<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________to_________________
Commission File Number: 000-24413
TROY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0807798
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2331 SOUTH PULLMAN STREET
SANTA ANA, CALIFORNIA 92705
(Address of principal executive offices) (Zip code)
(949) 250-3280
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of October 12, 2000, there were 10,880,764 shares of our Common
Stock outstanding.
<PAGE>
TROY GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED AUGUST 31, 2000
<TABLE>
<CAPTION>
INDEX
Page No.
--------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
August 31, 2000 and November 30, 1999........................................3
Consolidated Statements of Operations
for the Three Months and Nine Months ended August 31, 2000
and August 31, 1999..........................................................4
Consolidated Statements of Cash Flows
for the Nine Months ended August 31, 2000
and August 31, 1999..........................................................5
Notes to Consolidated Financial Statements................................6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................................17
Item 2. Changes in Securities and Use of Proceeds.....................................17
Item 3. Defaults Upon Senior Securities...............................................17
Item 4. Submission of Matters to a Vote of Security Holders...........................17
Item 5. Other Information.............................................................17
Item 6. Exhibits and Reports on Form 8-K..............................................17
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TROY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS August 31, November 30,
2000 1999
(Unaudited)
---------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 9,611 $ 4,783
Investment in available-for-sale securities............................... 4,628 7,647
Accounts receivable, less allowance for doubtful accounts of $705 and $294,
respectively........................................................... 9,857 12,530
Inventories................................................................ 6,022 5,082
Prepaid expenses and other................................................. 770 140
Deferred tax assets ...................................................... 1,160 1,160
---------------- -----------------
Total current assets.................................................. 32,048 31,342
Equipment and leasehold improvements, net..................................... 1,891 1,863
Other assets.................................................................. 9,707 3,853
---------------- -----------------
Total assets.......................................................... $ 43,646 $ 37,058
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................................... $ 59 $ 64
Accounts payable........................................................... 3,555 2,495
Accrued expenses........................................................... 3,258 2,322
Income taxes payable....................................................... 722 1,208
Deferred service revenue................................................... 244 242
---------------- -----------------
Total current liabilities............................................. 7,838 6,331
---------------- -----------------
Long-term debt, net of current portion........................................ 288 331
---------------- -----------------
Deferred tax liabilities...................................................... 601 601
---------------- -----------------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000 shares,
issued 2000 10,880,764 shares; and 1999 10,663,941 shares............... 109 107
Preferred stock, no par value, authorized 5,000,000 shares, issued none.... --- ---
Additional paid-in capital................................................. 20,467 17,397
Retained earnings.......................................................... 14,343 12,291
---------------- -----------------
Total stockholders' equity............................................ 34,919 29,795
---------------- -----------------
Total liabilities and stockholders' equity............................ $ 43,646 $ 37,058
================ =================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales........................................... $ 14,043 $ 17,416 $ 39,561 $ 40,882
Cost of goods sold.................................. 8,480 10,824 22,410 24,991
------------- -------------- ------------- -------------
Gross profit.................................. 5,563 6,592 17,151 15,891
------------- -------------- ------------- -------------
Operating expenses:
Selling, general and administrative ............. 4,387 2,992 11,400 7,028
Research and development......................... 1,053 919 3,052 2,661
------------- -------------- ------------- -------------
Operating income.............................. 123 2,681 2,699 6,202
Interest income..................................... 209 --- 634 ---
Interest expense.................................... (1) (65) (13) (227)
------------- -------------- ------------- -------------
Income before income taxes....................... 331 2,616 3,320 5,975
Provision for income taxes.......................... 115 1,146 1,269 2,480
------------- -------------- ------------- -------------
