<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 MAY 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 July 17, 2000, there were 10,859,514 shares of our Common Stock
outstanding.
<PAGE>
TROY GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MAY 31, 2000
INDEX
PAGE NO.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
May 31, 2000 and November 30, 1999............................. 2
Consolidated Statements of Operations
for the Three Months and Six Months ended May 31, 2000
and May 31, 1999............................................... 3
Consolidated Statements of Cash Flows
for the Six Months ended May 31, 2000
and May 31, 1999............................................... 4
Notes to Consolidated Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 13
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 14
Item 2. Changes in Securities and Use of Proceeds...................... 14
Item 3. Defaults Upon Senior Securities................................ 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
Item 5. Other Information.............................................. 14
Item 6. Exhibits and Reports on Form 8-K............................... 15
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TROY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS MAY 31, 2000 NOVEMBER 30,
(Unaudited) 1999
------- -------
Current assets:
<S> <C> <C>
Cash and cash equivalents ................................................... $ 6,679 $ 4,783
Investment in available-for-sale securities ................................ 8,133 7,647
Accounts receivable, less allowance for doubtful accounts of $336 and $294,
respectively ............................................................ 7,897 12,530
Inventories ................................................................. 5,644 5,082
Prepaid expenses and other .................................................. 956 140
Deferred tax assets ......................................................... 1,160 1,160
------- -------
Total current assets ................................................... 30,469 31,342
Equipment and leasehold improvements, net ...................................... 1,876 1,863
Other assets ................................................................... 9,988 3,853
------- -------
Total assets ........................................................... $42,333 $37,058
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ 59 $ 64
Accounts payable ............................................................ 3,036 2,495
Accrued expenses ............................................................ 2,715 2,322
Income taxes payable ........................................................ 727 1,208
Deferred service revenue .................................................... 188 242
------- -------
Total current liabilities .............................................. 6,725 6,331
------- -------
Long-term debt, net of current portion ......................................... 304 331
------- -------
Deferred tax liabilities ....................................................... 601 601
------- -------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 50,000,000 shares, issued
2000 10,859,514 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 .................................................. 20,468 17,397
Retained earnings ........................................................... 14,126 12,291
------- -------
Total stockholders' equity ............................................. 34,703 29,795
------- -------
Total liabilities and stockholders' equity ............................. $42,333 $37,058
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................ $ 11,632 $ 12,066 $ 25,518 $ 23,466
Cost of goods sold ................... 6,740 7,368 13,930 14,167
-------- -------- -------- --------
Gross profit ................... 4,892 4,698 11,588 9,299
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 3,772 1,915 7,013 4,036
Research and development .......... 1,012 932 1,999 1,742
-------- -------- -------- --------
Operating income ............... 108 1,851 2,576 3,521
Interest income ...................... 232 -- 424 --
Interest expense ..................... (5) (84) (12) (162)
-------- -------- -------- --------
Income before income taxes ........ 335 1,767 2,988 3,359
Provision for income taxes ........... 118 697 1,153 1,334
-------- -------- -------- --------
Net income ..................... $ 217 $ 1,070 $ 1,835 $ 2,025
======== ======== ======== ========
Net income per share:
Basic ............................. $ .02 $ .14 $ .17 $ .26
======== ======== ======== ========
Diluted ........................... $ .02 $ .13 $ .16 $ .25
======== ======== ======== ========
Weighted-average shares outstanding:
Basic ............................. 10,817 7,687 10,757 7,679
======== ======== ======== ========
Diluted ........................... 11,640 8,038 11,569 8,020
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
TROY GROUP, INC.
