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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
---------------------
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
- ------------------------------------------------ -------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
7 LASER LANE, WALLINGFORD, CT 06492
- ------------------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 203-269-1198
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any other amendment
to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ( ) No (X)
As of June 30, 2003 the aggregate market value of the registrant's issued and
outstanding voting stock held by non-affiliates of the registrant was
$63,900,000.
As of March 5, 2004, the registrant had outstanding 6,020,648 shares of common
stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders to be held on May 26,
2004 - Part III (Items 10-14).
PART I
ITEM 1. BUSINESS.
THE COMPANY
TransAct was incorporated in June 1996 and began operating as a
stand-alone business in August 1996 as a spin-off of the printer business that
was formerly conducted by certain subsidiaries of Tridex Corporation. We
completed an initial public offering on August 22, 1996.
TransAct Technologies Incorporated ("TransAct" or the "Company")
designs, develops, manufactures and markets transaction-based printers under the
Ithaca(R) and Magnetec(R) brand names. In addition, we market related
consumables, spare parts and service. Our printers are used worldwide to provide
transaction records such as receipts, tickets, coupons, register journals and
other documents. We focus on two core markets: (1) point-of-sale and banking
("POS") and (2) gaming and lottery. We sell our products directly to original
equipment manufacturers ("OEMs"), value-added resellers ("VARs"), selected
distributors and directly to end-users. Our product distribution spans across
the Americas, Europe, the Middle East, Africa, the Caribbean Islands and the
South Pacific. We have one primary operating facility located in Ithaca, New
York, five sales offices located in the United States, and one sales office and
service depot in the United Kingdom. Our executive offices are located at 7
Laser Lane, Wallingford, CT 06492 with a telephone number of (203) 269-1198.
GENERAL DEVELOPMENT OF BUSINESS
The year 2003 was a pivotal, and successful, year for TransAct,
highlighted by the following achievements:
- Increased revenues by $12,637,000, or 32% over 2002
- Increased operating income by $3,672,000
- Reported our first profitable year since 1999 with
net income of $1,528,000
- Repaid all our revolving bank borrowings
We continue to focus on sales growth in our two core markets, point of
sale and banking ("POS") and gaming and lottery, to drive increased
profitability.
The POS market remained soft in 2003 due to continued lower capital
spending by users of POS products and overall economic weakness, primarily in
the U.S. We expect to see some improvement in the POS market during 2004,
although not until the second half of 2004. Despite weakness of the market in
2003, our POS printer sales increased by 8.7% due primarily to growing sales of
our POSjet(R) and Bankjet(R) line of inkjet printers. During 2003, we announced
wins from two major financial services companies for shipments of over 19,000
Bankjet(R) printers to upgrade bank teller applications, which we began to ship
in 2003 and expect to complete shipping during 2004. Given our success in 2003
and in light of the renewed focus we see banks placing on branch banking, we
plan to more proactively seek opportunities with other banks for upgrading bank
teller systems, if and when they arise. Our long-term strategy in the POS market
is to capture at least 20% market share, or approximately $200 million in sales,
primarily through increasing and enhancing our product portfolio, increasing
geographic coverage, and growing our customer base.
Our focus in the gaming and lottery market is two-fold. On the lottery
side, we continue to hold a leading position based on our long-term purchase
agreements with GTECH Corporation ("GTECH"), our largest customer and the
world's largest provider of lottery terminals, with an approximately 70% market
share. GTECH has been our customer since 1995, and we continue to maintain a
good relationship with them. Currently, we fulfill substantially all of GTECH's
printer requirements for lottery terminal installations and upgrades. Our sales
to GTECH each year are directly dependent on the timing and number of
new and upgraded lottery terminal installations GTECH performs.
On the gaming side, our focus lies primarily in supplying printers for
use in slot machines in casinos. During 2003, we benefited from the increasing
number of casinos that began to convert traditional coin-issuing slot machines
into ticket-issuing slot machines. As a result, sales of our gaming and lottery
printers increased by over 50%. We expect this trend to continue into 2004, as
more casinos convert their slot machines. The adoption and rollout of the
ticket-in/ticket-out initiative is happening and we expect all 700,000 slot
machines in North America to be fitted with a printer within the next two to
four years. We also expect growth from gaming sales internationally, beginning
in late 2004, as markets such as Australia and Europe evaluate the use of this
technology for their slot machines.
1
Our services and consumables products, which include the repair of
printers and the sale of spare parts and consumables (paper, ribbons and inkjet
cartridges), offer a substantial growth opportunity and recurring revenue stream
for TransAct. Our services and consumables products revenue has grown to
$8,543,000 and 16.4% of net sales in 2003, an increase of over 22% from 2002.
During 2004, we plan to more actively promote and dedicate increased resources
to our services and consumables products in an effort to substantially increase
the volume of sales. We have implemented a specialized software system, improved
our sales lead tracking and prospecting processes, and instituted incentive
schemes for our sales people to enable us to better cross-sell our services and
consumables products to our customers. We also believe that the increasing sales
of our inkjet printers will drive substantially higher inkjet cartridge sales in
2004 and beyond.
Operationally, gross margin and operating margin were significantly
improved. We expect to see further gross margin and operating margin improvement
in 2004 as the volume of sales increases and we continue to focus on controlling
expenses. We reported net income for 2003 - the first time since 1999. We also
generated sufficient cash during 2003 to repay all outstanding revolving
borrowings under our credit facility, and had almost $500,000 of cash on our
balance sheet as of December 31, 2003.
FINANCIAL INFORMATION ABOUT SEGMENTS
We have assessed our operating and reportable segments and have
determined that we operate in one reportable segment, the design, development,
manufacture and marketing of transaction-based printers and printer-related
products.
PRODUCTS AND SERVICES
TransAct designs, develops, manufactures and markets a broad array of
transaction-based printers utilizing inkjet, thermal and impact printing
technology for applications requiring up to 60 character columns, primarily in
the POS and gaming and lottery markets. Our printers are configurable and offer
customers the ability to choose from a variety of features and functions.
Options typically include PC board configuration, paper cutting devices, paper
handling capacities and cabinetry color. In addition to our configurable
printers, we manufacture custom printers for certain OEM customers. In
collaboration with these customers, we provide engineering and manufacturing
expertise for the design and development of specialized printers. In addition,
we offer inkjet cartridges, printer ribbons, paper and replacement parts for all
of our products.
We provide customers with telephone sales and technical support, a
personal account representative to handle orders, shipping and general
information, and expedited shipping for orders of our configurable and custom
products. Technical and sales support personnel receive training on all of our
products and services manufactured. Our printers generally carry up to a
two-year limited warranty; extended warranties are available for purchase to
supplement the original warranty. Service contracts for the repair and
maintenance of printers beyond the original warranty period are also available
for purchase.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal materials used in manufacturing are inkjet, thermal and
impact printheads, injection molded plastic parts, formed/stamped metal parts,
circuit boards and electronic components. Although we could experience temporary
disruption if certain suppliers ceased doing business with us, our requirements
generally are available from a number of sources, except as described below.
Okidata Americas, Inc. ("Okidata"), is the sole supplier for a printer
component kit consisting of a printhead, control board and carriage (the "Oki
Kit"), that is used in all of our Ithaca(R) brand impact printers. The loss of
the supply of Oki Kits would have a material adverse effect on TransAct. We have
a supply agreement with Okidata to provide Oki Kits until June 8, 2005. Prices
under this agreement are fixed, but may be changed by Okidata after providing
180 days written notice.
Hewlett-Packard Company ("HP") is the sole supplier of inkjet
cartridges that are used in all of our inkjet printers. The loss of the supply
of HP inkjet cartridges would have a material adverse effect on the sale of our
inkjet printers. We have a supply agreement with HP to purchase inkjet
cartridges until February 1, 2005 at fixed prices.
2
We believe our relations with Okidata and HP are good and have
received no indication that these supply agreements will not be renewed beyond
the respective expiration dates of the current contracts. We cannot be certain,
however, that these supply agreements will be renewed, or if renewed, that the
terms will be as favorable as those under the current contracts.
PATENTS AND PROPRIETARY INFORMATION
We have significantly expanded our patent portfolio over the past four
years, and expect to continue to do so in the future. We also believe our patent
portfolio will provide additional opportunities to license our intellectual
property in the future. We currently own eight patents, four of which we
consider material. The earliest expiration date of these eight patents is in
2008 with the latest expiration date in 2020. Of the material patents, one
patent covers methods and apparatus for allowing a two-color printer to print
images using single pass technology by printing during both forward and reverse
movement of the print mechanism; another patent relates to our proprietary void
and reprint receipt printing method which is used in certain of our slot machine
printers; and two other patents cover a method for converting a full color image
into a two-color image, plus a background color. We also have sought patent
protection for certain design features of 1) printers using inkjet technology,
2) POS printers using thermal technology, and 3) thermal printers for use in
casino slot machines. We regard certain manufacturing processes and designs to
be proprietary and attempt to protect them through employee and third-party
nondisclosure agreements and similar means. It may be possible for unauthorized
third parties to copy certain portions of our products or to reverse engineer or
otherwise obtain and use, to our detriment, information that we regard as
proprietary. Moreover, the laws of some foreign countries do not afford the same
protection to our proprietary rights as do United States laws. There can be no
assurance that legal protections relied upon by the Company to protect our
proprietary position will be adequate or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technologies.
In November 2002, the Company was advised that certain POS printers
sold by us since late 1999 may use technology covered by recently issued patents
of a third party competitor. In an effort to resolve this matter, we originally
offered to pay approximately $160,000, while the other party sought payment of
up to $950,000. We recorded a charge of $160,000 in cost of sales in the fourth
quarter of 2002 related to this matter. Based on the likely outcome of current
negotiations, we recorded an additional charge of $740,000 in the fourth quarter
of 2003 related to usage prior to January 1, 2003. Although settlement
negotiations are continuing, we believe that the total accrual of $900,000 (the
"Patent Resolution Payment") reflects the best estimate of the expense related
to the pre-2003 usage of this third party patented technology. We also accrued
estimated royalty payments for usage of this technology after January 1, 2003.
SEASONALITY
Retailers typically reduce purchases of new POS equipment in the fourth
quarter, due to the increased volume of consumer transactions in the holiday
period, and our sales of printers in the POS market historically have increased
in the third quarter and decreased in the fourth quarter. Similarly,
installations of lottery terminals are typically reduced in the fourth quarter
resulting in decreased sales of lottery printers. However, we did not experience
material seasonality in our total net sales, due to significant growth in sales
from our gaming market (for which we have not experienced seasonality). As a
result, we experienced little impact from the mild seasonality of our POS and
lottery market.
CERTAIN CUSTOMERS
We currently have two ongoing OEM purchase agreements with GTECH
Corporation ("GTECH"). The first OEM purchase agreement ("GTECH Impact Printer
Agreement") provides for the sale of impact on-line lottery printers and spare
parts through December 31, 2004. The second OEM purchase agreement ("GTECH
Thermal Printer Agreement") provides for the sale of thermal on-line lottery
printers and spares parts, at fixed prices, through June 28, 2007. Firm purchase
orders for printers under either agreement may be placed annually by GTECH.
Pursuant to orders placed under the GTECH Impact Printer Agreement, we have
orders for approximately $2,000,000 of impact on-line lottery printers for
delivery during the second and third quarters of 2004. Because our new thermal
on-line lottery printer is a replacement for our impact on-line printer, we do
not expect any further shipments of impact on-line lottery printers in 2004
beyond the third quarter. Additionally, pursuant to the GTECH Thermal Printer
Agreement, we have received orders for approximately $1,800,000 worth of thermal
printers for delivery in 2004. We expect to receive additional orders from GTECH
for thermal printers during 2004. We also sell printers to GTECH for use in
lottery terminals at grocery store check-out lanes ("in-lane lottery printers").