Net income.................................... $ 216 $ 1,470 $ 2,051 $ 3,495
============= ============== ============= =============
Net income per share:
Basic ........................................... $ .02 $ .17 $ .19 $ .43
============= ============== ============= =============
Diluted.......................................... $ .02 $ .16 $ .18 $ .42
============= ============== ============= =============
Weighted-average shares outstanding:
Basic ........................................... 10,893 8,844 10,803 8,067
============= ============== ============= =============
Diluted.......................................... 11,395 9,223 11,511 8,421
============= ============== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
---------------------------------
August 31, August 31,
2000 1999
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 2,051 $ 3,495
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 1,190 670
Provision for doubtful accounts................. 504 75
Amortization of investment discounts, net....... --- (51)
Deferred taxes.................................. --- (76)
Changes in working capital components, net of
effects from acquisition of companies:
(Increase) decrease in:
Accounts receivable........................ 2,647 (5,658)
Income taxes refund receivable............. --- 319
Inventories................................ (940) (520)
Prepaid expenses and other................. (494) (151)
Increase (decrease) in:
Accounts payable........................... 1,060 113
Accrued expenses........................... 731 (582)
Income taxes payable....................... (486) 1,195
Deferred service revenue................... 2 9
--------------- ----------------
Net cash provided by (used in) operating
activities................................. 6,265 (1,162)
--------------- ----------------
Cash flows from investing activities:
Acquisition of companies........................... (3,240) (299)
Purchase of equipment and leasehold improvements... (437) (505)
Purchase of available-for-sale securities.......... (7,821) (7,499)
Maturities of available-for-sale securities........ 10,840 --
(Increase) decrease in other assets................ (1,080) 533
--------------- ----------------
Net cash (used in) investing activities......... (1,738) (7,770)
--------------- ----------------
Cash flows from financing activities:
Borrowings on notes payable........................ --- 12,203
Payments on notes payable.......................... --- (13,393)
Proceeds from issuance of debt..................... --- 670
Principal payments on debt......................... (273) (3,592)
Increase in checks issued not presented for payment --- 963
Proceeds from issuance of common stock............. 574 14,997
Dividends paid..................................... --- (200)
--------------- ----------------
Net cash provided by financing activities....... 301 11,648
--------------- ----------------
Net increase in cash and cash equivalents....... 4,828 2,716
Cash and cash equivalents, beginning of period........ 4,783 308
--------------- ----------------
Cash and cash equivalents, end of period.............. $ 9,611 $ 3,024
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
TROY GROUP, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
months and nine months ended August 31, 2000 are not necessarily indicative of
the results that may be expected for the year ended November 30, 2000. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for its fiscal year ended
November 30, 1999 (File No. 000-24413).
NOTE 2. INVENTORIES
Inventories consisted of the following as of August 31, 2000 and November 30,
1999 (amounts in thousands):
<TABLE>
<CAPTION>
August 31, 2000 November 30, 1999
--------------- -----------------
<S> <C> <C>
Raw materials........................ $ 3,270 $ 3,692
Work-in-process...................... 208 187
Finished goods....................... 2,544 1,203
------- -------
Total........................... $ 6,022 $ 5,082
======= =======
</TABLE>
NOTE 3. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
As of August 31, 2000, the Company had approximately $4.6 million in corporate
debt and marketable equity securities which management has determined should
be classified as available-for-sale. Approximately $2 million of these
securities have contractual maturity dates of up to one year and $2.6 million
of these securities have no maturity date. Market values approximated carrying
values. Accordingly, no unrealized gains or losses were recorded at August 31,
2000. There were no gains or loss recognized for the nine months ended August
31, 2000 or August 31, 1999.
NOTE 4. STOCK OPTION PLANS
During the three months ended August 31, 2000, the Company did not grant any
options to acquire shares of common stock. The following is a summary of total
outstanding options at August 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ------------------------------
Weighted-
Weighted- Average Weighted-
Range of Number of Average Remaining Number of Average
Exercise Prices Options Exercise Price Contractual Life Options Exercise Price
--------------- ------- -------------- ---------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$6.38 - $8.75 1,342,000 $ 7.19 9.09 275,000 $6.86
$13.16 - $14.25 25,000 $13.38 9.25 -- --
---------
1,367,000
=========
</TABLE>
At August 31, 2000, there were 1,324,341 shares remaining available for grant
under the Company's option plans.
