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SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 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 December 31, 1998
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: 0-21121
TRANSACT TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 06-1456680
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7 LASER LANE, WALLINGFORD, CT 06492
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 203-269-1198
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
(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 other amendment
to this Form 10-K. [ ]
As of MARCH 19, 1999 the aggregate market value of the registrant's issued and
outstanding voting stock held by non-affiliates of the registrant was
$15,400,000.
As of MARCH 19, 1998 the registrant had outstanding 5,558,700 shares of common
stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders to be held on May 6, 1999
- - Part III.
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PART I
GENERAL
TransAct Technologies Incorporated ("TransAct" or the "Company") designs,
develops, manufactures and markets transaction-based printers and related
products under the ITHACA(R) and MAGNETEC(R) brand names. The Company's printers
are used to provide transaction records such as receipts, tickets, coupons,
register journals and other documents. The Company focuses on four vertical
markets: point-of-sale ("POS") (from which the Company derived approximately 53%
of its net sales in the year ended December 31, 1998); gaming and lottery
(approximately 39% of net sales); kiosk (approximately 3% of net sales); and
financial services (approximately 5% of net sales). The Company sells its
products directly to end users, original equipment manufacturers ("OEMs"), value
added resellers ("VARs") and selected distributors, primarily in the United
States, Canada, Europe and Latin America. TransAct has two operating facilities
located in Wallingford, Connecticut and Ithaca, New York, and six sales offices,
five located in the United States and one in the United Kingdom.
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
In November 1995, the Board of Directors of Tridex Corporation ("Tridex")
approved a plan to combine the business operations of two of its wholly-owned
subsidiaries, Magnetec Corporation ("Magnetec") and Ithaca Peripherals
Incorporated ("Ithaca"), under unified management. TransAct was incorporated in
Delaware on June 17, 1996 as a wholly-owned subsidiary of Tridex. Following the
incorporation, Tridex, TransAct, Magnetec and Ithaca entered into a Plan of
Reorganization, pursuant to which: (i) Ithaca merged into Magnetec; (ii)
TransAct transferred to Tridex certain assets of Magnetec used in manufacturing
a printer ribbon product line; (iii) TransAct issued 5,400,000 shares of its
common stock to Tridex in exchange for all the outstanding shares of Magnetec;
(iv) TransAct sold in an initial public offering 1,322,500 shares or
approximately 19.7% of its common stock; (v) TransAct repaid $8,500,000 of
intercompany indebtedness to Tridex; (vi) Tridex applied to the Internal Revenue
Service (the "IRS") for a ruling that the distribution of the 5,400,000 shares
of TransAct owned by Tridex to Tridex stockholders (the "Distribution") would
constitute a tax-free reorganization for federal income tax purposes; and (vii)
Tridex agreed to effect the Distribution promptly after receipt of a favorable
ruling from the IRS and the satisfaction of certain other conditions.
On August 22, 1996, the Company sold 1,150,000 shares of its common stock
at a price of $8.50 per share in an initial public offering (the "Offering"). On
September 18, 1996, the Company sold an additional 172,500 shares upon exercise
of the underwriters' over-allotment option. Net proceeds from the Offering
(including the exercise of the underwriters' over-allotment option) were
approximately $9 million after payment of approximately $2.3 million of Offering
expenses.
On February 12, 1997, Tridex received a favorable ruling from the IRS
confirming the tax-free nature of the Distribution. On March 31, 1997 Tridex
distributed its 5,400,000 shares, or 80.3%, of TransAct's common stock, pro rata
to persons who were Tridex stockholders of record on March 14, 1997, on the
basis of approximately one share of TransAct for each share of Tridex. Upon
completion of the Distribution, Tridex no longer owned any shares of TransAct
common stock.
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(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
TransAct has assessed its operating and reportable segments and
determined that it operates in one reportable segment, the design, development,
manufacture and marketing of transaction-based printers and printer peripheral
products.
(C) NARRATIVE DESCRIPTION OF BUSINESS
(i) PRINCIPAL PRODUCTS AND SERVICES
TransAct designs, develops, manufactures and markets a broad array of
transaction-based printers utilizing dot matrix and thermal printing technology
for applications requiring up to 60 character columns in each of its four
vertical markets: POS, gaming and lottery, kiosk and financial services. The
Company also sells an 80 column laser printer for kiosk applications. The
Company's printers are configurable, which offer customers the ability to choose
from a variety of features and functions. Options typically include paper
cutting devices, paper handling capacities and number of print stations. In
addition to its configurable printers, TransAct manufactures custom printers for
certain OEM customers. In collaboration with these customers, the Company
provides engineering and manufacturing expertise for the design and development
of specialized printers.
The Company also manufactures and sells document transport mechanisms
which deliver the finished printed output to the consumer in unattended
applications, such as ATMs and kiosks. The Company also offers printer ribbons,
paper and replacement parts for all of its products.
The Company provides customers with telephone sales and technical
support, a personal account representative for orders, shipping and general
information and expedited shipping for orders of its customizable and custom
products. Technical and sales support personnel receive training in all of the
Company's products and services manufactured at their facility. The Company's
printers generally carry a one- or two-year limited warranty; extended
warranties are available for purchase on selected printers to supplement the
original warranty.
(ii) STATUS OF PRODUCT REQUIRING MATERIAL INVESTMENT
None.
(iii) SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal materials used in manufacturing are copper wire, magnetic
metals, injection molded plastic parts, formed metal parts and electronic
components. Although the Company could experience temporary disruption if
certain suppliers ceased doing business with the Company, the Company's
requirements generally are available from a number of sources. However, the
Company is dependent upon Okidata, Division of Oki America, Inc. ("Okidata") for
a printer component kit consisting of a printhead, control board and carriage
(the "Oki Kit"), which is used in all of the Company's ITHACA brand impact
printers. The loss of the supply of Oki Kits would have a material adverse
effect on the Company. TransAct has a supply agreement with Okidata to provide
Oki Kits until February 2000. Pricing for the Oki Kits is fixed through August
1999. TransAct believes its relations with Okidata are good and has received no
indication that the supply agreement will not be renewed beyond the expiration
of the current contract. TransAct cannot be certain, however, that the supply
agreement will be renewed, or if renewed, that the terms will be as favorable as
those under the current contract.
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(iv) PATENTS AND PROPRIETARY INFORMATION
The Company owns several patents, one of which it considers material.
That patent covers an automated paper cut-off device, which is a feature offered
on certain of the Company's POS printers. The Company regards certain
manufacturing processes and designs to be proprietary and attempts to protect
them through employee and third-party nondisclosure agreements and similar
means. It may be possible for unauthorized third parties to copy certain
portions of the Company's products or to reverse engineer or otherwise obtain
and use, to the Company's detriment, information that the Company regards as
proprietary. Moreover, the laws of some foreign countries do not afford the same
protection to the Company's proprietary rights as do United States laws. There
can be no assurance that legal protections relied upon by the Company to protect
its proprietary position will be adequate or that the Company's competitors will
not independently develop technologies that are substantially equivalent or
superior to the Company's technologies.
(v), (vi) SEASONALITY AND PRACTICES RELATING TO WORKING CAPITAL ITEMS
Retailers typically reduce purchases of new POS equipment in the fourth
quarter, due to the increased volume of consumer transactions in that period,
and the Company's sales of printers in the POS market historically have
increased in the third quarter and decreased in the fourth quarter. However, the
Company has not experienced material seasonality in its total net sales, due to
offsetting sales in other markets.
(vii) CERTAIN CUSTOMERS
The Company has an OEM purchase agreement with GTECH Corporation ("GTECH")
to provide on-line lottery printers and spare parts, at prices to be negotiated,
through October 2001. The Company also sells printers to GTECH for use in
in-lane lottery terminals. Sales to GTECH accounted for approximately 31.8%,
29.1% and 16.0% of net sales for the years ended December 31, 1998, 1997 and
1996, respectively.
(viii) BACKLOG
The Company's backlog of firm orders was approximately $16,100,000 as of
March 19, 1999 and $26,700,000 as of March 13, 1998. Based on customers' current
delivery requirements, TransAct expects to fill approximately $6,300,000 of its
backlog during 1999, and the remainder during 2000.
(ix) MATERIAL PORTION OF BUSINESS SUBJECT TO RENEGOTIATION OF PROFITS
None.
(x) COMPETITION
The market for transaction-based printers is extremely competitive, and
the Company expects such competition to intensify in the future. The Company
competes with a number of companies, many of which have greater financial,
technical and marketing resources than the Company. TransAct believes its
ability to compete successfully depends on a number of factors both within and
outside its control, including durability, reliability, quality, design
capability, product customization, price, customer support, success in
developing new products, manufacturing expertise and capacity, supply of
component parts and materials, strategic relationships with suppliers, the
timing of new product introductions by the Company and its competitors, general
market and economic conditions and, in some cases, the uniqueness of its
products.
Three of the Company's competitors, Epson America, Inc., Axiohm
Transaction Solutions and Star Micronics America, Inc. together control
approximately 70% of the United States market for POS printers, a market in
which the Company's strategy calls for increased market share. Another principal
competitor in the POS market is Citizen -- CBM America Corporation. Certain
competitors of the Company have lower costs, attributable to higher volume
production and off-shore manufacturing locations, and offer lower prices than
the Company from time to time.
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In the gaming and lottery, financial services and kiosk markets, no
single supplier holds a dominant position. Certain of the Company's products
sold for gaming and lottery, kiosk and financial service applications compete
based upon the Company's ability to provide highly specialized products, custom
engineering and ongoing technical support.
The Company's strategy for competing in its markets is to continue to
develop new products and product line extensions, to increase its geographic
market penetration, and to take advantage of strategic relationships. Although
the Company has historically maintained or increased sales with this strategy
and believes that its products, operations and relationships provide a
competitive foundation, there can be no assurance that the Company will compete
successfully in the future.
(xi) RESEARCH AND DEVELOPMENT ACTIVITIES
The Company spent approximately $3,642,000 in the year ended December 31,
1998, $2,773,000 in the year ended December 31, 1997 and $2,467,000 in the year
ended December 31, 1996 on engineering, design and product development efforts
in connection with specialized engineering and design to introduce new products
and to customize existing products.
