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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: June 30, 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
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(203) 269-1198
- --------------------------------------------------------------------------------
(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 Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
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 AUGUST 1, 2003
- ------------- --------------------------
COMMON STOCK,
$.01 PAR VALUE 5,842,429
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
Page No.
--------
PART I. Financial Information:
Item 1 Financial Statements (unaudited)
Consolidated condensed balance sheets as of June 30, 2003 and December
31, 2002 3
Consolidated condensed statements of operations for the three and six
months ended June 30, 2003 and 2002 4
Consolidated condensed statements of cash flow for the six months ended
June 30, 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 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
Item 4 Controls and Procedures 19
PART II. Other Information:
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
(In thousands) 2003 2002
--------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 293 $ 902
Receivables, net 8,778 4,039
Inventories 9,930 8,435
Refundable income taxes 228 228
Deferred tax assets 1,954 2,221
Other current assets 313 327
--------- ------------
Total current assets 21,496 16,152
--------- ------------
Fixed assets, net 3,984 3,924
Goodwill, net 1,469 1,469
Deferred tax assets 442 193
Other assets 166 292
--------- ------------
6,061 5,878
--------- ------------
Total assets $ 27,557 $ 22,030
========= ============
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan $ 100 $ 100
Accounts payable 3,328 2,983
Accrued liabilities 3,766 3,592
Accrued restructuring expenses (Note 5) 625 900
--------- ------------
Total current liabilities 7,819 7,575
--------- ------------
Revolving bank loan payable 5,976 2,541
Long-term portion of term loan 200 250
Long-term portion of accrued restructuring (Note 5) 601 818
Other liabilities 948 477
--------- ------------
7,725 4,086
--------- ------------
Total liabilities 15,544 11,661
--------- ------------
Commitments and contingencies (Note 6)
Mandatorily redeemable preferred stock 3,863 3,824
--------- ------------
Shareholders' equity:
Common stock 58 57
Additional paid-in capital 7,108 6,308
Retained earnings 1,009 599
Unamortized restricted stock compensation (58) (97)
Loan receivable from officer - (330)
Accumulated other comprehensive income 33 8
--------- ------------
Total shareholders' equity 8,150 6,545
--------- ------------
$ 27,557 $ 22,030
========= ============
See notes to consolidated condensed financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands, except per share data) 2003 2002 2003 2002
--------- --------- --------- ----------
Net sales $ 13,378 $ 10,921 $ 22,390 $ 21,446
Cost of sales 9,166 7,809 15,737 15,708
--------- --------- --------- ----------
Gross profit 4,212 3,112 6,653 5,738
--------- --------- --------- ----------
Operating expenses:
Engineering, design and product
development expenses 545 504 1,107 1,050
Selling and marketing expenses 1,264 1,094 2,308 2,125
General and administrative expenses 1,119 1,108 2,218 2,284
Business consolidation and restructuring
expenses (Note 5) - 5 - 46
--------- --------- --------- ----------
2,928 2,711 5,633 5,505
--------- --------- --------- ----------
Operating income 1,284 401 1,020 233
--------- --------- --------- ----------
Other income (expense):
Interest, net (76) (34) (122) (89)
Other, net (26) 84 (26) 105
--------- --------- --------- ----------
(102) 50 (148) 16
--------- --------- --------- ----------
Income before income taxes 1,182 451 872 249
Income taxes 395 162 283 89
--------- --------- --------- ----------
Net income 787 289 589 160
Dividends and accretion charges on
preferred stock (89) (89) (179) (179)
--------- --------- --------- ----------
Net income (loss) available to common
shareholders $ 698 $ 200 $ 410 $ (19)
========= ========= ========= ==========
Net income per share:
Basic and diluted $ 0.12 $ 0.04 $ 0.07 $ -
========= ========= ========= ==========
Shares used in per share calculation:
Basic 5,737 5,626 5,706 5,615
========= ========= ========= ==========
Diluted 6,047 5,626 5,897 5,615
========= ========= ========= ==========
See notes to consolidated condensed financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
(In thousands) 2003 2002
----------- -----------
Cash flows from operating activities:
Net income $ 589 $ 160
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash compensation expense 39 121
Depreciation and amortization 867 1,027
Deferred income taxes 267 74
Gain on disposal of equipment (1) -
Changes in operating assets and liabilities:
Receivables (4,739) 173
Inventories (1,495) 1,540
Other current assets 14 (5)
Other assets 71 (19)
Accounts payable 345 (421)
Accrued liabilities and other liabilities 645 373
Customer advance payment - 944
Accrued restructuring expenses (492) (1,407)
----------- -----------
Net cash (used in) provided by operating activities (3,890) 2,560
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (872) (269)
Proceeds from sale of fixed assets 1 -
Repayment of loan receivable from officer 330 -
----------- -----------
Net cash used in investing activities (541) (269)
----------- -----------
Cash flows from financing activities:
Revolving bank loan borrowings (repayments), net 3,435 (2,485)
Term loan repayments (50) (50)
Proceeds from option exercises 552 107
Payment of cash dividends on preferred stock (140) (140)
----------- -----------
Net cash provided by (used in) financing activities 3,797 (2,568)
----------- -----------
Effect of exchange rate changes on cash 25 61
----------- -----------
Decrease in cash and cash equivalents (609) (216)
Cash and cash equivalents at beginning of period 902 417
----------- -----------
Cash and cash equivalents at end of period $ 293 $ 201
=========== ===========
See notes to consolidated condensed financial statements.
