
2002, 2001 and 2000 consisted of the following:
YEAR ENDED JANUARY 31,
-------------------------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Current:
Federal ............................ $ -- $ 161 $ 25
State .............................. 13 30 --
Foreign ............................ 32 7 --
------- ------- -------
45 198 25
Deferred:
Federal and state .................. (4,622) 1,371 182
Foreign ............................ -- -- --
Change in valuation allowance ...... 7,249 (3,798) (182)
------- ------- -------
2,627 (2,427) --
------- ------- -------
Provision (benefit) for income taxes .......... $ 2,672 $(2,229) $ 25
======= ======= =======
For the years ended January 31, 2002, 2001 and 2000, the reconciliation
between the amounts computed by applying the United States federal statutory tax
rate of 34% to income (loss) before income taxes and the actual tax expense
follows:
YEAR ENDED JANUARY 31,
-------------------------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
Income tax (benefit) expense at statutory rate .......... $(4,316) $ 1,396 $ 239
State income tax (benefit) expense, net of
federal income tax benefit ......................... (376) 123 21
Change in valuation allowance ........................... 7,249 (3,798) (182)
Unrepatriated foreign earnings .......................... 28 -- --
Permanent differences ................................... 46 83 27
Nondeductible financing costs ........................... -- -- (89)
Rate differential - Foreign ............................. 3 -- --
Other ................................................... 38 (33) 9
------- ------- -------
Provision (benefit) for income taxes .................... $ 2,672 $(2,229) $ 25
======= ======= =======
F-10
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at January 31, 2002 and 2001 are summarized
below:
JANUARY 31,
-------------------------
2002 2001
------- -------
(IN THOUSANDS)
Current deferred tax assets:
Accounts receivable ...................... $ 144 $ 111
Accrued liabilities ...................... 148 416
Deferred revenue ......................... 166 223
Inventory ................................ 356 194
------- -------
Total current deferred tax assets ........ 814 944
------- -------
Long term deferred tax assets:
Net operating loss carryforwards ......... 6,078 1,164
Deferred rent ............................ 31 14
Other assets ............................. 248 259
Property and equipment ................... 78 245
------- -------
Total long-term deferred tax assets ...... 6,435 1,682
------- -------
Total deferred tax assets ............................. 7,249 2,626
------- -------
Valuation allowance ................................... (7,249) --
------- -------
Net deferred tax assets ............................... $ -- $ 2,626
======= =======
During the fourth quarter of fiscal 2002, we recorded a valuation
allowance of $7.2 million to fully offset the balance of our deferred tax assets
at January 31, 2002. We recorded this valuation allowance as a result of recent
evidence, principally our recent loss history, which led us to believe that the
future realization of our deferred tax assets was not likely in the near future.
During the fourth quarter of fiscal 2001, we recognized a $2.4 million
deferred income tax benefit in our results of operations. Additionally, we
recognized a $200,000 deferred tax asset for the tax benefits related to the
exercise of employee stock options through a corresponding increase to our
additional paid-in capital. These amounts represented the remainder of our net
operating losses for income taxes and other deferred tax assets at January 31,
2001, which had previously been fully offset by a valuation allowance. In
determining whether or not to provide a valuation allowance for our deferred tax
assets, we consider both positive and negative evidence and give greater weight
to evidence that is objectively verifiable. In the fourth quarter of fiscal
2001, we concluded that the realization of these deferred tax assets was more
likely than not based on the level of current year taxable income, the absence
of cumulative net operating losses for the past three years, anticipated future
operating results and the amount and expiration dates of our net operating loss
carryforwards. In prior periods, we concluded that the realization of our
deferred tax assets was not more likely than not and fully offset our deferred
tax assets with a valuation allowance.
