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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 LASER LANE, WALLINGFORD, CT 06492
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(Address of principal executive offices)
(Zip Code)
(203) 269-1198
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(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING MAY 2, 2003
COMMON STOCK,
$.01 PAR VALUE 5,717,253
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
Page No.
--------
PART I. Financial Information:
Item 1 Financial Statements (unaudited)
Consolidated condensed balance sheets as of March 31, 2003 and December
31, 2002 3
Consolidated condensed statements of operations for the three months
ended March 31, 2003 and 2002 4
Consolidated condensed statements of cash flow for the three months
ended March 31, 2003 and 2002 5
Notes to consolidated condensed financial statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 15
Item 4 Controls and Procedures 15
PART II. Other Information:
Item 6 Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, December 31,
(In thousands) 2003 2002
--------- ------------
ASSETS: (UNAUDITED)
Current assets:
Cash and cash equivalents $ 306 $ 902
Receivables, net 4,673 4,039
Inventories 10,138 8,435
Refundable income taxes 228 228
Deferred tax assets 2,341 2,221
Other current assets 315 327
--------- ---------
Total current assets 18,001 16,152
--------- ---------
Fixed assets, net 4,032 3,924
Goodwill, net 1,469 1,469
Deferred tax assets 193 193
Other assets 307 292
--------- ---------
6,001 5,878
--------- ---------
Total assets $ 24,002 $ 22,030
========= =========
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan $ 100 $ 100
Accounts payable 3,337 2,983
Accrued liabilities 3,624 3,592
Accrued restructuring expenses (Note 5) 672 900
--------- ---------
Total current liabilities 7,733 7,575
--------- ---------
Revolving bank loan payable 4,535 2,541
Long-term portion of term loan 225 250
Long-term portion of accrued restructuring (Note 5) 693 818
Other liabilities 698 477
--------- ---------
6,151 4,086
--------- ---------
Total liabilities 13,884 11,661
--------- ---------
Commitments and contingencies (Note 6)
Mandatorily redeemable preferred stock 3,844 3,824
--------- ---------
Shareholders' equity:
Common stock 57 57
Additional paid-in capital 6,313 6,308
Retained earnings 311 599
Unamortized restricted stock compensation (72) (97)
Loan receivable from officer (330) (330)
Accumulated other comprehensive loss (5) 8
--------- ---------
Total shareholders' equity 6,274 6,545
--------- ---------
$ 24,002 $ 22,030
========= =========
See notes to consolidated condensed financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands, except per share data) 2003 2002
---------- ---------
Net sales $ 9,012 $ 10,525
Cost of sales 6,571 7,899
---------- ---------
Gross profit 2,441 2,626
---------- ---------
Operating expenses:
Engineering, design and product
development expenses 562 546
Selling and marketing expenses 1,044 1,031
General and administrative expenses 1,099 1,176
Business consolidation and restructuring
expenses (Note 5) - 41
---------- ---------
2,705 2,794
---------- ---------
Operating loss (264) (168)
---------- ---------
Other income (expense):
Interest, net (46) (55)
Other, net - 21
---------- ---------
(46) (34)
---------- ---------
Loss before income taxes (310) (202)
Income tax benefit (112) (73)
---------- ---------
Net loss (198) (129)
Dividends and accretion charges on
preferred stock (90) (90)
---------- ---------
Net loss available to common shareholders $ (288) $ (219)
========== =========
Net loss per share:
Basic and diluted $ (0.05) $ (0.04)
========== =========
Shares used in per share calculation:
Basic and diluted 5,674 5,604
========== =========
See notes to consolidated condensed financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands) 2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $ (198) $ (129)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 473 608
Deferred income taxes (120) (77)
Gain on disposal of equipment (1) -
Changes in operating assets and liabilities:
Receivables (634) 471
Inventories (1,703) 349
Other current assets 12 (19)
Other assets (39) (13)
Accounts payable 354 332
Accrued liabilities and other liabilities 253 (57)
Customer advance payment - 4,062
Accrued restructuring expenses (353) (644)
----------- -----------
Net cash (used in) provided by operating activities (1,956) 4,883
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (532) (190)
Proceeds from sale of fixed assets 1 -
----------- -----------
Net cash used in investing activities (531) (190)
----------- -----------
Cash flows from financing activities:
Revolving bank loan borrowings (repayments), net 1,994 (4,994)
Term loan repayments (25) (25)
Proceeds from option exercises 5 79
Payment of cash dividends on preferred stock (70) (70)
----------- -----------
Net cash provided by (used in) financing activities 1,904 (5,010)
----------- -----------
Effect of exchange rate changes on cash (13) (23)
----------- -----------
Decrease in cash and cash equivalents (596) (340)
Cash and cash equivalents at beginning of period 902 417
----------- -----------
Cash and cash equivalents at end of period $ 306 $ 77
=========== ===========
See notes to consolidated condensed financial statements.