(xii) ENVIRONMENT
The Company is not aware of any material noncompliance with federal,
state and local provisions which have been enacted or adopted regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment.
(xiii) EMPLOYEES
As of March 19, 1999, TransAct Technologies and its subsidiaries employed
224 persons, of which 212 were full-time and 12 were temporary employees. None
of the Company's employees is unionized and the Company considers its
relationships with its employees to be good.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Company has foreign operations primarily from Ithaca Peripherals
Ltd., a wholly-owned subsidiary located in the United Kingdom, which had sales
to its customers of $4,990,000, $4,204,000 and $397,000 in 1998, 1997 and 1996,
respectively. The Company had export sales to its customers from its domestic
operations of approximately $3,396,000, $5,618,000 and $1,622,000 in 1998, 1997
and 1996, respectively.
(E) EXECUTIVE OFFICERS OF THE REGISTRANT AS OF DECEMBER 31, 1998
Name Age Position
---- --- --------
Thomas R. Schwarz 62 Chairman of the Board
Bart C. Shuldman 41 President, Chief Executive Officer and Director
Richard L. Cote 57 Executive Vice President, Chief Financial Officer,
Treasurer,Secretary and Director
David A. Ritchie 39 Executive Vice President - Sales
Lucy H. Staley 48 Senior Vice President - General Manager
(Ithaca, NY facility)
John Cygielnik 54 Senior Vice President - General Manager
(Wallingford, CT facility)
Michael S. Kumpf 49 Senior Vice President - Engineering
Steven A. DeMartino 29 Corporate Controller
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THOMAS R. SCHWARZ, Chairman of the Board, has been a Director of the
Company since its formation in June 1996. Mr. Schwarz was Chairman and Chief
Executive Officer of Grossman's Inc., a retailer of building materials, from
1990 until his retirement in 1994. Mr. Schwarz is a Director of Tridex,
Foilmark, Inc., Tanaka Growth Fund, Lebhar-Friedman Publishing Company and A&W
Restaurants.
BART C. SHULDMAN has been Chief Executive Officer, President and a
Director of the Company since its formation in June 1996. Previously, Mr.
Shuldman was Vice President of Sales and Marketing of Magnetec from April 1993
to August 1993, and served as President of Magnetec and later the combined
operations of Magnetec and Ithaca from August 1993 until June 1996.
RICHARD L. COTE has been Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and a Director of the Company since its formation
in June 1996. Prior thereto, he served as Senior Vice President and Chief
Financial Officer of Tridex from September 1993 to June 1996 and as Vice
President of Tridex from June 1993 to September 1993.
DAVID A. RITCHIE, was appointed Executive Vice President of Sales of the
Company in July 1997, and served as Vice President of Sales at TransAct's Ithaca
division from March 1996 to July 1997. Mr. Ritchie joined Ithaca in April 1995
as Southeast National Sales Manger. Prior to joining TransAct's Ithaca division,
Mr. Ritchie held several sales management positions including Regional Sales
Manager at Medintell Systems Corporation form March 1994 to April 1995 and
Manager of Distribution Channels at AT&T from January 1992 to February 1994.
LUCY H. STALEY, Senior Vice President-General Manager (Ithaca, NY
facility) since June 1996, served as a Vice President of Ithaca from 1984 until
June 1996.
JOHN CYGIELNIK, Senior Vice President-General Manager (Wallingford, CT
facility) since June 1996, joined Magnetec as Controller in 1992, and served as
Vice President of Finance of Magnetec from 1993 until June 1996.
MICHAEL S. KUMPF, Senior Vice President-Engineering since June 1996,
served as Vice President of Engineering of Ithaca from 1991 until June 1996.
STEVEN A. DEMARTINO, joined TransAct as Corporate Controller in August
1996 and was appointed an officer of the Company in January 1998. Prior to
joining TransAct, Mr. DeMartino was a self-employed financial consultant from
May 1996 to August 1996. Prior thereto, Mr. DeMartino, served as Controller of
NER/Copart, Inc. from September 1994 to May 1996, and senior accountant with
Price Waterhouse LLP from August 1991 to September 1994.
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ITEM 2. PROPERTIES.
The Company's operations are currently conducted at the facilities
described below:
Size Owned or Lease Expiration
Location Operations Conducted (Approx. Sq. Ft.) Leased Date
- ---------------------------------------------------------------------------------------------------------------------
Wallingford, Connecticut Manufacturing facility and 49,000 Leased March 31, 2008
executive offices
Ithaca, New York Manufacturing facility 59,000 Leased June 30, 2007
Georgia (2), New Jersey, New Six (6) regional sales 1,600 Leased Various
York, Texas and the United offices
Kingdom
The Company believes that its facilities generally are in good condition,
adequately maintained and suitable for their present and currently contemplated
uses.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of the year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market under
the symbol TACT. As of March 19, 1999, there were 1,133 holders of record of the
common stock. The high and low sales prices of the common stock reported during
each quarter of the years ended December 31, 1998 and 1997 were as follows:
Year Ended Year Ended
--------------------------- ----------------------------
December 31, 1998 December 31, 1997
--------------------------- ----------------------------
High Low High Low
------- ------ ------- -------
First Quarter 12-1/4 8-1/2 15-1/2 10
Second Quarter 10-5/8 7-3/4 14 10-3/4
Third Quarter 8-7/8 4-1/2 20 13-1/2
Fourth Quarter 7-1/2 1-3/4 20-1/4 10
No dividends on the common stock have been declared and the Company does
not anticipate declaring dividends in the foreseeable future. The Company's
credit agreement with Fleet National Bank restricts the payment of cash
dividends for the term of the agreement.
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ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended Nine Months Ended Year Ended
------------------------------------------- -------------------------- ----------
December 31, December 31, December 31, December 31, December 31, April 1,
1998 1997 1996 1995 1994 1995
----------- ----------- ------------ ----------- ----------- ----------
(Unaudited)
Statement of Income Data:
Net sales $52,239 $58,400 $42,134 $25,497 $25,426 $33,362
Gross profit 13,826 18,173 13,933 7,968 8,391 11,013
Operating income 2,148 7,831 5,233 1,579 3,030 3,705
Net income 1,206 4,893 3,340 916 1,883 2,304
Earnings per share (pro
forma prior to 1997):
Basic 0.20 0.72 0.57 0.17 0.35 0.43
Diluted 0.20 0.71 0.57 0.17 0.35 0.43
December 31, December 31, December 31, December 31, December 31, April 1,
1998 1997 1996 1995 1994 1995
----------- ----------- ------------ ----------- ----------- ----------
(Unaudited)
Balance Sheet Data:
Total assets $23,788 $24,699 $20,784 $15,969 $14,392 $15,358
Long term debt 5,075 - - - - -
Shareholders' equity 12,177 17,903 14,407 11,645 10,591 11,280
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Because the Company was wholly-owned by Tridex until August 22, 1996, the
Selected Financial Data which appear in Item 6 and the Consolidated Financial
Statements which appear in Item 8 of this report with respect to periods prior
to the year ended December 31, 1997 may not necessarily reflect the results of
operations or financial position of the Company or what the results of
operations would have been if the Company had been a stand alone entity during
the periods presented. This discussion should be read in conjunction with those
Consolidated Financial Statements and notes thereto. See Note 1 of Notes to
Consolidated Financial Statements (Basis of Presentation).
Certain statements included in this report, including without limitation
statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
forward-looking statements involve risks and uncertainties, including, but not
limited to, customer acceptance and market share gains, both domestically and
internationally, in the face of substantial competition from competitors that
have broader lines of products and greater financial resources; successful
product development; dependence on significant customers; dependence on third
parties for sales in Europe and Latin America; economic conditions in the United
States, Europe and Latin America; marketplace acceptance of new products; risks
associated with foreign operations; availability of third-party components at
reasonable prices; and the absence of price wars or other significant pricing
pressures affecting the Company's products in the United States or abroad.
Actual results may differ materially from those discussed in, or implied by, the
forward-looking statements.
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IMPACT OF THE YEAR 2000 ISSUE.
General. The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Program. The Company has begun a program to resolve its Year 2000 issue.
This program consists of four phases; assessment, remediation, testing and
contingency planning. The Company completed the assessment phase in December
1998 and is currently in the remediation and testing phases. During the
assessment phase, the Company assessed its products, key financial and operating
systems and other systems for Year 2000 compliance. The assessment included
identifying all critical information management systems and other critical
systems on which the Company relies, testing Year 2000 compliance of such
systems, and recommending steps for replacing/making corrective fixes to
noncompliant systems. Additionally, as part of the assessment phase, the
Company obtained compliance verification from third party vendors supplying
critical parts or services to the Company in order to determine their plans to
address their own Year 2000 issues.
Upon completion of the detailed assessment, the Company concluded that
substantially all its critical financial operating systems and other systems are
Year 2000 compliant. However, certain software and hardware components were
identified as noncompliant. The Company has established a plan to replace this
software and hardware by March 1999. Also, the Company believes that its
products will be unaffected by the Year 2000 Issue, as none of its products
contain embedded date information.
The testing phase of the program has been ongoing, and will continue to
be conducted as noncompliant software and hardware are replaced. The Company
estimates that the testing phase is approximately 90% completed as of December
31, 1998.
The Company has begun to develop a contingency plan to address third
party factors which are out of its control, and expects completion of this plan
by June 1999.
Costs. The Company plans completion of all phases, including contingency
planning, of the Year 2000 program by June 1999. All costs associated with the
Company's Year 2000 program are being expensed as incurred. The Company's total
cost associated with the Year 2000 program has not been, and based on results of
its detailed assessment, is not expected to be, material to the Company's
business, financial position, results of operations or cash flows. The estimated
total cost of the Year 2000 Program is approximately $50,000, which primarily
includes the cost of replacing/upgrading noncompliant software identified during
the assessment phase with compliant software. Costs incurred through December
31, 1998 have been de minimus.
Risks. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue can be mitigated.
However, the Company may not timely identify and remediate all significant Year
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2000 problems and remedial efforts may involve significant time and expense. If
such modifications and conversions are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the results of operations,
financial position or cash flows of the Company.
