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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: September 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to:
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Commission file number: 0-21121
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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
- --------------------------------------------------------------------------------
(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 NOVEMBER 3, 2003
- ----- ----------------------------
COMMON STOCK,
$.01 PAR VALUE 5,899,468
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
PART I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of September 30, 2003 and
December 31, 2002 3
Condensed consolidated statements of operations for the three and nine
months ended September 30, 2003 and 2002 4
Condensed consolidated statements of cash flow for the nine months ended
September 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 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 21
Item 4 Controls and Procedures 21
PART II. Other Information:
- -------- ------------------
Item 6 Exhibits and Reports on Form 8-K 22
Signatures 23
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, December 31,
(In thousands) 2003 2002
---------- ----------
ASSETS:
Current assets:
Cash and cash equivalents $ 480 $ 902
Receivables, net 7,430 4,039
Inventories 8,541 8,435
Refundable income taxes 228 228
Deferred tax assets 1,342 2,221
Other current assets 370 327
---------- ----------
Total current assets 18,391 16,152
---------- ----------
Fixed assets, net 3,872 3,924
Goodwill, net 1,469 1,469
Deferred tax assets 468 193
Other assets 108 292
---------- ----------
5,917 5,878
---------- ----------
Total assets $ 24,308 $ 22,030
========== ==========
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan $ 90 $ 100
Accounts payable 2,954 2,983
Accrued liabilities 4,022 3,592
Accrued restructuring expenses (Note 5) 622 900
---------- ----------
Total current liabilities 7,688 7,575
---------- ----------
Revolving bank loan payable 1,909 2,541
Long-term portion of term loan 353 250
Long-term portion of accrued restructuring (Note 5) 485 818
Deferred revenue 693 477
---------- ----------
3,440 4,086
---------- ----------
Total liabilities 11,128 11,661
---------- ----------
Commitments and contingencies (Note 6)
Mandatorily redeemable convertible preferred stock 3,883 3,824
---------- ----------
Shareholders' equity:
Common stock 58 57
Additional paid-in capital 7,183 6,308
Retained earnings 2,059 599
Unamortized restricted stock compensation (44) (97)
Loan receivable from officer -- (330)
Accumulated other comprehensive income 41 8
---------- ----------
Total shareholders' equity 9,297 6,545
---------- ----------
$ 24,308 $ 22,030
========== ==========
See notes to consolidated condensed financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands, except per share data) 2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales $ 15,048 $ 8,852 $ 37,438 $ 30,298
Cost of sales 10,229 6,550 25,966 22,258
---------- ---------- ---------- ----------
Gross profit 4,819 2,302 11,472 8,040
---------- ---------- ---------- ----------
Operating expenses:
Engineering, design and product
development expenses 550 458 1,657 1,508
Selling and marketing expenses 1,194 952 3,502 3,077
General and administrative expenses 1,098 1,020 3,316 3,304
Business consolidation and restructuring
expenses (Note 5) -- 912 -- 958
---------- ---------- ---------- ----------
2,842 3,342 8,475 8,847
---------- ---------- ---------- ----------
Operating income (loss) 1,977 (1,040) 2,997 (807)
---------- ---------- ---------- ----------
Other income (expense):
Interest, net (61) (59) (183) (148)
Write-off of deferred financing costs (103) -- (103) --
Other, net (32) (9) (58) 96
---------- ---------- ---------- ----------
(196) (68) (344) (52)
---------- ---------- ---------- ----------
Income (loss) before income taxes 1,781 (1,108) 2,653 (859)
Income tax provision (benefit) 641 (399) 924 (310)
---------- ---------- ---------- ----------
Net income (loss) 1,140 (709) 1,729 (549)
Dividends and accretion charges on
preferred stock (90) (90) (269) (269)
---------- ---------- ---------- ----------
Net income (loss) available to common
shareholders $ 1,050 $ (799) $ 1,460 $ (818)
========== ========== ========== ==========
Net income (loss) per share:
Basic $ 0.18 $ (0.14) $ 0.25 $ (0.15)
========== ========== ========== ==========
Diluted $ 0.17 $ (0.14) $ 0.24 $ (0.15)
========== ========== ========== ==========
Shares used in per share calculation:
Basic 5,830 5,645 5,748 5,625
========== ========== ========== ==========
Diluted 6,321 5,645 6,057 5,625
========== ========== ========== ==========
See notes to consolidated condensed financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 2003 2002
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 1,729 $ (549)
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash compensation expense 53 158
Write-off of deferred financing costs 103 --
Depreciation and amortization 1,278 1,520
Deferred income taxes 879 730
Gain on disposal of equipment (1) --
Changes in operating assets and liabilities:
Receivables (3,391) (40)
Inventories (106) 2,672
Refundable income taxes -- (1,065)
Other current assets (43) (140)