5
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of TransAct Technologies Incorporated (the
"Company"), the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly its financial position as of
March 31, 2003, and the results of its operations and cash flows for
the three months ended March 31, 2003 and 2002. The December 31, 2002
consolidated condensed balance sheet has been derived from the audited
financial statements at that date. These interim financial statements
should be read in conjunction with the audited financial statements for
the year ended December 31, 2002 included in the Company's Annual
Report on Form 10-K.
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.
Transaction gains and losses are included in other income.
The results of operations for the three months ended March 31,
2003 are not necessarily indicative of the results to be expected for
the full year.
2. Earnings per share
Basic earnings per common share for the three months ended
March 31, 2003 and 2002 were based on the weighted average number of
shares outstanding during the period. Diluted earnings per share for
the same periods were based on the weighted average number of shares
after consideration of any dilutive effect of stock options and
warrants. For the three months ended March 31, 2003 and 2002, the
effects of potential dilutive securities have been excluded, as they
would have been anti-dilutive. The outstanding stock options, warrants
and convertible mandatorily redeemable preferred stock would entitle
holders to acquire 1,456,000 and 1,242,000 shares of common stock as of
March 31, 2003 and 2002, respectively.
3. Inventories:
The components of inventory are:
March 31, December 31,
(In thousands) 2003 2002
--------- ------------
Raw materials and component parts $ 9,961 $ 8,339
Work-in-process - 1
Finished goods 177 95
--------- ---------
$ 10,138 $ 8,435
========= =========
4. Significant transactions
On March 24, 2003, the Company amended the LaSalle Credit
Facility. Under the terms of the amendment ("LaSalle Amendment No. 4"),
LaSalle (1) waived compliance with the minimum EBITDA covenant as of
December 31, 2002, (2) revised this covenant and certain other
financial covenants through May 2004 and (3) eliminated the
availability of the $1 million equipment loan facility due to expire in
May 2003. In addition, LaSalle has restricted $1 million of the
Company's borrowing availability under the revolving credit line
pending the outcome of ongoing patent licensing discussions for the use
of certain third party technology. Upon execution of LaSalle Amendment
No.4, the Company paid a fee of $25,000 to LaSalle.
6
. TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
5. Business consolidation and restructuring
In February 2001, the Company announced plans to establish a
global engineering and manufacturing center at its Ithaca, NY facility.
As part of this strategic decision, the Company undertook a plan to
consolidate all manufacturing and engineering into its existing Ithaca,
NY facility and close its Wallingford, CT facility (the
"Consolidation"). As of December 31, 2001, substantially all
Wallingford product lines were successfully transferred to Ithaca, NY.
The Company currently maintains a small component production line and
service depot in Wallingford. The closing of the Wallingford facility
resulted in the termination of employment of approximately 70
production, administrative and management employees. The Company had
applied the consensus set forth in EITF 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)" in
recognizing the accrued restructuring expenses.