The Company is currently identifying and analyzing the most reasonably
likely worst case scenarios for third party relationships affected by the Year
2000 Issue. These scenarios could include the inability of certain suppliers to
supply critical parts on a timely basis or the inability of customers to place
orders. Either of these scenarios, which is outside of the Company's control,
could result in a delay or an inability to ship product in the year 2000,
depending on the nature and severity of the problems. Furthermore, there can be
no assurance that any Year 2000 compliance problems of the Company or its
customers or suppliers will not have a material adverse effect on the results of
operations, financial position or cash flows of the Company.
The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. Risks to
completing the remaining portions of the program include the availability of
outside resources, the Company's ability to discover and correct potential Year
2000 problems which could have an impact on the Company's operations and the
ability of suppliers or customers to bring their systems into Year 2000
compliance.
(A) RESULTS OF OPERATIONS
(i) YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales into each of the Company's four vertical markets for
the years ended December 31, 1998 and 1997 were as follows:
Year ended Year ended
(In thousands) December 31, 1998 December 31, 1997
------------------------- -------------------------
Point of sale $27,778 53.2 % $23,342 40.0 %
Gaming and lottery 20,113 38.5 23,584 40.4
Kiosk 1,629 3.1 6,349 10.8
Financial services 2,719 5.2 5,125 8.8
------------- -------- -- ----------- ---------- --
$52,239 100.0 % $58,400 100.0 %
============= ======== == =========== ========== ==
Net sales for the year ended December 31, 1998 decreased $6,161,000, or
11%, to $52,239,000 from $58,400,000 in 1997 due to decreased shipments into the
gaming and lottery, kiosk and financial services markets, partially offset by an
increase in shipments into the point of sale ("POS") market. In addition, for
the reasons discussed below, the Company expects that net sales will decrease
for the year ended December 31, 1999 compared to the year ended December 31,
1998.
Point of sale: Sales of the Company's POS printers increased
approximately $4,436,000, or 19%, due largely to increased international printer
shipments (an increase of approximately $2,515,000), including increased printer
shipments into Europe and Latin America, and more shipments of printers for use
in the British Post Office project. Shipments of printers to the British Post
Office project were approximately $4,600,000 in 1998 compared to approximately
$3,600,000 in 1997. The Company does not anticipate making any further printer
shipments related to this project until 2000. In addition to increased
international printer shipments, domestic POS printer shipments increased
approximately $1,921,000.
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Gaming and lottery: Sales of the Company's gaming and lottery printers
decreased approximately $3,471,000, or 15%, from 1997. The overall decrease
primarily reflects a decrease of approximately $3,000,000 in shipments of
printers for use in video lottery terminals ("VLT"), due largely to the
uncertainty and litigation in South Carolina's video poker industry for most of
1998. However, VLT printer shipments resumed during the fourth quarter of 1998.
In addition to a decrease in printer shipments for use in VLTs, shipments of the
Company's on-line lottery printers and related spare parts declined $1,200,000
due to lower shipments to one customer in 1998 than in 1997. Shipments of
on-line lottery printers and spares to this customer were approximately
$15,800,000, or 30% of net sales in 1998, compared to approximately $17,000,000,
or 29% of net sales, in the prior year. The Company does not anticipate making
any further on-line lottery printer shipments, other than spares, to this
customer until 2000. The decrease in sales of printers for on-line lottery
terminals in 1998 was largely offset by an increase of approximately $800,000 of
printer shipments to the same customer for new in-lane lottery terminals. The
Company expects to continue making shipments of in-lane lottery printers to this
customer during 1999.
Kiosk: Kiosk printer sales decreased $4,720,000, or 74%, to $1,629,000
from $6,349,000 in 1997, which included shipments totaling approximately
$3,600,000 of the Company's thermal kiosk printers for use in a Canadian
government application. Additional shipments of these thermal kiosk printers are
expected to occur during 1999. The remaining decrease primarily reflects
shipments of other kiosk printers to various customers in 1997 that did not
repeat in 1998.
Financial services: Sales of the Company's printers into the financial
services market decreased $2,406,000, or 47%, primarily due to decreased
shipments to one customer of printers used in automated teller machines. The
Company expects slightly higher sales of its financial services printers for
1999 compared to 1998.
GROSS PROFIT. Gross profit decreased $4,347,000, or 24%, to $13,826,000
from $18,173,000 in 1997 due primarily to lower sales volume and, to a lessor
extent, non-recurring product discontinuance charges of $290,000 recorded during
1998. The gross margin declined to 26.5% from 31.1% largely due to lower sales
volume, non-recurring product discontinuance charges, and an unfavorable change
in sales mix, as certain customers at volume discount prices represented a
larger proportion of sales in 1998 compared to 1997. Due to lower expected sales
volume in 1999 compared to 1998, the Company expects its gross margin in 1999 to
be slightly lower than that of 1998.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
development costs increased $869,000, or 31%, to $3,642,000 from $2,773,000 in
1997, and increased as a percentage of net sales to 7.0% from 4.7%. This
increase reflects the Company's continued focus on new product development and
design expense, primarily for products in the POS and gaming and lottery
markets, including increased expenses related to additional engineering staff.
SELLING AND MARKETING. Selling and marketing expenses increased $252,000,
or 8%, to $3,280,000 from $3,028,000 in 1997, and increased as a percentage of
net sales to 6.3% from 5.2%. Such expenses increased due to additional sales
staff, increased sales commissions and additional marketing staff related to the
establishment of a corporate marketing department during 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased slightly by $85,000 to $4,456,000 in 1998 from $4,541,000 in 1997.
General and administrative expenses increased as a percentage of net sales to
8.5% from 7.8%, due to lower volume of sales in 1998 compared to 1997.
11
12
PROVISION FOR RESTRUCTURING. During the year ended December 31, 1998, the
Company recorded a provision for restructuring of $300,000 to cover severance
costs related to the downsizing and reorganization of the Company's
manufacturing facility in Wallingford, Connecticut.
OPERATING INCOME. Operating income decreased $5,683,000, or 73%, to
$2,148,000 from $7,831,000 in 1997. Operating income as a percentage of net
sales declined to 4.1% from 13.4%, due to (1) lower gross margin on lower sales
volume and an unfavorable change in sales mix, (2) increased engineering, design
and product development expense, (3) increased selling and marketing expense and
(4) non-recurring charges of $590,000, consisting of $300,000 for restructuring
and $290,000 for product discontinuance.
INTEREST. During 1998, the Company incurred net interest expense of
$353,000 compared to net interest income of $16,000 in 1997. The increase in
interest expense is due to increased borrowings on the Company's line of credit
during 1998 primarily to fund stock repurchases and also for working capital
requirements. See "Liquidity and Capital Resources" below.
INCOME TAXES. The provision for income taxes for the year ended December
31, 1998 reflects an effective tax rate of 34.0% compared to 37.5% in the prior
year. The decline in the Company's effective tax rate is largely due to tax
benefits derived from certain tax credits and its foreign sales corporation.
NET INCOME. Net income for the year ended December 31, 1998 was
$1,206,000, or $0.20 per share (basic and diluted), as compared to $4,893,000,
or $0.72 per share basic and $0.71 per share diluted, in 1997.
(ii) YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31,
1996
NET SALES. Net sales into each of the Company's four vertical markets for
the years ended December 31, 1997 and 1996 were as follows:
Year ended Year ended
(In thousands) December 31, 1997 December 31, 1996
------------------------- -------------------------
Point of sale $23,342 40.0 % $21,414 50.8 %
Gaming and lottery 23,584 40.4 12,217 29.0
Kiosk 6,349 10.8 3,379 8.0
Financial services 5,125 8.8 5,124 12.2
------------- -------- -- ----------- ---------- --
$58,400 100.0 % $42,134 100.0 %
============= ======== == =========== ========== ==
Net sales for the year ended December 31, 1997 increased $16,266,000, or
39%, to $58,400,000 from $42,134,000 in 1996, substantially due to increased
shipments into the gaming and lottery market. Shipments of the Company's on-line
lottery printers increased approximately $10,200,000, to approximately
$17,000,000, or 29% of net sales, in 1997, from approximately $6,800,000, or
16%, in 1996. Additionally, shipments of the Company's gaming printers for use
in video lottery terminals increased approximately $1,800,000 from 1996. Sales
into the kiosk market increased by approximately $2,970,000, or 88%,
substantially due to increased shipments of the Company's thermal kiosk
printers. Shipments of the
12
13
Company's financial services printers during 1997 were essentially unchanged
from 1996. Sales of the Company's POS printers during 1997 increased
approximately $1,928,000, or 9%, from 1996 due largely to an increase in printer
shipments into the international POS market, largely offset by a decline in
domestic POS printer shipments. The Company's international sales during 1997
were $9,822,000, or 17% of net sales, compared to $2,019,000, or 5% of net sales
in the prior year.
GROSS PROFIT. Gross profit increased $4,240,000, or 30%, to $18,173,000
from $13,933,000 in 1996 due primarily to the higher volume of sales. The gross
margin declined to 31.1% from 33.1%, due primarily to a larger proportion of
printer sales at lower average selling prices resulting from volume discount
pricing, particularly in the gaming and lottery market. Operating income as a
percentage of net sales increased in 1997 from 1996 (see "Operating Income"
below).
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
development costs increased $306,000, or 12%, to $2,773,000 from $2,467,000 for
1996, but decreased as a percentage of net sales to 4.7% from 5.9%. This
increase was due primarily to increased product development and design costs,
primarily for new products and enhancements to existing products in the POS and
kiosk markets.
SELLING AND MARKETING. Selling and marketing expenses increased $442,000,
or 17%, to $3,028,000 from $2,586,000 in 1996, primarily due to increases in the
level of sales staff and increased commissions resulting from a higher volume of
sales principally in the kiosk and POS markets. Selling expenses decreased as a
percentage of net sales to 5.2% from 6.1% due primarily to management's ability
to control these expenses while increasing sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $894,000, or 25%, over 1996, primarily reflecting an increase of
general and administrative expenses incurred by the Company as a stand alone,
public company. In 1996, such expenses were allocated from Tridex, its former
parent. Additionally, the increase reflects increased incentive compensation
and, to a lesser extent, additional administrative staff expenses to support
higher business volumes. General and administrative expenses decreased as a
percentage of net sales to 7.8% from 8.7% due primarily to management's ability
to control these expenses while increasing sales.