Other assets 11 (25)
Accounts payable (29) (1,057)
Accrued liabilities and other liabilities 646 777
Accrued restructuring expenses (611) (994)
---------- ----------
Net cash provided by operating activities 518 1,987
---------- ----------
Cash flows from investing activities:
Purchases of fixed assets (1,156) (374)
Proceeds from sale of fixed assets 1 --
Repayment of loan receivable from officer 330 --
---------- ----------
Net cash used in investing activities (825) (374)
---------- ----------
Cash flows from financing activities:
Revolving bank loan repayments, net (632) (1,342)
Term loan borrowings 450 --
Term loan repayments (357) (75)
Proceeds from option exercises 601 121
Payment of cash dividends on preferred stock (210) (210)
---------- ----------
Net cash used in financing activities (148) (1,506)
---------- ----------
Effect of exchange rate changes on cash 33 71
---------- ----------
(Decrease) increase in cash and cash equivalents (422) 178
Cash and cash equivalents at beginning of period 902 417
---------- ----------
Cash and cash equivalents at end of period $ 480 $ 595
========== ==========
See notes to consolidated condensed financial statements.
5
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED 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 condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly its financial position as of September 30,
2003, the results of its operations for the three and nine months ended
September 30, 2003 and 2002, and its cash flows for the nine months ended
September 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 nine months ended September
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 nine months ended
September 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 nine months ended September 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 1,336,000 shares of common stock as of September 30, 2003 and 2002,
respectively.
3. Inventories:
The components of inventory are:
September 30, December 31,
(In thousands) 2003 2002
---------- ----------
Raw materials and component parts $ 8,465 $ 8,339
Work-in-process -- 1
Finished goods 76 95
---------- ----------
$ 8,541 $ 8,435
========== ==========
6
. TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. New credit facility
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 and 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 plus accrued interest based on a sixty month
amortization schedule 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.
Concurrent with the signing of the Banknorth Credit Facility, the
Company recorded a charge of approximately $103,000 in the third quarter
of 2003 related to the write-off of unamortized deferred financing costs
from the prior credit facility with LaSalle.
As of September 30, 2003, the Company had $1,909,000 and $443,000
outstanding on the revolving credit line and term loan, respectively.
Undrawn commitments under the Banknorth Credit Facility were approximately
$9,591,000 at September 30, 2003. However, the Company's maximum
additional available borrowings under the facility were limited to
approximately $5,800,000 at September 30, 2003 based on the borrowing base
of the Company's collateral. Annual principal payments on the term loan
are $90,000.
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED 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 following table summarizes the activity recorded in the
restructuring accrual during the three and nine months ended September 30,
2003 and 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2003 2002 2003 2002
---------- ---------- ---------- ----------
Accrual balance, beginning of
period $ 1,226 $ 1,595 $ 1,718 $ 3,002
Business consolidation and
restructuring expenses -- 912 -- 958
Cash payments (119) (499) (611) (1,952)
---------- ---------- ---------- ----------
Accrual balance, end of period $ 1,107 $ 2,008 $ 1,107 $ 2,008
========== ========== ========== ==========
Approximately $485,000 and $818,000 of the restructuring accrual were
classified as long-term at September 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 September 30, 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 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 nine months ended
September 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.
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. Accrued product warranty liability
The following table summarizes the activity recorded in the accrued
product warranty liability during the three and nine months ended
September 30, 2003 and 2002.
Three months ended Nine months ended
September 30, September 30,
(In thousands) 2003 2002 2003 2002
---------- ---------- ---------- ----------
Balance, beginning of period $ 601 $ 754 $ 644 $ 710
Additions related to warranties issued 125 99 320 379
Warranty costs incurred (166) (116) (404) (352)
---------- ---------- ---------- ----------
Balance, end of period $ 560 $ 737 $ 560 $ 737
========== ========== ========== ==========
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 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.
9
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED 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 pursuant to FAS 123, "Accounting for
Stock-Based Compensation" had been applied to the Company's stock plans.