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
MAY 31, MAY 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 1,835 $ 2,025
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization ....................... 695 467
Provision for doubtful accounts ..................... 62 29
Amortization of investment discounts, net ......... (129) --
Changes in working capital components,
net of effects from acquisition of companies:
(Increase) decrease in:
Accounts receivable ............................ 5,049 (1,297)
Income taxes refund receivable ................. -- 319
Inventories .................................... (562) (1,194)
Prepaid expenses and other ..................... (816) (81)
Increase (decrease) in:
Accounts payable ............................... 541 (91)
Accrued expenses ............................... 188 (879)
Income taxes payable ........................... (481) 655
Deferred service revenue ....................... (54) 9
-------- --------
Net cash provided by (used in) operating
Activities ..................................... 6,328 (38)
-------- --------
Cash flows from investing activities:
Acquisition of companies ............................... (3,240) (299)
Purchase of equipment and leasehold improvements ....... (252) (338)
Purchase of available-for-sale securities .............. (5,500) --
Maturities of available-for-sale securities ............ 5,143 --
Increase in other assets ............................... (900) (271)
-------- --------
Net cash (used in) investing activities ............. (4,749) (908)
-------- --------
Cash flows from financing activities:
Borrowings on notes payable ............................ -- 12,097
Payments on notes payable .............................. -- (12,040)
Proceeds from issuance of debt ......................... -- 670
Principal payments on debt ............................. (257) (480)
Increase in checks issued not presented for payment .... -- 633
Proceeds from issuance of common stock ................ 574 --
Dividends paid ......................................... -- (200)
-------- --------
Net cash provided by financing activities ........... 317 680
-------- --------
Net increase (decrease) in cash and cash equivalents 1,896 (266)
Cash and cash equivalents, beginning of period ............ 4,783 308
-------- --------
Cash and cash equivalents, end of period .................. $ 6,679 $ 42
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<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 six months ended
May 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 May 31, 2000 and November 30, 1999
(amounts in thousands):
<TABLE>
<CAPTION>
MAY 31, 2000 NOVEMBER 30, 1999
------------ -----------------
<S> <C> <C>
Raw materials............................ $3,457 $3,692
Work-in-process.......................... 308 187
Finished goods........................... 1,879 1,203
------ ------
Total............................... $5,644 $5,082
====== ======
</TABLE>
NOTE 3. INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES
As of May 31, 2000, the Company had approximately $8.1 million in corporate debt
and marketable equity securities which management has determined should be
classified as available-for-sale. Approximately $5.5 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 May 31, 2000. There
were no gains or loss recognized for the six months ended May 31, 2000 or May
31, 1999.
NOTE 4. STOCK OPTION PLANS
During the three months ended May 31, 2000, the Company granted options to
acquire 225,000 shares of common stock at a weighted-average exercise price of
$8.75 per share. The following is a summary of total outstanding options at May
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 1,344,000 $7.18 9.34 145,000 $6.83
$13.16 - $14.25 25,000 $13.30 9.50 --- ---
-----------
1,369,000
===========
</TABLE>
At May 31, 2000, there were 1,322,341 shares remaining available for grant under
the Company's option plans.
5
<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 Six Months Ended
------------------ ----------------
(amounts in thousands, except per (amounts in thousands, except per
share data) share data)
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NUMERATOR FOR BASIC AND DILUTED NET
INCOME PER SHARE:
Net income.......................... $217 $1,070 $1,835 $2,025
==== ====== ====== ======
DENOMINATOR:
Denominator for basic net income
per share - weighted-average shares
outstanding......................... 10,817 7,687 10,757 7,679
Effect of employee stock options
and warrants........................ 823 351 812 341
------ ----- ------ -----
Denominator for diluted net income
per share........................... 11,640 8,038 11,569 8,020
====== ===== ====== =====
NET INCOME PER SHARE:
Basic............................... $ .02 $ .14 $ .17 $ .26
===== ===== ===== =====
Diluted............................. $ .02 $ .13 $ .16 $ .25
===== ===== ===== =====
</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:
Current assets............................................ $ 177,000
Equipment and leasehold improvements...................... 61,000
Other assets.............................................. 94,000
Intangible assets, including customer list, assembled
workforce, core technology and goodwill................. 2,703,000
Current liabilities assumed............................... (383,000)
-------------
$2,652,000
=============
The acquisition has been accounted for as a purchase and results of operations
of American Development, Inc. since the date of acquisition are included in the
Company's consolidated financial statements.
Pro forma consolidated results of operations for six months ended May 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):
6
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
----------------
May 31, 2000 May 31, 1999
------------ ------------
<S> <C> <C>
Sales $ 25,771 $ 24,081
======== ========
Net income $ 1,783 $ 1,977
======== ========
Net income per share:
Basic $ .17 $ .26
======== ========
Diluted $ .15 $ .25
======== ========
</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:
Current assets............................................. $ 301,000
Equipment and leasehold improvements....................... 17,000
Intangible assets, including customer list, assembled
workforce, core technology and goodwill.................. 2,817,000
Current liabilities assumed................................ (47,000)
------------
$3,088,000
============
The acquisition has been accounted for as a purchase and results of operations
of CableNet Technologies since the date of acquisition are included in the
Company's consolidated financial statements.
Pro forma consolidated results of operations for the six months ended May 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>
Six Months Ended
----------------
May 31, 2000 May 31, 1999
------------ ------------
<S> <C> <C>
Sales $ 26,100 $ 24,159
======== ========
Net income $ 1,843 $ 2,012
======== ========
Net income per share:
Basic $ .17 $ .26
======== ========
Diluted $ .16 $ .25
======== ========
</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.