5
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. TransAct Technologies Incorporated ("TransAct" or the
"Company"), through its primary operating facility in Ithaca, NY,
operates in one industry segment, transaction-based printers and
related products. TransAct designs, develops, manufactures and markets
transaction-based printers under the Ithaca(R)and Magnetec(R)brand
names. In addition, the Company markets related consumables, spare
parts and service. The Company's printers are used worldwide to provide
transaction records such as receipts, tickets, coupons, register
journals and other documents. The Company focuses on two core markets:
point-of-sale ("POS") and gaming and lottery. The Company sells its
products to original equipment manufacturers ("OEMs"), value-added
resellers, selected distributors and directly to end-users. The
Company's product distribution spans across the Americas, Europe, the
Middle East, Africa, the Caribbean Islands and the South Pacific.
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
June 30, 2003, the results of its operations for the three and six
months ended June 30, 2003 and 2002, and its cash flows for the six
months ended June 30, 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 and six months ended
June 30, 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 and six months
ended June 30, 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 and six months ended June 30, 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 that were excluded
from the diluted earnings per share calculation would entitle holders
to acquire 444,000 and 1,431,000 shares of common stock as of June 30,
2003 and 2002, respectively.
3. Inventories:
The components of inventory are:
June 30, December 31,
(In thousands) 2003 2002
--------- ------------
Raw materials and component parts $ 9,792 $ 8,339
Work-in-process - 1
Finished goods 138 95
--------- ---------
$ 9,930 $ 8,435
========= =========
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
4. Significant transactions
In May 2003, an officer of the Company repaid an outstanding
loan of $330,000, plus accrued interest.
During the second quarter of 2003, the Company received cash
proceeds of approximately $552,000 from the issuance of approximately
110,000 shares of common stock from employee stock option exercises.
The Company also recorded a deferred tax asset of approximately
$249,000 resulting from the sale of employee stock from these stock
option exercises.
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 following table summarizes the activity recorded in the
restructuring accrual during the three and six months ended June 30,
2003 and 2002.
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2003 2002 2003 2002
-------- -------- -------- --------
Accrual balance, beginning of
period $ 1,365 $ 2,358 $ 1,718 $ 3,002
Business consolidation and
restructuring expenses - 5 - 46
Cash payments (139) (768) (492) (1,453)
-------- -------- -------- --------
Accrual balance, end of period $ 1,226 $ 1,595 $ 1,226 $ 1,595
======== ======== ======== ========
Approximately $601,000 and $818,000 of the restructuring
accrual were classified as long-term at June 30, 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 June 30, 2003 includes estimated
non-cancelable lease payments and other related costs through
approximately September 30, 2004.
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
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 related
to past usage, while the other party seeks payment of up to $950,000
(the "Patent Resolution Payment"). Discussions with the other party are
ongoing, and the outcome is uncertain. 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 three and six months ended June 30, 2003, the Company recognized
additional charges in cost of sales to reflect the potential payment
for printers sold during these periods that may use technology covered
by the competitor's patents.
7. Accrued product warranty liability
The following table summarizes the activity recorded in the
accrued product warranty liability during the three and six months
ended June 30, 2003 and 2002.
Three months ended Six months ended
June 30, June 30,
(In thousands) 2003 2002 2003 2002
------- ------ ------ ------
Balance, beginning of period $ 625 $ 719 $ 644 $ 710
Additions related to warranties issued 80 140 195 280
Warranty costs incurred (104) (105) (238) (236)
------- ------ ------ ------
Balance, end of period $ 601 $ 754 $ 601 $ 754
======= ====== ====== ======
8. 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"). The Company has recorded stock-based compensation expense
related to restricted stock grants ratably over the vesting period.
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.
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
8. Accounting for Stock-Based Compensation (continued)
The following table illustrates the effect on net income
(loss), compensation expense and net income (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.
Thee months ended Six months ended
June 30, June 30
2003 2002 2003 2002
------- ------ ------ ------
(In thousands, except per share data)
Net loss available to common shareholders:
Net income, as reported $ 787 $ 289 $ 589 $ 160
Add: Stock-based compensation expense
included in reported net income,
net of tax 9 31 26 77
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (153) (150) (315) (286)
------- ------ ------ ------
Pro forma net income (loss) 643 170 300 (49)
Dividends and accretion charges on
preferred stock (89) (89) (179) (179)
------- ------ ------ ------
Pro forma net income (loss) available to
common shareholders $ 554 $ 81 $ 121 $ (228)
======= ====== ====== ======
Net income (loss) per share:
Basic:
As reported $ 0.12 $ 0.04 $ 0.07 $ -
Pro forma $ 0.10 $ 0.01 $ 0.02 $(0.04)
Diluted:
As reported $ 0.12 $ 0.04 $ 0.07 $ -
Pro forma $ 0.09 $ 0.01 $ 0.02 $(0.04)
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 and six
months ended June 30, 2003 and 2002.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- --------- --------
Risk-free interest rate 2.5% 4.6% 2.6% 4.5%
Dividend yield 0% 0% 0% 0%
Expected volatility factor 82.0% 83.3% 82.0% 83.3%
Expected option term 5.7 years 6.4 years 5.7 years 6.4 years
Weighted average fair value of options
granted during period $ 6.33 $ 4.22 $ 5.72 $ 4.14
9
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
9. Subsequent Events
On July 8, 2003, the holders of the Series B Cumulative
Convertible Redeemable Preferred Stock, Advance Capital Advisors, L.P.,
exercised their 44,444 warrants to purchase common stock at $9 per
share. In lieu of cash consideration, the Company canceled 31,821 of
their warrants in exchange for the issuance of 12,623 shares of common
stock.