At January 31, 2002, we had approximately $5.5 million in federal
income tax net operating loss carryforwards available to offset future income
taxes payable which, if not utilized, expire beginning in 2016 through 2022. The
utilization of these net operating loss carryforwards depends primarily on the
recognition of taxable income in future years. Our net operating loss
carryforwards and related expiration dates are summarized below:
YEAR OF EXPIRATION -
YEAR ENDING JANUARY 31, AMOUNT
----------------------- ------
(IN THOUSANDS)
2016 $1,625
2017 674
2018 1,075
2019 64
2022 2,090
F-11
6. CREDIT FACILITY
We have a $5.0 million secured revolving line of credit from a bank,
which expires on October 15, 2002. There were no borrowings against this line of
credit at January 31, 2002 or 2001. 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 the maintenance of various covenants, including a restriction on paying
dividends. We were in compliance with these covenants at January 31, 2002. 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. In April
1998, we issued a $250,000 letter of credit under this facility in connection
with an operating lease obligation. This letter of credit is reduced annually by
$50,000.
At January 31, 2001, we had an unused $200,000 letter of credit from a
bank under an additional credit facility. Both the letter of credit and that
additional credit facility expired on January 10, 2002. As security for the
letter of credit, we were required to maintain a certificate of deposit for
$200,000. The certificate of deposit was classified as restricted cash at
January 31, 2001.
7. REDEEMABLE, CONVERTIBLE PREFERRED STOCK
Prior to November 2000, we had designated 4,799,999 shares as series A
redeemable, convertible preferred stock, 2,961,585 shares as series B
redeemable, convertible preferred stock and 1,215,500 shares as series C
redeemable, convertible preferred stock. Through August 1995, we had issued and
sold 4,799,999 shares of series A preferred stock at $1.00 per share. In January
1996, we issued and sold 2,961,585 shares of series B preferred stock at $2.55
per share. During March and June 1997, we issued and sold a total of 1,222,222
shares of series C preferred stock at $2.25 per share.
The shares of preferred stock automatically converted into common stock
upon the closing of our initial public offering on January 31, 2000. Each share
of series A preferred stock converted into .606 shares of common stock. Each
share of series B preferred stock converted into .773 shares of common stock.
Each share of series C preferred stock converted into .606 shares of common
stock.
Prior to conversion of the preferred shares, dividends on common shares
required the approval of the holders of a majority of the shares of each series
of preferred stock and were payable only after any preferred stock dividend
requirements were satisfied.
Additionally, the series A, series B and series C redeemable,
convertible preferred stock had liquidation preferences equal to $1.00, $2.55
and $2.25 per share, respectively.
The series A, series B and series C redeemable, convertible preferred
stock were subject to mandatory redemption in two equal installments in 2001 and
2002 at a redemption price of each series A, series B, and series C share equal
to the greater of cost or appraised value. The shares of preferred stock were
not recorded at redemption value due to the uncertainty of redemption at amounts
greater than their carrying value.
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------ ----------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT TOTAL
------ ------- ------ ------- ------- ------- --------
(IN THOUSANDS)
Balance January 31, 1999 ............... 4,800 $ 4,782 2,962 $ 7,530 $ 1,215 $ 2,730 $ 15,042
Preferred stock accretion ............ -- 9 -- 11 -- 2 22
Conversion of preferred stock to
common stock .................... (4,800) (4,791) (2,962) (7,541) (1,215) (2,732) (15,064)
------ ------- ------ ------- ------- ------- --------
Balance-- January 31, 2000 ............. -- $ -- -- $ -- -- $ -- $ --
====== ======= ====== ======= ======== ======= ========
We netted the costs associated with the issuance of redeemable,
convertible preferred stock against the gross proceeds received and accreted the
carrying amount of each series of preferred stock through a charge to additional
paid-in capital.
F-12
8. SHAREHOLDERS' EQUITY
Preferred Stock -- We are authorized to issue up to 12,000,000 shares
of $0.01 par value preferred stock. As of November 2000, we had designated
880,000 shares as Series A Junior Participating Preferred Stock. No shares of
this junior participating preferred stock were issued or outstanding at January
31, 2002.
Common Stock -- We are authorized to issue up to 88,000,000 shares of
$0.01 par value common stock.