6
<PAGE>
NOTE 5. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
(amounts in thousands, except per (amounts in thousands, except per
share data) share data)
August 31, 2000 August 31, 1999 August 31, 2000 August 31, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NUMERATOR FOR BASIC AND DILUTED NET
INCOME PER SHARE:
Net income.......................... $ 216 $1,470 $2,051 $3,495
====== ====== ====== ======
DENOMINATOR:
Denominator for basic net income
per share - weighted-average shares
outstanding......................... 10,893 8,844 10,803 8,067
Effect of employee stock options
and warrants........................ 502 379 708 354
------ ----- ------ -----
Denominator for diluted net income
per share........................... 11,395 9,223 11,511 8,421
====== ===== ====== =====
NET INCOME PER SHARE:
Basic............................... $ .02 $ .17 $ .19 $ .43
===== ===== ===== =====
Diluted............................. $ .02 $ .16 $ .18 $ .42
===== ===== ===== =====
</TABLE>
NOTE 6. BUSINESS COMBINATIONS
AMERICAN DEVELOPMENT, INC.
On February 18, 2000, the Company acquired certain assets and assumed certain
liabilities of American Development, Inc., a software development company, in
exchange for 42,654 shares of $0.01 par value common stock, $1,179,000 in cash
and $54,000 in direct expenses. The total acquisition cost was $2,652,000,
including $330,000 recorded in connection with warrants issued to a
consultant, and was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 177,000
Equipment and leasehold improvements ................................................. 61,000
Other assets.......................................................................... 94,000
Intangible assets, including customer list, assembled
workforce, core technology and goodwill ........................................... 2,703,000
Current liabilities assumed .......................................................... (383,000)
--------
$2,652,000
==========
</TABLE>
The acquisition has been accounted for as a purchase and results of operations
of American Development, Inc. since the date of acquisition are included in
the Company's consolidated financial statements.
7
<PAGE>
NOTE 6. BUSINESS COMBINATIONS, CONTINUED
Pro Forma consolidated results of operations for nine months ended August 31,
2000 as though American Development, Inc. had been acquired as of December 1,
1998 are as follows (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
August 31, August 31,
2000 1999
-------------- -------------
<S> <C> <C>
Sales..................................... $ 39,814 $ 41,768
======== ========
Net income................................ $ 1,999 $ 3,379
======== ========
Net income per share:
Basic.................................. $ 0.18 $ 0.42
======== ========
Diluted................................ $ 0.17 $ 0.40
======== ========
</TABLE>
The above amounts reflect pro forma adjustments for amortization of
intangibles and number of shares outstanding. This pro forma financial
information does not purport to be indicative of the results of operations
had the American Development, Inc. acquisition actually taken place at the
earlier date.
CABLENET TECHNOLOGIES
On May 9, 2000, the Company acquired North Carolina-based CableNet
Technologies, which specializes in printer enhancement and connectivity
technology, in exchange for 54,386 shares of $0.01 par value common stock,
$1,945,000 in cash, $62,000 in direct expenses and $306,000 recorded in
connection with warrants issued to a consultant. The total acquisition cost
was $3,088,000 and was allocated as follows:
<TABLE>
<S> <C>
Current assets ........................................ $ 301,000
Equipment and leasehold improvements .................. 17,000
Intangible assets, including customer list, assembled
workforce, core technology and goodwill............. 2,817,000
Current liabilities assumed............................ (47,000)
-------------
$ 3,088,000
=============
</TABLE>
The acquisition has been accounted for as a purchase and results of operations
of CableNet Technologies since the date of acquisition are included in the
Company's consolidated financial statements.
8
<PAGE>
NOTE 6. BUSINESS COMBINATIONS, CONTINUED
Pro Forma consolidated results of operations for the nine months ended August
31, 2000 and 1999 as though CableNet Technologies had been acquired as of
December 1, 1998 are as follows (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
August 31, August 31,
2000 1999
------------ ------------
<S> <C> <C>
Sales............................................. $ 40,143 $ 42,024
============ ============
Net income........................................ $ 2,059 $ 3,522
============ ============
Net income per share:
Basic.......................................... $ 0.19 $ 0.43
============ ============
Diluted........................................ $ 0.18 $ 0.42
============ ============
</TABLE>
The above amounts reflect pro forma adjustments for amortization of intangibles
and number of shares outstanding. This pro forma financial information does not
purport to be indicative of the results of operations had the CableNet
Technologies acquisition actually taken place at the earlier date.