On August 6, 2003, the Company entered into a new $12.5
million credit facility (the "Banknorth Credit Facility") with
Banknorth N.A. The Banknorth Credit Facility replaced the Company's
prior credit facility with LaSalle Business Credit, Inc. ("LaSalle").
The Banknorth Credit Facility provides for an $11.5 million revolving
credit line expiring on July 31, 2006, and a $1 million equipment loan
facility which may be drawn down through July 31, 2004. Borrowings
under the revolving credit line bear a floating rate of interest at the
prime rate. Borrowings under the equipment loan bear a floating rate of
interest at prime rate plus 0.25%. Under certain circumstances, the
Company 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
2.75% and 3.0% under the revolving credit facility and the equipment
loan facility, respectively. In addition, the Company may select a
fixed interest rate based on the five-year Federal Home Loan Bank of
Boston rate plus 3.0% for borrowings under the equipment loan facility.
The Company also pays a fee of 0.25% on unused borrowings under the
revolving credit line. Borrowings under the Banknorth Credit Facility
are secured by a lien on all the assets of the Company. The Banknorth
Credit Facility imposes certain quarterly financial covenants on the
Company, restricts the payment of dividends on its common stock and the
creation of other liens.
The borrowing base of the revolving credit line under the
Banknorth Facility is based on the lesser of $11.5 million and (i) 85%
of eligible accounts receivable plus (ii) the lesser of (a) $5,500,000
and (b) 45% of eligible raw material inventory plus 50% of eligible
finished goods inventory, less (iii) a $1,000,000 reserve pending the
determination of the Patent Resolution Payment (see Note 6) and less
(iv) a $40,000 credit reserve.
Concurrent with the signing of the Banknorth Credit Facility,
the Company borrowed $450,000 under the equipment loan facility.
Principal payments for any borrowings under the equipment loan facility
are due in equal installments based on a sixty month amortization
schedule, plus accrued interest, on the first day of each month
beginning September 1, 2003, with the unpaid principal balance due on
the earlier of (1) July 31, 2008 or (2) acceleration of the
indebtedness under the revolving credit line or the equipment line due
to an event of default.
The Company will record a charge of approximately $110,000 in
the third quarter of 2003 related to unamortized deferred financing
costs from the prior credit facility with LaSalle.
10. Recent accounting pronouncements
In May 2003, the FASB issued Statement of Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("FAS 150"). FAS 150
changes the accounting for certain financial instruments that, under
previous guidance, could be classified as equity or "mezzanine" equity,
including mandatorily redeemable instruments, by now requiring those
instruments to be classified as liabilities in the statement of
financial position. Further, FAS 150 requires disclosure regarding the
terms of those instruments and settlement alternatives. FAS 150 is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003. The Company
believes that FAS 150 will not have a material impact on the Company's
financial statements.
10
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; risks
associated with the determination of the Patent Resolution Payment; 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. 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 and the reasonably foreseeable future.
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.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 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 %) June 30, 2003 June 30, 2002
---------------------- -------------------
Point of sale $ 4,808 35.9% $ 5,062 46.4%
Gaming and lottery 8,570 64.1 5,859 53.6
---------------------- -------------------
$ 13,378 100.0% $ 10,921 100.0%
====================== ===================
International $ 1,318 9.9% $ 1,073 9.8%
====================== ===================
Net sales for the second quarter of 2003 increased $2,457,000, or 22%, from the
prior year's second quarter due to significantly higher shipments into the
gaming and lottery market, offset by slightly lower sales into our point of sale
("POS") market. Overall, international sales increased by $245,000, or 23%.
POINT OF SALE:
Sales of our POS printers decreased by approximately $254,000, or 5% from the
same period last year. Domestic POS printer sales decreased to $3,881,000,
representing a $205,000, or 5%, decrease from the second quarter of 2002, due
primarily to lower sales through our U.S. distributors. 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
37% in the second quarter of 2003 compared to the second quarter of 2002, due
largely to shipments of our Bankjet line of inkjet printers to a major financial
services holding company to upgrade its U.S. bank teller stations.
International POS printer shipments decreased by approximately $49,000, or 5%,
to $927,000, due primarily to lower sales of our thermal fiscal printers in
Europe. Sales of such printers are principally project-oriented, and we cannot
predict if and when future sales may occur. Lower thermal fiscal printer sales
were somewhat offset by higher sales through our expanding network of
international distributors and higher service and spare parts revenue.