During the fourth quarter of fiscal 2001, we adopted a shareholder
rights plan. Under the plan, our board of directors authorized and declared a
dividend distribution of one right for each share of our common stock
outstanding. Under the plan, the rights initially trade with the common stock
and are not exercisable. In the absence of further action by our board of
directors, the rights generally will become exercisable and allow the holder to
acquire shares of our common stock at a discounted price if a person or group
acquires beneficial ownership of 15% or more of the outstanding shares of our
common stock. Rights held by persons or groups that exceed the applicable
threshold will be void. In certain circumstances, the rights entitle the holder
to buy shares in an acquiring entity at a discounted price. Our board of
directors may, at its option, redeem all rights for $0.01 per right generally at
any time prior to the rights becoming exercisable. In certain circumstances, our
board of directors may, at its option, exchange all or part of the exercisable
rights for shares of our common stock at an exchange ratio of one share of
common stock per right. The rights will expire on November 27, 2010 unless
earlier redeemed, exchanged or amended by our board of directors. The issuance
of the rights was not a taxable event, does not affect our reported financial
results, including earnings per share, and did not change the way our common
stock is traded.
Stock Option Plans -- At January 31, 2002, we had stock option plans
that provide for the granting of stock options to officers, employees, and key
persons to purchase up to 5,827,273 shares of our common stock, of which options
to purchase up to 1,414,099 shares were available for future grants. The plans
allow for the grant of both incentive and nonqualified stock options. The
exercise price of the incentive stock options may not be less than fair market
value of the stock on the date of grant. Generally, these options are
exercisable ratably over three or four years and expire at the earlier of three
months after the optionee's employment terminates or after ten years from the
date of grant.
Under our 1994 associates stock option plan, as amended, we may issue,
to nonemployees who act as directors, consultants or advisors, nonqualified
stock options to purchase up to 80,303 shares of our common stock, of which
options to purchase up to 50,142 shares were available for future grants.
Generally, these options are exercisable immediately upon grant and expire at
the earlier of three months after the nonemployee ceases to be associated with
T/R Systems or ten years from the date of grant.
The following table presents the activity in the above plans:
YEAR ENDED JANUARY 31,
-------------------------------------------------------------
2002 2001 2000
----------------- ------------------ -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------- ---------
(SHARES IN THOUSANDS)
Options outstanding as of
the beginning of the period 1,734 $ 6.88 1,484 $ 2.83 1,510 $ 1.16
Granted............................. 1,168 2.95 835 10.75 297 9.26
Exercised........................... (57) 0.99 (470) 0.92 (288) 0.77
Forfeited........................... (489) 6.43 (115) 7.04 (35) 2.48
------ ------ ------
Options outstanding as of
the end of the period............. 2,356 5.17 1,734 6.88 1,484 2.83
====== ====== ======
Options exercisable as of
the end of the period............. 885 4.36 591 2.02 764 0.94
====== ====== ======
Weighted-average fair value
of options granted during the
year............................. $ 2.26 $ 9.26 $ 2.18
====== ====== ======
F-13
The following table summarizes information about stock options
outstanding at January 31, 2002:
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF JANUARY 31, CONTRACTUAL EXERCISE JANUARY 31, EXERCISE
EXERCISE PRICES 2002 LIFE (YEARS) PRICE 2002 PRICE
------------------------- ------------- ------------ --------- -------------- ---------
(SHARES IN THOUSANDS)
$ 0.17 to $ 0.83......... 515 4.1 $ 0.81 515 $ 0.81
1.80 to 3.30......... 528 9.6 2.04 19 3.30
3.87 to 4.95......... 559 8.7 4.02 58 4.93
5.78 to 6.60......... 204 7.1 6.36 89 6.41
8.25 to 10.00......... 123 6.7 9.25 70 9.28
11.00 to 13.55......... 305 8.0 12.86 98 12.79
17.00................... 122 8.0 17.00 36 17.00
------ ----
$ 0.17 to $17.00......... 2,356 7.5 5.17 885 4.36
====== ====
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:
YEAR ENDED JANUARY 31,
-----------------------------------------
2002 2001 2000
-------- -------- ------
Expected life (years) ............................ 5.6 5.8 2.5
Interest rate .................................... 3.6% 6.2% 5.6%
Volatility ....................................... 109.1% 128.8% 32.2%
Dividend yield ................................... 0.0% 0.0% 0.0%
Had compensation for our stock option grants in fiscal 2002, 2001 and
2000 been determined by using grant-date fair value based on the guidance in
SFAS No. 123, our net loss would have been $19.0 million in fiscal 2002 and our
net income would have been $3.9 million in fiscal 2001 and $541,000 in fiscal
2000. Basic and diluted net loss per share would have been $1.55 in fiscal 2002
and basic net income per share would have been $0.33 in fiscal 2001 and $0.20 in
fiscal 2000, and diluted net income per share would have been $0.31 in fiscal
2001 and $0.05 in fiscal 2000.