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands, except per share data)
Net loss available to common shareholders:
Net income (loss), as reported $ 1,140 $ (709) $ 1,729 $ (549)
Add: Stock-based compensation expense
included in reported net income,
net of tax 9 24 35 101
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (152) (169) (467) (455)
---------- ---------- ---------- ----------
Pro forma net income (loss) 997 (854) 1,297 (903)
Dividends and accretion charges on
preferred stock (90) (90) (269) (269)
---------- ---------- ---------- ----------
Pro forma net income (loss) available to
common shareholders $ 907 $ (944) $ 1,028 $ (1,172)
========== ========== ========== ==========
Net income (loss) per share:
Basic:
As reported $ 0.18 $ (0.14) $ 0.25 $ (0.15)
Pro forma $ 0.16 $ (0.17) $ 0.18 $ (0.21)
Diluted:
As reported $ 0.17 $ (0.14) $ 0.24 $ (0.15)
Pro forma $ 0.14 $ (0.17) $ 0.17 $ (0.21)
9. Significant transactions
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.
During the three and nine months ended September 30, 2003, the
Company received cash proceeds of approximately $49,000 and $601,000 from
the issuance of approximately 9,000 and 119,000 shares of common stock
from employee stock option exercises. The Company also recorded a deferred
tax asset of approximately $24,000 and $273,000 in the three and nine
months ended September 30, 2003, respectively, resulting from Company tax
deductions related to the sale of employee stock from these stock option
exercises.
10
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 adoption of FAS 150 did not have a material impact on
the Company's financial statements.
In November 2002, the Emerging Issues Task Force (EITF) issued EITF
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." This
issue addresses revenue recognition for arrangements with multiple
deliverables which should be considered as separate units of accounting if
the deliverables meet certain criteria as described in EITF 00-21. This
issue is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have
a material impact on the Company's financial statements.
11
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 payments to a competitor that has advised
us that certain of our printers may use the competitor's patents; 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 recognized 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 for 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.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
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 %) September 30, 2003 September 30, 2002
------------------- ------------------
Point of sale $ 6,053 40.2% $4,607 52.0%
Gaming and lottery 8,995 59.8 4,245 48.0
------- ----- ------ -----
$15,048 100.0% $8,852 100.0%
======= ===== ====== =====
International $ 1,116 7.4% $1,501 17.0%
======= ===== ====== =====
Net sales for the third quarter of 2003 increased $6,196,000, or 70%, from the
prior year's third quarter due to significantly higher shipments into the gaming
and lottery market, as well as increased shipments into our point of sale
("POS") market. Overall, international sales decreased by $385,000, or 26%.
POINT OF SALE:
Sales of our POS products worldwide increased by approximately $1,446,000, or
31% from the same period last year. Domestic POS revenue increased to
$5,003,000, representing a $1,704,000, or 52%, increase from the third quarter
of 2002, due largely to significantly higher sales of our POSjet(R)and
Bankjet(R)lines of inkjet printers. Sales of our POSjet(R)line of inkjet
printers increased by approximately 282% in the third quarter of 2003 compared
to the third quarter of 2002. The increase is largely attributable to (1)
shipments of our Bankjet(R)line of inkjet printers to two major financial
services companies to upgrade bank teller stations (2) increased shipments of
our POSjet(R)line of inkjet printers, including shipments to one of the
world's largest casual dining restaurant chains for use in their food and
beverage service operations, and (3) higher service, spare parts and consumables
revenue.
International POS printer shipments decreased by approximately $258,000, or 20%,
to $1,050,000, due primarily to lower sales of our thermal fiscal printers in
Europe (approximately $450,000). 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
(approximately $200,000) through our expanding network of international
distributors and higher service, spare parts and consumables revenue.
Sales of our products into the POS market are typically lower in the fourth
quarter as compared to the third quarter since retailers typically reduce
purchases of new POS equipment in the fourth quarter due to increased volume of
consumer transactions in that period related to the holiday season. However, we
expect sales into the POS market for the fourth quarter of 2003 to be consistent
with those reported for the third quarter of 2003 and higher than those reported
in the fourth quarter of 2002, due to continued growth in sales of our
POSjet(R)and Bankjet(R)lines of inkjet printers and expected sales of
our newly-introduced iTherm(TM) 280 high-speed, two-color thermal printer. We
remain cautiously optimistic that economic conditions will continue to improve
and sales of our POS products will continue to increase in 2004.