Sales of in-lane lottery printers are project-oriented, and, as such, we cannot
predict if and when future sales may occur. Sales to GTECH accounted for
approximately 19%, 27% and 33% of net sales in 2003, 2002 and 2001,
respectively.
We also provide printers to Harrah's for use in casino slot machines
throughout the United States. During 2003, sales to Harrah's accounted for
approximately 12% of net sales. We have received orders for approximately
$2,200,000 from Harrah's of printers for delivery in 2004. We expect to receive
additional orders from them for printers during 2004.
3
BACKLOG
Our backlog of firm orders was approximately $5,344,000 as of March 5,
2004, including approximately $3,200,000 and $500,000 to GTECH and Harrah's,
respectively, compared to $7,628,000 as of March 14, 2003, including
approximately $4,300,000 to GTECH and none to Harrah's. Based on customers'
current delivery requirements, we expect to fill our entire current backlog
during 2004.
COMPETITION
The market for transaction-based printers is extremely competitive, and
we expect such competition to continue in the future. We compete with a number
of companies, many of which have greater financial, technical and marketing
resources than us. We believe our ability to compete successfully depends on a
number of factors both within and outside our control, including durability,
reliability, quality, design capability, product customization, price, customer
support, success in developing new products, manufacturing expertise and
capacity, supply of component parts and materials, strategic relationships with
suppliers, the timing of new product introductions by us and our competitors,
general market, economic and political conditions and, in some cases, the
uniqueness of our products.
In the POS market, our major competitor is Epson America, Inc., which
controls a dominant portion of the POS markets into which we sell. We also
compete, to a much lesser extent, with Axiohm Transaction Solutions, Star
Micronics America, Inc., Citizen -- CBM America Corporation, and Korean Printer
Solutions. Certain competitors of ours have greater financial resources, lower
costs attributable to higher volume production, and sometimes offer lower prices
than us.
In the lottery market (consisting principally of on-line lottery
transaction printing), we hold a leading position, based largely on our
long-term purchase agreements with GTECH, which controls approximately 70% of
the worldwide on-line lottery market. We compete in this market based solely on
our ability to provide specialized, custom-engineered products to GTECH.
In the gaming market (consisting principally of slot machine and video
lottery terminal transaction printing), we and our major competitor,
FutureLogic, Inc., comprise a substantial portion of the market. We also
compete, to a lesser extent, with JCM American Corporation and Money Controls, a
division of Coin Acceptors, Inc. (Coinco). Certain of our products sold for
gaming applications compete based upon our ability to provide highly specialized
products, custom engineering and ongoing technical support.
Our strategy for competing in our markets is to continue to develop new
products and product line extensions, to increase our geographic market
penetration, take advantage of strategic relationships, and to lower product
costs by sourcing certain products overseas. We expect to particularly focus on
(1) promoting our line of slot machine printers into the gaming market, (2)
increasing sales of our new iTherm(TM)280 thermal POS printer and family of
printers utilizing Hewlett Packard's inkjet printing technology, and (3)
expanding our consumables, spare parts and service business. Although we believe
that our products, operations and relationships provide a competitive
foundation, there can be no assurance that we will compete successfully in the
future.
RESEARCH AND DEVELOPMENT ACTIVITIES
We spent approximately $2,276,000, $2,025,000 and $3,070,000 in 2003,
2002 and 2001, respectively, on engineering, design and product development
efforts in connection with specialized engineering and design to introduce new
products and to customize existing products. During 2004, we expect to focus the
majority of our research and development activities on the continuing
development and enhancement of (1) our family of printers for the POS market
utilizing inkjet and thermal printing technology and (2) our ticket-issuing
printers for use in the casino market.
ENVIRONMENT
We are not aware of any material noncompliance with federal, state and
local provisions that have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment.
EMPLOYEES
As of March 12, 2004, TransAct Technologies and our subsidiaries
employed 201 persons, of whom 148 were full-time and 53 were temporary
employees. None of our employees is unionized, and we consider our relationships
with our employees to be good.
4
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We have foreign operations primarily from TransAct Technologies Ltd., a
wholly-owned subsidiary located in the United Kingdom, which had sales to its
customers of $1,068,000, $738,000, and $1,791,000 (primarily to Fujitsu for
sales and service of printers used in the British Post Office) in 2003, 2002 and
2001, respectively. We had export sales to our customers from our domestic
operations of approximately $3,663,000, $3,968,000 and $6,131,000 in 2003, 2002
and 2001, respectively. Total international sales, which include sales from our
foreign subsidiary and export sales from our domestic operations, were
approximately $4,731,000, $4,706,000 and $7,922,000 in 2003, 2002 and 2001,
respectively.
ADDITIONAL INFORMATION
We make available free of charge through our internet website,
WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC.
We maintain a Code of Business Conduct that is applicable to all
employees, including our Chief Executive Officer, Chief Financial Officer and
Controller. This Code, which requires continued observance of high ethical
standards such as honesty, integrity and compliance with the law in the conduct
of our business, is available for public access on our internet website.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instructions G(3) of form 10-K, the following list
is included as an unnumbered item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 26, 2004.
The following is a list of the names and ages of all executive officers
of the registrant, indicating all positions and offices with the registrant held
by each such person and each person's principal occupations and employment
during at least the past five years.
Name Age Position
---- --- --------
Bart C. Shuldman 46 Chairman of the Board, President and Chief Executive Officer
Richard L. Cote 62 Executive Vice President, Chief Financial Officer, Treasurer, Secretary
and Director
James B. Stetson 46 Executive Vice President - Sales and Marketing
Michael S. Kumpf 54 Executive Vice President - Engineering
Steven A. DeMartino 34 Senior Vice President - Finance and Information Technology
BART C. SHULDMAN has been Chief Executive Officer, President and a
Director of the Company since its formation in June 1996. Previously, Mr.
Shuldman served as President of Magnetec and later the combined operations of
Magnetec and Ithaca from August 1993 until June 1996. In February 2001, Mr.
Shuldman was elected Chairman of the Board.
RICHARD L. COTE has been Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and a Director of the Company since its formation
in June 1996. Prior thereto, he served as Senior Vice President and Chief
Financial Officer of Tridex from September 1993 to June 1996. On June 1, 2004,
Mr. Cote will step down as Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director of the Company. Mr. Cote will continue in a
consulting capacity through the end of 2004.
JAMES B. STETSON was appointed Executive Vice President, Sales and
Marketing in November 2001, and served as Senior Vice President of Worldwide
Sales from February 2000 to November 2001, and Vice President of Sales, Latin
America from October 1997 to February 2000. Prior to joining TransAct, Mr.
Stetson served as Vice President and Sales Manager at Gekay Sales and Service
Company from 1995 until October 1997.
MICHAEL S. KUMPF was appointed Executive Vice President of Engineering
in March 2002. He served as Senior Vice President, Engineering from June 1996 to
March 2002 and Vice President, Engineering of Ithaca from 1991 until June 1996.
5
STEVEN A. DEMARTINO, a certified public accountant, joined TransAct as
Corporate Controller in August 1996 and was appointed an officer of the Company
in January 1998, Vice President in December 1999, and Senior Vice President,
Finance and Information Technology in October 2001. Prior to joining TransAct,
Mr. DeMartino was a self-employed financial consultant from May 1996 to August
1996. Prior thereto, Mr. DeMartino served as Controller of Copart, Inc. from
September 1994 to May 1996. On June 1, 2004, Mr. DeMartino will succeed Mr. Cote
as TransAct's Executive Vice President, Chief Financial Officer, Treasurer and
Secretary.
ITEM 2. PROPERTIES.
Our operations are currently conducted at the facilities described
below. 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 consolidated all manufacturing and engineering from our
Wallingford, CT facility into our existing Ithaca, NY facility. Our corporate
headquarters are still located in the Wallingford, CT facility. Although we are
actively seeking to sublease our Wallingford, CT facility, in 2003 we determined
that because of the continuing regional decline in the commercial real estate
market, it was unlikely that we would be able to sublease our facility. As such,
we increased our restructuring accrual at December 31, 2003 to provide for the
remaining non-cancelable lease payments and other related costs for this
facility through the expiration of the lease (March 31, 2008). The increase in
the restructuring accrual includes the reversal of estimated sublease income for
the remainder of the lease term.
In connection with the consolidation of facilities into Ithaca, we
added approximately 10,000 square feet of manufacturing space and 3,000 square
feet of office space to our Ithaca facility during 2002.
Size Owned or Lease Expiration
Location Operations Conducted (Approx. Sq. Ft.) Leased Date
-------- -------------------- ----------------- ------ ----
Wallingford, Connecticut Executive offices 49,000 Leased March 31, 2008
Ithaca, New York Manufacturing facility 74,000 Leased June 30, 2007
Doncaster, United Kingdom Sales office and service 2,800 Leased August 1, 2009
depot
Georgia (2), Nevada, New York and Five (5) regional sales 750 Leased Various
Texas offices
We believe that our facilities generally are in good condition,
adequately maintained and suitable for their present and currently contemplated
uses.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of the year covered by this report.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUERS PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the Nasdaq SmallCap Market under the
symbol TACT. As of March 12, 2004, there were 675 holders of record of the
common stock. The high and low sales bid quotations of the common stock reported
during each quarter of the years ended December 31, 2003 and 2002 were as
follows:
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter $ 5.67 $ 3.90 $ 6.70 $ 3.90
Second Quarter 13.89 5.05 7.00 4.51
Third Quarter 17.90 11.75 5.99 3.60
Fourth Quarter 27.40 15.82 5.12 3.91
No dividends on common stock have been declared, and we do not
anticipate declaring dividends in the foreseeable future. Our credit agreement
with Banknorth N.A. restricts the payment of cash dividends on our common stock
for the term of the agreement.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 52,098 $ 39,461 $ 43,974 $ 53,720 $ 44,889
Gross profit 15,543 10,216 9,774 14,142 11,754
Operating expenses 12,855 11,200 17,060 14,296 11,719
Operating income (loss) 2,688 (984) (7,286) (154) 35
Net income (loss) 1,528 (692) (4,922) (344) 324
Net income (loss) available
to common shareholders 1,170 (1,050) (5,280) (664) 324
Net income (loss) per share:
Basic 0.20 (0.19) (0.95) (0.12) 0.06
Diluted 0.19 (0.19) (0.95) (0.12) 0.06
December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
----- ---- ---- ---- ----
Balance Sheet Data:
Total assets $26,361 $22,030 $25,791 $27,619 $25,684
Working capital 11,787 8,798 8,366 13,631 11,094
Long-term debt, excluding
current portion 330 2,791 5,344 5,944 7,100
Redeemable convertible
preferred stock 3,902 3,824 3,746 3,668 -
Shareholders' equity 10,347 6,545 7,315 12,191 12,207
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
FORWARD LOOKING STATEMENTS
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; dependence on third
parties for sales outside the United States including Australia, New Zealand,
Europe and Latin America; economic and political conditions in the United
States, Australia, New Zealand, Europe and Latin America; marketplace acceptance
of new products; risks associated with the Patent Resolution Payment;
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 and 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.
OVERVIEW
The year 2003 was a pivotal, and successful, year for TransAct,
highlighted by the following achievements:
- Increased revenues by $12,637,000, or 32% over 2002
- Increased operating income by $3,672,000
- Reported our first profitable year since 1999 with
net income of $1,528,000
- Repaid all our revolving bank borrowings
We continue to focus on sales growth in our two core markets, point of
sale and banking ("POS") and gaming and lottery, to drive increased
profitability. During 2003, our total net sales grew by over 32% to
approximately $52,098,000. See the table below for a breakdown of our sales.