Despite ongoing economic weakness and continued lower capital spending by users
of our POS products, we expect sales into the POS market for the third quarter
of 2003 to be higher than those reported for the second quarter of 2003, due to
expected sales of our newly-introduced iTherm(TM) 280 two-color thermal printer
and continued growth in sales of our POSjet and Bankjet lines of inkjet
printers.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers increased by $2,711,000, or 46%, from
the second quarter a year ago, primarily due to significantly higher shipments
of our slot machine printers.
Sales of our gaming printers, which include video lottery terminal ("VLT") and
slot machine printers, and related spare parts and repairs, increased by
approximately $2,900,000 to $5,200,000. 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 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.
Total sales to GTECH Corporation ("GTECH") (a worldwide lottery terminal
provider and major customer), which included impact and thermal on-line lottery
printers, impact in-lane lottery printers, and spare parts revenue, decreased by
$200,000 to approximately $3,350,000 in the second quarter of 2003.
Shipments of on-line lottery printers (which include impact and thermal
printers) and spare parts revenue decreased by $100,000 to approximately
$3,350,000 in the second quarter of 2003. Shipments of in-lane lottery printers
totaled approximately $100,000 in the second quarter of 2002. We made no in-lane
lottery printer shipments in the second 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 the remaining
approximately $3,500,000 in the third quarter of 2003. We expect to receive
orders from GTECH for additional thermal on-line lottery printers for delivery
in the fourth
12
quarter of 2003. We do not currently have any orders from GTECH for our impact
on-line or in-lane lottery printers, and we cannot predict if and when any such
orders may occur.
See the table below for an analysis of revenues from GTECH.
Three months ended
(In thousands, except %) June 30,
2003 2002
--------- --------
On-line lottery printers and spare parts $ 3,350 $ 3,450
In-lane lottery printers - 100
--------- --------
$ 3,350 $ 3,550
========= ========
% of consolidated net sales 25% 33%
International sales into the gaming and lottery market increased $294,000, or
303%, to $391,000 in the second quarter of 2003. This increase is the result of
our decision to expand the distribution and sales of our gaming printers outside
of the United States (primarily in Europe and Australia). As such, we expect
international sales of our gaming printers to steadily grow in 2003, with more
significant growth in 2004.
GROSS PROFIT. Gross profit increased $1,100,000, or 35%, and gross margin
increased to 31.5% from 28.5%, due primarily to higher volume of sales and a
more favorable sales mix in the second quarter of 2003 compared to the second
quarter of 2002. We expect gross margin for the third and fourth quarters of
2003 to be approximately the same as that reported for the second quarter of
2003.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $41,000, or 8%, due primarily to higher expenses related
to the development of our new thermal on-line lottery printer for GTECH and
iTherm(TM)280 thermal POS printer. Such expenses decreased as a percentage of
net sales to 4.1% from 4.6%, due primarily to a higher volume of sales in the
second quarter of 2003 compared to the second quarter of 2002.
SELLING AND MARKETING. Selling and marketing expenses increased by $170,000, or
16%, due primarily to (1) higher sales commissions resulting from higher sales
in the second quarter of 2003 compared to the second quarter of 2002 and (2)
additional sales staff and expenses associated with the opening of a new sales
office in Las Vegas to support our growing gaming printer sales. Selling and
marketing expenses decreased as a percentage of net sales to 9.4% from 10.0%,
due primarily to higher volume of sales in the second quarter of 2003 compared
to the second quarter of 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
slightly by $11,000, or 1%. General and administrative expenses decreased as a
percentage of net sales to 8.4% from 10.2% due primarily to a higher volume of
sales in the second quarter of 2003 compared to the second quarter of 2002.
BUSINESS CONSOLIDATION AND RESTRUCTURING. During the second quarter of 2002, we
incurred $5,000 of expenses related to the Consolidation, primarily for moving
expenses. We did not incur any charges related to the Consolidation in the
second quarter of 2003. See Note 5 to the Consolidated Condensed Financial
Statements.
OPERATING INCOME. During the second quarter of 2003 we reported operating income
of $1,284,000, or 9.6% of net sales, compared to operating income of $401,000,
or 3.7% of net sales in the second quarter of 2002. The increase in our
operating income was due largely to higher gross profit on higher sales,
partially offset by higher operating expenses (primarily selling and marketing)
in the second quarter of 2003 compared to 2002.
INTEREST. Net interest expense increased to $76,000 from $34,000 in the second
quarter of 2002 due largely to higher average revolving borrowings, partially
offset by lower interest rates. Average revolving borrowings were unusually low
in the second quarter of 2002 as a result of the receipt of an advance payment
of approximately $5.8 million from a major customer in advance of printer
shipments, the proceeds of which were used to repay outstanding revolving
borrowings in 2002. We expect revolving borrowings to decrease from $5,976,000
at June 30, 2003 to approximately $3 million to $4 million by the end of the
third quarter of 2003, as we collect receivables and continue to reduce
inventories in the third quarter of 2003. As a result, we expect interest
expense to decrease in the third quarter of 2003 compared to the second quarter
of 2003. See "Liquidity and Capital Resources" below for more information.