GAMING AND LOTTERY:
Sales of our gaming and lottery products increased by $4,750,000, or 112%, from
the third quarter a year ago, primarily due to significantly higher shipments of
on-line lottery printers to GTECH and higher shipments of our slot machine
printers.
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, increased by
$2,900,000 to approximately $4,700,000, or 31% of net sales, in the third
quarter of 2003, compared to $1,800,000, or 20% of net sales, in the third
quarter of 2002.
Shipments of on-line lottery printers (which include impact and thermal
printers) and spare parts revenue increased by $2,900,000 to approximately
$4,700,000 in the third 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 $7.9 million of
these thermal printers, of which we expect to ship the remaining approximately
$500,000 in the fourth quarter of 2003. We anticipate receiving orders from
GTECH during the fourth quarter of 2003 for additional thermal on-line lottery
printers for delivery in 2004. We made no in-lane lottery printer shipments in
the third quarter of 2003 or 2002. Due to the project-by-project nature of sales
of impact
13
on-line lottery printers and in-lane lottery printers, we cannot predict if and
when any future orders for these printers may occur.
Sales of our gaming printers, which include video lottery terminal ("VLT")
printers and slot machine printers used in casinos and racetracks ("racinos"),
and related spare parts and repairs, increased by approximately $1,900,000 to
$4,300,000. 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, and more significantly in 2004, as more casinos are expected to convert
to ticket-in, ticket-out slot machines and as a result of the racino initiative
in the state of New York and other jurisdictions.
International sales into the gaming and lottery market decreased $127,000, or
66%, to $66,000 in the third quarter of 2003. Although we expect international
sales into the gaming and lottery market to remain relatively flat in the fourth
quarter of 2004 compared to the third quarter of 2003, we expect moderate growth
in these sales during 2004, as 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).
GROSS PROFIT. Gross profit increased $2,517,000, or 109%, and gross margin
increased to 32.0% from 26.0%, due primarily to higher volume of sales and a
more favorable sales mix, including increased sales of higher margin gaming and
lottery printers, in the third quarter of 2003 compared to the third quarter of
2002. We expect gross margin for the fourth quarter of 2003 to be approximately
the same as that reported for the first nine months of 2003.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $92,000, or 20%, due primarily to higher compensation
related expenses. Such expenses decreased as a percentage of net sales to 3.7%
from 5.2%, due primarily to a higher volume of sales in the third quarter of
2003 compared to the third quarter of 2002.
SELLING AND MARKETING. Selling and marketing expenses increased by $242,000, or
25%, due primarily to higher (1) sales commissions resulting from higher sales
in the third quarter of 2003 compared to the third quarter of 2002
(approximately $80,000), (2) compensation related expenses, including additional
sales staff and expenses associated with the opening of a new sales office in
Las Vegas to support our growing gaming printer sales (approximately $80,000)
and (3) marketing expenses (approximately $50,000). Selling and marketing
expenses decreased as a percentage of net sales to 7.9% from 10.8%, due
primarily to higher volume of sales in the third quarter of 2003 compared to the
third quarter of 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$78,000, or 8%, due largely to higher legal expense related to expanding our
patent portfolio and the Patent Resolution Payment (as more fully described in
Note 6). General and administrative expenses decreased as a percentage of net
sales to 7.3% from 11.5% due primarily to a higher volume of sales in the third
quarter of 2003 compared to the third quarter of 2002.
BUSINESS CONSOLIDATION AND RESTRUCTURING. During the third quarter of 2002, we
incurred $912,000 of expenses related to the Consolidation. Approximately
$900,000 of these expenses were the result of a revision of our estimate for
non-cancelable lease payments included in the restructuring accrual. Based on
regional softness in demand in the commercial real estate market, we increased
our restructuring accrual by $900,000 to reflect the longer period of time
projected to sublease our Wallingford, CT facility. The accrual now includes
estimated non-cancelable lease payments and other related costs through
approximately September 30, 2004. See Note 5 to the Consolidated Condensed
Financial Statements.