NOTE 7. SEGMENT INFORMATION
The following tables summarize revenues and net income (loss) by operating
segment and unallocated corporate for the three and nine months ended August 31,
2000 and August 31, 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(amounts in thousands) (amounts in thousands)
August 31, 2000 August 31, 1999 August 31, 2000 August 31, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Financial Payment Solutions.. $ 10,965 $ 15,553 $ 30,074 $ 34,824
Connectivity................. 3,078 1,863 9,487 6,058
--------------- --------------- --------------- ---------------
$ 14,043 $ 17,416 $ 39,561 $ 40,882
=============== =============== =============== ===============
Net income (loss):
Financial Payment Solutions.. $ 775 $ 1,910 $ 2,672 $ 4,228
Connectivity................. (168) 186 1,053 447
Unallocated Corporate........ (391) (626) (1,674) (1,180)
--------------- --------------- --------------- ---------------
$ 216 $ 1,470 $ 2,051 $ 3,495
=============== =============== =============== ===============
</TABLE>
9
<PAGE>
NOTE 8. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
(amounts in thousands)
August 31, 2000 August 31, 1999
--------------- ---------------
<S> <C> <C>
Cash paid during the period for:
Interest........................................................... $ 13 $250
------ ----
Income taxes....................................................... $1,855 $966
------ ----
Supplemental schedule of noncash investing and financing activities
Purchase of CableNet Technologies and American Development, Inc.
in 2000 and Telgate Equipment Corporation in 1999:
Total purchase price............................................. $5,740 $924
Less fair value of common stock and stock warrants issued in
connection with the acquisitions............................... 2,500 625
------ ----
Cash purchase price.............................................. $3,240 $299
====== ====
</TABLE>
10
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with our Consolidated Financial Statements and related Notes included in this
report. This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform act of 1995. The statements contained
in this report that are not historical in nature, particularly those that
utilize terminology such as "may," "will," "should," "expects," "anticipates,"
"estimates," "believes" or "plans," or comparable terminology, are
forward-looking statements based on current expectations and assumptions.
Various risks and uncertainties could cause actual results to differ
materially from those expressed in such forward-looking statements. These
risks and uncertainties include those related to the growth in acceptance of
ECheck Secure-TM- by online brokerage firms, e-merchants and other bill
payment applications; our ability to integrate and offer ACH solutions with
our ECheck Secure-TM- software; the timely and successful development and
integration of the Bluetooth standard with the JetSend protocol; market
acceptance of products incorporating wireless printing technologies; our
ability to continue to develop and market other e-commerce payment, networked
payment and wireless and other connectivity technologies; our ability to
refocus our management and resources on the emerging ECheck Secure-TM- and
wireless printing technologies; the ability to hire and retain qualified
management, technology and other personnel; the impact of competition from
existing and new technologies and companies; the ability to identify and
assimilate acquired companies and technologies, the continued demand for
printed financial documents; and the other factors set forth in our periodic
reports and other documents filed with the Securities and Exchange Commission
from time to time.
BACKGROUND
Our products consist of financial payment solutions and connectivity
products that serve a wide variety of industries including e-commerce
retailers, online brokerages, telecommunications, financial services,
insurance, computer hardware, automotive, personnel and others.
We are a leading worldwide provider of financial payment solutions.
Our software, firmware and hardware solutions enable businesses to
electronically transmit and output financial payment information across
computer networks and the Internet.
Our financial payment solutions consist of e-commerce payment
solutions and networked computer payment solutions. Our e-commerce payment
solutions enable Internet merchants to accept payments from their customers'
checking accounts as an alternative to credit cards. Our networked computer
payment solutions enable standard laser printers to print MICR lines,
graphics, barcodes and forms and to perform additional functions such as
auditing, status checking and security.
Our connectivity products enhance the connectivity of devices that
transmit information over computer networks and the Internet.
In early May 2000, we announced details of our strategy to
capitalize on our e-commerce payment solutions and wireless connectivity
opportunities, currently represented by our ACH and eCHECK SECURE-TM-
solutions and Bluetooth connectivity products initiative, and shift focus
away from our established financial payment solutions with short-term profit
potential. We recently announced the formation of a new Financial Services
Group to consolidate various aspects of the Company's online payment
solutions business. Our decision to focus resources and future investments on
these opportunities creates significant changes to our short- and long-term
business plans.