Since 2001, the Company has incurred approximately $5.1
million of non-recurring costs associated with the Consolidation,
including severance pay, stay bonuses, employee benefits, moving
expenses, non-cancelable lease payments, accelerated depreciation and
other costs. The Company does not expect to incur any additional
charges related to the Consolidation during 2003.
The following table summarizes the activity recorded in the
restructuring accrual during the three months ended March 31, 2003 and
2002.
Three Months Ended
March 31,
(In thousands) 2003 2002
-------- --------
Accrual balance, beginning of
period $ 1,718 $ 3,002
Business consolidation and
restructuring expenses - 41
Cash payments (353) (685)
-------- --------
Accrual balance, end of period $ 1,365 $ 2,358
======== ========
Approximately $693,000 and $818,000 of the restructuring
accrual was classified as long-term at March 31, 2003 and December 31,
2002, respectively. These amounts represent the portion of
non-cancelable lease termination costs and other costs expected to be
paid beyond one year. The accrual at March 31, 2003 includes estimated
non-cancelable lease payments and other related costs through
approximately September 30, 2004.
6. Contingent liabilities
In November 2002, the Company was advised that certain POS
printers sold by the Company since late 1999 may use technology covered
by recently issued patents of a significant and well-funded competitor.
The Company is analyzing the cited patents for validity and
applicability to the Company's products. In an effort to resolve this
matter, the Company has offered to pay approximately $160,000, while
the other party seeks payment of up to $950,000. While the outcome of
the Company's patent analysis and discussions cannot be predicted, the
Company recognized a charge of $160,000 in cost of sales in the fourth
quarter of 2002. This charge represents what the Company believes to be
a fair and reasonable payment for past sales of such printers. During
the first quarter of 2003, the Company accrued an additional $54,000 in
cost of sales to reflect the potential payment for printers sold during
the quarter.
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
7. Accounting for 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. Since
the exercise price of employee stock options granted by the Company
generally 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").
In December 2002, the FASB issued Statement of Financial
Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FAS 123" ("FAS 148"). FAS
148 provides additional transition guidance for those entities that
elect to voluntarily adopt the accounting provisions of FAS 123,
Accounting for Stock-Based Compensation. FAS 148 also mandates certain
new disclosures that are incremental to those required by FAS 123. The
provisions of FAS 148 are effective for fiscal years ending after
December 15, 2002. The Company adopted the disclosure provisions of FAS
148 during the fourth quarter of 2002.
The following table illustrates the effect on net loss,
compensation expense and loss per share as if the Black-Scholes fair
value method described in FAS 123, "Accounting for Stock-Based
Compensation" had been applied to the Company's stock plans.
Three months ended
March 31,
2003 2002
------- -------
(In thousands, except per share data)
Net loss available to common shareholders:
Net loss available to common shareholders,
as reported $ (288) $ (219)
Add: Stock-based compensation expense
included in reported net loss, net of tax 16 46
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (161) (136)
------- -------
Pro forma net loss available to common
Shareholders $ (433) $ (309)
======= =======
Net loss per share:
Basic and diluted:
As reported $ (0.05) $ (0.04)
Pro forma (0.08) (0.06)
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
7. Accounting for Stock-Based Compensation (continued)
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 three months
ended March 31, 2003 and 2002.
Three months ended
March 31,
2003 2002
-------- ---------
Risk-free interest rate 2.7% 4.5%
Dividend yield 0% 0%
Expected volatility factor 82.3% 83.3%
Expected option term 6.4 years 6.4 years
Weighted average fair value of options granted during period $3.28 $4.12
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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; introduction of
new products into the marketplace by competitors; successful product
development; dependence on significant customers including GTECH Corporation;
dependence on third parties for sales in Europe and Latin America; economic and
political conditions in the United States, Europe and Latin America; marketplace
acceptance of our new products; risks associated with foreign operations; our
ability to successfully sublease our facility in Wallingford, CT; availability
of third-party components at reasonable prices; and the absence of price wars or
other significant pricing pressures affecting our products in the United States
or abroad. Actual results may differ materially from those discussed in, or
implied by, the forward-looking statements. The forward-looking statements speak
only as of the date of this report and we assume no duty to update them to
reflect new, changing or unanticipated events or circumstances.