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
-------------- ----------------- ----------------- ----------------
Printers - POS $14,027 26.9% $12,900 32.7% $ 1,127 8.7%
Printers - Gaming and lottery 29,528 56.7% 19,578 49.6% 9,950 50.8%
------- ----- ------- ----- -------
Subtotal - printers 43,555 83.6% 32,478 82.3% 11,077 34.1%
Services and consumables 8,543 16.4% 6,983 17.7% 1,560 22.3%
------- ----- ------- ----- -------
Total net sales $52,098 100.0% $39,461 100.0% $12,637 32.0%
======= ===== ======= ===== =======
The POS market remained soft in 2003 due to continued lower capital
spending by users of POS products and overall economic weakness, primarily in
the U.S. We expect to see some improvement in the POS market during 2004,
although not until the second half of 2004. Despite weakness of the market in
2003, our POS printer sales increased by 8.7% due primarily to growing sales of
our POSjet(R) and Bankjet(R) line of inkjet printers. During 2003, we announced
wins from two major financial services companies for shipments of over 19,000
Bankjet(R) printers to upgrade bank teller applications, which we began to ship
in 2003 and expect to complete shipping during 2004. Given our success in 2003
and in light of the renewed focus we see banks placing on branch banking, we
plan to more proactively seek opportunities with other banks for upgrading bank
teller systems, if and when they arise. Our long-term strategy in the POS market
is to capture at least 20% market share, or approximately $200 million in sales,
primarily through increasing and enhancing our product portfolio, increasing
geographic coverage, and growing our customer base.
Our focus in the gaming and lottery market is two-fold. On the lottery
side, we continue to hold a leading position based on our long-term purchase
agreements with GTECH Corporation ("GTECH"), our largest customer and the
world's largest provider of lottery terminals, with an approximately 70% market
share. GTECH has been our customer since 1995, and we continue to maintain a
good relationship with them. Currently, we fulfill substantially all of GTECH's
printer requirements for lottery terminal installations and upgrades. During
2003, total sales to GTECH were approximately $9,750,000, representing a
decrease of approximately 9% from 2002. Based on existing orders and expected
future demand based on input from GTECH, we expect overall sales to GTECH in
2004 to be slightly below the 2003 level. Our sales to GTECH each year are
directly dependent on the timing and number of new and upgraded lottery terminal
installations GTECH performs.
8
On the gaming side, our focus lies primarily in supplying printers for
use in slot machines in casinos. During 2003, we benefited from the increasing
number of casinos that began to convert traditional coin-issuing slot machines
into ticket-issuing slot machines. As a result, sales of our gaming and lottery
printers increased by over 50%. We expect this trend to continue into 2004, as
more casinos convert their slot machines. The adoption and rollout of the
ticket-in/ticket-out initiative is happening and we expect all 700,000 slot
machines in North America to be fitted with a printer within the next two to
four years. We also expect growth from gaming sales internationally, beginning
in late 2004, as markets such as Australia and Europe evaluate the use of this
technology for their slot machines.
Our services and consumables products, which include the repair of
printers and the sale of spare parts and consumables (paper, ribbons and inkjet
cartridges), offer a substantial growth opportunity and recurring revenue stream
for TransAct. Our services and consumables products revenue has grown to
$8,543,000 and 16.4% of net sales in 2003, an increase of over 22% from 2002.
During 2004, we plan to more actively promote and dedicate increased resources
to our services products in an effort to substantially increase the volume of
sales. We have implemented a specialized software system, improved our sales
lead tracking and prospecting processes, and instituted incentive schemes for
our sales people to enable us to better cross-sell our services products to our
customers. We also believe that the increasing sales of our inkjet printers will
drive substantially higher inkjet cartridge sales in 2004 and beyond.
Operationally, gross margin and operating margin were significantly
improved. We expect to see further gross margin and operating margin improvement
in 2004 as the volume of sales increases and we continue to focus on controlling
expenses. We reported net income for 2003 - the first time since 1999. We also
generated sufficient cash during 2003 to repay all outstanding revolving
borrowings under our credit facility, and had almost $500,000 of cash on our
balance sheet as of December 31, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America. These principles require the use of estimates,
judgments and assumptions. Such estimates and judgments are based upon
historical experience and certain assumptions that are believed to be reasonable
in the particular circumstances. Those judgments affect both balance sheet items
and income statement categories. Our estimates include those related to revenue
recognition, inventory obsolescence, the valuation of deferred tax assets and
liabilities, depreciable lives of equipment, warranty obligations, and
restructuring accruals. We evaluate our assumptions on an ongoing basis by
comparing actual results with our estimates. Actual results may differ from the
original estimates. The following accounting policies are those that we believe
to be most critical in the preparation of our financial statements.
REVENUE RECOGNITION - Our typical contracts include the sale of
printers, which are sometimes accompanied by separately-priced extended warranty
contracts. We also sell spare parts, consumables, and other repair services
(sometimes pursuant to multi-year product maintenance contracts) which are not
included in the original printer sale and are ordered by the customer as needed.
We recognize revenue pursuant to the guidance within SAB 104, "Revenue
Recognition". Specifically, revenue is recognized when evidence of an
arrangement exists, delivery (based on shipping terms which are generally FOB
shipping point) has occurred, the selling price is fixed and determinable, and
collectibility is reasonably assured. We provide for an estimate of product
returns and price protection based on historical experience at the time of
revenue recognition.
Revenue related to extended warranty and product maintenance contracts
is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"), "Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts."
Pursuant to FTB 90-1, revenue related to separately priced product maintenance
contract is deferred and recognized over the term of the maintenance period. We
record deferred revenue for amounts received from customers for maintenance
contracts prior to the maintenance period.
Our customers have the right to return products that do not function
properly within a limited time after delivery. We monitor and track product
returns and record a provision for the estimated future returns based on
historical experience. Returns have historically been within expectations and
the provisions established, but we cannot guarantee that we will continue to
experience return rates consistent with historical patterns.
We offer some of our customers price protection as an incentive to
carry inventory of our product. These price protection plans provide that if we
lower prices, we will credit them for the price decrease on inventory they hold.
Our customers typically carry limited amounts of inventory, and we infrequently
lower prices on current products. As a result, the amounts paid under these
plans have been minimal. However, we cannot guarantee that this minimal level
will continue.
9
ACCOUNTS RECEIVABLE - We have standardized credit granting and review
policies and procedures for all customer accounts, including: credit reviews of
all new customer accounts; ongoing credit evaluations of current customers;
credit limits and payment terms based on available credit information; and
adjustments to credit limits based upon payment history and the customer's
current credit worthiness. We also provide an estimate of doubtful accounts
based on historical experience and specific customer collection issues. Our
allowance for doubtful accounts as of December 31, 2003 was $100,000, or 1.1% of
outstanding accounts receivable, which we feel is appropriate considering the
overall quality of the accounts receivable. While credit losses have
historically been within expectations and the reserves established, we cannot
guarantee that our credit loss experience will continue to be consistent with
historical experience. As of December 31, 2003, we had an accounts receivable
balance due from Harrah's (casinos) of 31% of the total balance due. No other
customer accounts receivable balance exceeded 10%.
INVENTORY - Our inventories are valued at the lower of cost or market.
We assess market value based on historical usage and estimates of future demand.
Assumptions are reviewed at least quarterly and adjustments are made, as
necessary, to reflect changed market conditions. Should circumstances change and
we determine that additional inventory is subject to obsolescence, additional
write-downs of inventory could result in a charge to income. As of December 31,
2003, our net inventory included a reserve to write inventory down to lower of
cost or market of $1,950,000, or 19.5% of gross inventory. Reserves increased
significantly in 2002 and remained at that level during 2003 due to several
products that were discontinued during that time period.
INCOME TAXES - In preparing our consolidated financial statements, we
are required to estimate income taxes in each of the jurisdictions in which we
operate. This involves estimating the actual current tax exposure together with
assessing temporary differences between the tax basis of certain assets and
liabilities and their reported amounts in the financial statements, as well as
net operating losses, tax credits and other carryforwards. These differences
result in deferred tax assets and liabilities, which are included within our
consolidated balance sheets. We then assess the likelihood that the deferred tax
assets will be realized from future taxable income, and to the extent that we
believe that realization is not likely, we establish a valuation allowance.
Significant judgment is required in determining the provision for
income taxes and, in particular, any valuation allowance recorded against our
deferred tax assets. On a quarterly basis, we evaluate the recoverability of our
deferred tax assets based upon historical results and forecasted taxable income
over future years, and match this forecast against the basis differences,
deductions available in future years and the limitations allowed for net
operating loss and tax credit carryforwards to ensure that there is adequate
support for the realization of the deferred tax assets. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged
as a reduction to income in the period such determination was made. Likewise,
should we determine that we would be able to realize future deferred tax assets
in excess of its net recorded amount, an adjustment to the deferred tax assets
would increase net income in the period such determination was made.
As of December 31, 2003, we recorded a net deferred tax asset of
approximately $3,024,000 and a valuation allowance of $331,000, primarily on a
portion of our foreign tax credits, research and development credits and certain
state net operating loss carryforwards. We will need to recognize approximately
$8.0 million in future taxable income in order to realize all of our deferred
tax assets at December 31, 2003. Based on our projection of future taxable
income, no additional valuation allowance is considered necessary. Should
circumstances change and we determine that some or all of the deferred taxes
would not be realized, a valuation allowance would be recorded resulting in a
charge to income in the period the determination is made.
GOODWILL - We test the impairment of goodwill each year, or whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. We completed our last assessment as of December 31, 2003. Factors
considered that may trigger an impairment review are: significant
underperformance relative to expected historical or projected future operating
results; significant changes in the manner of use of acquired assets or the
strategy for the overall business; significant negative industry or economic
trends; and significant decline in market capitalization relative to net book
value. Goodwill amounted to $1,469,000 at December 31, 2003.
RESTRUCTURING - 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 manufacturing facility (the "Consolidation"). However, our Company
headquarters remains in Wallingford, CT. Our technology shift to inkjet and
thermal printing from dot matrix impact printing has dramatically reduced the
labor content in our printers, and therefore, lowered 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
service depot that remains in Connecticut. The closing of the Wallingford
manufacturing facility resulted in the termination of employment of
approximately 70 production, administrative and management employees.
10
Through December 31, 2003, we have incurred approximately $6.2 million
of expenses associated with the Consolidation, including severance pay, stay
bonuses, employee benefits, moving expenses, non-cancelable lease payments, and
other costs, of which approximately $1.1 million, $1.0 million and $4.1 million
were recognized in 2003, 2002 and 2001, respectively. We do not expect to incur
any additional restructuring expenses related to the Consolidation beyond 2003.
See the "Liquidity and Capital Resources" section for a discussion of the
expected impact of the Consolidation on our future results of operations and
cash flows.
In connection with the Consolidation of manufacturing facilities in
2001, we recorded significant accruals. These accruals comprised severance pay,
stay bonuses, employee benefits, non-cancelable lease payments and certain other
expenses. Management has made reasonable estimates of such costs and expenses.
However, if actual costs differ from the estimates, charges or credits to income
could result in the period the adjustments are determined. In 2002 and 2003, we
changed our estimate of sublease income on the Wallingford, CT facility,
resulting in additional restructuring expense.
WARRANTY - We generally warranty our products for up to 24 months and
record the estimated cost of such product warranties at the time the sale is
recorded. Estimated warranty costs are based upon actual past experience of
product returns and the related estimated cost of labor and material to make the
necessary repairs. If actual future product return rates or the actual costs of
material and labor differ from the estimates, adjustments to the accrued
warranty liability would be made.
CONTINGENCIES - We record an estimated liability related to
contingencies based on our estimates of the probable outcomes. On a quarterly
basis, we assess the potential liability related to pending litigation, audits
and other contingencies and confirm or revise estimates and reserves as
appropriate.
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 third
party competitor. In an effort to resolve this matter, we originally offered to
pay approximately $160,000, while the other party sought payment of up to
$950,000. We recorded a charge of $160,000 in cost of sales in the fourth
quarter of 2002 related to this matter. Based on the likely outcome of current
negotiations, we recorded an additional charge of $740,000 in the fourth quarter
of 2003 related to usage prior to January 1, 2003. Although settlement
negotiations are continuing, we believe that the total accrual of $900,000 (the
"Patent Resolution Payment") reflects the best estimate of the expense related
to the pre-2003 usage of this third party patented technology. We also accrued
estimated royalty payments for usage of this technology after January 1, 2003.