OPERATING INCOME. Operating income increased $2,598,000, or 50%, to
$7,831,000 from $5,233,000 in 1996. Operating income improved as a percentage of
net sales, increasing to 13.4% from 12.4%, due primarily to the Company's
ability to control operating expenses while increasing sales.
OTHER INCOME. Other income (expense) for the year ended December 31, 1996
included a gain of $285,000 from the sale of securities acquired in the sale of
the Company's solenoid product line in 1994.
INCOME TAXES. The provision for income taxes for the year ended December
31, 1997 reflects an effective tax rate of 37.5%. The effective rate in 1996 was
39.6%. The decline in the Company's effective tax rate is largely due to tax
benefits derived from the establishment of a foreign sales corporation and
certain tax credits.
13
14
NET INCOME. Net income for 1997 was $4,893,000, or $0.72 per share
(basic) and $0.71 per share (diluted). Net income for 1996 was $3,340,000, or
$0.57 per share (basic and diluted).
(B) LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $4,047,000, $3,835,000
and $1,972,000 in 1998, 1997 and 1996, respectively. The Company's working
capital declined to $10,107,000 at December 31, 1998 from $11,438,000 at
December 31, 1997. The current ratio also declined to 2.69 to 1 at December 31,
1998 from 2.87 to 1 at December 31, 1997. The decrease in the Company's working
capital and current ratio at December 31, 1998 was the result of short-term
financing for stock repurchases.
During November 1997, the Board of Directors approved the repurchase of
up to 500,000 shares of the Company's common stock at a price of no more than
$12 per share. During May, August and October 1998, the Board approved the
repurchase of an additional 500,000, 250,000 and 250,000 shares, respectively,
bringing the total authorized to 1.5 million shares. As of December 31, 1997,
the Company had acquired 200,000 shares of its common stock for $2,251,000.
During 1998, the Company repurchased an additional 1,003,000 shares of its
common stock for $7,170,000. Since the Company began the stock repurchase
program in December 1997 through December 31, 1998, it has repurchased 1,203,000
shares for $9,421,000 (an average cost of $7.83 per share). See Note 18 of Notes
to Consolidated Financial Statements concerning repurchases since December 31,
1998. Further repurchases of the Company's common stock will depend upon future
cash flow of the Company and stock market conditions.
On August 29, 1996, the Company entered into an agreement with Fleet
National Bank ("Fleet") to provide the Company with a $5,000,000 revolving
credit facility (the "Credit Facility"). The Credit Facility bore interest on
outstanding borrowings at Fleet's prime rate and bore a commitment fee of 0.25%
on any unused portion of the Credit Facility. The Credit Facility also permitted
the Company to designate a LIBOR rate on outstanding borrowings with a margin of
1.5 percentage points over the market rate. The Credit Facility was secured by a
lien on substantially all of the assets of the Company, imposed certain
financial covenants and restricted the payment of cash dividends. The Company
had $300,000 of outstanding borrowings under the Credit Facility at December 31,
1997.
On January 29, 1998, the Company replaced its existing $5,000,000 Credit
Facility with a new $15,000,000 revolving credit facility (the "New Credit
Facility"). The New Credit Facility, also with Fleet, provides the Company with
a $5,000,000 revolving working capital facility, and a $10,000,000 revolving
credit facility that may be used for activities such as acquisitions and
repurchases of the Company's common stock. Borrowings under the $10,000,000
revolving credit facility may, at the Company's election, be converted to a
four-year term loan commencing on June 30, 1999, the expiration date of the New
Credit Facility. Any term loan borrowings mature on June 30, 2003. Borrowings
under the New Credit Facility bear interest on outstanding borrowings at Fleet's
prime rate (7.75% at December 31, 1998) and bear a commitment fee ranging from
0.25% to 0.50% on any unused portion of the New Credit Facility. The New Credit
Facility also permits the Company to designate a LIBOR rate on outstanding
borrowings with a margin ranging from 1.25 to 1.75 percentage points over the
market rate, depending on the Company meeting certain ratios. The New Credit
Facility is secured by a lien
14
15
on substantially all of the assets of the Company, imposes certain financial
covenants and restricts the payment of cash dividends and the creation of liens.
During 1998, the Company borrowed $13,400,000 under the New Credit
Facility, with $5,800,000 outstanding at December 31, 1998. The Company intends
to convert the outstanding borrowings to a four-year term loan at the expiration
of the New Credit Facility. In accordance with that intent, $5,075,000
($5,800,000, less the current maturity of $725,000) has been classified as
long-term debt at December 31, 1998. Although the current credit facility
expires on June 30, 1999, the Company expects to obtain a replacement facility
to provide working capital beyond such expiration date. The Company is currently
discussing with Fleet alternative financing arrangements, including a long-term
revolving credit facility.
The Company's capital expenditures were approximately $2,232,000,
$2,266,000 and $1,836,000 in 1998, 1997 and 1996, respectively. These
expenditures primarily included new product tooling, computer equipment, and
factory machinery and equipment. The Company's capital expenditures for 1999 are
expected to be approximately $3,500,000, a majority for new product tooling.
The Company believes that cash flows generated from operations and
borrowings available under its current and future credit facilities, as
necessary, will provide sufficient resources to meet the Company's working
capital needs, finance its capital expenditures and common stock repurchases,
and meet its liquidity requirements through December 31, 1999.
(C) IMPACT OF INFLATION
TransAct believes that its business has not been affected to a
significant degree by inflationary trends because of the low rate of inflation
during the past three years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
15
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Page
Number
------
Report of Independent Accountants 17
TransAct Technologies Incorporated consolidated financial statements:
Consolidated balance sheets as of December 31, 1998 and December 31, 1997. 18
Consolidated statements of income for the years ended December 31, 1998, 1997 and 1996. 19
Consolidated statements of cash flows for the years ended December 31, 1998, 1997 and 1996. 20
Consolidated statement of changes in shareholders' equity for the period from December 31, 21
1995 through December 31, 1998.
Notes to consolidated financial statements. 22
16
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of TransAct Technologies Incorporated
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of changes
in shareholders' equity present fairly, in all material respects, the
financial position of TransAct Technologies Incorporated and its
subsidiaries, as described in Note 1, at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 8, 1999
17
18
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, December 31,
1998 1997
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 546 $ 391
Receivables, net (Note 4) 5,153 7,235
Inventories (Note 5) 8,744 8,570
Other current assets 1,651 1,365
-------- --------
Total current assets 16,094 17,561
-------- --------
Plant and equipment, net (Note 6) 5,664 4,989
Excess of cost over fair value of net assets acquired, net
(Note 2) 1,900 2,073
Other assets 130 76
-------- --------
7,694 7,138
-------- --------
$ 23,788 $ 24,699
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Bank loans payable (Note 9) $ 725 $ 300
Accounts payable 2,188 3,043
Accrued liabilities (Note 7) 3,074 2,780
-------- --------
Total current liabilities 5,987 6,123
-------- --------
Long term debt (Note 9) 5,075 --
Other liabilities 549 673
-------- --------
5,624 673
-------- --------
Commitments and contingencies (Note 10)
Shareholders' equity (Notes 11 and 12):
Common stock, $0.01 par value; 20,000,000
authorized; 5,629,500 and 6,810,300 issued 56 68
Preferred stock, 5,000,000 authorized, no issued
and outstanding -- --
Additional paid-in capital 5,763 14,975
Retained earnings 7,268 6,062
Unamortized restricted stock compensation (903) (942)
Accumulated other comprehensive income (7) (9)
-------- --------
12,177 20,154
Less: Treasury stock, at cost, 200,000 shares (Note 15) -- (2,251)
-------- --------
Total shareholders' equity 12,177 17,903
-------- --------
$ 23,788 $ 24,699
======== ========
See accompanying notes to consolidated financial statements.
18
19
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended December 31,
1998 1997 1996
-------- -------- --------
Net sales $52,239 $58,400 $42,134
Cost of sales 38,413 40,227 28,201
-------- -------- --------
Gross profit 13,826 18,173 13,933
-------- -------- --------
Operating expenses:
Engineering, design and product
development costs 3,642 2,773 2,467
Selling and marketing expenses 3,280 3,028 2,586
General and administrative expenses 4,456 4,541 3,647
Provision for restructuring (Note 15) 300 -- --
-------- -------- --------
11,678 10,342 8,700
-------- -------- --------
Operating income 2,148 7,831 5,233
-------- -------- --------
Other income (expense):
Interest, net (353) 16 (17)
Other, net 32 (19) 312
-------- -------- --------
(321) (3) 295
-------- -------- --------
Income before income taxes 1,827 7,828 5,528
Income tax provision (Note 13) 621 2,935 2,188
-------- -------- --------
Net income $1,206 $4,893 $3,340
======== ======== ========
Net income per share (pro forma for 1996):
Basic $0.20 $0.72 $0.57
======== ======== ========
Diluted 0.20 0.71 0.57
======== ======== ========
Weighted average common shares
outstanding (pro forma for 1996):
Basic 6,163 6,767 5,864
======== ======== ========
Diluted 6,170 6,932 5,884
======== ======== ========
See accompanying notes to consolidated financial statements.
19
20
TransAct Technologies Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income $1,206 $4,893 $3,340
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,030 1,591 1,135
Deferred income taxes (415) (51) (82)
Gain on sale of securities available for sale -- -- (285)
Loss on disposal of equipment 8 8 6
Changes in operating assets and liabilities:
Receivables 2,082 (1,790) (2,199)
Inventories (174) (1,200) (1,017)
Other current assets 173 (623) 30
Other assets (134) (50) (27)
Accounts payable (855) 580 (248)
Accrued liabilities and other liabilities 126 477 1,319
-------- -------- --------
Net cash provided by operating activities 4,047 3,835 1,972
-------- -------- --------
Cash flows from investing activities:
Purchases of plant and equipment (2,232) (2,266) (1,836)
Proceeds from sale of securities available
for sale -- -- 508
Proceeds from sale of equipment 3 3 13
Other -- -- (5)
-------- -------- --------
Net cash used in investing activities (2,229) (2,263) (1,320)
-------- -------- --------
Cash flows from financing activities:
Bank line of credit borrowings 13,400 1,500 --
Bank line of credit repayments (7,900) (1,200) --
Purchases of treasury stock (7,170) (2,251) --
Proceeds from option exercises 2 76 --
Tax benefit related to employee stock sales 3 647 --
Payment of intercompany debt -- (1,000) (7,500)
Net proceeds from issuance of stock -- -- 8,991
Net transactions with Tridex prior to the
initial public offering -- -- (1,087)
-------- -------- --------
Net cash provided by (used in) financing
activities (1,665) (2,228) 404
-------- -------- --------
Effect of exchange rate changes on cash 2 6 (15)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 155 (650) 1,041
Cash and cash equivalents at beginning of period 391 1,041 --
-------- -------- --------
Cash and cash equivalents at end of period $546 $391 $1,041
======== ======== ========
Supplemental cash flow information:
Interest paid $351 $52 $28
Income taxes paid 561 2,775 592
See accompanying notes to consolidated financial statements.