OPERATING INCOME (LOSS). During the third quarter of 2003 we reported operating
income of $1,977,000, or 13.1% of net sales, compared to an operating loss of
($1,040,000), or (11.8%) of net sales in the third quarter of 2002. The
significant increase in our operating income was due largely to higher gross
profit on higher sales, partially offset by higher operating expenses in the
third quarter of 2003 compared to 2002. Although sales increased by 70% in the
third quarter of 2003 compared to the third quarter of 2002, operating expenses
(excluding restructuring expenses) only increased by 17%, which provided
substantial operating leverage in third quarter of 2003 that we expect to
continue into the fourth quarter of 2003 and 2004. The third quarter 2002
results were also adversely impacted by a charge of $912,000 related to the
Consolidation.
INTEREST. Net interest expense increased slightly to $61,000 from $59,000 in the
third quarter of 2002. Average revolving borrowings and average interest rates
were approximately the same in the third quarter of 2003 compared
14
to the third quarter of 2002. We expect revolving borrowings to decrease from
$1,909,000 at September 30, 2003 to approximately $1 million by the end of 2003,
as we continue to generate cash from operations in the fourth quarter of 2003.
As a result, we expect interest expense to decrease slightly in the fourth
quarter of 2003 compared to the third quarter of 2003. See "Liquidity and
Capital Resources" below for more information.
WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into a new
credit facility with Banknorth N.A, which replaced an existing facility with
LaSalle Business Credit, Inc ("LaSalle"). We recorded a charge of approximately
$103,000 in the third quarter of 2003 related to the write-off of unamortized
deferred financing costs from our prior credit facility with LaSalle Business
Credit. Our new credit facility with Banknorth contains more favorable terms
than those contained in our prior facility with LaSalle, which we believe will
result in significant costs savings during the term of the new credit facility.
OTHER EXPENSE. Other expense for the third quarter of 2003 and 2002 primarily
includes transaction exchange loss recorded by our UK subsidiary. Such expense
increased in the third quarter of 2003 compared to the third quarter of 2002 due
to the continued strengthening of the British pound against the dollar.
INCOME TAXES. We recorded an income tax provision of $641,000 in the third
quarter of 2003 and an income tax benefit of $399,000 in the third quarter of
2002, both at an effective rate of 36%.
NET INCOME (LOSS). We reported net income during the third quarter of 2003 of
$1,140,000, or $0.17 per share (diluted) after giving effect to $90,000 of
dividends and accretion charges on preferred stock. This compares to a net loss
of ($709,000), or ($0.14) per share (diluted) for the third quarter of 2002,
after giving effect to $90,000 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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
NET SALES. Net sales by market for the current and prior year's nine month
period in dollars and as a percentage of total net sales were as follows:
Nine months ended Nine months ended
(In thousands, except %) September 30, 2003 September 30, 2002
------------------------- --------------------
Point of sale $15,192 40.6% $13,741 45.4%
Gaming and lottery 22,246 59.4 16,557 54.6
------- ----- ------- -----
$37,438 100.0% $30,298 100.0%
======= ===== ======= =====
International $ 3,500 9.3% $ 3,585 11.8%
======= ===== ======= =====
Net sales for the first nine months of 2003 increased $7,140,000, or 24%, from
the prior year's first nine months due to higher shipments into both the POS and
gaming and lottery market. Overall, international sales decreased slightly by
$85,000, or 2%.
POINT OF SALE:
Sales of our POS products worldwide increased by approximately $1,451,000, or
11%, from the same period last year. Domestic POS revenue increased $1,677,000,
or 16%, to $12,153,000 in the first nine months of 2003, led by significantly
higher sales of our POSjet(R)and Bankjet(R)lines of inkjet printers. The
increase is largely attributable to (1) shipments of our Bankjet(R)line of
inkjet printers to two major financial services companies to upgrade bank teller
stations, (2) increased shipments of our POSjet(R)line of inkjet printers,
including shipments to one of the world's largest casual dining restaurant
chains for use in their food and beverage service operations, and (3) higher
service, spare parts and consumables revenue.
International POS printer shipments decreased by approximately $226,000, or 7%,
to $3,039,000, due primarily to lower sales of our thermal fiscal printers in
Europe (approximately $700,000). 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
(approximately $500,000) through our expanding network of international
distributors and higher service, spare parts and consumables revenue.