ACCUMULATED OTHER COMPREHENSIVE INCOME - Stockholders' equity contains
certain items classified as other comprehensive income, including foreign
currency translation adjustments related to our non-U.S. subsidiary company that
has a designated functional currency other than the U.S. dollar. We are required
to translate the subsidiary functional currency financial statements to U.S.
dollars using a combination of historical, month-end and weighted average
foreign exchange rates. This combination of rates creates the foreign currency
translation adjustments component of other comprehensive income.
(A) RESULTS OF OPERATIONS
(i) YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31,
2002
NET SALES. Net sales by market for the years ended December 31, 2003
and 2002 were as follows:
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
----------------------- ----------------------- -----------------------
Point of sale and banking $20,745 39.8% $18,475 46.8% $ 2,270 12%
Gaming and lottery 31,353 60.2% 20,986 53.2% 10,367 49%
------- ------- ------- ------- -------
$52,098 100.0% $39,461 100.0% $12,637 32%
======= ======= ======= ======= =======
International $ 4,731 9.1% $ 4,706 11.9% $ 25 1%
======= ======= ======= ======= =======
Net sales for 2003 increased $12,637,000, or 32%, from 2002 largely due
to significantly higher shipments into our gaming and lottery market, as well as
increased shipments into our POS market. Overall, international sales remained
relatively flat in 2003 compared to 2002.
11
Point of sale and banking: Sales of our POS products worldwide increased
approximately $2,270,000, or 12%, from 2002.
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
----------------------- ----------------------- ----------------
Domestic $16,510 79.6% $14,119 76.4% $ 2,391 17%
International 4,235 20.4% 4,356 23.6% (121) (3%)
------- ----- ------- ----- -------
$20,745 100.0% $18,475 100.0% $ 2,270 12%
======= ===== ======= ===== =======
Domestic POS revenue increased 17% due largely to significantly higher
sales of our POSjet(R) and Bankjet(R) lines of inkjet printers. Sales of such
inkjet printers increased by approximately 187% in 2003 compared to 2002. The
overall increase in domestic POS revenue 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) significantly higher service, spare parts and
consumables (mostly replacement inkjet cartridges) revenue.
International POS revenue decreased 3% due primarily to lower sales of
our thermal fiscal printers in Europe (approximately $800,000). Lower thermal
fiscal printer sales were largely offset by (1) higher sales (approximately
$300,000) through our expanding network of international distributors and (2)
higher service, spare parts and consumables revenue (approximately $400,000),
largely resulting from a service contract related to printers shipped for the
British Post Office in prior years. Such service contract expires in the second
quarter of 2005, and provides quarterly revenue of approximately $250,000. We
are currently negotiating for the renewal of this contract upon its expiration,
however, there can be no assurance that we will be successful. We also continue
to actively seek additional distribution partners in both Latin America and
Europe in order to increase our breadth of coverage and future sales in these
regions.
We expect sales into the POS market for the first quarter of 2004 to be
consistent with those reported for the fourth quarter of 2003. However, we
expect full year sales for 2004 to be modestly higher than those reported during
2003.
Gaming and lottery: Sales of our gaming and lottery products increased
by $10,367,000, or 49%, from 2002, primarily due to significantly stronger sales
of our slot machine and video lottery terminal ("VLT") printers, somewhat offset
by lower sales of lottery printers to GTECH.
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
----------------------- ----------------------- -----------------
Domestic $30,857 98.4% $20,636 98.3% $10,221 50%
International 496 1.6% 350 1.7% 146 42%
----------------------- ----------------------- -------
$31,353 100.0% $20,986 100.0% $10,367 49%
======================= ======================= =======
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
------------------- -------------------- ----------------
Gaming $ 21,587 68.9% $ 10,277 49.0% $ 11,310 110%
Lottery 9,766 31.4% 10,709 51.0% (943) (9%)
-------- ----- -------- ----- --------
$ 31,353 100.0% $ 20,986 100.0% $ 10,367 49%
======== ===== ======== ===== ========
Sales of our gaming products, which include video lottery terminal
("VLT") and slot machine printers used in casinos and racetracks ("racinos"),
and related spare parts and repairs, more than doubled from 2002. 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 issuing coins ("ticket-in, ticket-out" or
"TITO"). Based on existing orders and sales opportunities for TITO printers, we
expect sales of our casino printers to continue to increase in 2004, as more
regulatory approvals for racinos are expected to be obtained and more casinos
are expected to convert to ticket-in, ticket-out slot machines. Also, due to
government budget shortfalls, many states have approved (such as New York and
Oklahoma) or are considering VLT initiatives as a means of raising revenue. As
such, we also expect sales of our VLT printers to increase in 2004 compared to
2003 due to these initiatives.
12
Total sales to GTECH, which included impact and thermal on-line lottery
printers, impact in-lane lottery printers (primarily found at checkout counters
of certain grocery stores), and spare parts revenue, decreased by $943,000 to
approximately $9,750,000, or 19% of net sales, in 2003, compared to $10,700,000,
or 27% of net sales, in 2002.
See the table below for an analysis of revenues from GTECH.
Year ended
(In thousands, except %) December 31,
2003 2002
------- -------
Impact on-line lottery printers and spare parts $ 1,596 $10,032
Thermal on-line lottery printers 8,000 -
In-lane lottery printers 170 677
------- -------
$ 9,766 $10,709
======= =======
% of consolidated net sales 19% 27%
Sales to GTECH of impact on-line lottery printers and spare parts
totaled approximately $1,596,000 in 2003, compared to $10,032,000 in 2002. We
have approximately $2,000,000 of orders from GTECH for impact on-line lottery
printers for delivery in the second and third quarters of 2004. Because our
thermal on-line lottery printer is a replacement for our impact on-line lottery
printer, we do not expect any further shipments of impact on-line lottery
printers in 2004 beyond the third quarter. Shipments of in-lane lottery printers
totaled approximately $170,000 in 2003 compared to $677,000 in 2002. Since sales
of in-lane lottery printers are project-oriented, we cannot predict if and when
future sales may occur. In July 2002, we entered into a 5-year agreement with
GTECH to provide a newly designed thermal on-line lottery printer. During 2003,
we shipped approximately $8,000,000 of these printers. We made no shipments of
thermal on-line lottery printers during 2002. Based on existing orders and
expected future demand based on input from GTECH, we expect sales of our thermal
on-line lottery printers in 2004 to be slightly less than those reported in
2003.
International gaming and lottery product sales increased slightly from
2002. Such sales represented less than 2% of total sales into this market during
2003 and 2002. However, we expect growth in international gaming revenue,
beginning in late 2004, as markets such as Australia and Europe evaluate the use
of this technology for their slot machines.
GROSS PROFIT. Gross profit increased by $5,327,000, or 52%, to
$15,543,000, and gross margin increased to 29.8% from 25.9%. Both gross profit
and gross margin for 2003 benefited from a substantial increase in the volume of
sales (32%) and a more favorable sales mix, including increased sales of higher
margin gaming and lottery printers in 2003 compared to 2002. Gross profit
included a charge of $740,000, or 1.4% of net sales, and $160,000, or 0.4% of
net sales, related to the Patent Resolution Payment (see "Contingent
Liabilities" in Liquidity and Capital Resources) in 2003 and 2002, respectively.
We expect gross margin for 2004 to be approximately 32-33%, as we gain operating
leverage on higher expected sales volume in 2004 compared to 2003.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
development expenses primarily include salary and payroll related expenses for
our engineering staff, depreciation and design expenses (including prototype
printer expense, outside design and testing services and supplies). Such
expenses increased $251,000, or 12%, to $2,276,000, primarily due to higher (1)
compensation related expenses (approximately $80,000) and (2) expenses
(including travel) related largely to the development of our new thermal on-line
lottery printer for GTECH and our iTherm(TM)280 thermal POS printer ($170,000).
Engineering and product development expenses decreased as a percentage of net
sales to 4.4% from 5.1%, primarily due to significantly higher sales volume in
2003 compared to 2002. We expect engineering and product development expenses to
increase in 2004 as we plan to add staff to continue increasing product
development to expand our families of inkjet printers for the POS market and
ticket-issuing printers for the casino market.
13
SELLING AND MARKETING. Selling and marketing expenses primarily include
salaries and payroll related expenses for our sales and marketing staff, sales
commissions, travel expenses, expenses associated with the lease of sales
offices, advertising, trade show expenses and other promotional marketing
expenses. Selling and marketing expenses increased by $941,000, or 23%, to
$4,968,000, due primarily to higher (1) sales commissions resulting from
increased sales in 2003 compared to 2002 (approximately $440,000), (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 $250,000), (3) selling expenses at
our UK facility due largely to the unfavorable impact of exchange rates in the
period (approximately $140,000) and (4) marketing expenses (approximately
$100,000). Selling and marketing expenses decreased as a percentage of net sales
to 9.5% from 10.2%, due primarily to higher volume of sales in 2003 compared to
2002. We expect selling and marketing expenses to increase modestly in 2004, as
we plan to add sales staff to help grow our sales and increase our breadth of
coverage in our markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
primarily include: salaries and payroll related expenses for our executive,
accounting, human resource and information technology staff; expenses for our
corporate headquarters; professional and legal expenses; and telecommunication
expenses. General and administrative expenses increased by $293,000, or 7%, to
$4,483,000. During 2003 we incurred higher legal expenses (approximately
$250,000) related to our growing patent portfolio and the Patent Resolution
Payment. In addition, incentive compensation increased by approximately
$130,000. These increases were somewhat offset by staff reductions resulting
from the Consolidation (approximately $80,000). General and administrative
expenses decreased as a percentage of net sales to 8.6% from 10.6%, due
primarily to higher volume of sales in 2003 compared to 2002. We expect general
and administrative expenses to increase somewhat in 2004, due largely to planned
expenses related to required compliance with the Sarbanes-Oxley Act of 2002 and
additional finance staff related to our CFO transition plan and growth in our
overall business.
BUSINESS CONSOLIDATION AND RESTRUCTURING. We incurred $1,128,000 and
$958,000 of expenses related to the Consolidation in 2003 and 2002,
respectively. These expenses were substantially the result of revisions to our
original estimate for non-cancelable lease payments included in the
restructuring accrual. During the third quarter of 2002, 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 then
projected to sublease our Wallingford, CT facility. The accrual at December 31,
2002 reflected estimated sublease income after September 30, 2004. After
expanded efforts during 2003, we determined that because of the continuing
regional decline in the commercial real estate market in 2003, it was unlikely
that we would be able to sublease our Wallingford, CT facility. As such, we
increased our restructuring accrual, which represents the reversal of estimated
sublease income, in the fourth quarter of 2003 by $1,128,000 to provide for the
remaining non-cancelable lease payments and other related costs for this
facility through the expiration of the lease (March 31, 2008).
We do not expect to incur any further restructuring expenses related to
the Consolidation beyond 2003. See "Consolidation Expenses" in Liquidity and
Capital Resources).
OPERATING INCOME (LOSS). During 2003, we reported operating income of
$2,688,000, or 5.2% of net sales, compared to an operating loss of $984,000, or
2.5% of net sales, in 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 2003 compared
to 2002. Operating income (loss) for 2003 and 2002 included charges related to
the Consolidation ($1,128,000 and $958,000, respectively) and the Patent
Resolution Payment ($740,000 and $160,000, respectively).
INTEREST. We reported interest expense of $219,000 in 2003 compared to
$217,000 in 2002. Interest income decreased by $16,000 to $9,000 in 2003. The
decrease in interest income was largely attributable to a higher level of
invested cash in 2002 resulting from 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. At December 31, 2003, we had no outstanding revolving
borrowings and $420,000 outstanding under a term loan, that we repaid during
January 2004. We expect to generate cash during 2004, and, as a result, expect
to report interest income on our available cash in 2004. 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. Our new credit facility with Banknorth contains more favorable terms
that 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.