20
21
TransAct Technologies Incorporated
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
Unamortized Accumulated Tridex
Additional Restricted Other Investment
Common Stock Paid-in Retained Stock Comprehensive Treasury in the
Shares Amount Capital Earnings Compensation Income Stock Company
------ ------ ------- -------- ------------ ------ ----- -------
Balance, December 31, 1995 -- $ -- $ -- $ -- $ -- $ -- $ -- $ 11,645
Net transactions with Tridex:
Allocation of general and
administrative expenses
from Tridex -- -- -- -- -- -- -- (869)
Sales to affiliates -- -- -- -- -- -- -- 1,998
Net transfers to Tridex -- -- -- -- -- -- -- (2,216)
Reclassification of note
payable to Tridex -- -- -- -- -- -- -- (8,500)
Issuance of shares to Tridex
in exchange for all
outstanding shares of
Magnetec 5,400,000 54 4,207 -- -- -- -- (4,229)
Issuance of Offering shares 1,322,500 13 8,978 -- -- -- -- --
Purchase of warrants -- -- 1 -- -- -- -- --
Comprehensive income:
Net income prior to Offering -- -- -- -- -- -- -- 2,171
Net income subsequent to
Offering -- -- -- 1,169 -- -- -- --
Foreign currency translation
adjustment -- -- -- -- -- (15) -- --
---------- ------- -------- -------- -------- ------ ------- --------
Balance, December 31, 1996 6,722,500 67 13,186 1,169 -- (15) -- --
Issuance of restricted stock 78,800 1 1,066 -- (1,066) -- -- --
Issuance of shares from
exercise of stock options 9,000 -- 76 -- -- -- -- --
Amortization of restricted
stock compensation -- -- -- -- 124 -- -- --
Tax benefit related to
employee stock sales -- -- 647 -- -- -- -- --
Purchase of treasury shares (200,000) -- -- -- -- -- (2,251) --
Comprehensive income:
Foreign currency
translation adjustments -- -- -- -- -- 6 -- --
Net income -- -- -- 4,893 -- -- -- --
---------- ------- -------- -------- -------- ------ ------- --------
Balance, December 31, 1997 6,610,300 68 14,975 6,062 (942) (9) (2,251) --
Issuance of restricted stock 25,000 -- 228 -- (228) -- -- --
Cancellation of restricted
stock (3,000) -- (36) -- 36 -- -- --
Issuance of shares from
exercise of stock options 200 -- 2 -- -- -- -- --
Amortization of restricted
stock compensation -- -- -- -- 231 -- -- --
Tax benefit related to
employee stock sales -- -- 3 -- -- -- -- --
Purchase of treasury shares (1,003,000) -- -- -- -- -- (7,170) --
Retirement of treasury shares -- (12) (9,409) -- -- -- 9,421 --
Comprehensive income:
Foreign currency
translation adjustment -- -- -- -- -- 2 -- --
Net income -- -- -- 1,206 -- -- -- --
---------- ------- -------- -------- -------- ------ ------- --------
Balance, December 31, 1998 5,629,500 $ 56 $ 5,763 $ 7,268 $ (903) $ (7) $ -- $ --
========== ======= ======== ======== ======== ====== ======= ========
See accompanying notes to consolidated financial statements.
21
22
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
TransAct Technologies Incorporated ("TransAct" or the "Company") was
incorporated on June 17, 1996, as a wholly-owned subsidiary of Tridex
Corporation ("Tridex"). Following the incorporation, TransAct and two of
Tridex's wholly-owned subsidiaries, Magnetec Corporation ("Magnetec") and
Ithaca Peripherals Incorporated ("Ithaca"), entered into a Plan of
Reorganization (the "Plan of Reorganization"), pursuant to which: (i)
Ithaca merged into Magnetec; (ii) TransAct transferred to Tridex certain
assets of Magnetec used in manufacturing a printer ribbon product line;
(iii) TransAct issued 5,400,000 shares of its common stock to Tridex in
exchange for all the outstanding shares of Magnetec; (iv) TransAct sold in
an initial public offering (the "Offering") 1,322,500 shares or
approximately 19.7% of its common stock; (v) TransAct repaid $8,500,000 of
intercompany indebtedness to Tridex; (vi) Tridex applied to the Internal
Revenue Service (the "IRS") for a ruling that the distribution of the
5,400,000 shares of TransAct owned by Tridex to Tridex stockholders (the
"Distribution") would constitute a tax-free reorganization for federal
income tax purposes; and (vii) Tridex agreed to effect the Distribution
promptly after receipt of a favorable ruling from the IRS and the
satisfaction of certain other conditions.
On February 12, 1997, Tridex received a favorable ruling from the IRS
confirming the tax-free nature of the Distribution. On March 31, 1997
Tridex distributed its 5,400,000 shares, or 80.3% of TransAct's common
stock, pro rata to persons who were Tridex stockholders of record on March
14, 1997, on the basis of approximately one share of TransAct for each
share of Tridex. Upon completion of the Distribution, Tridex no longer
owned any shares of TransAct capital stock.
The financial statements of the Company have been prepared principally
on the basis of items (i) and (ii) of the Plan of Reorganization outlined
above and include the financial position and consolidated (combined prior
to the implementation of the Plan of Reorganization) results of operations
and cash flows of the business described. The term consolidated as used
herein refers to both the consolidated and combined financial statements.
The Company carries its assets and liabilities at historical cost. The
financial results in these financial statements are not necessarily
indicative of results that would have occurred if the Company had been a
separate stand alone entity during the periods presented or of future
results of the Company.
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND PRODUCTS: TransAct, through its two operations, one in
Wallingford, CT and the other in Ithaca, NY, operates in one industry
segment, transaction-based printers and printer peripheral products.
TransAct designs, develops, manufactures and markets transaction-based
printers and related products under the ITHACA and MAGNETEC brand names.
The Company's printers are used to provide transaction records such as
receipts, tickets, coupons, register journals and other documents. The
Company focuses on four vertical markets: point-of-sale ("POS") (from which
the Company derived approximately 53% of net sales for the year ended
December 31, 1998); gaming and lottery (approximately 39% of net sales);
kiosk (approximately 3% of net sales); and financial services
(approximately 5% of net sales). The Company sells its products directly to
end users, original equipment manufacturers ("OEM"), value-added resellers
and selected distributors, primarily in the United States, Canada, Europe
and Latin America.
TransAct designs, develops, manufactures and markets a broad array of
transaction-based printers utilizing dot matrix and thermal printing
technology for applications requiring up to 60 character columns in each of
its four vertical markets. The Company also sells an 80 column laser
printer for kiosk applications. The Company's printers are configurable,
which offer customers the ability to choose from a variety of features and
functions. Options typically include paper cutting devices, paper handling
capacities and number of print stations. In addition to its configurable
printers, TransAct manufactures custom printers for certain OEM customers.
In collaboration with these customers, the Company provides engineering and
manufacturing expertise for the design and development of specialized
printers.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, after elimination of all material intercompany accounts and
transactions.
22
23
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with a maturity date of three months or less at date of
purchase to be cash equivalents.
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.
FOREIGN CURRENCY: The financial position and results of operations of
the Company's foreign subsidiaries are measured using local currency as the
functional currency. Assets and liabilities of such subsidiaries have been
translated at end of period exchange rates, and related revenues and
expenses have been translated at weighted average exchange rates. The
aggregate effect of translation adjustments so calculated for periods prior
to the Offering, which would be ordinarily included as a separate component
of shareholders' equity, is de minimis. Transaction gains and losses are
included in other income.
INVENTORIES: Inventories are stated at the lower of cost (principally
standard cost which approximates actual cost on a first-in, first-out
basis) or market.
PLANT AND EQUIPMENT AND DEPRECIATION: Plant and equipment and
leasehold improvements are stated at cost. Depreciation is provided for
primarily by the straight-line method over the estimated useful lives. The
estimated useful life of machinery, furniture and equipment is three to ten
years. Leasehold improvements are amortized over the shorter of the term of
the lease or the useful life of the asset. Depreciation amounted to
$1,546,000, $1,227,000 and $905,000 in the year ended December 31, 1998,
1997 and 1996, respectively.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED: The excess of
cost over fair value of net assets acquired (goodwill) resulted from the
acquisition of Ithaca in 1991. The original amount applicable to this
acquisition totaled $3,536,000 and is being amortized on the straight-line
method over 20 years. Accumulated amortization of goodwill was $1,636,000
and $1,463,000 at December 31, 1998 and 1997, respectively. The Company
periodically reviews goodwill to assess recoverability based upon
expectations of non-discounted cash flows from operations for Ithaca. The
Company believes that no impairment of goodwill exists at December 31,
1998.
REVENUE RECOGNITION: Sales are recognized when the product is shipped.
Revenue from extended warranty and maintenance agreements is recognized
over the term of such agreements as services are performed. Sales to one
customer accounted for approximately 32%, 29% and 16% of net sales for the
year ended December 31, 1998, 1997 and 1996, respectively.
INCOME TAXES: Through the date of the Distribution, the Company was
included in the consolidated federal and certain state income tax returns
of Tridex. The income tax amounts reflected in the accompanying financial
statements are accounted for under the liability method in accordance with
FAS 109 "Accounting for Income Taxes," and for the periods presented
through the date of the Distribution are an allocation of Tridex's
consolidated balances, and are computed as if a separate return had been
filed for the Company, using those elements of income and expense as
reported in the consolidated statements of income. Subsequent to the
Distribution, the Company files federal and state income tax returns
separately from Tridex. See Note 13.