PLANT CONSOLIDATION
In February 2001, we announced plans to establish a global engineering and
manufacturing center at our Ithaca, NY facility. As part of this strategic
decision, we undertook a plan to consolidate all manufacturing and engineering
into our existing Ithaca, NY facility and close our Wallingford, CT facility
(the "Consolidation"). Our technology shift to inkjet and thermal printing from
dot matrix impact printing has dramatically reduced the labor content in our
printers, and therefore, lowers the required production capacity. As of December
31, 2001, we successfully transferred substantially all our Wallingford product
lines to Ithaca, NY, with the exception of a small production line and service
depot that remains in Connecticut. The closing of the Wallingford facility
resulted in the termination of employment of approximately 70 production,
administrative and management employees.
Through December 31, 2002, we incurred approximately $5.1 million of
non-recurring costs associated with the Consolidation, including severance pay,
stay bonuses, employee benefits, moving expenses, non-cancelable lease payments,
and other costs, of which approximately $1.0 million and $4.1 million was
recognized in 2002 and 2001, respectively. We do not expect to incur any
additional charges related to the Consolidation during 2003. See the "Liquidity
and Capital Resources" section for a discussion of the expected impact of the
Consolidation on our future results of operations and cash flows.
As a result of the Consolidation, we realized improved gross margins and lower
operating expenses in 2002, and lowered our operating income breakeven point
from $54 million to approximately $42 million in sales (based on our current
sales mix and operating expense level), which we believe will provide us with
substantial operating leverage in 2003.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America. The presentation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets
and liabilities. Our estimates include those related to revenue recognition,
inventory obsolescence, the valuation of deferred tax assets and liabilities,
depreciable lives of equipment, warranty obligations, contingent liabilities and
restructuring accruals. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. For a complete description of our accounting policies, see Item 7
of Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Critical Accounting Policies," included in our Form 10-K for the
year ended December 31, 2002.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
NET SALES. Net sales by market for the current and prior year's quarter in
dollars and as a percentage of total net sales were as follows:
Three months ended Three months ended
(In thousands, except %) March 31, 2003 March 31, 2002
-------------------- --------------------
Point of sale $ 4,331 48.1% $ 4,072 38.7%
Gaming and lottery 4,681 51.9 6,453 61.3
-------------------- --------------------
$ 9,012 100.0% $ 10,525 100.0%
==================== ====================
International $ 1,066 11.8% $ 1,011 9.6%
==================== ====================
Net sales for the first quarter of 2003 decreased $1,513,000, or 14%, from the
prior year's first quarter due to lower shipments into the gaming and lottery
market, offset by slightly higher sales into our point of sale ("POS") market.
Overall, international sales increased slightly by $55,000, or 5%.
POINT OF SALE:
Sales of our POS printers increased by approximately $259,000, or 6% from the
same period last year. Domestic POS printer sales increased to $3,269,000,
representing a $178,000, or 6%, increase from the first quarter of 2002, due to
higher sales through our U.S. distributors. Despite this increase, domestic
sales remained soft due to continued lower capital spending by users of our POS
products. However, sales of our POSjet line of inkjet printers increased by
approximately 107% in the first quarter of 2003 compared to the first quarter of
2002.
International POS printer shipments increased by approximately $81,000, or 8%,
to $1,062,000, due primarily to higher sales through our expanding network of
international distributors and higher service and spare parts revenue.