14
OTHER INCOME (EXPENSE). Other expense for 2003 primarily included
transaction exchange loss recorded by our UK subsidiary. Other income for 2002
included a one-time gain of $145,000 resulting from the receipt of 2,146 shares
of common stock from our health insurance company, Anthem, Inc., upon its
demutualization. We sold these shares during the third quarter of 2002. This
gain was partially offset by approximately $50,000 of transaction exchange loss
recorded by our UK subsidiary during 2002, due to the strengthening of the
British pound against the dollar.
INCOME TAXES. We recorded an income tax provision of $725,000 at an
effective rate of 32.2% in 2003, and an income tax benefit of $390,000 at an
effective rate of 36.0% in 2002. The lower effective rate in 2003 reflects a
favorable outcome of a state tax audit, benefits from certain tax credits, and
utilization of state net operating loss carryforwards not previously
anticipated. We expect to record income taxes at an effective rate of
approximately 36% during 2004.
NET INCOME (LOSS). We reported net income in 2003 of $1,528,000, or
$0.19 per share (diluted) after giving effect to $358,000 of dividends and
accretion charges on preferred stock. This compares to a net loss in 2002 of
$692,000, or $0.19 per share (diluted) after giving effect to $358,000 of
dividends and accretion charges on preferred stock. Both per-share amounts are
after giving effect to $358,000 of dividends and accretion charges on preferred
stock. In future quarters, dividends and accretion charges on preferred stock
will be approximately $90,000, before the effect of any conversion or redemption
of the preferred stock.
(ii) YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31,
2001
NET SALES. Net sales by market for the years ended December 31, 2002
and 2001 were as follows:
Year ended Year ended Change
(In thousands) December 31, 2002 December 31, 2001 $ %
--------------------- ----------------- -----------------
Point of sale and banking $18,475 46.8% $24,105 54.8% $(5,630) (23%)
Gaming and lottery 20,986 53.2% 19,869 45.2% 1,117 6%
----- ------- ----- -------
$39,461 100.0% $43,974 100.0% $(4,513) (10%)
===== ======= ===== =======
International $ 4,706 11.9% $ 7,922 18.0% $(3,216) (41%)
===== ======= ===== =======
Net sales for 2002 decreased $4,513,000, or 10%, from 2001 largely due
to lower shipments into our POS market, partially offset by higher sales into
our gaming and lottery market. Overall, international sales decreased by
$3,216,000 or 41%, primarily due a reduction in (1) revenue related to the
British Post Office project (approximately $400,000), (2) kiosk printer
shipments for use in a Canadian government application (approximately
$1,500,000), (3) shipments of our thermal fiscal printer in Europe
(approximately $1,000,000) and (4) POS revenue through distribution in Europe
and Latin America (approximately $500,000), partially offset by an increase in
international sales of our gaming and lottery printers (approximately $300,000).
Point of sale and banking: Sales of our POS products worldwide
decreased approximately $5,630,000, or 23%.
Year ended Year ended Change
(In thousands) December 31, 2002 December 31, 2001 $ %
-------------------- -------------------- -----------------
Domestic $ 14,119 76.4% $ 16,235 67.4% $ (2,116) (13%)
International 4,356 23.6% 7,870 32.6% (3,514) (45%)
--------- ------- ----------- ------- ---------
$ 18,475 100.0% $ 24,105 100.0% $ (5,630) (23%)
========= ======= =========== ======= =========
Domestic POS product revenue decreased $2,116,000, or 13%, as we
experienced softness in demand from our domestic distributors, particularly in
the first and third quarters of 2002. Sales of our kiosk and ATM printers and
related spare parts also declined by approximately $900,000. Due to steadily
declining sales and low anticipated future sales, we decided to no longer sell
such printers after 2002. Sales in 2002 included increasing sales of our POSjet
line of inkjet printers.
15
International POS printer shipments decreased approximately 45% for
several reasons. First, sales to ICL Pathway for the British Post Office
project, which included printer shipments, spare parts and service revenue,
declined by approximately $400,000 to $1,800,000 in 2002. We completed shipping
printers for the British Post Office project during the first quarter of 2001,
and expect no future sales for this project, other than spare parts and service.
Secondly, shipments of our thermal fiscal printer in Europe declined by
approximately $1,000,000 to $950,000 in 2002. Thirdly, during 2001, we shipped
approximately $1,500,000 of our thermal kiosk printers for use in a Canadian
government application. We made no shipments of these printers in 2002. We do
not expect to make any future shipments for this application. Lastly, we
experienced a decrease of approximately $500,000 in sales through distribution,
primarily in Latin America, and to a lesser extent, in Europe.
Gaming and lottery: Sales into the gaming and lottery market increased
by $1,117,000, or 6%, from 2001, primarily due to stronger sales of our video
lottery terminal ("VLT") and slot machine printers, largely offset by lower
sales of lottery printers to GTECH.
Year ended Year ended Change
(In thousands) December 31, 2002 December 31, 2001 $ %
--------------------- ---------------------- ------------------
Domestic $ 20,636 98.3% $ 19,817 98.3% $ 819 4%
International 350 1.7% 52 1.7% 298 573%
---------- ----- ---------- ----- ---------
$ 20,986 100.0% $ 19,869 100.0% $ 1,117 6%
========== ===== ========== ===== =========
Year ended Year ended Change
(In thousands) December 31, 2002 December 31, 2001 $ %
----------------------- ------------------------ ------------------
Gaming $ 10,277 49.0% $ 5,413 27.2% $ 4,864 90%
Lottery 10,709 51.0% 14,456 72.8% (3,747) (26%)
---------- ----- ---------- ----- ---------
$ 20,986 100.0% $ 19,869 100.0% $ 1,117 6%
========== ===== ========== ===== =========
Sales of our gaming printers, which included VLT and slot machine
printers, and related spare parts and repairs, increased by approximately
$4,864,000, or 90%. The increase in gaming printer sales resulted from two
factors; (1) increased installations of our VLT printers in West Virginia and
other states, including approximately $1,600,000 of sales of a custom printer to
one customer and (2) increased sales of our casino printers, primarily for use
in slot machines at casinos throughout North America that print receipts instead
of issuing coins ("ticket-in, ticket-out").
Shipments to GTECH, which included on-line and in-lane lottery printers
and spare parts revenue, decreased $3,747,000, or 26%. See the table below for
an analysis of revenues from GTECH. Since sales of in-lane lottery printers are
project-oriented, we cannot predict if and when future sales may occur.
Year ended
(In thousands, except %) December 31,
2002 2001
------- -------
Impact on-line lottery printers and spare parts $10,032 $14,253
In-lane lottery printers 677 203
------- -------
$10,709 $14,456
======= =======
% of consolidated net sales 27% 27%
GROSS PROFIT. Gross profit increased by $442,000, or 5%, to
$10,216,000, and the gross margin also increased to 25.9% from 22.2%. Both gross
profit and gross margin for 2002 benefited from improved sales mix and cost
reductions resulting from the Consolidation.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
development expenses decreased $1,045,000, or 34%, to $2,025,000, and also
decreased as a percentage of net sales to 5.1% from 7.0%. This decrease is
primarily due to a reduction in engineering staff at our Wallingford, CT
facility due to the Consolidation.
16
SELLING AND MARKETING. Selling and marketing expenses decreased
$543,000, or 12%, to $4,027,000, and decreased as a percentage of net sales to
10.2% from 10.4%. Such expenses decreased mostly due to lower planned
promotional and advertising expenses and staff reductions resulting from the
Consolidation.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by $1,909,000, or 31%, to $4,190,000, and decreased as a percentage of
net sales to 10.6% from 13.9%. The decrease primarily resulted from (1) staff
reductions resulting from the Consolidation and (2) the inclusion in 2001 of
$680,000 of accelerated depreciation on certain assets located at the Company's
Wallingford, CT facility (primarily leasehold improvements and computer
equipment) whose useful lives were shortened as a result of the Consolidation.
BUSINESS CONSOLIDATION AND RESTRUCTURING. We incurred $958,000 of
expenses related to the Consolidation in 2002. These expenses were substantially
the result of a revision to our estimate for non-cancelable lease payments
included in the restructuring accrual at September 30, 2002. 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 then
projected to sublease our Wallingford, CT facility. The accrual at December 31,
2002 reflected estimated sublease income after September 30, 2004.
During 2001, we incurred approximately $3,321,000 of Consolidation
expenses, which primarily included a portion of employee severance and
termination related expenses and facility closure and consolidation expenses
(including moving expenses, estimated non-cancelable lease payments and other
costs). See "Consolidation Expenses" in Liquidity and Capital Resources).
OPERATING LOSS. During 2002, we reported an operating loss of $984,000,
or 2.5% of net sales, compared to an operating loss of $7,286,000, or 16.6% of
net sales, in 2001. The reduction in our operating loss was due to (1)
significantly reduced operating expenses as a direct result of the
Consolidation, (2) lower Consolidation expenses and (3) higher gross margin.
INTEREST. Net interest expense decreased by $205,000 to $192,000 in
2002, due largely to a significant reduction in our average outstanding
borrowings under our revolving bank facility resulting from significantly lower
inventories (approximately $2,200,000), receipt of an advance payment from a
customer, and to a lesser extent, lower interest rates.
OTHER INCOME. Other income for 2002 includes a one-time gain of
$145,000 resulting from the receipt of 2,146 shares of common stock from our
health insurance company, Anthem, Inc., upon its demutualization. We sold these
shares during the third quarter of 2002. This gain was partially offset by
approximately $50,000 of transaction exchange loss recorded by our UK subsidiary
during 2002, due to the strengthening of the British pound against the dollar,
mostly in the second quarter of 2002.
INCOME TAXES. We recorded an income tax benefit of $390,000 and
$2,748,000 in 2002 and 2001, respectively, at an effective rate of approximately
36.0% in each period.
NET LOSS. We reported a net loss in 2002 of $692,000, or $0.19 per
share (basic and diluted) after giving effect to $358,000 of dividends and
accretion charges on preferred stock. This compares to a net loss of $4,922,000,
or $0.95 per share (basic and diluted) after giving effect to $358,000 of
dividends and accretion charges on preferred stock in 2001. In future quarters,
dividends and accretion charges on preferred stock will be approximately
$90,000, before the effect of any conversion or redemption of the preferred
stock.
17
(B) LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: During 2003, we significantly improved our operating results.
We reported our first profitable year since 1999 and as of December 31, 2003
reported no revolving bank debt. Looking forward, we expect to generate
approximately $5 to $6 million in cash from operations during 2004 and have
between $4 and $5 million of cash on our balance sheet at the end of 2004. We
also expect to earn interest income on our available cash balance throughout
2004.
Operating activities: The following significant factors affected our
cash provided by operations of $1,814,000 in 2003:
- We reported net income of $1,528,000.
- We recorded depreciation, amortization and non-cash
compensation expense of $1,723,000.
- Accounts receivable increased by $5,035,000 because of
significantly higher sales in the fourth quarter of 2003
compared to the fourth quarter of 2002.
- Inventories decreased by $374,000, despite a significant
increase in sales, due to improved inventory management.
- Accounts payable increased by $305,000 due to the timing of
payments and increased inventory purchases resulting from a
higher volume of sales.
- Accrued liabilities increased by $1,172,000, primarily due to
higher compensation related accruals and an increase in
deferred revenue on extended warranty contracts and other
customer prepayments.
- Accrued license fees increased by $1,038,000 related to the
Patent Resolution Payment (see "Contingent Liabilities"
below).
- Accrued restructuring expenses increased by $407,000. (See
"Consolidation Expenses" below).