Sales of our products into the POS market are typically lower in the fourth
quarter as compared to the third quarter since retailers typically reduce
purchases of new POS equipment in the fourth quarter due to increased volume of
15
consumer transactions in that period related to the holiday season. However, we
expect sales into the POS market for the fourth quarter of 2003 to be consistent
with those reported for the third quarter of 2003 and higher than those reported
in the fourth quarter of 2002, due to continued growth in sales of our
POSjet(R)and Bankjet(R)lines of inkjet printers and expected sales of our
newly-introduced iTherm(TM) 280 high-speed, two-color thermal printer. We remain
cautiously optimistic that economic conditions will continue to improve and
sales of our POS products will resume increasing in 2004.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers increased by $5,689,000, or 34%, from
the first nine months of 2002, primarily due to significantly higher shipments
of our slot machine printers, somewhat offset by lower printer shipments of
lottery printers to GTECH.
Sales of our gaming printers, which include VLT printers and slot machine
printers used in casinos and racetracks ("racinos"), and related spare parts and
repairs, increased by approximately $6,600,000 to $13,400,000. 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, and more
significantly in 2004, as more casinos are expected to convert to ticket-in,
ticket-out slot machines and as a result of the racino initiative in the state
of New York and other jurisdictions.
Total sales to GTECH, which included impact and thermal on-line lottery
printers, impact in-lane lottery printers, and spare parts revenue, decreased by
$900,000 to approximately $8,850,000 in the first nine months of 2003.
Shipments of on-line lottery printers (which include impact and thermal
printers) and spare parts revenue decreased by $200,000 to approximately
$8,850,000 in the nine months of 2003. Shipments of in-lane lottery printers
totaled approximately $700,000 in the first nine months of 2002. We made no
in-lane lottery printer shipments in first nine months 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
$7.9 million of these thermal printers, of which we expect to ship the remaining
approximately $500,000 in the fourth quarter of 2003. We anticipate receiving
orders from GTECH during the fourth quarter of 2003 for additional thermal
on-line lottery printers for delivery in 2004. We currently have no orders for
our impact on-line lottery printers. Due to the project-by-project nature of
sales of our impact on-line lottery printers and in-lane lottery printers, we
cannot predict if and when any future orders for these printers may occur.
See the table below for an analysis of revenues from GTECH.
Nine months ended
(In thousands, except %) September 30,
2003 2002
------ ------
On-line lottery printers and spare parts $8,850 $9,050
In-lane lottery printers -- 700
------ ------
$8,850 $9,750
====== ======
% of consolidated net sales 24% 32%
International sales into the gaming and lottery market increased $141,000, or
44%, to $461,000 in the first nine months 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). Although we
expect international sales into the gaming and lottery market to remain
relatively flat in the fourth quarter of 2003 compared to the third quarter of
2003, we expect moderate growth in these sales during 2004, as 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).
GROSS PROFIT. Gross profit increased $3,432,000, or 43%, and gross margin
increased to 30.6% from 26.5%, due primarily to higher volume of sales and a
more favorable sales mix, including increased sales of higher margin gaming and
lottery printers, primarily in the second and third quarters of 2003 compared to
the second and third quarters of 2002. We expect gross margin for the fourth
quarter of 2003 to be approximately the same as that reported for the first nine
months of 2003.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $149,000, or 10%, due primarily to higher compensation
related expenses (approximately $80,000) and higher
16
expenses (including travel) related to the development of our new thermal
on-line lottery printer for GTECH and our iTherm(TM)280 thermal POS printer
primarily in the first half of 2003 (approximately $60,000). Such expenses
decreased as a percentage of net sales to 4.4% from 5.0%, due primarily to a
higher volume of sales in the first nine months of 2003 compared to the same
prior year period.
SELLING AND MARKETING. Selling and marketing expenses increased by $425,000, or
14% due primarily to higher (1) sales commissions resulting from higher sales in
the first nine months of 2003 compared to the first nine months of 2002
(approximately $180,000), (2) compensation related expenses, including
additional sales staff and expenses associated with the opening of a new sales
office in Las Vegas, to support our growing gaming printer sales (approximately
$140,000), and (3) selling expenses at our UK facility due largely to the
unfavorable impact of exchange rates in the period (approximately $70,000) and
(4) marketing expenses (approximately $30,000). Selling and marketing expenses
decreased as a percentage of net sales to 9.4% from 10.1%, due primarily to
higher volume of sales in the first nine months of 2003 compared to the first
nine months of 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
slightly by $12,000, or less than 1%. We incurred higher legal expenses
(approximately $190,000) related to our growing patent portfolio and the Patent
Resolution Payment that were almost entirely offset by staff reductions
resulting from the Consolidation (approximately $180,000). General and
administrative expenses decreased as a percentage of net sales to 8.9% from
10.9% due primarily to a higher volume of sales in the first nine months of 2003
compared to the first nine months of 2002.