7
<PAGE>
NOTE 7. SEGMENT INFORMATION
The following tables summarize revenues and net income (loss) by operating
segment and unallocated corporate for the three and six months ended May 31,
2000 and May 31, 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
(amounts in thousands) (amounts in thousands)
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
------------ ------------ ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Financial Payment Solutions $ 9,538 $ 9,978 $ 19,110 $ 19,271
Connectivity .............. 2,094 2,088 6,408 4,195
-------- -------- -------- --------
$ 11,632 $ 12,066 $ 25,518 $ 23,466
======== ======== ======== ========
Net income (loss):
Financial Payment Solutions $ 878 $ 1,154 $ 1,897 $ 2,318
Connectivity .............. 22 117 1,221 261
Unallocated Corporate ..... (683) (201) (1,283) (554)
-------- -------- -------- --------
$ 217 $ 1,070 $ 1,835 $ 2,025
======== ======== ======== ========
</TABLE>
NOTE 8. CASH FLOW INFORMATION
Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
Six Months Ended
----------------
(amounts in thousands)
May 31, 2000 May 31, 1999
------------ ------------
Cash paid during the period for:
<S> <C> <C>
Interest............................................................. $ 12 $165
------ ----
Income taxes $1,763 $467
------ ----
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>
8
<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 continued growth in acceptance of
ECheck Secure(TM) by e-merchants and e-consumers; 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 eCHECK SECURE(TM) solution and
Bluetooth connectivity products initiative, and shift focus away from our
established financial payment solutions with short-term profit potential. Our
decision to focus resources and future investments on these opportunities
creates significant changes to our short-
9
<PAGE>
and long-term business plans. 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 North Carolina-based CableNet Technologies,
a provider of printer enhancement and connectivity technology. 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
six months ended May 31, 2000 we recognized revenue from the sale of a software
license agreement by the percentage of completion method. In the six months
ended May 31, 2000 and the fiscal year ended November 30, 1999, a reseller of
our imaging supplies, Cannon IV Inc., accounted for 8.2% and 11.4%,
respectively, of our net sales, of which we believe a significant portion was
sold to a single customer. In addition, a reseller of our laser printers and
connectivity products, Comark, Inc. also sold products to this same customer
which accounted for .8% and 19.9%, respectively, of our net sales for the six
months ended May 31, 2000 and the fiscal year ended November 30, 1999, although
the percentage of net sales for fiscal 1999 was due to a significant replacement
order of laser printers during that year and is not believed to be indicative of
percentages of net sales for future periods. We also sell our products directly
to the significant customer of Cannon IV and Comark. Direct sales to these
resellers' significant customer were .7% and 2.6% of our net sales for the six
months ended May 31, 2000 and the fiscal year ended November 30, 1999,
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 Six Months Ended
------------------ ----------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 57.9 61.1 54.6 60.4
------ ------ ------ ------
Gross Profit 42.1 38.9 45.4 39.6
Selling, general and administrative expenses 32.4 15.9 27.5 17.2
Research and development expenses 8.8 7.7 7.8 7.4
Operating income 0.9 15.3 10.1 15.0
Interest income 2.0 --- 1.6 ---
Interest expense --- (0.7) --- (0.7)
Income before income taxes 2.9 14.6 11.7 14.3
Provision for income taxes (1.0) (5.7) (4.5) (5.7)
Net income 1.9 8.9 7.2 8.6
</TABLE>
THREE MONTHS ENDED MAY 31, 2000 COMPARED TO THREE MONTHS ENDED MAY 31, 1999
NET SALES. Our net sales were $11.6 million for the three months
ended May 31, 2000, with $9.5 million attributable to financial payment
solutions and $2.1 million attributable to connectivity products
10
<PAGE>
and software. This represented a decrease in net sales of $500,000 or 3.6% from
$12.1 million in the three months ended May 31, 1999. Net sales were not
significantly affected by price changes.
COST OF GOODS SOLD. Cost of goods sold decreased by $600,000 or 8.5%
to $6.7 million in the three months ended May 31, 2000 from $7.3 million in the
three months ended May 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 57.9% in the second quarter of 2000 from
61.1% in the second quarter of 1999.