Investing activities: We used approximately $930,000 of cash for
investing activities in 2003 compared to using $577,000 in 2002. Our capital
expenditures were approximately $1,261,000 and $577,000 in 2003 and 2002,
respectively. 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 2004 to be approximately
$1,600,000, primarily for tooling for new products and enhanced versions of our
existing 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: We used approximately $1,387,000 in financing
activities during 2003, largely due to net repayments under our revolving credit
facility (approximately $2,541,000) and payments of cash dividends on our
preferred stock (approximately $280,000), largely offset by proceeds from stock
option exercises (approximately $1,364,000) and net term loan borrowings
(approximately $70,000).
WORKING CAPITAL
Our working capital increased to $11,787,000 at December 31, 2003 from
$8,798,000 at December 31, 2002. The current ratio also increased to 2.36 to 1
at December 31, 2003 from 2.20 to 1 at December 31, 2002. The increase in both
working capital and the current ratio was largely due to significantly higher
receivables (approximately $5,035,000) due to higher sales in the fourth quarter
of 2003 compared to the fourth quarter of 2002, partially offset by higher
accrued expenses (approximately $1,046,000), mostly due to an increase in
compensation related accruals and deferred revenue, at the end of 2003 compared
to 2002.
DEFERRED TAXES
As of December 31, 2003, we had a net deferred tax asset of
approximately $3,024,000. In order to utilize this deferred tax asset, we will
need to generate approximately $8.0 million of taxable income in future years.
Based on future projections of taxable income, we have determined that it is
more likely than not that the existing net deferred tax asset will be realized.
18
CONTINGENT LIABILITIES
In November 2002, the Company was advised that certain POS printers
sold by us since late 1999 may use technology covered by recently issued patents
of a third party competitor. In an effort to resolve this matter, we originally
offered to pay approximately $160,000, while the other party sought payment of
up to $950,000. We recorded a charge of $160,000 in cost of sales in the fourth
quarter of 2002 related to this matter. Based on the likely outcome of current
negotiations, we recorded an additional charge of $740,000 in the fourth quarter
of 2003 related to usage prior to January 1, 2003. Although settlement
negotiations are continuing, we believe that the total accrual of $900,000 (the
"Patent Resolution Payment") reflects the best estimate of the expense related
to the pre-2003 usage of this third party patented technology. We also accrued
estimated royalty payments for usage of this technology after January 1, 2003.
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 10 to the Consolidated Financial Statements) 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.
As of December 31, 2003, we had no outstanding borrowings on the
revolving credit line and $420,000 outstanding under the term loan. Undrawn
commitments under the Banknorth Credit Facility were approximately $11,500,000
at December 31, 2003. However, our maximum additional available borrowings under
the facility were limited to approximately $6,100,000 at December 31, 2003 based
on the borrowing base of our collateral. Annual principal payments on the term
loan are $90,000. We repaid the remaining balance on the term loan in January
2004. We were in compliance with all financial covenants of the Banknorth Credit
Facility at December 31, 2003.
Prior to the Banknorth Credit Facility, we operated under a three-year,
$13.5 million credit facility (the "LaSalle Credit Facility") with LaSalle which
was scheduled to expire on May 25, 2004. The LaSalle Credit Facility provided a
$12 million revolving credit line, a $0.5 million term loan and a $1 million
equipment loan facility. Borrowings under the LaSalle Credit Facility bore a
floating rate of interest based on LaSalle's prime rate.
On November 12, 2002, we amended the LaSalle Credit Facility. Under the
terms of the amendment ("LaSalle Amendment No. 3"), LaSalle (1) waived
compliance with the minimum EBITDA, minimum tangible net worth and fixed charge
coverage ratio financial covenants as of September 30, 2002 and (2) revised
these covenants to exclude the effect of $900,000, of the total $912,000, of
restructuring charges incurred in the third quarter. 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.
19
PREFERRED STOCK
In connection with our 7% Series B Cumulative Convertible Redeemable
Preferred Stock (the "Preferred Stock"), we paid $280,000 of cash dividends in
2003, 2002 and 2001, and expect to pay $70,000 per quarter during 2004. 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. 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 2000, 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 $3,802,000 to $10,347,000 at December
31, 2003 from $6,545,000 at December 31, 2002. The increase was primarily due to
the following for the year ended December 31, 2003: (1) net income available to
common shareholders of $1,170,000, (2) the repayment by an officer of an
outstanding loan of $330,000, (3) proceeds of approximately $1,364,000 from the
issuance of approximately 241,000 shares of common stock from stock option
exercises and purchase from our employee stock purchase plan, (4) an increase in
additional paid in capital of approximately $769,000 resulting from the
recording of a deferred tax asset from tax deductions arising from stock option
exercises and (5) an increase in accumulated other comprehensive income of
$99,000 due to translation adjustments from our U.K. subsidiary.
CONSOLIDATION EXPENSES
During 2001, we incurred approximately $4,096,000 of business
consolidation, restructuring and related charges as a result of the
Consolidation. These expenses primarily included employee severance and
termination related expenses, facility closure and consolidation expenses
(including moving expenses, estimated non-cancelable lease payments and other
costs) and accelerated depreciation and asset disposal losses on certain
leasehold improvements and other fixed assets. Although the Consolidation was
substantially completed in 2001, we incurred an additional $958,000 expenses
associated with the Consolidation during 2002. During 2002, we revised our
original estimate for future sublease payments included in the restructuring
accrual. Based on regional softness in demand in the commercial real estate
market, we increased the restructuring accrual by $900,000 to reflect the longer
period of time then projected to sublease our Wallingford, CT facility. After
expanded efforts in 2003, we determined that because of the continuing regional
decline in the commercial real estate market during 2003, it was unlikely that
we would be able to sublease our Wallingford, CT manufacturing facility, which
has a lease term that expires in March 2008. As a result, during the fourth
quarter of 2003, we increased our restructuring accrual by $1,270,000 to provide
for the remaining non-cancelable lease payments and related costs associated
with the manufacturing facility. This increase represented the reversal of
estimated sublease income for the remainder of the lease term. In addition, we
determined that we will not terminate several employees originally included in
the Consolidation. As a result, we reversed the remaining $142,000 of accrued
restructuring expenses in 2003 related to employee severance and termination
expenses, as we completed all required payments for such expenses by December
31, 2003.
As a result of the Consolidation, we significantly lowered our cost
structure in 2002 and 2003, with annual cost savings of over $4 million compared
to 2001. We believe such cost savings will continue to contribute to additional
operating leverage in 2004. We do not expect to incur any additional
restructuring expense related to the Consolidation beyond 2003. See Note 8 to
the Consolidated Financial Statements for further detail.
Of the total of $6,182,000 of Consolidation expenses, approximately
$5,407,000 required or will require cash outlays. We paid approximately
$721,000, $2,242,000 and $424,000 of these costs in 2003, 2002 and 2001,
respectively. We expect to pay approximately $480,000 of these costs per year
from 2004 through 2007, and the remaining $100,000 in 2008. These payments from
2004 through 2008 relate primarily to lease and occupancy costs in our
Wallingford, CT facility.
20
CONTRACTUAL OBLIGATIONS
TransAct's contractual obligations as of December 31, 2003 were as
follows:
(In thousands) Total < 1 year 1-3 years 3-5 years > 5 years
- -------------- ----- -------- --------- ---------- ---------
Long term debt obligations $ 420 $ 90 $ 180 $ 150 $ 150
Operating lease obligations 6,289 952 1,938 1,602 1,797
Purchase obligations 19,255 16,384 2,871 - -
Long term debt obligations include originally scheduled payments on our
term loan with Banknorth as of December 31, 2003. We repaid the remaining
balance on the term loan ($420,000) in January 2004. Purchase obligations are
for purchases made in the normal course of business to meet operational
requirements, primarily of raw material and component part inventory.
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, to finance our capital
expenditures and meet our liquidity requirements through at least December 31,
2004.
Our Series B Preferred Stock is redeemable at the option of the holders
on or after April 7, 2005 for an aggregate of $4,000,000. We believe that cash
flows generated from operations and borrowings available under the Banknorth
Credit Facility will also provide sufficient resources to satisfy redemption of
the Preferred Stock in 2005, if it were to occur. However, we may also consider
additional financing sources as appropriate, including raising additional equity
capital.
(C) IMPACT OF INFLATION
TransAct believes that its business has not been affected to a
significant degree by inflationary trends because of the low rate of inflation
during the past three years, nor does it believe it will be significantly
affected by inflation during 2004.
ITEM 7A. 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 flows.
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 flows.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
Number
------
Report of Independent Auditors 23
TransAct Technologies Incorporated consolidated financial statements:
Consolidated balance sheets as of December 31, 2003 and
December 31, 2002. 24
Consolidated statements of operations
for the years ended December 31, 2003, 2002 and 2001. 25
Consolidated statements of changes in shareholders' equity and
comprehensive income (loss) for the years ended December 31, 2003,
2002 and 2001. 26
Consolidated statements of cash flows for the years ended
December 31, 2003, 2002 and 2001. 27
Notes to consolidated financial statements. 28
22
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of TransAct Technologies Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and
comprehensive income (loss) and of cash flows, present fairly, in all material
respects, the financial position of TransAct Technologies Incorporated and its
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 26, 2004, except for Note 21
which is as of March 4, 2004
23
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
2003 2002
------------ -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 498 $ 902
Receivables, net 9,074 4,039
Inventories 8,061 8,435
Refundable income taxes 130 228
Deferred tax assets 2,340 2,221
Other current assets 379 327
-------- --------
Total current assets 20,482 16,152
-------- --------
Fixed assets, net 3,607 3,924
Goodwill 1,469 1,469
Deferred tax assets 684 193
Other assets 119 292
-------- --------
5,879 5,878
-------- --------
Total assets $ 26,361 $ 22,030
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan $ 90 $ 100
Accounts payable 3,288 2,983
Accrued liabilities 2,892 2,244
Accrued restructuring expenses 480 900
Accrued patent license fees 408 160
Deferred revenue 1,537 967
-------- --------
Total current liabilities 8,695 7,354
-------- --------
Revolving bank loan payable - 2,541
Long-term portion of term loan 330 250
Accrued restructuring expenses 1,645 818
Accrued patent license fees 750 -
Accrued product warranty 169 221
Deferred revenue 523 477
-------- --------
3,417 4,307
-------- --------
Total liabilities 12,112 11,661
-------- --------
Commitments and contingencies
Series B Redeemable convertible preferred stock, $0.01 par
value, 8,000 shares authorized, 4,000 shares issued and
outstanding (liquidation preference of $4,098 and $4,176
as of December 31,2003 and 2002) 3,902 3,824
-------- --------
Shareholders' equity:
Preferred stock, $0.01 par value, 4,792,000
authorized, none issued and outstanding - -
Preferred stock, Series A, $0.01 par value, 200,000
authorized, none issued and outstanding - -
Common stock, $0.01 par value, 20,000,000 authorized,
5,968,433 and 5,715,119 shares issued and outstanding 60 57
Additional paid-in capital 8,441 6,308
Retained earnings 1,769 599
Unamortized restricted stock compensation (30) (97)
Loan receivable from officer - (330)
Accumulated other comprehensive income 107 8
-------- --------
Total shareholders' equity 10,347 6,545
-------- --------
Total liabilities, redeemable convertible preferred stock and
shareholders' equity $ 26,361 $ 22,030
======== ========
See accompanying notes to consolidated financial statements.