During the year ended January 31, 1998, we recorded $130,000 in
deferred compensation, which represented the excess of the estimated market
value of our common stock over the exercise price of stock options granted at
date of grant. Deferred compensation is amortized over the vesting period of the
stock options, four years. Compensation expense related to stock options was
$28,000 in fiscal 2002, $32,000 in fiscal 2001 and $33,000 in fiscal 2000.
Employee Stock Purchase Plan - During fiscal 2001, our shareholders
approved our 2000 employee stock purchase plan with an initial reserve of
200,000 shares of our common stock. The plan allows eligible employees to
purchase shares of our common stock at 85% of the lower of the fair market value
of our common stock on the first or last day of an offering period through
payroll deductions of up to 10% of each employee's compensation. Offering
periods typically last six months. The plan is intended to qualify as an
"Employee Stock Purchase Plan" within the meaning of Section 423 of the Internal
Revenue Code. We sold 24,918 shares of our common stock under this plan in
fiscal 2002 and 10,858 shares in fiscal 2001.
F-14
9. COMMITMENTS
We lease existing office facilities and equipment under operating lease
agreements, which expire through 2010. We have the option to renew two of our
facility leases for one five-year term at the expiration of the original term.
The future noncancelable minimum rent schedule for these leases is as follows:
YEAR ENDING JANUARY 31, AMOUNT
----------------------- ------
(IN THOUSANDS)
2003...................... $ 801
2004...................... 722
2005...................... 643
2006...................... 614
2007...................... 669
Thereafter................ 891
------
Total........... $4,340
======
Rent expense was $753,000 for fiscal 2002, $556,000 for fiscal 2001 and
$389,000 for fiscal 2000.
10. SEGMENT INFORMATION
We operate in one reportable segment, the output management market, and
assess performance based on operating income. Revenue by geographic area is
summarized below:
YEAR ENDED JANUARY 31,
-----------------------------------------
2002 2001 2000
------- ------- -------
(IN THOUSANDS)
United States ................... $12,331 $26,091 $17,505
Asia ............................ 3,432 2,155 1,047
Europe .......................... 1,364 2,494 1,662
Other foreign countries ......... 491 1,506 2,108
------- ------- -------
Total ........................... $17,618 $32,246 $22,322
======= ======= =======
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.
For the year ended January 31, 2002, our largest customer represented
22.4% of our total revenue. For the year ended January 31, 2001, our three
largest customers represented 20.8%, 18.7% and 12.7% of our total revenue. For
the year ended January 31, 2000, our two largest customers represented 34.9% and
11.5% of our total revenue. At January 31, 2002 two customers represented 26.2%
and 19.6% of our total receivables. At January 31, 2001, two customers
represented 20.3% and 11.5% of our total receivables.
11. EMPLOYEE RETIREMENT SAVING PLAN
We have a pretax saving plan under Section 401(k) of the Internal
Revenue Code for all eligible U.S. employees. Under the plan, eligible employees
are able to contribute up to 15% of their compensation, not to exceed the
maximum IRS deferral amount. Our discretionary contribution is determined by our
board of directors. Currently, we match 50% of each participant's contribution,
up to 6% of the participant's compensation. Our contributions vest for each
employee ratably over four years beginning on the employee's date of hire. We
contributed $216,000 to the plan during fiscal 2002, $181,000 during fiscal 2001
and $114,000 during fiscal 2000.