EARNINGS PER SHARE: TransAct adopted FAS 128 "Earnings per Share,"
effective December 15, 1997, which requires the dual presentation of basic
and diluted earnings per share for complex capital structures. In
accordance with FAS 128, earnings per share presented in the accompanying
financial statements for periods prior to adoption have been restated. For
the year ended December 31, 1996, pro forma basic and diluted earnings per
share are based on the weighted average number of shares outstanding during
the period, as if all shares issued to Tridex prior to the Offering had
been outstanding throughout the period.
23
24
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION: The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations in accounting for its stock
options. Under APB 25, because the exercise price of employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). See Note
11.
SEGMENT REPORTING: FASB Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131") requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Generally, financial information is required to be reported on
the basis that it is used internally for evaluating segment performance and
allocating resources. The Company has assessed its operating and reportable
segments and determined that it operates in one reportable segment as
defined in FAS 131.
3. RELATED PARTY TRANSACTIONS
Prior to the Offering, Tridex provided certain general and
administrative services to the Company, including tax, treasury, risk
management and insurance, legal, marketing, accounting, auditing, human
resources and executive management. For periods prior to the Offering,
these expenses were allocated to the Company based upon actual usage for
those expenses directly attributable to the Company, and otherwise
allocated based upon other methods which management believes to be
reasonable. The allocation amounted to $869,000 for the year ended December
31, 1996. These costs may have been different had the Company operated as a
separate stand-alone entity during the periods presented.
On July 31, 1996, the Company entered into a Corporate Services
Agreement with Tridex. Under the terms of this agreement, Tridex agreed to
provide the Company with certain services, including employee benefit
administration, human resource and related services, administrative
services, risk management, regulatory compliance, preparation of tax
returns and certain financial and other services. Such services were
provided and reimbursed at actual cost, which amounted to approximately
$96,000 and $91,000 for the year ended December 31, 1997 and 1996,
respectively. Certain services ceased to be provided after March 31, 1997.
Also, pursuant to the terms of the agreement, Tridex agreed to pay 15% of
the direct employment costs of the Company's chief financial officer
through March 31, 1997, which amounted to approximately $7,000 and $8,000
for the year ended December 31, 1997 and 1996, respectively. The Corporate
Services Agreement expired on December 31, 1997.
On July 31, 1996, the Company entered into a Tax Sharing Agreement
with Tridex. The agreement provides for the treatment of certain tax
attributes of the Company including the method of allocating tax
obligations, treatment of tax carryforwards and the computation of income
tax provisions for the Company between the date of the Offering and the
Distribution. In addition, tax benefits related to certain tax
carryforwards arising prior to the Distribution will be paid to Tridex as
the carryforwards are utilized. For the year ended December 31, 1997 and
December 31, 1996, the Company paid, net of refunds from Tridex,
approximately $410,000 and $527,000, respectively, to Tridex pursuant to
the agreement.
The Company and Tridex also entered into an Asset Transfer Agreement
dated July 31, 1996, under which the Company agreed to transfer to Tridex
certain assets used in the manufacturing process of the printer ribbon
product line. Additionally, on September 28, 1996, the Company and Tridex
entered into a Manufacturing Support Services Agreement. Under this
agreement, the Company agrees to provide Tridex with space within its
Wallingford, CT manufacturing facility and certain support services for the
ribbon business through September 28, 1998. This agreement was amended on
June 1, 1998 to extend the term of the agreement to June 1, 2000. Pursuant
to this agreement, Tridex agrees to pay the Company a monthly fee
calculated to compensate the Company for the direct and indirect costs
incurred by the Company to provide the space and render such services.
These fees amounted to approximately $254,000 and $67,000 during 1997 and
1996, respectively. The Company also purchased approximately $4,000 and
$5,000 of ribbons from Tridex during the same periods.
24
25
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company sells certain POS printers to a wholly-owned subsidiary of
Tridex. Revenues from the sale of such printers amounted to $2,675,000 and
$3,178,000 during 1997 and 1996 , respectively.
Subsequent to 1997, Tridex is no longer a related party.
4. RECEIVABLES
Receivables are net of the allowance for doubtful accounts. The
reconciliation of the allowance for doubtful accounts is as follows:
Year Ended December 31,
1998 1997 1996
----- ----- ----
(In thousands)
Balance at beginning of period $ 102 $ 106 $ 40
Provision for doubtful accounts 41 18 66
Accounts written off, net of recoveries (4) (22) --
----- ----- ----
Balance at end of period $ 139 $ 102 $106
===== ===== ====
5. INVENTORIES
The components of inventories are:
December 31,
(In thousands) 1998 1997
------ ------
Raw materials and component parts $7,754 $7,482
Work-in-process 495 588
Finished goods 495 500
------ ------
$8,744 $8,570
====== ======
6. PLANT AND EQUIPMENT
The components of plant and equipment, net are:
December 31,
(In thousands) 1998 1997
-------- --------
Tooling, machinery and equipment $ 9,533 $ 8,399
Furniture, office and computer equipment 3,276 2,545
Leasehold improvements 551 339
-------- --------
13,360 11,283
Less: accumulated depreciation (7,696) (6,294)
-------- --------
$ 5,664 $ 4,989
======== ========
25
26
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACCRUED LIABILITIES
The components of accrued liabilities are:
December 31,
(In thousands) 1998 1997
------ ------
Payroll and fringe benefits $ 522 $1,225
Income taxes payable 757 415
Customer advances, deferred revenue and
warranty 850 436
Restructuring 300 --
Other 645 704
------ ------
$3,074 $2,780
====== ======
8. RETIREMENT SAVINGS PLAN
On April 1, 1997, the Company established the TransAct Technologies
Retirement Savings Plan (the "Plan"), a defined contribution plan under
Section 401(k) of the Internal Revenue Code. Prior to the Distribution, the
Company's employees participated in the Tridex Corporation Retirement
Savings Plan. All full-time employees are eligible to participate in the
Plan at the beginning of the calendar quarter immediately following their
date of hire. The Company matches employees' contributions at a rate of 50%
of employees' contributions up to the first 4% of the employees'
compensation contributed to the Plan. The Company's matching contributions
were $159,000, $101,000 and $80,000 in 1998, 1997 and 1996, respectively,
and are included in general and administrative expense. Prior to January 1,
1998, the Company's rate of matching contributions was 37.5% of the
employees' contributions up to the first 4% of the employees' compensation
contributed to the Plan.
9. BANK CREDIT AGREEMENT
On August 29, 1996, the Company entered into an agreement with Fleet
National Bank ("Fleet") to provide the Company with a $5,000,000 revolving
credit facility (the "Credit Facility"). The Credit Facility bore interest
on outstanding borrowings at Fleet's prime rate and bore a commitment fee
of 0.25% on any unused portion of the Credit Facility. The Credit Facility
also permitted the Company to designate a LIBOR rate on outstanding
borrowings with a margin of 1.5 percentage points over the market rate. The
Credit Facility was secured by a lien on substantially all of the assets of
the Company, imposed certain financial covenants and restricted the payment
of cash dividends. The Company had $300,000 of borrowings outstanding under
the Credit Facility at December 31, 1997.
On January 29, 1998, the Company replaced its existing $5,000,000
Credit Facility with a new $15,000,000 facility (the "New Credit
Facility"). The New Credit Facility, also with Fleet, provides the Company
with a $5,000,000 revolving working capital facility, and a $10,000,000
revolving credit facility that may be used for activities such as
acquisitions and repurchases of the Company's common stock. Borrowings
under the $10,000,000 revolving credit facility may, at the Company's
election, be converted to a four-year term loan commencing on June 30,
1999, the expiration date of the New Credit Facility. Any term loan
borrowings mature on June 30, 2003. Borrowings under the New Credit
Facility bear interest at Fleet's prime rate and bear a commitment fee
ranging from 0.25% to 0.50% on any unused portion of the New Credit
Facility (0.375% at December 31, 1998). The New Credit Facility also
permits the Company to designate a LIBOR rate on outstanding borrowings
with a margin ranging from 1.25 to 1.75 percentage points over the market
rate, depending on the Company meeting certain ratios. The New Credit
Facility is secured by a lien on substantially all of the assets of the
Company, imposes certain financial covenants and restricts the payment of
cash dividends and the creation of liens. The Company had $5,800,000 of
borrowings outstanding under the New Credit Facility at December 31, 1998.
The Company intends to convert the outstanding borrowings to a four-year
term loan at the expiration of the New Credit Facility. In accordance with
that intent, $5,075,000 ($5,800,000, less the current maturity of $725,000)
has been classified as long-term debt at December 31, 1998.
26
27
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company was lessee on operating leases for
equipment and real property. The terms of certain leases provide for
escalating rent payments in later years of the lease as well as payment of
minimum rent and real estate taxes. Rent expense amounted to approximately
$957,000, $713,000 and $682,000 in the year ended December 31, 1998, 1997
and 1996, respectively. Minimum aggregate rental payments required under
operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 31, 1998 are as follows: $864,000 in
1999; $856,000 in 2000; $844,000 in 2001; $841,000 in 2002; $843,000 in
2003 and $3,268,000 thereafter.
The Company has a long-term purchase agreement for certain printer
components. Under the terms of the agreement, the Company receives
favorable pricing for volume purchases over the life of the contract. In
the event anticipated purchase levels are not achieved, the Company would
be subject to retroactive price increases on previous purchases. Management
currently anticipates achieving sufficient purchase levels to maintain the
favorable prices.
In conjunction with the Plan of Reorganization, as described in Note
1, Tridex indemnified the Company from any liabilities, including
environmental liabilities, which could arise in connection with a
manufacturing facility owned by Tridex and formerly operated by the
Company.
11. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS. On July 30, 1996, the Company adopted the 1996 Stock
Plan which provides for the grant of awards to officers and other key
employees of the Company, and the Directors' Stock Plan which provides for
non-discretionary awards to non-employee directors. The plans provide for
awards in the form of: (i) incentive stock options, (ii) non-qualified
stock options, (iii) shares of restricted stock, (iv) restricted units, (v)
stock appreciation rights or (vi) limited stock appreciation rights.