GROSS PROFIT. As a result of the above factors, gross profit increased
by $200,000 to $4.9 million in the three months ended May 31, 2000 from $4.7
million in the three months ended May 31, 1999. Gross profit as a percentage of
net sales increased to 42.1% in the second quarter of 2000 from 38.9% in the
second 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 $1.8 million or 97.0% to $3.7 million in
the three months ended May 31, 2000 from $1.9 million in the three months
ended May 31, 1999. This increase was due primarily to additional operating
expenses of $400,000 as a result of the acquisitions of Troy Telgate, Troy
AMDev and CableNet Technologies, an increase of $1.4 million due to increases
in personnel, 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 32.4% in the second quarter of 2000
from 15.9% in the second quarter of 1999, due to our acquisition strategy and
our associated growth requirements. In connection with our shift in focus, we
intend to invest in national 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 $80,000 or 8.8% to $1 million in the three months ended May 31,
2000 from $932,000 in the three months ended May 31, 1999. Of this increase,
$136,000 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 8.7% in
the second quarter of 2000 and 7.7% in the second quarter of 1999. In
connection with our growth initiatives, we expect research and development
expenses to continue to exceed historical levels as we add additional
personnel and incur additional related costs. This forward-looking statement
will be impacted by the timing and amount of additional research and
development expenditures and our ability to attract and retain research and
development personnel and the associated costs of such personnel.
OPERATING INCOME. As a result of the above factors, operating income
decreased by $1.7 million or 94.2% to $108,000 in the three months ended May 31,
2000 from $1.8 million in the three months ended May 31, 1999. Operating income
as a percentage of net sales decreased to 0.9% in the second quarter of 2000
from 15.3% in the second quarter of 1999.
INTEREST INCOME. Interest income was $232,000 in the three months ended
May 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 three months ended May 31, 1999.
INTEREST EXPENSE. Interest expense decreased by $79,000 to $5,000 in
the three months ended May 31, 2000 from $84,000 in the three months ended May
31, 1999. This decrease was due to decreased borrowings under our line of credit
and term debt.
INCOME TAXES. Income taxes decreased to $118,000 in the three months
ended May 31, 2000 from $697,000 in the three months ended May 31, 1999. This
decrease is a result of decreased income before income taxes. Income taxes as a
percentage of pretax income decreased to 35.2% in the second quarter of 2000
from 39.4% in the second quarter of 1999.
11
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SIX MONTHS ENDED MAY 31, 2000 COMPARED TO SIX MONTHS ENDED MAY 31, 1999
NET SALES. Our net sales were $25.5 million for the six months ended
May 31, 2000, with $19.1 million attributable to financial payment solutions
and $6.4 million attributable to connectivity products and software. This
represented an increase in net sales of $2.1 million or 8.7% from $23.4
million in the six months ended May 31, 1999. This increase was due primarily
to an increase of $2.3 million in sales of our connectivity products, which
included a $2.0 million software licensing sale, and an increase of $1.4
million in sales of our proprietary imaging supplies. These increases were
offset by an $1.6 million decrease in sales of out laser printers, impact
printers and services. Net sales were not significantly affected by price
changes.
COST OF GOODS SOLD. Cost of goods sold decreased by $237,000 or 1.7% to
$13.9 million in the six months ended May 31, 2000 from $14.2 million in the six
months ended May 31, 1999. This was primarily due to increased sales of higher
gross margin products. Cost of goods sold as a percentage of net sales decreased
to 54.6% in the six months ended May 31, 2000 from 60.4% in the six months ended
May 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.
GROSS PROFIT. As a result of the above factors, gross profit increased
by $2.3 million or 24.6% to $11.6 million in the six months ended May 31, 2000
from $9.2 million in the six months ended May 31, 1999. Gross profit as a
percentage of net sales increased to 45.4% in the six months ended May 31, 2000
from 39.6% in the six months ended May 31, 1999. This increase was also
primarily due to the sale of a significant amount of connectivity software
during the first quarter of 2000 at an increased profit margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $3 million or 73.8% to $7 million in the
six months ended May 31, 2000 from $4 million in the six months ended May 31,
1999. This increase was due primarily to additional operating expenses of
$580,000 as a result of the acquisitions of Troy Telgate, Troy AMDev, and
CableNet Technologies and an increase of $2.4 million due to increases in
personnel, 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 27.5% in the six months ended May 31, 2000 from 17.2%
in the six months ended May 31, 1999, due to our acquisition strategy and our
associated growth requirements.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $257,000 or 14.8% to $2 million in the six months ended May 31,
2000 from $1.7 million in the six months ended May 31, 1999. Of this increase,
$255,000 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
six months ended May 31, 2000 and 7.4% in the six months ended May 31, 1999.
OPERATING INCOME. As a result of the above factors, operating income
decreased by $945,000 or 26.8% to $2.6 million in the six months ended May 31,
2000 from $3.5 million in the six months ended May 31, 1999. Operating income as
a percentage of net sales decreased to 10.1% in the six months ended May 31,
2000 from 15.0% in the six months ended May 31, 1999.