F-15
12. NET INCOME (LOSS) PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income (loss) per common share:
YEAR ENDED JANUARY 31,
------------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income (loss) ........................................ $(15,367) $ 6,634 $ 677
Accretion on redeemable preferred stock .................. -- -- (22)
-------- -------- --------
Net income (loss) applicable to common ................... (15,367) 6,634 655
shareholders-- Basic
Add back accretion on redeemable preferred stock ......... -- -- 22
-------- -------- --------
Net income (loss) applicable to common
shareholders-- Diluted ................................. $(15,367) $ 6,634 $ 677
Denominator:
Weighted average shares outstanding-- Basic .............. 12,257 12,008 2,641
Conversion of preferred stock ............................ -- -- 6,012
Effect of outstanding stock options ...................... -- 878 1,208
-------- -------- --------
Total-- Diluted .......................................... 12,257 12,886 9,861
======== ======== ========
Net income (loss) per common shares-- Basic ................ $ (1.25) $ 0.53 $ 0.25
======== ======== ========
Net income (loss) per common and
common equivalent shares-- Diluted ....................... $ (1.25) $ 0.49 $ 0.07
======== ======== ========
For the years ended January 31, 2002, 2001 and 2000, the historical
diluted computations exclude the effects of all stock options and shares of
convertible preferred stock which were antidilutive. At each corresponding
period ended January 31, 2002, 2001 and 2000, common shares issuable under these
arrangements which were antidilutive were 2,356,000, 706,000 and 69,000.
13. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following tables summarize our supplemental unaudited quarterly
consolidated financial data for fiscal 2002 and fiscal 2001:
QUARTER ENDED
------------------------------------------------------------------
APRIL 30, 2001 JULY 31, 2001 OCTOBER 31, 2001 JANUARY 31, 2002
-------------- ------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenue .................................... $ 5,894 $ 5,565 $ 3,064 $ 3,095
Operating income (loss) .......................... (2,656) (1,963) (5,568) (3,181)
Net income (loss) ................................ (1,522) (1,147) (3,478) (9,220)
Net income (loss) per common share - Basic ....... $ (0.12) $ (0.09) $ (0.28) $ (0.75)
Net income (loss) per common share - Diluted ..... (0.12) (0.09) (0.28) (0.75)
QUARTER ENDED
------------------------------------------------------------------
APRIL 30, 2000 JULY 31, 2000 OCTOBER 31, 2000 JANUARY 31, 2000
-------------- ------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenue ..................................... $ 7,310 $ 8,839 $ 9,070 $ 7,027
Operating income .................................. 455 1,337 1,674 (983)
Net income ........................................ 800 1,650 2,014 1,870
Net income per common share - Basic ............... $ 0.07 $ 0.14 $ 0.17 $ 0.15
Net income per common share - Diluted ............. 0.06 0.13 0.16 0.15
As described in note 5, the results of operations for the quarterly
periods ended January 31, 2002 and 2001 include income tax adjustments related
to reducing our deferred tax assets by recording a valuation allowance.
F-16
SCHEDULE II
T/R SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS(1) PERIOD
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Year ended January 31, 2002 allowance $ 300 $ 893 $ -- $ (804) $ 389
for doubtful accounts
Year ended January 31, 2001 allowance 150 140 12 (2) 300
for doubtful accounts
Year ended January 31, 2000 allowance 200 71 -- (121) 150
for doubtful accounts
Year ended January 31, 2002 allowance 499 1,309 -- (846) 962
for inventory obsolescence
Year ended January 31, 2001 allowance 421 182 -- (104) 499
for inventory obsolescence
Year ended January 31, 2000 allowance 573 119 -- (271) 421
for inventory obsolescence
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(1) Deductions represent write-offs to the respective reserve accounts.