BUSINESS CONSOLIDATION AND RESTRUCTURING. During the first nine months of 2002,
we incurred $958,000 of expenses related to the Consolidation. Approximately
$900,000 of these expenses were the result of a revision of our estimate for
non-cancelable lease payments included in the restructuring accrual. Based on
regional softness in demand in the commercial real estate market, we increased
our restructuring accrual by $900,000 to reflect the longer period of time
projected to sublease our Wallingford, CT facility. The accrual now includes
estimated non-cancelable lease payments and other related costs through
approximately September 30, 2004. See Note 5 to the Consolidated Condensed
Financial Statements.
OPERATING INCOME (LOSS). During the first nine months of 2003 we reported
operating income of $2,997,000, or 8.0% of net sales, compared to an operating
loss of ($807,000), or (2.7%) of net sales in the first nine months of 2002. The
significant 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 expenses) in the first nine months of 2003 compared to
2002. Although sales increased by 24% from the first nine months of 2003
compared to the first nine months of 2002, operating expenses (excluding
restructuring expenses) only increased by 7%, which provided substantial
operating leverage in the first nine months of 2003 that we expect to continue
into the fourth quarter of 2003 and 2004. The results for the first nine months
of 2002 were also adversely impacted by a charge of $958,000 related to the
Consolidation.
INTEREST. Net interest expense increased to $183,000 from $148,000 in the first
nine months of 2002 due largely to higher average revolving borrowings,
partially offset by lower interest rates. Average revolving borrowings were
unusually low in the first nine months 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
$1,909,000 at September 30, 2003 to approximately $1 million by the end of 2003,
as we continue to generate cash from operation in the fourth quarter of 2003. As
a result, we expect interest expense to decrease slightly in the fourth quarter
of 2003 compared to the third quarter of 2003. See "Liquidity and Capital
Resources" below for more information.
WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into a new
credit facility with Banknorth N.A, which replaced an existing facility with
LaSalle Business Credit, Inc ("LaSalle"). We recorded a charge of approximately
$103,000 in the third quarter of 2003 related to the write-off of unamortized
deferred financing costs from our prior credit facility with LaSalle Business
Credit. Our new credit facility with Banknorth contains more favorable terms
than those contained in our prior facility with LaSalle, which we believe will
result in significant costs savings during the term of the new credit facility.
OTHER INCOME (EXPENSE). Other expense for the first nine months of 2003
primarily includes transaction exchange loss recorded by our UK subsidiary.
Other income for the first nine months 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 $50,000 of transaction
17
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 an income tax provision of $924,000 in the first nine
months of 2003 at an effective rate of 34.8%, and an income tax benefit of
$310,000 at in effective rate of 36% in the first nine months 2002. The lower
effective rate in the 2003 period reflects a favorable outcome of a state tax
audit.
NET INCOME (LOSS). We reported net income during the first nine months of 2003
of $1,729,000, or $0.24 per share (diluted) after giving effect to $269,000 of
dividends and accretion charges on preferred stock. This compares to a net loss
of ($549,000), or ($0.15) per share (diluted) for the first nine months of 2002,
after giving effect to $269,000 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
Cash provided by operating activities: We generated cash from operations of
$518,000 and $1,987,000 in the first nine months of 2003 and 2002, respectively.
During the first nine months of 2003, we reported net income of $1,729,000
compared to a net loss of ($549,000) in the same period of 2002. Depreciation
and amortization (including non-cash compensation expense) totaled $1,434,000
compared to $1,678,000 in the same period of 2002. Deferred income taxes
decreased by $879,000 from year-end substantially due to an increase in the
provision for income taxes in the period. Accounts payable were essentially flat
from year-end. We expect accounts payable to remain at approximately the same
level in the fourth quarter of 2003 as in the third quarter of 2003. Accrued
liabilities and other liabilities, excluding accrued restructuring, increased by
$646,000, 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 nine months of 2003 were the following: receivables increased by
approximately $3,391,000 from year-end, due largely to an increase in volume of
sales compared to the prior period. Inventories increased by only approximately
$106,000, despite a significant increase in sales volume in 2003 compared to
2002. We expect inventories at the end of the fourth quarter of 2003 to be
approximately the same as those reported at the end of the third quarter of
2003. The restructuring accrual decreased by $611,000, representing lease
payments for the Wallingford Facility, and to a lesser extent, payouts for
severance pay and related benefits. (See "Consolidation Expenses" below.)