13
OTHER INCOME (EXPENSE). Other expense for the second quarter of 2003 primarily
includes transaction exchange loss recorded by our UK subsidiary. Other income
for the second quarter of 2002 includes a one-time gain of $145,000 resulting
from the receipt of 2,146 shares of common stock from our former health
insurance company, Anthem, Inc., upon its demutualization. This gain was
partially offset by approximately $60,000 of transaction exchange loss recorded
by our UK subsidiary in the quarter, due to the strengthening of the British
pound against the dollar.
INCOME TAXES. We recorded a provision for income taxes of $395,000 and $162,000
in the second quarter of 2003 and 2002, respectively, at an effective rate of
approximately 33.4% and 36.0%, respectively. The lower effective rate in the
2003 period reflects a favorable outcome of a state tax audit.
NET INCOME. We reported net income during the second quarter of 2003 of
$787,000, or $0.12 per share (basic and diluted) after giving effect to $89,000
of dividends and accretion charges on preferred stock. This compares to net
income of $289,000, or $0.04 per share (basic and diluted) for the second
quarter of 2002, after giving effect to $89,000 of dividends and accretion
charges on preferred stock. In the future, dividends and accretion charges on
preferred stock will be approximately $90,000 per quarter, assuming no
conversion or redemption of the preferred stock.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
NET SALES. Net sales by market for the current and prior year's six month period
in dollars and as a percentage of total net sales were as follows:
Six months ended Six months ended
(In thousands, except %) June 30, 2003 June 30, 2002
-------------------- ---------------------
Point of sale $ 9,139 40.8% $ 9,134 42.6%
Gaming and lottery 13,251 59.2 12,312 57.4
-------------------- ---------------------
$ 22,390 100.0% $ 21,446 100.0%
==================== =====================
International $ 2,384 10.6% $ 2,084 9.7%
==================== =====================
Net sales for the first half of 2003 increased $944,000, or 4%, from the prior
year's first half due to higher shipments into the gaming and lottery market.
Overall, international sales increased by $300,000, or 14%, due primarily to
higher shipments of our gaming printers.
POINT OF SALE:
Sales of our POS printers were essentially unchanged from the same period last
year. Domestic POS printer sales were also essentially unchanged at $7,150,000
in the first half of 2003 compared to $7,177,000 in the first half of 2002.
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 55% in the first half of 2003 compared to the first half of
2002, due largely to shipments of our Bankjet line of inkjet printers to a major
financial services holding company to upgrade its U.S. bank teller stations in
the second quarter of 2003.
International POS printer shipments increased by approximately $32,000, or 2%,
to $1,989,000, due primarily to higher sales through our expanding network of
international distributors and higher service and spare parts revenue, largely
offset by lower sales of our thermal fiscal printers in Europe. Sales of our
thermal fiscal printers are principally project-oriented, and we cannot predict
if and when future sales may occur.
Despite ongoing economic weakness and continued lower capital spending by users
of our POS products, we expect sales into the POS market for the third quarter
of 2003 to be higher than those reported for the second quarter of 2003, due to
expected sales of our newly-introduced iTherm(TM) 280 two-color thermal printer
and continued growth in sales of our POSjet and Bankjet lines of inkjet
printers.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers increased by $939,000, or 8%, from the
first half a year ago, primarily due to significantly higher shipments of our
slot machine printers, largely offset by lower printer shipments of on-line
lottery printers to GTECH.
14
Sales of our gaming printers, which include VLT and slot machine printers, and
related spare parts and repairs, increased by approximately $4,700,000 to
$9,100,000. 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 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.
Total sales to GTECH, which included impact and thermal on-line lottery
printers, impact in-lane lottery printers, and spare parts revenue, decreased by
$3,800,000 to approximately $4,150,000 in the first half of 2003.
Shipments of on-line lottery printers (which include impact and thermal
printers) and spare parts revenue decreased by $3,100,000 to approximately
$4,150,000 in the first half of 2003. Shipments of in-lane lottery printers
totaled approximately $700,000 in the first half of 2002. We made no in-lane
lottery printer shipments in first half 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 the remaining approximately
$3,500,000 in the third quarter of 2003. We expect to receive orders from GTECH
for additional thermal on-line lottery printers for delivery in the fourth
quarter of 2003. We do not currently have any orders from GTECH for our impact
on-line or in-lane lottery printers, and we cannot predict if and when any such
orders may occur.
See the table below for an analysis of revenues from GTECH.
Six months ended
(In thousands, except %) June 30,
2003 2002
--------- --------
On-line lottery printers and spare parts $ 4,150 $ 7,250
In-lane lottery printers - 700
--------- --------
$ 4,150 $ 7,950
========= ========
% of consolidated net sales 19% 37%
International sales into the gaming and lottery market increased $268,000, or
211%, to $395,000 in the first half of 2003. This increase is the result of our
decision to expand the distribution and sales of our gaming printers outside of
the United States (primarily in Europe and Australia). As such, we expect
international sales of our gaming printers to steadily grow in 2003, with more
significant growth in 2004.