Due to on-going economic weakness, we expect continued lower capital spending by
users of our POS products, and continued worldwide softness in demand for our
POS products in 2003. As a result, we expect sales into the POS market for the
second quarter of 2003 to be consistent with those reported for the first
quarter of 2003.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers decreased by $1,772,000, or 27%, from
the first quarter a year ago, primarily due to lower shipments of our on-line
lottery printer, somewhat offset by stronger sales of our video lottery terminal
("VLT") and slot machine printers.
Total sales to GTECH Corporation ("GTECH") (a worldwide lottery terminal
provider and major customer), which included impact on-line and in-lane lottery
printers, and spare parts revenue, decreased $3,600,000 to approximately
$800,000 in the first quarter of 2003.
Shipments of impact on-line lottery printers and spare parts revenue decreased
by $3,000,000 to approximately $800,000 in the first quarter of 2003. Although
GTECH may place future orders for our impact on-line lottery printer, we do not
currently have any orders for such printers, and we cannot predict if and when
any such orders may occur. Shipments of in-lane lottery printers totaled
approximately $600,000 in the first quarter of 2002. We made no in-lane lottery
printer shipments in the first quarter of 2003. In July 2002, we entered into a
5-year agreement with GTECH to provide a newly-designed thermal on-line lottery
printer. We have received orders from GTECH for approximately $6.5 million of
these thermal printers, of which we expect to ship approximately $4.0 million
during the second quarter of 2003 and the remainder during the third quarter of
2003. We expect to receive additional thermal printer orders from GTECH for
delivery in 2003.
See the table below for an analysis of revenues from GTECH.
Three months ended
March 31,
2003 2002
---- ------
On-line lottery printers and spare parts $800 $3,800
In-lane lottery printers - 600
---- ------
$800 $4,400
==== ======
% of consolidated net sales 9% 42%
11
Sales of our gaming printers, which include VLT and slot machine printers, and
related spare parts and repairs, increased by approximately $1,800,000 to
$3,900,000. This increase resulted primarily from significantly increased
installations of our casino printers, primarily for use in slot machines at
casinos throughout North America that print receipts instead of dropping coins
("ticket-in, ticket-out"). Based on existing orders and sales opportunities, we
expect sales of our gaming printers to continue to increase during the second
quarter and the remainder of 2003, as more casinos are expected to convert to
ticket-in, ticket-out slot machines and as a result of the VLT initiative in the
state of New York.
International sales into the gaming and lottery market were minimal in both the
first quarter of 2003 and 2002.
GROSS PROFIT. Gross profit decreased $185,000, or 7%, due primarily to lower
volume of sales. Despite a 14% decline in sales, gross margin increased to 27.1%
from 25.0%, largely as a result of a more favorable sales mix in the first
quarter of 2003 compared to the first quarter of 2002. We expect gross margin
for the second quarter of 2003 to be approximately 30%, due largely to higher
expected volume of sales compared to the first quarter of 2003.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased slightly by $16,000, or 3%. Such expenses also increased as a
percentage of net sales to 6.2% from 5.2%, due primarily to lower volume of
sales in the first quarter of 2003 compared to the first quarter of 2002.
SELLING AND MARKETING. Selling and marketing expenses increased slightly by
$13,000, or 1%. Selling and marketing expenses also increased as a percentage of
net sales to 11.6% from 9.8%, due to lower volume of sales in the first quarter
of 2003 compared to the first quarter of 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$77,000, or 7%. The decrease primarily resulted from staff reductions resulting
from the Consolidation, somewhat offset by higher legal expenses to support our
growing patent portfolio. General and administrative expenses increased as a
percentage of net sales to 12.2% from 11.2% due primarily to lower volume of
sales in the first quarter of 2003 compared to the first quarter of 2002.