Options granted are at prices equal to 100% of the fair market value of the
common stock at the date of grant. Options granted have a ten-year term and
vest over a five-year period, unless automatically accelerated. At December
31, 1998, the Company has reserved 960,000 shares of common stock for
issuance under the 1996 Stock Plan and Directors' Stock Plan.
During the fourth quarter of 1998, the Company approved the
cancellation and reissuance of certain outstanding options under the 1996
Stock Plan. Under the program, holders of outstanding options as of
December 10, 1998, excluding the Company's executive officers, obtained in
substitution for existing options new options for the same number of
shares. The new options, totaling 190,600, are exercisable at a price of
$4.75 per share, the fair market value of the common stock on the reissue
date. The new options maintain the vesting schedule established by the
canceled option. These 190,600 options have been treated as canceled and
granted in 1998 in the table below.
The 1996 Stock Plan and Directors' Stock Plan option activity is
summarized below:
Year Ended December 31,
1998 1997 1996
---------------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of
Period 542,600 $10.97 339,300 $ 8.50 -- --
Granted 428,100 5.75 227,500 14.45 339,300 $ 8.50
Exercised (200) 8.50 (9,000) 8.50 -- --
Canceled (218,200) 10.83 (15,200) 10.04 -- --
-------- ------ -------- ------ ------- ------
Outstanding at end of period 752,300 8.04 542,600 10.97 339,300 8.50
======== ====== ======== ====== ======= ======
Options exercisable at end of
period 165,360 $ 8.28 57,060 $ 8.50 -- $ --
======= ====== ======== ====== ======= ======
27
28
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company applies APB 25 and related interpretations in accounting
for its long-term incentive stock plans. Accordingly, no compensation cost
has been recognized for its stock options.
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted- Weighted- Weighted-
Outstanding at Average Average Exercisable at Average
December 31, Exercise Remaining December 31, Exercise
Range of Exercise Prices 1998 Price Contractual Life 1998 Price
---- ----- ---------------- ---- -----
(In years)
$ 3.00 - $ 7.50 299,600 $4.38 8.3 53,640 $4.75
7.51 - 10.00 327,000 8.72 8.2 86,220 8.50
10.01 - 12.50 8,500 11.66 8.4 1,500 11.75
12.51 - 15.00 51,200 13.75 8.0 10,800 13.74
15.01 - 17.50 66,000 16.38 8.6 13,200 16.38
Had compensation expense been recognized based on the fair value of
the options at their grant dates, as prescribed in FAS 123, the Company's
net income and net income per share would have been as follows:
Year Ended December 31,
1998 1997 1996
---- ---- ----
(In thousands, except per share data)
Net income:
As reported $ 1,206 $ 4,893 $ 3,340
Pro forma under FAS 123 747 4,422 3,248
Net income per share:
Basic:
As reported 0.20 0.72 0.57
Pro forma under FAS 123 0.12 0.65 0.55
Diluted:
As reported 0.20 0.71 0.57
Pro forma under FAS 123 0.12 0.64 0.55
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for the grants made during the years ended December 31, 1998, 1997 and
1996.
Year Ended December 31,
1998 1997 1996
---- ---- ----
Risk-free interest rate 4.9% 6.4% 5.1%
Dividend yield 0% 0% 0%
Expected volatility factor 78.1% 60.0% 59.5%
Expected option term 10 years 10 years 10 years
Weighted average fair value of options granted during period $ 4.69 $ 10.97 $ 6.25
28
29
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
RESTRICTED STOCK: Under the 1996 Stock Plan, the Company has granted
shares of restricted common stock, for no consideration, to its Chairman of
the Board, officers and certain key employees. The 1996 Stock Plan and
Directors' Stock Plan restricted stock activity is summarized below:
Year Ended December 31,
1998 1997
---- ----
Outstanding shares at beginning of period 78,800 --
Granted 25,000 78,800
Canceled (3,000) --
-------- ------
Outstanding shares at end of period 100,800 78,800
======== ======
Vested shares at end of period 9,360 --
======== ======
Of the 100,800 shares of restricted stock outstanding at December 31,
1998, 46,800 shares vest over a five-year period, while 54,000 shares vest
at the end of a five-year period. Under certain conditions vesting may be
automatically accelerated. Upon issuance of the restricted stock, unearned
compensation equivalent to the market value at the date of grant is charged
to shareholders' equity and subsequently amortized over the vesting period.
Amortization expense of $231,000 and $124,000 was recorded during 1998 and
1997, respectively.
WARRANTS: On August 22, 1996, the Company sold to the underwriters of
the Offering, for nominal consideration, a warrant to purchase from the
Company up to 115,000 shares of common stock at an exercise price of $10.20
per share. The warrant is exercisable for a period of five years beginning
April 1, 1998.
12. STOCKHOLDER RIGHTS PLAN
In December 1997, the Board of Directors adopted a stockholder rights
plan declaring a distribution of one right (the "Rights") for each
outstanding share of the Company's common stock to shareholders of record
at December 15, 1997. Initially, each of the Rights will entitle the
registered holder to purchase from the Company one one-thousandth of a
share of Series A Preferred Stock, $0.01 par value, at a price of $69 per
one one-thousandth of a share. The Rights, however, will not become
exercisable unless and until, among other things, any person or group of
affiliated persons acquires beneficial ownership of 15 percent or more of
the then outstanding shares of the Company's Common Stock. If a person, or
group of persons, acquires 15 percent or more of the outstanding Common
Stock of the Company (subject to certain conditions and exceptions more
fully described in the Rights Agreement), each Right will entitle the
holder (other than the person, or group of persons, who acquired 15 percent
or more of the outstanding Common Stock) to purchase Preferred Stock of the
Company having a market value equal to twice the exercise price of the
Right. The Rights are redeemable, under certain circumstances, for $0.0001
per Right and will expire, unless earlier redeemed, on December 2, 2007.
The stockholders rights plan was amended on February 18, 1999. See Note 18.
29
30
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
The components of the income tax provision are as follows:
Year Ended December 31,
1998 1997 1996
---- ---- ----
(In thousands)
Current:
Federal $ 779 $ 2,461 $ 1,934
State 126 525 336
Foreign 131 -- --
------- ------- -------
1,036 2,986 2,270
------- ------- -------
Deferred:
Federal (371) (46) (73)
State (44) (5) (9)
------- ------- -------
(415) (51) (82)
------- ------- -------
Total income tax provision $ 621 $ 2,935 $ 2,188
======= ======= =======
The Company had foreign income before taxes of $435,000 in 1998,
$131,000 in 1997 and a loss before taxes of $51,000 in 1996.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. The Company's gross deferred tax assets and liabilities were
comprised of the following:
December 31,
(In thousands) 1998 1997
---- ----
Gross deferred tax assets:
Liabilities and reserves $1,187 $710
====== ====
Gross deferred tax liabilities:
Depreciation $ 425 $363
====== ====
Differences between the U.S. statutory federal income tax rate and the
Company's effective income tax rate are analyzed below:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income taxes 6.0 4.4 4.0
Non-deductible purchase accounting adjustments 4.4 0.9 1.1
Tax benefit from foreign sales corporation (2.2) (1.0) --
Tax benefit from tax credits (5.8) (1.6) --
Foreign rate differential (0.9) -- --
Other (1.5) 0.8 0.5
---- ---- ----
Effective tax rate 34.0% 37.5% 39.6%
==== ==== ====
30
31
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. DISCLOSURE REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of trade accounts receivable, other current
assets, trade accounts payable, accrued expenses and bank loans approximate
fair value because of the short maturity of those instruments.
15. SIGNIFICANT TRANSACTIONS
During the fourth quarter of 1998, the Company recorded a
restructuring charge of $300,000 for severance costs related to the
downsizing and reorganization of its manufacturing facility in Wallingford,
CT.
During November 1997, the Board of Directors approved the repurchase
of up to 500,000 shares of the Company's common stock at a price of no more
than $12 per share. During May, August and October 1998, the Board approved
the repurchase of an additional 500,000, 250,000 and 250,000 shares,
respectively, bringing the total authorized to 1.5 million shares. As of
December 31, 1997, the Company acquired 200,000 shares of its common stock
for $2,251,000. During 1998, the Company repurchased an additional
1,003,000 shares of its common stock for $7,170,000. Since the Company
began the stock repurchase program in December 1997 through December 31,
1998, it has repurchased 1,203,000 shares for $9,421,000 (an average cost
of $7.83 per share). See Note 18 concerning repurchases since December 31,
1998.
16. INTERNATIONAL OPERATIONS
The Company has foreign operations primarily from Ithaca Peripherals
Ltd., a wholly-owned subsidiary, which had sales to its customers of
$4,990,000, $4,204,000 and $397,000 in the year ended December 31, 1998,
1997 and 1996, respectively. The Company had export sales to its customers
from the United States of approximately $3,396,000, $5,618,000 and
$1,622,00 in the year ended December 31, 1998, 1997 and 1996, respectively.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company's quarterly results of operations for the years ended
December 31, 1998, 1997 and 1996 (unaudited) are as follows:
Quarter Ended
------------------------------------------------------------
(In thousands, except per share amounts) March 28 June 27 September 26 December 31
----------- ---------- ------------ -----------
1998:
Net sales $ 13,280 $ 12,500 $ 13,600 $12,859
Gross profit 3,746 3,435 3,778 2,867
Net income (loss) 634 231 533 (192)
Net income (loss) per share:
Basic 0.10 0.04 0.09 (0.03)
Diluted 0.10 0.04 0.09 (0.03)
31
32
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)(CONTINUED)
Quarter Ended
---------------------------------------------------------------
March 29 June 28 September 27 December 31
---------------------------------------------------------------
1997:
Net sales $ 14,014 $ 15,569 $ 16,040 $ 12,777
Gross profit 4,352 4,963 5,065 3,793
Net income 1,087 1,360 1,582 864
Net income per share:
Basic 0.16 0.20 0.23 0.13
Diluted 0.16 0.20 0.23 0.12
March 30 June 29 September 28 December 31
---------------------------------------------------------------
1996:
Net sales $ 10,463 $ 9,762 $ 10,794 $ 11,115
Gross profit 3,479 3,328 3,655 3,471
Net income 865 868 927 680
Net income per share:
Basic 0.16 0.16 0.16 0.10
Diluted 0.16 0.16 0.16 0.10
18. SUBSEQUENT EVENTS (UNAUDITED)
As of February 8, 1999 the Company had purchased an additional 70,800
shares of its common stock on the open market for approximately $229,000.