INTEREST INCOME. Interest income was $424,000 in the six months ended
May 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 six months ended May 31, 1999.
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INTEREST EXPENSE. Interest expense decreased by $150,000 to $12,000 in
the six months ended May 31, 2000 from $162,000 in the six months ended May 31,
1999. This decrease was due to decreased borrowings under our line of credit and
term debt.
INCOME TAXES. Income taxes decreased to $1.2 million in the six months
ended May 31, 2000 from $1.3 million in the six months ended May 31, 1999. This
decrease is a result of decreased income before income taxes. Income taxes as a
percentage of pretax income decreased to 38.6% in the six months ended May 31,
2000 from 39.7% in the six months ended May 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $6.3 million in the
six months ended May 31, 2000 compared to $38,000 used in operating
activities in the six months ended May 31, 1999. This increase was due
primarily to a decrease in accounts receivable and an increase in accounts
payable, partially offset by an increase in inventories and a decrease in
accrued expenses. The receivable decrease resulted primarily from
collections. The increase in inventories resulted primarily from increased
levels to meet anticipated sales. The decrease in accrued expenses is
primarily the result of payment of incentive compensation for the fiscal year
ended November 30, 1999.
Cash flows used in investing activities were $4.7 million in the six
months ended May 31, 2000 compared to $908,000 used in the six months ended May
31, 1999. Included in cash flows used in investing activities in the six months
ended May 31, 2000 was $357,000 in net purchases of available-for-sale
securities, $3.2 million for our acquisition of companies and $1.3 million for
prepaid licensing fees.
Cash flows provided by financing activities were $317,000 in the six
months ended May 31, 2000 compared to cash flows provided by financing
activities of $680,000 in the six months ended May 31, 1999.
We currently have a $5,000,000 general line of credit and a $10,000,000
acquisition line of credit with a bank. 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 approximately $80,000 was
outstanding at May 31, 2000. There were no borrowings outstanding against either
line of credit on May 31, 2000, and as of that date approximately $4,920,000 was
available under the general line of credit and all $10,000,000 was available
under the acquisition line of credit. The acquisition line of credit expires
October 1, 2000 and 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
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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 $5.5 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 May 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 May 31, 2000, we had approximately $14.8
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
$148,000. 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 May 31, 2000). At May 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.
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 9, 2000 we issued an aggregate of 54,386 shares of common stock
in connection with our acquisition of CableNet Technologies. The issuance was
made without registration in reliance on Regulation D or Section 4(2) under the
Securities Act of 1933, as amended. In relying upon these exemptions we made
certain inquiries and received certain assurances to establish that the
exemptions were available for the issuance. Among other things, we confirmed
that: (i) the sale was made by personal contact from our officers or directors
or other persons closely associated with us; (ii) the purchaser gave assurance
of investment intent; (iii) the certificate for the shares bears a legend
restricting transfer; and (iv) the sale was made to one person.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held on April 6, 2000. The
following individuals were elected at the Annual Meeting as Directors of the
Company to serve until the next annual meeeting or until their respective
successors are elected and qualified. Shares voted in favor of these
Directors and shares withheld were as follows:
<TABLE>
<CAPTION>
Director Shares For Shares Withheld
-------- ---------- ---------------
<S> <C> <C>
Patrick J. Dirk 9,898,931 9,550
Brian P. Dirk 9,898,931 9,550
Robert S. Messina 9,898,931 9,550
Norman B. Keider 9,898,931 9,550
John B. Zaepfel 9,898,931 9,550
William P. O'Reilly 9,898,931 9,550
Gene A. Bier 9,898,931 9,550
Dr. Harold L. Clark 9,898,931 9,550
</TABLE>
Shareholders authorized and approved an amendment to the Company's 1998 Stock
Incentive Plan to increase the number of shares of common stock specifically
reserved for issuance under the plan by 1,500,000 shares, from 1,200,000
shares to 2,700,000 shares, with shares voted as follows:
Shares For: 7,949,374 Shares Against: 312,862
Shares Abstaining: 15,379 Broker Non-Votes: 1,630,866
Shareholders ratified the appointment of McGladrey & Pullen, LLP as the
Company's independent auditor for the fiscal year ending November 30, 2000,
with shares voted as follows:
Shares For: 9,899,275 Shares Against: 2,965
Shares Abstaining: 6,241
ITEM 5 - OTHER INFORMATION
None.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
Exhibit
Number Description
------- -----------
27.1 Financial Data Schedule
(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
-------------------------------
July 17, 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
Item No. Description Method of Filing
-------- ----------- ----------------
27.1 Financial Data Schedule Filed herewith electronically
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