GROSS PROFIT. Gross profit increased $915,000, or 16%, and gross margin
increased to 29.7% from 26.8%, due primarily to higher volume of sales and a
more favorable sales mix, primarily in the second quarter of 2003 compared to
the second quarter of 2002. We expect gross margin for the third and fourth
quarters of 2003 to be approximately the same as that reported for the second
quarter of 2003.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $57,000, or 5%, due primarily to higher expenses related
to the development of our new thermal on-line lottery printer for GTECH and our
iTherm(TM)280 thermal POS printer in the first half of 2003. Such expenses
remained flat at 4.9% of sales in each of the first six months of 2003 and 2002.
SELLING AND MARKETING. Selling and marketing expenses increased by $183,000, or
9%, and increased as a percentage of net sales to 10.3% from 9.9%, due primarily
to (1) higher sales commissions resulting from higher sales in the first half of
2003 compared to the first half of 2002 and (2) additional sales staff and
expenses associated with the opening of a new sales office in Las Vegas, to
support our growing gaming printer sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$66,000, or 3%, and decreased as a percentage of net sales to 9.9% from 10.7%.
The decrease primarily resulted from staff reductions resulting from the
Consolidation, somewhat offset by higher legal expenses to support our growing
patent portfolio.
BUSINESS CONSOLIDATION AND RESTRUCTURING. During the first half of 2002, we
incurred $46,000 of expenses related to the Consolidation, primarily for
severance costs and moving expenses. We did not incur any charges related to the
Consolidation in the first half of 2003. See Note 5 to the Consolidated
Condensed Financial Statements.
15
OPERATING INCOME. During the first half of 2003 we reported operating income of
$1,020,000, or 4.6% of net sales, compared to operating income of $233,000, or
1.1% of net sales in the first half of 2002. The increase in our operating
income was due largely to higher gross profit on higher sales, partially offset
by higher operating expenses (primarily selling and marketing) in the first half
of 2003 compared to the same period of 2002.
INTEREST. Net interest expense increased to $122,000 from $89,000 in the first
half of 2002 due largely to higher average revolving borrowings, partially
offset by lower interest rates. Average revolving borrowings were unusually low
in the first half of 2002 as a result of the receipt of an advance payment of
approximately $5.8 million from a major customer in advance of printer
shipments, the proceeds of which were used to repay outstanding revolving
borrowings in 2002. We expect revolving borrowings to decrease from $5,976,000
at June 30, 2003 to approximately $3 million to $4 million by the end of the
third quarter of 2003, as we collect receivables and continue to reduce
inventories in the third quarter of 2003. As a result, we expect interest
expense to decrease in the third quarter of 2003 compared to the second quarter
of 2003. See "Liquidity and Capital Resources" below for more information.
OTHER INCOME (EXPENSE). Other expense for the first half of 2003 primarily
includes transaction exchange loss recorded by our UK subsidiary. Other income
for the first half of 2002 includes a one-time gain of $145,00 resulting from
the receipt of 2,146 shares of common stock from our former health insurance
company, Anthem, Inc., upon its demutualization. This gain was partially offset
by approximately $40,000 of transaction exchange loss recorded by our UK
subsidiary in the period, due to the strengthening of the British pound against
the dollar.
INCOME TAXES. We recorded a provision for income taxes of $283,000 and $89,000
in the first six months of 2003 and 2002, respectively, at an effective rate of
approximately 32.5% and 36.0%, respectively. The lower effective rate in the
2003 period reflects a favorable outcome of a state tax audit.
NET INCOME. We reported net income during the first half of 2003 of $589,000, or
$0.07 per share (basic and diluted) after giving effect to $179,000 of dividends
and accretion charges on preferred stock. This compares to net income of
$160,000, or $0.00 per share (basic and diluted) for the first half of 2002,
after giving effect to $179,000 of dividends and accretion charges on preferred
stock. In the future, dividends and accretion charges on preferred stock will be
approximately $90,000 per quarter, assuming no conversion or redemption of the
preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Operating activities - summary: We used cash in operations of $3,890,000 in the
first half of 2003, compared to generating $2,560,000 of cash from operations in
the first half of 2002. The significant decrease in cash generated from
operations was the result of two primary factors. First, receivables
significantly increased in the first half of 2003 due largely to the timing of
sales in the period including the resumption of volume printer shipments to
GTECH. Second, we made a significant investment in inventory during the first
half of 2003, as we prepared for increased sales of our gaming and lottery
printers for the second and third quarter of 2003.
Cash provided by operating activities: During the first half of 2003, we
reported net income of $589,000 compared to $160,000 in the same period of 2002.
Depreciation and amortization totaled $906,000 compared to $1,148,000 in the
same period of 2002. Deferred income taxes decreased by $267,000 from year-end
substantially due to an increase in the provision for income taxes in the
period. Accounts payable increased by $345,000 from the year-end due largely to
the increase in our inventory. We expect accounts payable to remain at
approximately the same level in the third quarter of 2003 as in the second
quarter of 2003. Accrued liabilities and other liabilities, excluding accrued
restructuring, increased by $645,000, 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 half of 2003 were the following: Receivables increased by
approximately $4,739,000 from year-end, due largely to the timing of sales in
the quarter, and an increase in volume of sales compared to the prior period.
Inventories increased by approximately $1,495,000, 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. We expect
inventories at the end of the third quarter of 2003 to be approximately the same
as those reported at the end of the second quarter of 2003. The restructuring
accrual decreased by $492,000, representing payouts for severance pay and
related benefits and lease payments for the Wallingford Facility. (See
"Consolidation Expenses" below.)