BUSINESS CONSOLIDATION AND RESTRUCTURING. During the first quarter of 2002, we
incurred $41,000 of expenses related to the Consolidation, primarily for
severance costs. We did not incur any charges related to the Consolidation in
the first quarter of 2003, and do not expect to incur any additional charges for
the remainder of 2003. See Note 5 to the Consolidated Condensed Financial
Statements.
OPERATING LOSS. During the first quarter of 2003 we reported an operating loss
of $264,000, or 2.9% of net sales, compared to an operating loss of $168,000, or
1.6% of net sales in the first quarter of 2002. The increase in our operating
loss was due largely to lower gross profit on lower sales, partially offset by
lower operating expenses, in the first quarter of 2003 compared to 2002.
INTEREST. Net interest expense decreased to $46,000 from $55,000 in the first
quarter of 2002 due largely to lower average revolving borrowings and lower
interest rates. We expect revolving borrowings to increase to approximately $5
million to $6 million by end of the second quarter of 2003, as we fund growth in
receivables and inventories for anticipated higher sales volume in the second
quarter of 2003. As a result, we expect interest expense to increase in the
second quarter of 2003 compared to the first quarter of 2003. See "Liquidity and
Capital Resources" below for more information.
OTHER INCOME. Other income for the first quarter of 2002 primarily includes
transaction exchange gain recorded by our UK subsidiary.
INCOME TAXES. We recorded an income tax benefit of $112,000 and $73,000 in the
first quarter of 2003 and 2002, respectively, at an effective rate of
approximately 36.0% in each quarter.
NET LOSS. We reported a net loss during the first quarter of 2003 of $198,000,
or $0.05 per share (basic and diluted) after giving effect to $90,000 of
dividends and accretion charges on preferred stock. This compares to a net loss
of $129,000, or $0.04 per share (basic and diluted) for the first quarter of
2002, after giving effect to $90,000 of dividends and accretion charges on
preferred stock. In future quarters, dividends and accretion charges on
preferred stock will be approximately $90,000, assuming no conversion or
redemption of the preferred stock.
12
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Operating activities - summary: We used cash in operations of $1,956,000 in the
first quarter of 2003, compared to generating $4,883,000 of cash from operations
in the first quarter of 2002. The significant decrease in cash generated from
operations was the result of two primary factors. First, we received an advanced
payment of approximately $5,824,000 from a customer in the first quarter of 2002
that significantly increased cash from operations for that period. Second, we
made a significant investment in inventory during the first quarter of 2003, as
we prepared for increased sales of our gaming and lottery printers for the
second quarter of 2003.
Cash provided by operating activities: During the first quarter of 2003,
depreciation and amortization totaled $473,000 compared to $608,000 in the same
quarter of 2002. Accounts payable increased by $354,000 from the year-end due
largely to the increase in our inventory. We expect accounts payable to continue
to increase in the second quarter of 2003 in proportion to our expected
inventory increase. Accrued liabilities and other liabilities, excluding accrued
restructuring, increased by $253,000, primarily due to an increase in deferred
revenue on an extended warranty contract with a certain customer.
Cash used in operating activities: Offsetting the activities providing cash in
the first quarter of 2003 were the following. Deferred taxes increased by
$120,000 due primarily to the income tax benefit recorded in the first quarter
of 2003. Receivables increased by approximately $634,000 from year-end, due
largely to the timing of sales in the quarter. Inventories increased by
approximately $1,703,000, in preparation for volume shipments of our new thermal
on-line lottery printer for GTECH and anticipated increasing sales of our gaming
printers in the second quarter of 2003. The restructuring accrual decreased by
$353,000, representing payouts for severance pay and related benefits and lease
payments for the Wallingford Facility. (See "Consolidation Expenses" below).
Investing activities: Our capital expenditures were approximately $532,000 and
$190,000 in the first quarter of 2003 and 2002, respectively. These expenditures
primarily included new product tooling, and to a lesser extent, computer
equipment. We expect capital expenditures for 2003 to be approximately
$1,800,000, primarily for tooling for our new thermal lottery printer for GTECH
and other new products.