On February 23, 1999, with the Board of Directors' approval, the
Company provided a $330,000 loan to an officer of the Company. The loan
proceeds were used to purchase 104,000 shares of the Company's common stock
on the open market during January and February 1999. The loan is payable on
February 23, 2004, and is a full recourse obligation to the officer secured
by 154,000 shares of the Company's common stock, which includes 50,000
shares of restricted stock. The loan bears interest at a rate equivalent to
the Company's average borrowing rate under the New Credit Facility with
Fleet Bank, and is payable annually. The principal amount of the loan will
be deducted from shareholders' equity.
On February 16, 1999, the Company amended its Stockholder Rights Plan
that was originally adopted in December 1997. The amendment removed that
provision in the plan that stipulated that the plan may be modified or
redeemed only by those members of the Board of Directors that are defined
as continuing directors. A continuing director as generally defined under
the plan is a member of the Board of Directors prior to the commencement of
a hostile takeover of the Company.
32
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information contained in "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement (the
"Proxy Statement") for its Annual Meeting of Shareholders which is scheduled to
be held on May 6, 1999 is hereby incorporated herein by reference. Also, see
information under "Executive Officers of Registrant" in Item 1.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in "Executive Compensation" other than the
Compensation Committee Report on Executive Compensation of the Proxy Statement
is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is hereby incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in "Certain Relationships and Related
Transactions" of the Proxy Statement is hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING FINANCIAL STATEMENTS AND EXHIBITS ARE FILED AS PART OF
THIS REPORT:
(i) Financial statements
See Item 8.
(ii) Financial statement schedules
All schedules are omitted since the required information is
either (a) not present or not present in amounts sufficient to
require submission of the schedule or (b) included in the
financial statements or notes thereto.
33
34
(iii) List of exhibits
3.1(a) Certificate of Incorporation of the Company, filed with the Secretary of State of (2)
Delaware on June 17, 1996.
3.1(b) Certificate of Amendment of Certificate of Incorporation of the Company, filed with (5)
the Secretary of State of Delaware on May 30, 1997.
3.2 Amended and Restated By-laws of the Company. (1)
4.1 Specimen Common Stock Certificate. (2)
4.2 Amended and Restated Rights Agreement between TransAct and American Stock Transfer & (8)
Trust Company dated February 16, 1998
10.1 Plan of Reorganization dated as of June 24, 1996 among Tridex, Magnetec, TransAct (2)
and Ithaca.
10.2 Amendment to Plan of Reorganization dated as of August 30, 1996 among Tridex, (3)
Magnetec, TransAct and Ithaca.
10.3 Agreement and Plan of Merger dated as of July 16, 1996 between Magnetec and Ithaca. (2)
10.4 Asset Transfer Agreement dated as of July 31, 1996 between Magnetec and Tridex. (2)
10.5 Manufacturing Support Services Agreement between Magnetec and Tridex, dated as of (3)
September 28, 1996.
10.6 Corporate Services Agreement dated as of July 30, 1996 between Tridex and TransAct. (3)
10.7 Printer Supply Agreement dated as of July 31, 1996 between Magnetec and Ultimate (2)
Technology Corporation.
10.8 Tax Sharing Agreement dated as of July 31, 1996 between Tridex and TransAct. (3)
10.9 Credit Agreement dated as of August 29, 1996 among TransAct, Magnetec and Fleet (3)
National Bank.
10.10 Purchase Agreement dated as of October 17, 1996 between ICL Pathway Limited, Ithaca (3)
Peripherals Limited and TransAct. (Pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Company has requested
confidential treatment of portions of this exhibit deleted from the filed copy.)
10.11(x) 1996 Stock Plan, effective July 30, 1996. (3)
10.12(x) Non-Employee Directors' Stock Plan, effective August 22, 1996. (3)
10.13 Sales and Marketing Agreement by and between the Company and Oki Europe Limited, (2)
dated May 9, 1996. (Pursuant to Rule 477 under the Securities Act of 1993, as
amended (the "Securities Act"), the Company has requested confidential treatment of
portions of this exhibit deleted from the filed copy.)
10.14 OEM Purchase Agreement by and between GTECH, TransAct and Magnetec, commencing (4)
October 1, 1996. (Pursuant to Rule 24b-2 under the Exchange Act, the Company has
requested confidential treatment of portions of this exhibit deleted from the filed
copy.)
10.15 OEM Purchase Agreement by and between OKIDATA and Tridex, dated January 21, 1991. (2)
(Pursuant to Rule 477 under the Securities Act, the Company has requested
confidential treatment of portions of this exhibit deleted from the filed copy.)
34
35
10.16 Strategic Agreement by and between OKIDATA and Tridex, dated May 9, 1996. (Pursuant (2)
to Rule 477 under the Securities Act, the Company has requested confidential
treatment of portions of this exhibit deleted from the filed copy.)
10.17 Lease Agreement by and between Pyramid Construction Company and Magnetec, dated (2)
August 1, 1994.
10.18 Lease Agreement by and between Bomax Properties and Ithaca, dated as of March 23, (2)
1992.
10.19 First Amendment to Lease Agreement by and between Bomax Properties and Ithaca, dated (2)
as of October 18, 1993.
10.20(x) Employment Agreement, dated July 31, 1996, by and between the Company and Bart C. (2)
Shuldman.
10.21(x) Employment Agreement, dated July 31, 1996, by and between the Company and Richard L. (2)
Cote.
10.22(x) Severance Agreement by and between TransAct and Lucy H. Staley, dated September 4, (3)
1996
10.23(x) Severance Agreement by and between TransAct and John Cygielnik, dated September 10, (3)
1996.
10.24(x) Severance Agreement by and between TransAct and Michael S. Kumpf, dated September 4, (3)
1996.
10.25(x) Severance Agreement by and between TransAct and David A. Ritchie, dated July 1, 1997. (5)
10.26 Credit Agreement dated as of January 29, 1998 among TransAct, Magnetec and Fleet (5)
National Bank.
10.27 Second Amendment to Lease Agreement by and between Bomax Properties and Ithaca, (5)
dated December 2, 1996.
10.28 Lease Agreement by and between Pyramid Construction Company and Magnetec, dated (5)
July 30, 1997.
10.29 Amendment to OEM Purchase Agreement by and between Okidata and Tridex, dated May 31, (5)
1996. (Pursuant to Rule 24b-2 under the Exchange Act, the Company has requested
confidential treatment of portions of this exhibit deleted from the filed copy.)
10.30 Agreement by and between the Company and Seth M. Lukash, dated as of March 19, 1998 (6)
10.31 Amended and Restated Manufacturing Support Services Agreement between Tridex (7)
Corporation and Magnetec Corporation, dated June 1, 1998
10.32(x) Severance Agreement by and between TransAct and Steven A. DeMartino, dated January (1)
21, 1998.
10.33 Amendment to OEM Purchase Agreement by and between Okidata and Tridex, dated May 22, (1)
1998. (Pursuant to Rule 24b-2 under the Exchange Act, the Company has requested
confidential treatment of portions of this exhibit deleted from the filed copy.)
10.34 Loan Agreement by and between the Company and Bart C. Shuldman, dated February 23, (1)
1999.
11.1 Computation of earnings per share. (1)
21.1 Subsidiaries of the Company. (1)
23.1 Consent of PricewaterhouseCoopers LLP (1)
27.1 Financial Data Schedule. (1)
35
36
(1) These exhibits are filed herewith.
(2) These exhibits, which were previously filed with the
Company's Registration Statement on Form S-1 (No.
333-06895), are incorporated by reference.
(3) These exhibits, which were previously filed with the
Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1996, are incorporated by
reference.
(4) This exhibit, which was previously filed with the
Company's Current Report on Form 8-K filed October
11, 1996, is incorporated by reference.
(5) These exhibits, which were previously filed with the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997, is incorporated by
reference.
(6) This exhibit, which was previously filed with the
Company's Quarterly Report on Form 10-Q for the
period ended March 28, 1998, is incorporated by
reference.
(7) This exhibit, which was previously filed with the
Company's Quarterly Report on Form 10-Q for the
period ended June 27, 1998, is incorporated by
reference.
(8) This exhibit, which was previously filed with the
Company's Current Report on Form 8-K filed February
18, 1999, is incorporated by reference.
x Management contract or compensatory plan or
arrangement required to be filed pursuant to Item
14(c).
(B) REPORTS ON FORM 8-K.
None.
36
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
By: /s/ Bart C. Shuldman
------------------------------------------------
Bart C. Shuldman
President, Chief Executive Officer and Director
Date: March 29, 1999
Pursuant to the requirements of the Securities 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/ Bart C. Shuldman President, Chief Executive Officer and March 29, 1999
- ------------------------------------ Director
Bart C. Shuldman (Principal Executive Officer)
/s/ Richard L. Cote Executive Vice President, Chief Financial March 29, 1999
- ------------------------------------ Officer, Treasurer, Secretary and Director
Richard L. Cote (Principal Financial Officer)
/s/ Steven A. DeMartino Corporate Controller March 29, 1999
- ------------------------------------ (Principal Accounting Officer)
Steven A. DeMartino
/s/ Thomas R. Schwarz Chairman of the Board and Director March 29, 1999
- ------------------------------------
Thomas R. Schwarz
/s/ Graham Y. Tanaka Director March 29, 1999
- ------------------------------------
Graham Y. Tanaka
/s/ Charles A. Dill Director March 29, 1999
- ------------------------------------
Charles A. Dill
37
38
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
-------
3.2 Amended and Restated By-laws of the Company.
10.32 Severance Agreement by and between TransAct and
Steven A. DeMartino, dated January 21, 1998.
10.33 Amendment to OEM Purchase Agreement by and between
Okidata and Tridex, dated May 22, 1998. (Pursuant to
Rule 24b-2 under the Exchange Act, the Company has
requested confidential treatment of portions of this
exhibit deleted from the filed copy.)
10.34 Loan Agreement by and between the Company and Bart C.
Shuldman, dated February 23, 1999.
11.1 Computation of earnings per share.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule.
38