11
<PAGE>
In the short-term, we expect to continue to redirect resources and make
significant investments in sales and marketing, and expect minimal
profitability for fiscal 2000 as we pursue these objectives.
On May 9, 2000, we acquired substantially all of the assets of North
Carolina-based CableNet Technologies, a provider of printer enhancement and
connectivity technology through our subsidiary, Troy XCD, Inc. We intend to
utilize CableNet's technical expertise, specifically its printing protocol
languages, to develop products that will support our wireless connectivity
and other strategic growth initiatives.
OVERVIEW
Net sales are generated from the sale of our connectivity and
financial payment solutions and services. We recognize revenue from the sale
of our products when the goods are shipped to the customer, we recognize
service revenue over the period of the contract on a straight-line basis and,
during the nine month and three month periods ended August 31, 2000, we
recognized revenue from the sale of software license agreements by the
percentage of completion method. In the nine month and three month periods
ended August 31, 2000, a reseller of our imaging supplies, Cannon IV Inc.,
accounted for 9.9% and 13.1%, respectively, of our net sales, of which we
believe a significant portion was resold to a single customer. In addition, in
the nine month and three month periods ended August 31, 2000, a reseller of
our laser printers and connectivity products, Comark, Inc., accounted for 0.6%
and 0.3%, respectively, of our net sales, of which we believe a significant
portion was resold to the same single customer. Our net sales for fiscal 1999
included a significant replacement order of laser printers to Comark during
that year which we do not believe will necessarily be indicative of net sales
for future periods. We also sell our products directly to the significant
customer of Cannon IV and Comark. Our direct sales to this customer of our
resellers were 0.4% and 0.0% of our net sales for the nine month and three
month periods ended August 31, 2000, respectively. We do not have a written or
oral contract with Cannon IV, Comark or their significant customer. All sales
are made through purchase orders.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information derived from our consolidated statements of operations expressed
as a percentage of net sales
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 60.4 62.1 56.6 61.1
Gross Profit 39.6 37.9 43.4 38.9
Selling, general and administrative expenses 31.2 17.2 28.8 17.2
Research and development expenses 7.5 5.3 7.8 6.5
Operating income .9 15.4 6.8 15.2
Interest income 1.5 -- 1.6 --
Interest expense -- (0.4) -- (0.6)
Income before income taxes 2.4 15.0 8.4 14.6
Provision for income taxes (.8) (6.6) (3.2) (6.1)
Net income 1.6 8.4 5.2 8.5
</TABLE>
THREE MONTHS ENDED AUGUST 31, 2000 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1999
NET SALES. Our net sales were $14.0 million for the three months
ended August 31, 2000, with $11.0 million attributable to financial payment
solutions and $3.0 million attributable to connectivity products and software.
Net sales in the three months ended August 31, 2000 decreased by $3.4 million,
12
<PAGE>
or 19.4%, from $17.4 million in the three months ended August 31, 1999. This
cumulative decrease in net sales represents a $6.1 million decrease in sales
of our laser printers, impact printers and services, which was partially
offset by an increase of $1.5 million in sales of our proprietary imaging
supplies and an increase of $1.2 million in sales of our connectivity
products, which includes $800,000 in software licensing revenue. Net sales
were not significantly affected by price changes. The decrease in our net
sales for the third quarter of 2000, as compared to net sales for the third
quarter of 1999, can be attributed to a significant replacement order of laser
printers to Comark, Inc. of $5.4 million recorded in the third quarter of
1999, as well as the implementation of our strategy to shift our focus away
from our established financial payment solutions and toward our e-commerce
payment solutions and wireless connectivity opportunities. In connection with
our shift in focus, we may continue to license our software technology to
third parties as we consider appropriate. To the extent that our mix of
revenue sources continues to shift toward sales of connectivity products and
technology licensing, our net sales could vary from historical patterns.