16
Investing activities: We used approximately $541,000 of cash from investing
activities in the first half of 2003 compared to using $269,000 in the same
period of 2002. Our capital expenditures were approximately $872,000 and
$269,000 in the first half of 2003 and 2002, respectively. These expenditures in
2003 primarily included new product tooling (largely for our new thermal on-line
lottery printer for GTECH and our newly-introduced iTherm(TM)280 thermal POS
printer), 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 the POS market, and other new
products. During the second quarter of 2003, we received cash proceeds of
$330,000, plus accrued interest, from an officer of the Company in repayment of
an outstanding loan.
Financing activities: Financing activities provided $3,797,000 during the first
half of 2003, largely due to net borrowings under our revolving credit facility
(approximately $3,435,000) and proceeds from stock option exercises
(approximately $552,000), partially offset by term loan repayments
(approximately $50,000) and payments of cash dividends on our preferred stock
(approximately $140,000). Financing activities used $2,568,000 during the first
half 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 $13,677,000 at June 30, 2003 from $8,577,000 at
December 31, 2002. The current ratio also increased to 2.75 to 1 at June 30,
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 receivables ($4,739,000) and
(2) higher inventories ($1,495,000), offset by (3) lower cash and cash
equivalents ($609,000) compared to December 31, 2002.
DEFERRED TAXES
As of June 30, 2003, we had a net deferred tax asset of approximately
$2,396,000. In order to utilize this deferred tax asset, we will need to
generate approximately $6.5 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 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 related to past usage, while the other
party seeks payment of up to $950,000 (the "Patent Resolution Payment").
Discussions with the other party are ongoing, and the outcome is uncertain.
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 three and six months ended June 30,
2003, we recognized additional charges in cost of sales to reflect the potential
payment for printers sold during these periods that may use technology covered
by the competitor's patents.
CREDIT FACILITY AND BORROWINGS
On August 6, 2003, we entered into a new $12.5 million credit facility (the
"Banknorth Credit Facility") with Banknorth N.A. The Banknorth Credit Facility
replaced our prior credit facility (the "LaSalle Credit Facility) with LaSalle
Business Credit, Inc. ("LaSalle"). The Banknorth Credit Facility provides for an
$11.5 million revolving credit line expiring on July 31, 2006, and a $1 million
equipment loan facility which may be drawn down through July 31, 2004.
Borrowings under the revolving credit line bear a floating rate of interest at
the prime rate. Borrowings under the equipment loan bear a floating rate of
interest at the prime rate plus 0.25%. 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 2.75% and 3.0% under the
revolving credit facility and the equipment loan facility, respectively. In
addition, we may select a fixed interest rate based on the five-year Federal
Home Loan Bank of Boston rate plus 3.0% for borrowings under the equipment loan
facility. We also pay a fee of 0.25% on unused borrowings under the revolving
credit line. Borrowings under the Banknorth Credit Facility are secured by a
lien on all the assets of the Company. The Banknorth Credit Facility imposes
certain quarterly financial covenants on the Company, restricts the payment of
dividends on its common stock and the creation of other liens.
The borrowing base of the revolving credit line under Banknorth Credit Facility
is based on the lesser of $11.5 million and (i) 85% of eligible accounts
receivable plus (ii) the lesser of (a) $5,500,000 and (b) 45% of eligible raw
material inventory plus 50% of eligible finished goods inventory, less (iii) a
$1,000,000 reserve pending the determination of the Patent Resolution Payment
(see Note 6 to the Consolidated Condensed Financial Statements) and less (iv) a
$40,000 credit reserve. If the Banknorth
17
Credit Facility were effective June 30, 2003, our maximum additional available
borrowings would have been limited to approximately $3,400,000 at that date, on
a pro forma basis, based on the borrowing base of our collateral.
Concurrent with the signing of the Banknorth Credit Facility, we borrowed
$450,000 under the equipment loan facility. Principal payments for any
borrowings under the equipment loan facility are due in equal installments based
on a sixty month amortization schedule, plus accrued interest, on the first day
of each month beginning September 1, 2003, with the unpaid principal balance due
on the earlier of (1) July 31, 2008 or (2) acceleration of the indebtedness
under the revolving credit line or the equipment line due to an event of
default.
We will record a charge of approximately $110,000 in the third quarter of 2003
related to unamortized deferred financing costs from the prior credit facility
with LaSalle.
Prior to the Banknorth Credit Facility, we had a $13.5 million credit facility
with LaSalle. The LaSalle Credit Facility provided 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 bore a floating rate of
interest based on LaSalle's prime rate plus 1.0%. Under certain circumstances,
we could 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 bore 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 restricted $1 million of our borrowing availability
under the revolving credit line pending the determination of the Patent
Resolution Payment. Upon execution of LaSalle Amendment No. 4, we paid a fee of
$25,000 to LaSalle.
As of June 30, 2003, we had $5,976,000 and $300,000 outstanding on the revolving
credit line and term loan, respectively. Undrawn commitments under the LaSalle
Credit Facility were approximately $6,024,000 at June 30, 2003. However, our
maximum additional available borrowings under the facility were limited to
approximately $3,100,000 at June 30, 2003 based on the borrowing base of our
collateral. Annual principal payments on the term loan were $100,000.