24
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2003 2002 2001
---- ---- ----
Net sales $ 52,098 $ 39,461 $ 43,974
Cost of sales 36,555 29,245 34,200
-------- -------- --------
Gross profit 15,543 10,216 9,774
-------- -------- --------
Operating expenses:
Engineering, design and product development 2,276 2,025 3,070
Selling and marketing 4,968 4,027 4,570
General and administrative 4,483 4,190 6,099
Business consolidation and restructuring 1,128 958 3,321
-------- -------- --------
12,855 11,200 17,060
-------- -------- --------
Operating income (loss) 2,688 (984) (7,286)
-------- -------- --------
Other income (expense):
Interest expense (219) (217) (430)
Interest income 9 25 33
Write-off of deferred financing costs (103) - -
Other, net (122) 94 13
-------- -------- --------
(435) (98) (384)
-------- -------- --------
Income (loss) before income taxes 2,253 (1,082) (7,670)
Income tax provision (benefit) 725 (390) (2,748)
-------- -------- --------
Net income (loss) 1,528 (692) (4,922)
Dividends and accretion charges on preferred
stock (358) (358) (358)
-------- -------- --------
Net income (loss) available to common
shareholders $ 1,170 $ (1,050) $ (5,280)
======== ======== ========
Net income (loss) per common share:
Basic $ 0.20 $ (0.19) $ (0.95)
Diluted $ 0.19 $ (0.19) $ (0.95)
Shares used in per share calculation:
Basic 5,793 5,636 5,551
Diluted 6,223 5,636 5,551
See accompanying notes to consolidated financial statements.
25
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
(In thousands, except share data)
Unamortized
Common Stock Additional Restricted
------------------- Paid-in Retained Stock
Shares Amount Capital Earnings Compensation
------ ------ ------- -------- ------------
Balance, December 31, 2000 5,607,827 56 $ 6,069 $ 6,929 $ (477)
Issuance of restricted stock 20,000 - 95 - (95)
Cancellation of restricted stock (3,000) - (22) - 22
Issuance of shares from exercise of
stock options 53,500 1 233 - -
Issuance of shares from employee
stock purchase plan 6,443 - 28 - -
Amortization of restricted stock
compensation - - - - 264
Tax charge related to restricted
stock vested - - (100) - -
Dividends paid on preferred stock - - - (280) -
Accretion of preferred stock -
discount and issuance costs - - (78) - -
Comprehensive loss:
Foreign currency translation
adjustment - - - - -
Net loss - - - (4,922) -
--------- -------- ---------- ---------- ----------
Balance, December 31, 2001 5,684,770 57 6,303 1,649 (286)
Cancellation of restricted stock (600) - (5) - 5
Issuance of shares from exercise of
stock options 26,100 - 111 - -
Issuance of shares from employee
stock purchase plan 4,849 - 19 - -
Amortization of restricted stock
compensation - - - 184 -
Tax charge related to restricted
stock vested - - (120) - -
Dividends paid on preferred stock - - - (280) -
Accretion of preferred stock
discount and issuance costs - - - (78) -
Comprehensive income (loss):
Foreign currency translation
adjustment - - - - -
Net loss - - - (692) -
--------- -------- ---------- ---------- ----------
Balance, December 31, 2002 5,715,119 57 6,308 599 (97)
Issuance of shares from exercise of
stock options 238,604 3 1,355 - -
Issuance of shares from employee
stock purchase plan 2,087 - 9 - -
Issuance of shares from cashless
exercise of common stock
warrants 12,623 - - - -
Amortization of restricted stock
compensation - - - - 67
Tax benefit related to employee
stock sales - - 769 - -
Dividends paid on preferred stock - - - (280) -
Accretion of preferred stock
discount and issuance costs - - - (78) -
Repayment of loan from officer - - - - -
Comprehensive income:
Foreign currency translation
adjustment - - - - -
Net income - - - 1,528 -
--------- -------- ---------- ---------- ----------
Balance, December 31, 2003 5,968,433 $ 60 $ 8,441 $ 1,769 $ (30)
========= ======== ========== ========== ==========
Loan Accumulated
Receivable Other Total
from Comprehensive Comprehensive
Officer Income (Loss) Total Income (Loss)
------- ------------- ----- -------------
Balance, December 31, 2000 $ (330) $ (56) $ 12,191
Issuance of restricted stock - - -
Cancellation of restricted stock - - -
Issuance of shares from exercise of
stock options - 234 -
Issuance of shares from employee
stock purchase plan - - 28
Amortization of restricted stock
compensation - - 264
Tax charge related to restricted
stock vested - - (100)
Dividends paid on preferred stock - - (280)
Accretion of preferred stock
discount and issuance costs - - (78)
Comprehensive loss:
Foreign currency translation
adjustment - (22) (22) $ (22)
Net loss - - (4,922) (4,922)
----------- ---------- ---------- ------------
Balance, December 31, 2001 (330) (78) 7,315 (4,944)
============
Cancellation of restricted stock - - - -
Issuance of shares from exercise of
stock options - - 111
Issuance of shares from employee
stock purchase plan - - 19
Amortization of restricted stock
compensation 184 -
Tax charge related to restricted
stock vested - - (120)
Dividends paid on preferred stock - - (280)
Accretion of preferred stock
discount and issuance costs - (78) -
Comprehensive income (loss):
Foreign currency translation
adjustment - 86 86 86
Net loss - - (692) (692)
----------- ---------- ---------- ------------
Balance, December 31, 2002 (330) 8 6,545 (606)
============
Issuance of shares from exercise of
stock options - - 1,358
Issuance of shares from employee
stock purchase plan - - 9
Issuance of shares from cashless
exercise of common stock
warrants - - -
Amortization of restricted stock
compensation - - 67
Tax benefit related to employee
stock sales - - 769
Dividends paid on preferred stock - - (280)
Accretion of preferred stock
discount and issuance costs - - (78)
Repayment of loan from officer 330 - 330
Comprehensive income:
Foreign currency translation
adjustment - 99 99 99
Net income - - 1,528 1,528
----------- ---------- ---------- ------------
Balance, December 31, 2003 $ - $ 107 $ 10,347 $ 1,627
=========== ========== ========== ============
See accompanying notes to consolidated financial statements.
26
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2003 2002 2001
------- ------- -------
Cash flows from operating activities:
Net income (loss) $ 1,528 $ (692) $(4,922)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Non-cash compensation expense 67 184 264
Write-off of deferred bank financing costs 103 - -
Depreciation and amortization 1,656 1,935 3,134
Deferred income taxes 162 968 (2,743)
Loss (gain) on sale of fixed assets (1) - 209
Changes in operating assets and liabilities:
Receivables (5,035) 8 2,090
Inventories 374 2,198 (776)
Refundable income taxes 98 (228) -
Other current assets (52) (115) 599
Other assets (8) (63) (326)
Accounts payable 305 80 213
Accrued liabilities and other liabilities 1,212 528 706
Accrued patent license fees 998 160 -
Accrued restructuring expenses 407 (1,284) 2,897
------- ------- -------
Net cash provided by operating activities 1,814 3,679 1,345
------- ------- -------
Cash flows from investing activities:
Purchases of fixed assets (1,261) (577) (1,382)
Proceeds from sale of fixed assets 1 - 2
Repayment of loan receivable from officer 330 - -
------- ------- -------
Net cash used in investing activities (930) (577) (1,380)
------- ------- -------
Cash flows from financing activities:
Revolving bank loan repayments, net (2,541) (2,453) (950)
Term loan borrowings 450 - 500
Term loan repayments (380) (100) (50)
Proceeds from option exercises and employee
stock purchase plan 1,364 130 262
Payment of cash dividends on preferred stock (280) (280) (280)
------- ------- -------
Net cash provided used in financing
activities (1,387) (2,703) (518)
------- ------- -------
Effect of exchange rate changes 99 86 (22)
------- ------- -------
Increase (decrease) in cash and cash
equivalents (404) 485 (575)
Cash and cash equivalents, beginning of period 902 417 992
------- ------- -------
Cash and cash equivalents, end of period $ 498 $ 902 $ 417
======= ======= =======
Supplemental cash flow information:
Interest paid $ 226 $ 252 $ 403
Income taxes paid (refunded), net 229 (975) (637)
Non-cash financing activities:
Accretion of preferred stock discount and
issuance costs 78 78 78
See accompanying notes to consolidated financial statements.
27
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
TransAct Technologies Incorporated ("TransAct"), which has a
headquarters in Wallingford, CT and a 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, we market related consumables, spare parts and service. Our
printers are used worldwide to provide transaction records such as
receipts, tickets, coupons, register journals and other documents. We focus
on two core markets: point-of-sale and banking ("POS") and gaming and
lottery. We sell our products to original equipment manufacturers ("OEM"),
value-added resellers, selected distributors, as well as directly to
end-users. We operate predominantly in the United States of America,
however, our product distribution spans across the Americas, Europe, the
Middle East, Africa, the Caribbean Islands and the South Pacific.
We design, develop, manufacture and market a broad array of
transaction-based printers utilizing inkjet, thermal and impact printing
technology for applications requiring up to 60 character columns in each of
its vertical markets. Our printers are configurable, which offer customers
the ability to choose from a variety of features and functions. Options
typically include printed circuit board configuration, paper cutting
devices, paper handling capacities and cabinetry color. In addition to our
configurable printers, we manufacture custom printers for certain OEM
customers. In collaboration with these customers, we provide engineering
and manufacturing expertise for the design and development of specialized
printers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements were prepared on a consolidated basis to include the accounts of
the TransAct and its wholly-owned subsidiaries. All significant
intercompany accounts, transactions and unrealized profit were eliminated
in consolidation. Certain prior year amounts have been reclassified to
conform to the current year's presentation.
USE OF ESTIMATES: The accompanying consolidated financial statements
were prepared using estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses, and disclosure of
contingent assets and liabilities as of the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
SEGMENT REPORTING: We apply the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("FAS 131"). We view our operations and manage our
business as one segment, the design, development, manufacture and sale of
transaction-based printers. Factors used to identify TransAct's single
operating segment include the organizational structure of the Company and
the financial information available for evaluation by the chief operating
decision-maker in making decisions about how to allocate resources and
assess performance. We operate predominantly in one geographical area, the
United States of America. See Note 19 for information regarding our
international operations. We provide the following disclosures of revenues
from products and services:
Year ended Year ended Year ended
(In thousands) December 31, 2003 December 31, 2002 December 31, 2001
------------------ ----------------- ------------------
Printers - POS $ 14,027 26.9% $ 12,900 32.7% $ 18,887 43.0%
Printers - Gaming and lottery 29,528 56.7% 19,578 49.6% 18,965 43.1%
--------- ----- ------- ----- ---------- -----
Subtotal - printers 43,555 83.6% 32,478 82.3% 37,852 86.1%
Services and consumables 8,543 16.4% 6,983 17.7% 6,122 13.9%
--------- ----- -------- ----- ---------- -----
Total net sales $ 52,098 100.0% $ 39,461 100.0% $ 43,974 100.0%
========= ===== ======== ===== ========== =====
CASH AND CASH EQUIVALENTS: We consider all highly liquid investments with a
maturity date of three months or less at date of purchase to be cash
equivalents.
28
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES: Inventories are stated at the lower of cost (principally
standard cost which approximates actual cost on a first-in, first-out
basis) or market. We assess market value based on historical usage and
estimates of future demand in the market.
FIXED ASSETS: Fixed assets are stated at cost. Depreciation is
provided for primarily by the straight-line method over the estimated
useful lives. The estimated useful life of tooling is five years; machinery
and equipment is ten years; furniture and office equipment is five to ten
years; and computer equipment is three years. Leasehold improvements are
amortized over the shorter of the term of the lease or the useful life of
the asset. Costs related to repairs and maintenance are expensed as
incurred. Depreciation was $1,579,000, $1,843,000 and $2,858,000 in 2003,
2002 and 2001, respectively. Depreciation for 2001 included $680,000 of
accelerated depreciation on certain leasehold improvements and other fixed
assets due to the closing of our Wallingford, CT facility. As part of the
facility closing, we disposed of $2,114,000 and $895,000 of fixed assets at
cost, net of accumulated depreciation of $2,114,000 and $800,000 during
2002 and 2001, respectively. This resulted in a loss on disposal of $0 and
$95,000 in 2002 and 2001, respectively.
GOODWILL: We adopted the provisions of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS
142") on January 1, 2002. Under FAS 142, goodwill will no longer be
amortized and will be tested for impairment at least annually at the
reporting unit level.