COST OF GOODS SOLD. Cost of goods sold decreased by $2.3 million or
21.7% to $8.5 million in the three months ended August 31, 2000 from $10.8
million in the three months ended August 31, 1999. This decrease was primarily
due to decreased net sales offset by sales of higher gross margin products.
Cost of goods sold as a percentage of net sales decreased to 60.4% in the
third quarter of 2000 from 62.1% in the third quarter of 1999. Cost of goods
sold in the three months ended August 31, 2000 included a software licensing
charge of $460,000. In connection with our shift in focus, we may enter into
agreements to license technology from other companies. As a result, of these
agreements, cost of goods sold could vary from historical patterns.
GROSS PROFIT. As a result of the above factors, gross profit
decreased by $1.0 million to $5.6 million in the three months ended August 31,
2000 from $6.6 million in the three months ended August 31, 1999. Gross profit
as a percentage of net sales increased to 39.6% in the third quarter of 2000
from 37.9% in the third quarter of 1999. This increase was also primarily due
to sales of higher gross margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.4 million or 46.6% to $4.4 million in
the three months ended August 31, 2000 from $3.0 million in the three months
ended August 31, 1999. This increase was due primarily to additional
operating expenses of $600,000 as a result of the acquisitions of Troy AMDev
and CableNet Technologies, an increase of $800,000 due to increases in
personnel, the allowance for doubtful accounts, amortization of intangible
assets due to the acquisitions, promotions and other expenses. Selling,
general and administrative expenses as a percentage of net sales increased to
31.2% in the third quarter of 2000 from 17.2% in the third quarter of 1999,
due to our acquisition strategy and our associated growth requirements. In
connection with our shift in focus, we intend to continue to invest in
advertising and other marketing expenditures, substantially increase the size
of the sales force, and add technical resources as required. As a result of
these expenditures and hiring initiatives, we expect selling, general and
administrative expenses to continue to exceed historical levels. This
forward-looking statement will be impacted by the timing and amount of these
expenditures, our ability to attract and retain sales and marketing personnel
and the associated costs of such personnel, and the success of our
advertising efforts.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $134,000 or 14.6% to $1.1 million in the three months ended
August 31, 2000 from $919,000 in the three months ended August 31, 1999. Of
this increase, $40,000 was due to additional research and development expenses
as a result of the acquisitions of Troy AMDev and CableNet Technologies.
Research and development expenses as a percentage of net sales was 7.5% in the
third quarter of 2000 and 5.3% in the third quarter of 1999. In connection
with our growth initiatives and efforts to development new connectivity
technologies, we expect research and development expenses to continue to
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exceed historical levels as we add additional personnel and incur additional
related costs. This forward-looking statement will be impacted by the timing
and amount of additional research and development expenditures and our ability
to attract and retain research and development personnel and the associated
costs of such personnel.
OPERATING INCOME. As a result of the above factors, operating income
decreased by $2.6 million or 95.4% to $123,000 in the three months ended
August 31, 2000 from $2.7 million in the three months ended August 31, 1999.
Operating income as a percentage of net sales decreased to 0.9% in the third
quarter of 2000 from 15.4% in the third quarter of 1999.
INTEREST INCOME. Interest income was $209,000 in the three months
ended August 31, 2000. This income was due to our investment of proceeds from
our initial public offering and cash flow provided by operations.
INTEREST EXPENSE. Interest expense decreased by $64,000 to $1,000 in
the three months ended August 31, 2000 from $65,000 in the three months ended
August 31, 1999. This decrease was due to decreased borrowings under our line
of credit and term debt.
INCOME TAXES. Income taxes decreased to $115,000 in the three months
ended August 31, 2000 from $1.1 million in the three months ended August 31,
1999. This decrease is a result of decreased income before income taxes.
Income taxes as a percentage of pretax income decreased to 34.7% in the third
quarter of 2000 from 44.0% in the third quarter of 1999.
NINE MONTHS ENDED AUGUST 31, 2000 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1999
NET SALES. Our net sales were $39.6 million for the nine months ended
August 31, 2000, with $30.1 million attributable to financial payment
solutions and $9.5 million attributable to connectivity products and software.
Our net sales in the nine months ended August 31, 2000 decreased by $1.3
million or 3.2% from $40.9 million in the nine months ended August 31, 1999.