Investing activities: We used approximately $825,000 of cash from investing
activities in the first nine months of 2003 compared to using $374,000 in the
same period of 2002. Our capital expenditures were approximately $1,156,000 and
$374,000 in the first nine months 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 $1,400,000, 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 used $148,000 during the first nine
months of 2003, largely due to net repayments under our revolving credit
facility (approximately $632,000) and payments of cash dividends on our
preferred stock (approximately $210,000), largely offset by proceeds from stock
option exercises (approximately $601,000) and net term loan borrowings
(approximately $93,000). Financing activities used $1,506,000 during the first
nine months 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 $10,703,000 at September 30, 2003 from
$8,577,000 at December 31, 2002. The current ratio also increased to 2.39 to 1
at September 30, 2003 from 2.13 to 1 at December 31, 2002. The increase in both
working capital and the current ratio was largely due largely to higher
receivables ($3,391,000) somewhat offset by lower cash and cash equivalents
($422,000) and lower deferred tax assets ($879,000) compared to December 31,
2002.
DEFERRED TAXES
As of September 30, 2003, we had a net deferred tax asset of approximately
$1,810,000. In order to utilize this deferred tax asset, we will need to
generate approximately $5.0 million of taxable income in future years. Based on
18
future financial projections, 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 nine months ended September
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 and 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 (a) $11.5 million or (b) 85% of eligible accounts
receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of eligible raw
material inventory plus 50% of eligible finished goods inventory, less (ii) a
$1,000,000 reserve pending the determination of the Patent Resolution Payment
(see Note 6) and less (iii) a $40,000 credit reserve.
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 plus
accrued interest based on a sixty month amortization schedule 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 recorded a charge of approximately $103,000 in the third quarter of 2003
related to the write-off of unamortized deferred financing costs from our prior
credit facility with LaSalle. Our new credit facility with Banknorth contains
more favorable terms than those contained in our prior facility with LaSalle,
which we believe will result in significant costs savings during the term of the
new credit facility.
As of September 30, 2003, we had $1,909,000 and $443,000 outstanding on the
revolving credit line and term loan, respectively. Undrawn commitments under the
Banknorth Credit Facility were approximately $9,591,000 at September 30, 2003.
However, our maximum additional available borrowings under the facility were
limited to approximately $5,800,000 at September 30, 2003 based on the borrowing
base of our collateral. Annual principal payments on the term loan are $90,000.
PREFERRED STOCK
In connection with our 7% Series B Cumulative Convertible Redeemable Preferred
Stock (the "Preferred Stock"), we paid $270,000 of cash dividends to Advance
Capital Advisors, L.P. in the first nine months 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 convertible at any time by
the holders at a conversion price of $9.00 per common share. 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.
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Upon a change of control, as defined, holders have the right to redeem the
Preferred Stock for an aggregate of $8,000,000 plus any unpaid dividends.
In 2002, we issued to the Preferred Stock holders warrants to purchase an
aggregate of 44,444 shares of our common stock at an exercise price of $9.00 per
common share. On July 8, 2003, the holders exercised their 44,444 warrants. In
lieu of cash consideration, we canceled 31,821 of their warrants in exchange for
the issuance of 12,623 shares of common stock.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $2,752,000 to $9,297,000 at September 30, 2003
from $6,545,000 at December 31, 2002. The increase was primarily due to the
following for the nine months ended September 30, 2003: (1) net income available
to common shareholders of $1,460,000, (2) the repayment by an officer of an
outstanding loan of $330,000, (3) proceeds of approximately $601,000 from the
issuance of approximately 119,000 shares of common stock from employee stock
option exercises and (4) an increase in additional paid in capital of
approximately $273,000 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 $1,107,000
at September 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 $611,000 and $1,952,000 of
Consolidation expenses in the first nine months of 2003 and 2002, respectively.
We expect to pay approximately $150,000 of these expenses in the last three
months of 2003, and the remaining $957,000 in 2004.
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, 2004.
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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, during the period covered by this report.
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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 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 July 28, 2003 to report
under Items 7 and 9 a press release announcing the Company's financial
results for the quarter ended June 30, 2003 pursuant to Item 12 of Form
8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
(Registrant)
November 10, 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)
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EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
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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