Financing activities: Financing activities provided $1,904,000 during the first
quarter of 2003, largely due to net borrowings under our revolving credit
facility (approximately $1,994,000), partially offset by term loan repayments
(approximately $25,000) and payments of cash dividends on our preferred stock
(approximately $70,000). Financing activities used $5,010,000 during the first
quarter of 2002, largely due to repayment of borrowings under our revolving
credit line as a result of the receipt of an advanced payment of approximately
$5,824,000 from a customer in the first quarter of 2002.
WORKING CAPITAL
Our working capital increased to $10,268,000 at March 31, 2003 from $8,577,000
at December 31, 2002. The current ratio also increased to 2.34 to 1 at March 31,
2003 from 2.13 to 1 at December 31, 2002. The increase in both working capital
and the current ratio was largely due to (1) higher inventories ($1,703,000) and
(2) higher receivables ($634,000), offset by (3) lower cash and cash equivalents
($596,000) compared to December 31, 2002.
DEFERRED TAXES
As of March 31, 2003, we had a net deferred tax asset of approximately
$2,534,000. In order to utilize this deferred tax asset, we will need to
generate approximately $7 million of taxable income in future years. Based on
future financial projections and our ability to carry back our 2002 net
operating loss, we have determined that that it is more likely than not that the
existing net deferred tax asset will be realized.
CONTINGENT LIABILITIES
In November 2002, we were advised that certain POS printers sold by us since
late 1999 may use technology covered by recently issued patents of a significant
and well-funded competitor. We are analyzing the cited patents for validity and
applicability to our products. In an effort to resolve this matter, we have
offered to pay approximately $160,000, while the other party seeks payment of up
to $950,000 (the "Patent Resolution Payment"). While the outcome of our patent
analysis and discussions cannot be predicted, we recognized a charge of $160,000
in cost of sales in the fourth quarter of 2002. This charge represents what we
believe to be a fair and reasonable payment for past sales of such printers.
During the first quarter of 2003, we accrued an additional $54,000 in cost of
sales to reflect the potential payment for printers sold during the quarter.
13
CREDIT FACILITY AND BORROWINGS
We currently have a $13.5 million credit facility (the "LaSalle Credit
Facility") with LaSalle Business Credit, Inc. ("LaSalle") that expires on May
25, 2004. The LaSalle Credit Facility provides a $12 million revolving credit
line, a $0.5 million term loan and a $1 million equipment loan facility.
Revolving borrowings under the LaSalle Credit Facility bear a floating rate of
interest based on LaSalle's prime rate plus 1.0%. Under certain circumstances,
we may select a fixed interest rate for a specified period of time of up to 180
days on borrowings based on the current LIBOR rate plus 3.5%. Borrowings under
the term loan and equipment loan bear a floating rate of interest based on
LaSalle's prime rate plus 1.5%, or the current LIBOR rate plus 4.0%.
On March 24, 2003, we amended the LaSalle Credit Facility. Under the terms of
the amendment ("LaSalle Amendment No. 4"), LaSalle (1) waived compliance with
the minimum EBITDA covenant as of December 31, 2002, (2) revised this covenant
and certain other financial covenants through May 2004 and (3) eliminated the
availability of the $1 million equipment loan facility due to expire in May
2003. In addition, LaSalle has restricted $1 million of our borrowing
availability under the revolving credit line pending the Patent Resolution
Payment. Upon execution of LaSalle Amendment No. 4, we paid a fee of $25,000 to
LaSalle.
As of March 31, 2003, we had $4,535,000 and $325,000 outstanding on the
revolving credit line and term loan, respectively. Undrawn commitments under the
LaSalle Credit Facility were approximately $7,465,000 at March 31, 2003.
However, our maximum available borrowings under the facility were approximately
$2,450,000 at March 31, 2003 based on the borrowing base of our collateral.