This decrease was due primarily to a $7.7 million decrease in sales of our
laser printers, impact printers and services, which was partially offset by an
increase of $3.0 million in sales of our proprietary imaging supplies and an
increase of $3.4 million in sales of our connectivity products, which included
$2.8 million in software licensing sales. The decrease in our net sales for
the nine months ended August 31, 2000, as compared to the nine months ended
August 31, 1999, can be attributed to a significant replacement order of laser
printers to Comark, Inc. of $5.4 million, as well as the implementation of our
strategy to shift our focus away from our established financial payment
solutions and toward our e-commerce payment solutions and wireless
connectivity opportunities. Net sales were not significantly affected by price
changes.
COST OF GOODS SOLD. Cost of goods sold decreased by $2.6 million or
10.3% to $22.4 million in the nine months ended August 31, 2000 from $25.0
million in the nine months ended August 31, 1999. This decrease was primarily
due to increased sales of higher gross margin products. Cost of goods sold as
a percentage of net sales decreased to 56.6 % in the nine months ended August
31, 2000 from 61.1% in the nine months ended August 31, 1999. This decrease
was primarily due to the sale of a significant amount of connectivity software
during the first quarter of 2000 at an increased profit margin. Cost of goods
sold in the nine months ended August 31, 2000 included a software licensing
charge of $460,000.
GROSS PROFIT. As a result of the above factors, gross profit
increased by $1.3 million or 7.9% to $17.2 million in the nine months ended
August 31, 2000 from $15.9 million in the nine months ended August 31, 1999.
Gross profit as a percentage of net sales increased to 43.4% in the nine
months ended August 31, 2000 from 38.9% in the nine months ended August 31,
1999. This increase was also
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primarily due to a significant increase in licensing revenue from our
connectivity software during the first quarter of 2000 at a higher profit
margin than we customarily earn from our financial payment solutions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $4.4 million or 62.2% to $11.4 million in
the nine months ended August 31, 2000 from $7.0 million in the nine months
ended August 31, 1999. This increase was due primarily to additional operating
expenses of $1.2 million as a result of the acquisitions of Troy Telgate, Troy
AMDev, and CableNet Technologies and an increase of $3.2 million due to
increases in personnel, the allowance for doubtful accounts, amortization of
intangible assets due to the acquisitions, promotions and other expenses.
Selling, general and administrative expenses as a percentage of net sales
increased to 28.8% in the nine months ended August 31, 2000 from 17.2% in the
nine months ended August 31, 1999, due to our acquisition strategy and our
associated growth requirements.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $391,000 or 14.7% to $3.1 million in the nine months ended August
31, 2000 from $2.7 million in the nine months ended August 31, 1999. Of this
increase, $260,000 was due to additional research and development expenses as
a result of the acquisitions of Troy Telgate, Troy AMDev, and CableNet
Technologies. Research and development expenses as a percentage of net sales
was 7.8% in the nine months ended August 31, 2000 and 6.5% in the nine months
ended August 31, 1999, due to our acquisition strategy and our associated
growth requirements.
OPERATING INCOME. As a result of the above factors, operating income
decreased by $3.5 million or 56.5% to $2.7 million in the nine months ended
August 31, 2000 from $6.2 million in the nine months ended August 31, 1999.
Operating income as a percentage of net sales decreased to 6.8% in the nine
months ended August 31, 2000 from 15.2% in the nine months ended August 31,
1999.
INTEREST INCOME. Interest income was $634,000 in the nine months
ended August 31, 2000. This income was due to our investment of proceeds from
our initial public offering and cash flow provided by operations. We did not
have interest income in the nine months ended August 31, 1999.
INTEREST EXPENSE. Interest expense decreased by $214,000 to $13,000
in the nine months ended August 31, 2000 from $227,000 in the nine months
ended August 31, 1999. This decrease was due to decreased borrowings under our
line of credit and term debt.
INCOME TAXES. Income taxes decreased to $1.3 million in the nine
months ended August 31, 2000 from $2.5 million in the nine months ended August
31, 1999. This decrease is a result of decreased income before income taxes.