PREFERRED STOCK
In connection with our 7% Series B Cumulative Convertible Redeemable Preferred
Stock (the "Preferred Stock"), we paid $140,000 of cash dividends to Advance
Capital Advisors, L.P. in the first half of 2003 and 2002, and expect to pay
$70,000 per quarter for the remainder of 2003. We also record non-cash accretion
of approximately $20,000 per quarter related to preferred stock warrants and
issuance costs. 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.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $1,605,000 to $8,150,000 at June 30, 2003 from
$6,545,000 at December 31, 2003. The increase was primarily due to the following
for the six months ended June 30, 2003: (1) net income available to common
shareholders of $410,000, (2) the repayment by an officer of an outstanding loan
of $330,000, (3) proceeds of approximately $552,000 from the issuance of
approximately 110,000 shares of common stock from employee stock option
exercises and (4) an increase in additional paid in capital of approximately
$249,000 resulting from the recording of a deferred tax asset from the sale of
employee stock from stock option exercises.
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.
Accrued restructuring expenses related to the Consolidation totaled $1,226,000
at June 30, 2003, and include remaining severance pay, and estimated
non-cancelable lease payments and other related costs through approximately
September 30, 2004. We paid approximately $492,000 and $1,453,000 of
Consolidation expenses in the first half of 2003 and 2002, respectively. We
expect to pay approximately $300,000 of these expenses in the last six months of
2003, and the remaining $926,000 in 2004.
18
RESOURCE SUFFICIENCY
We believe that cash flows generated from operations and borrowings available
under the Banknorth Credit Facility will provide sufficient resources to meet
our 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), to finance our capital expenditures and to meet
our liquidity requirements through at least 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 ongoing basis as market
factors and our needs suggest.
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 revolving 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 our 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
As of the end of the period covered by this quarterly 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 filed as exhibits to this
report.
19
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 20, 2003.
Matters voted upon at the meeting and the number of votes cast for,
against, withheld or abstentions, are as follows:
(1) To consider and act upon a proposal to elect two Directors, one by
holders of Common Stock and one by holders of Series B Preferred
Stock, to serve until the 2006 Annual Meeting of Stockholders or
until their successors have been duly elected and qualified.
Nominees were Charles A. Dill and Jeffrey T. Leeds. Votes cast by
holders of Common Stock were as follows:
- -----------------------------------------------------------
For Withheld
- -----------------------------------------------------------
Charles A. Dill 5,070,721 252,429
- -----------------------------------------------------------
Votes cast by holders of Series B Preferred Stock (on an
as-converted basis) were as follows:
- -----------------------------------------------------------
For Withheld
- -----------------------------------------------------------
Jeffrey T. Leeds 444,444 -
- -----------------------------------------------------------
(2) To approve an amendment to the Company's Non-Employee Directors'
Stock Plan to increase the number of shares of Common Stock
available for issuance thereunder by 100,000 shares, to an aggregate
of 240,000 shares. Votes cast were as follows (counting the votes of
common stock and Series B Preferred Stock together as a single
class): 4,749,085 shares for; 943,467 shares against; and 75,042
shares abstained.
(3) To ratify the selection of PricewaterhouseCoopers LLP as the
Company's independent accountants for 2003. Votes cast were as
follows (counting the votes of common stock and Series B Preferred
Stock together as a single class): 5,596,643 shares for; 162,923
shares against; and 8,028 shares abstained.
The following directors continue to serve until the Annual Meeting of
Stockholders in the year 2004 or until their successors have been duly
elected and qualified: Graham Y. Tanaka and Richard L. Cote.
The following directors continue to serve until the Annual Meeting of
Stockholders in the year 2005 or until their successors have been duly
elected and qualified: Thomas R. Schwarz and Bart C. Shuldman.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits filed herein
Exhibit 10.30 OEM Purchase Agreement between Oki Data
Americas, Inc. ("Oki Data") and TransAct
Technologies Incorporated dated as of June
8, 2003. (Pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended,
the Company has requested confidential
treatment of portions of this exhibit
deleted from the filed copy.)
Exhibit 10.31 Revolving Credit, Equipment Loan and
Security Agreement between TransAct
Technologies Incorporated and Banknorth N.A.
dated August 6, 2003.
Exhibit 11.1 Computation of earnings per share
Exhibit 31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 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
A report on Form 8-K was furnished on April 30, 2003 to report
under Items 7 and 9 a press release announcing the Company's
financial results for the quarter ended March 31, 2003 pursuant to
Item 12 of Form 8-K.
21
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)
August 11, 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)
22
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
- -------
10.30 OEM Purchase Agreement between Oki Data Americas, Inc. ("Oki Data")
and TransAct Technologies Incorporated dated as of June 8, 2003.
(Pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,
as amended, the Company has requested confidential treatment of
portions of this exhibit deleted from the filed copy.)
10.31 Revolving Credit, Equipment Loan and Security Agreement between
TransAct Technologies Incorporated and Banknorth N.A. dated August
6, 2003.
11.1 Computation of earnings per share.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
23