Annual principal payments on the term loan are $100,000.
PREFERRED STOCK
In connection with its 7% Series B Cumulative Convertible Redeemable Preferred
Stock (the "Preferred Stock"), we paid $70,000 of cash dividends to Advance
Capital Advisors, L.P. in the first quarter of 2003 and 2002, and expect to pay
$70,000 per quarter for the remainder of 2003. The preferred stock is redeemable
at the option of the holders on April 7, 2005 for an aggregate of $4,000,000
plus any unpaid dividends.
CONSOLIDATION EXPENSES
Through December 31, 2002, we incurred approximately $5.1 million of
non-recurring costs associated with the Consolidation, including severance pay,
stay bonuses, employee benefits, moving expenses, non-cancelable lease payments,
and other costs, of which approximately $1.0 million and $4.1 million was
recognized in 2002 and 2001, respectively. We do not expect to incur any
additional charges related to the Consolidation during 2003.
Accrued restructuring expenses related to the Consolidation totaled $1,365,000
at March 31, 2003, and include remaining severance pay, and estimated
non-cancelable lease payments and other related costs through approximately
September 30, 2004. We paid approximately $353,000 and $685,000 of Consolidation
expenses in the first quarter of 2003 and 2002, respectively. We expect to pay
approximately $450,000 of these expenses in the last nine months of 2003, and
the remaining $915,000 in 2004.
RESOURCE SUFFICIENCY
We believe that cash flows generated from operations and borrowings available
under the LaSalle Credit Facility, as amended, will provide sufficient resources
to meet the Company's working capital needs, including costs associated with the
Consolidation and the Patent Resolution Payment (as described in Note 6 to the
Consolidated Condensed Financial Statements), finance its capital expenditures
and meet its liquidity requirements through December 31, 2003. However, we
recognize that the level of financial resources available to us is an important
factor, and we will consider additional financing sources as appropriate,
including raising additional equity capital on an on-going basis as market
factors and our needs suggest. We currently expect to refinance any outstanding
borrowings under the LaSalle Credit Facility prior to its expiration in May
2004.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to
borrowings under our LaSalle Credit Facility. These borrowings bear interest at
variable rates and the fair value of this indebtedness is not significantly
affected by changes in market interest rates. An effective increase or decrease
of 10% in the current effective interest rates under the LaSalle Credit Facility
would not have a material effect on our results of operations or cash flow.
FOREIGN CURRENCY EXCHANGE RISK
A substantial portion of our sales are denominated in U.S. dollars and, as a
result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made. This exposure may change over time as business
practices evolve and could have a material adverse impact on our financial
results in the future. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material impact on our future results
of operations or cash flow.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days of the filing of this report, an evaluation of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
was conducted under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer. Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures were adequate and designed to
ensure that information required to be disclosed by the Company in this report
is recorded, processed, summarized and reported in a timely manner, including
that such information is accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses in internal
controls, subsequent to the evaluation described above.
Reference is made to the Certifications of the Chief Executive Officer and Chief
Financial Officer about these and other matters following the signature page of
this report.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits filed herein
Exhibit 11.1 Computation of earnings per share
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
----------------------------------
(Registrant)
May 9, 2003 /s/ Richard L. Cote
--------------------
Richard L. Cote
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
/s/ Steven A. DeMartino
-----------------------
Steven A. DeMartino
Senior Vice President, Finance and
Information Technology
(Principal Accounting Officer)
16
CERTIFICATION
I, Bart C. Shuldman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TransAct Technologies
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Bart C. Shuldman
- --------------------
Bart C. Shuldman
Chairman, President and Chief Executive Officer
17
CERTIFICATION
I, Richard L. Cote, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TransAct Technologies
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Richard L. Cote
- -------------------
Richard L. Cote
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
18
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
- -------
11.1 Computation of earnings per share.
99.1 Certification pursuant to 18 U.S.C.Section 1350 as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
19