Income taxes as a percentage of pretax income decreased to 38.2% in the nine
months ended August 31, 2000 from 41.5% in the nine months ended August 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $6.3 million in the
nine months ended August 31, 2000 compared to $1.2 million used in operating
activities in the nine months ended August 31, 1999. This increase was due
primarily to a decrease in accounts receivable and an increase in accounts
payable and accrued expenses, partially offset by an increase in inventories,
prepaid expenses and other, and a decrease in income taxes payable. The
accounts receivable decrease resulted primarily from collections. The increase
in inventories resulted primarily from increased levels to meet anticipated
sales.
Cash flows used in investing activities were $1.7 million in the nine
months ended August 31, 2000 compared to $7.8 million used in the nine months
ended August 31, 1999. Included in cash flows
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used in investing activities in the nine months ended August 31, 2000 was $3.0
million in net proceeds from available-for-sale securities and $3.2 million
for our acquisition of companies.
Cash flows provided by financing activities were $301,000 in the nine
months ended August 31, 2000 compared to cash flows provided by financing
activities of $11.6 million in the nine months ended August 31, 1999.
We currently have a $5.0 million general line of credit and are in
the process of renewing our $10.0 million acquisition line of credit with
Comerica Bank - California. Both lines of credit are secured by substantially
all of our assets and are subject to certain financial covenants. In
connection with the general line-of-credit agreement, we have a $650,000
standby letter of credit sublimit agreement of which $80,000 was outstanding
at August 31, 2000. There were no borrowings outstanding against either line
of credit on August 31, 2000, and as of that date $4,920,000 million was
available under the general line of credit and all $10.0 million was available
under the acquisition line of credit. The acquisition line of credit expired
on October 1, 2000, although we have been advised by our bank that this line
of credit will be renewed on substantially similar terms. The general line of
credit has no expiration date.
We believe that cash generated by operating activities, the net
proceeds from our initial public offering and funds available under our credit
facility will be sufficient to finance our operating activities for at least
the next 12 months. To the extent that the funds generated from these sources
are insufficient to finance our operating activities, we would need to raise
additional funds through public or private financing. We cannot assure you
that additional financing will be available on terms favorable to us, or at
all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or
to future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, exchange rates, commodity prices, equity prices and
other market changes. Market risk is attributed to all market sensitive
financial instruments, including long-term debt.
We do not utilize derivative financial instruments. Accordingly, our
exposure to market risk is through our investments in available-for-sale
securities and our bank debt which bears interest at variable rates.
Available-for-sale securities consist of corporate debt and marketable equity
securities. Approximately $2.0 million of these securities have contractual
maturity dates of up to one year and $2.6 million of these securities have no
maturity dates. At August 31, 2000, market values approximated carrying
values. Due to the short-term maturities of these securities, management
believes that there is no significant market risk. At August 31, 2000, we had
approximately $14.2 million in cash, cash equivalents and investments in
available-for-sale securities, and, accordingly, a sustained decrease in the
rate of interest earned of 1% would cause a decrease in the amount of annual
interest earned of $142,000. The bank debt is a revolving line of credit. All
borrowings bear interest based upon the reference rate per annum as announced
by the bank (9.5% at August 31, 2000). At August 31, 2000, there were no
amounts outstanding under the line of credit agreement and, accordingly, a
sustained increase in the reference rate of 1% would not cause our annual
interest expense to change.
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PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 Amendment to Lease, dated August 24, 2000, between
Troy Systems International, Inc. and Ragco, a general
partnership
10.2 1998 Stock Incentive Plan, as amended
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TROY GROUP, INC.
/s/ Patrick J. Dirk
----------------------------
October 13, 2000 Patrick J. Dirk
Chairman, President and
Chief Executive Officer
/s/ Del L. Conrad
----------------------------
Del L. Conrad
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Item No. Description Method of Filing
-------- ----------- ----------------
<S> <C> <C>
10.1 Amendment to Lease, dated August 24, 2000, Filed herewith electronically
between Troy Systems International,
Inc. and Ragco, a general partnership
10.2 1998 Stock Incentive Plan, as amended Filed herewith electronically
27.1 Financial Data Schedule Filed herewith electronically
</TABLE>
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