Prior to the adoption of FAS 142 on January 1, 2002, we had been
amortizing goodwill related to the acquisition of (1) Ithaca Peripherals,
Inc. ("Ithaca") in 1991 and (2) the ribbon business formerly conducted by
Tridex ("Tridex Ribbon Business") in 1999. The original amount applicable
to the Ithaca acquisition totaled $3,536,000 and was being amortized on the
straight-line method over twenty years. The original amount applicable to
the Tridex Ribbon Business acquisition totaled $180,000 and was being
amortized on the straight-line method over five years. We recorded
amortization of goodwill of approximately $134,000, net of taxes, during
2001.
FAS 142 requires that goodwill be tested annually for impairment, or
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. We have performed an impairment test as of
December 31, 2003 and determined that no impairment has occurred.
LONG-LIVED ASSETS: We evaluate our long-lived assets, which are
comprised primarily of fixed assets, for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset group to future
undiscounted net cash flows expected to be generated by the asset group. If
such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. We did not recognize any impairment
loss for long-lived assets in 2003, 2002 or 2001, other than the assets
disposed of as part of the closing of our Wallingford, CT facility during
2001.
REVENUE RECOGNITION: Our typical contracts include the sale of
printers, which are sometimes accompanied by separately-priced extended
warranty contracts. We also sell spare parts, consumables, and other repair
services (sometimes pursuant to multi-year product maintenance contracts)
which are not included in the original printer sale and are ordered by the
customer as needed. We recognize revenue pursuant to the guidance within
SAB 104, "Revenue Recognition". Specifically, revenue is recognized when
evidence of an arrangement exists, delivery (based on shipping terms which
are generally FOB shipping point) has occurred, the selling price is fixed
and determinable, and collectibility is reasonably assured. We provide for
an estimate of product returns based on historical experience at the time
of revenue recognition.
Revenue related to extended warranty and product maintenance contracts
is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"),
"Accounting for Separately Priced Extended Warranty and Product Maintenance
Contracts." Pursuant to FTB 90-1, revenue related to separately priced
product maintenance contract is deferred and recognized over the term of
the maintenance period. We record deferred revenue for amounts received
from customers for maintenance contracts prior to the maintenance period.
29
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED): In December 2003, the SEC issued
Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104"), which
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104
rescinds accounting guidance in SAB 101 related to multiple-element
arrangements as this guidance has been superseded as a result of the
issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." The adoption of SAB 104 did not have a material impact on
our financial position or results of operations.
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 our financial statements.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
expose TransAct to concentrations of credit risk are limited to accounts
receivable. Sales to GTECH Corporation ("GTECH") (for lottery printers)
accounted for approximately 19%, 27% and 33% of net sales during 2003, 2002
and 2001, respectively. Sales to Harrah's (for casino slot machine
printers) accounted for approximately 12% of net sales during 2003. As of
December 31, 2003, we had an accounts receivable balance due from Harrah's
(for sales of casino printers) that accounted for 31% of the total accounts
receivable. No other customer accounts receivable balance exceeded 10% of
the total balance due at December 31, 2003.
WARRANTY: We warrant our products for up to 27 months and record the
estimated cost of such product warranties at the time the sale is recorded.
Estimated warranty costs are based upon actual past experience of product
returns and the related estimated cost of labor and material to make the
necessary repairs.
The following table summarizes the activity recorded in the accrued
product warranty liability during 2003, 2002 and 2001:
Year ended December 31,
(In thousands) 2003 2002 2001
------ ------ ------
Balance, beginning of year $ 644 $ 710 $ 603
Additions related to warranties issued 409 394 609
Warranty costs incurred (558) (460) (502)
------ ------ ------
Balance, end of year $ 495 $ 644 $ 710
====== ====== ======
Approximately $169,000 and $221,000 of the accrued product warranty
liability were classified as long-term at December 31, 2003 and 2002,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses
include engineering, design and product development expenses incurred in
connection with specialized engineering and design to introduce new
products and to customize existing products, and are expensed as a
component of operating expenses as incurred. We spent approximately
$2,276,000, $2,025,000 and $3,070,000 on research and development expenses
in 2003, 2002 and 2001, respectively.
RESTRUCTURING: In 2001, we undertook a plan to consolidate all
manufacturing and engineering into our existing Ithaca, NY facility and
close our Wallingford, CT facility. We have 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 restructuring expenses. See
Note 8.
30
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: The income tax amounts reflected in the accompanying
financial statements are accounted for under the liability method in
accordance with FAS 109 "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled.
We assess the likelihood that net deferred tax assets will be realized from
future taxable income, and to the extent that we believe that realization
is not likely, we establish a valuation allowance.
FOREIGN CURRENCY TRANSLATION: The financial position and results of
operations of our foreign subsidiary in the United Kingdom are measured
using local currency as the functional currency. Assets and liabilities of
such subsidiary have been translated into U.S. dollars at the year-end
exchange rate, related revenues and expenses have been translated at the
weighted average exchange rate for the year, and shareholders' equity has
been translated at historical exchange rates. The resulting translation
gains or (losses) are recorded in stockholders' equity as a cumulative
translation adjustment, which is a component of accumulated other
comprehensive income. Foreign currency transaction gains and losses are
recognized in Other Income (Expense) and have not been significant for all
periods presented.
STOCK-BASED COMPENSATION: We have 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. We have adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended
by Statement of Financial Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123" ("FAS
148"). See Note 12 for additional disclosures related to our stock-based
compensation plans.
The following table illustrates the effect on net income (loss),
compensation expense and 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 our stock plans. For the years ended
December 31, 2002 and 2001, stock-based compensation expense determined
under the fair value method has been adjusted to properly reflect related
tax effects.
Year Ended December 31,
(In thousands, except per share data) 2003 2002 2001
---------- --------- ---------
Net income (loss) available to common shareholders:
Net income (loss) available to common shareholders,
as reported $ 1,170 $ (1,050) $ (5,280)
Add: Stock-based compensation expense included in
Reported net income (loss), net of tax 43 118 169
---------- --------- ---------
Deduct: Stock-based compensation expense determined (229) (753) (1,094)
under fair value based method for all awards, net of tax
Pro forma net income (loss) available to common shareholders $ 984 $ (1,685) $ (6,205)
========== ========= =========
Net income (loss) per share:
Basic:
As reported $ 0.20 $ (0.19) $ (0.95)
Pro forma 0.17 (0.30) (1.12)
Diluted:
As reported $ 0.19 $ (0.19) $ (0.95)
Pro forma 0.16 (0.30) (1.12)
31
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount for cash and
cash equivalents approximates fair value because of the short maturity of
these instruments. The carrying amount of receivables, other current
assets, other assets, accounts payable and accrued liabilities is a
reasonable estimate of fair value because of the short nature of the
transactions. The carrying value of long-term debt approximates the fair
value based upon the variable rate on that debt.
NET INCOME AND LOSS PER SHARE: We report net income or loss per share
in accordance with Financial Standard No. 128, "Earnings per Share (EPS)"
("FAS 128"). Under FAS 128, basic EPS, which excludes dilution, is computed
by dividing income or loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Net income or
loss available to common shareholders represents reported net income or
loss less accretion of redeemable convertible preferred stock. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. Diluted EPS includes in-the-money options and warrants using the
treasury stock method, and also includes the assumed conversion of
preferred stock using the if-converted method, but only if dilutive. During
a loss period, the assumed exercise of in-the-money stock options and
warrants and the conversion of convertible preferred stock has an
anti-dilutive effect, and therefore, these instruments are excluded from
the computation of dilutive EPS.
COMPREHENSIVE INCOME: Statement of Accounting Standard No. 130,
"Reporting Comprehensive Income" ("FAS 130"), requires that items defined
as comprehensive income or loss be separately classified in the financial
statements and that the accumulated balance of other comprehensive income
or loss be reported separately from accumulated deficit and additional
paid-in-capital in the equity section of the balance sheet. We include the
foreign currency translation adjustment related to our subsidiary in the
United Kingdom within our calculation of comprehensive income.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In September 2002,
the FASB issued Statement of Financial Standard No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("FAS 146"). This
statement provides guidance on the recognition and measurement of
liabilities associated with exit or disposal activities and requires that
such liabilities be recognized when incurred. This statement is effective
for exit or disposal activities initiated on or after January 1, 2003 and
does not impact the recognition of costs under our existing programs. We
accounted for our business consolidation and restructuring (Note 7) under
the existing guidance 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)". Accordingly, FAS
146 did not impact the timing or recognition of costs associated with our
current exit or disposal activities.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES: In
November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). The interpretation
provides guidance on the guarantor's accounting and disclosure requirements
for guarantees, including indirect guarantees of indebtedness. The
accounting guidelines are applicable to guarantees issued after December
31, 2002, irrespective of the guarantor's fiscal year-end. However, the
disclosure requirements are effective for financial statements that end
after December 15, 2002. We adopted the disclosure provisions of FIN 45
related to our warranty obligations in the fourth quarter of 2002. (See
Note 2).
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). FIN 46 requires us to consolidate a variable interest
entity ("VIE") if we have a majority of the risks, rewards or both of that
entity. FIN 46 will be effective for most VIEs beginning in the fourth
quarter of 2003. TransAct has no investments in VIEs; therefore, FIN 46 had
no effect on our financial statements.
32
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In April 2003, the FASB
issued Statement of Accounting Standard No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149
clarifies when a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a financing
component that warrants special reporting in the statements of cash flows.
FAS 149 is generally effective for contracts entered into or modified after
June 30, 2003. The adoption of FAS 149 had no effect on our financial
statements
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY: In May 2003, the FASB issued Statement of
Accounting Standard 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 our financial statements.
4. RECEIVABLES
Receivables are net of the allowance for doubtful accounts. The
reconciliation of the allowance for doubtful accounts is as follows:
Year Ended December 31,
2003 2002 2001
---- ---- ----
(In thousands)
Balance at beginning of year $ 78 $ 84 $ 107
Doubtful accounts provision (reversal) 76 (2) 45
Accounts written off, net of recoveries (54) (4) (68)
------ ----- ------
Balance at end of year $ 100 $ 78 $ 84
====== ===== ======
5. INVENTORIES
The components of inventories are:
December 31,
(In thousands) 2003 2002
------- --------
Raw materials and component parts $ 7,947 $ 8,339
Work-in-process - 1
Finished goods 114 95
-------- --------
$ 8,061 $ 8,435
======== ========
6. FIXED ASSETS
The components of fixed assets are:
December 31,
(In thousands) 2003 2002
-------- --------
Tooling, machinery and equipment $ 11,843 $ 10,841
Furniture, office and computer equipment 3,506 3,291
Leasehold improvements 486 465
-------- --------
15,835 14,597
Less: accumulated depreciation and amortization (12,228) (10,673)
-------- --------
$ 3,607 $ 3,924
======== ========
33
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACCRUED LIABILITIES
The components of accrued liabilities are:
December 31,
(In thousands) 2003 2002
------- -------
Payroll and fringe benefits $ 1,087 $ 505
Income taxes 560 455
Warranty - current portion 326 423
Rent and occupancy 331 326
Other 588 535
------- -------
$ 2,892 $ 2,244
======= =======
8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES
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 manufacturing facility (the "Consolidation"). As of
December 31, 2001, substantially all Wallingford product lines were
successfully transferred to Ithaca, NY. We currently maintain our corporate
headquarters and a small service depot in Wallingford. The closing of the
Wallingford facility resulted in the termination of employment of
approximately 70 production, administrative and management employees. We
have 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.
During 2001, we recorded expenses of approximately $4,096,000 related
to costs associated with the Consolidation, including severance pay, stay
bonuses, employee benefits, moving expenses, non-cancelable lease payments,
accelerated depreciation and other costs.
During 2002, we incurred an additional $958,000 of Consolidation
expenses. Approximately $900,000 of these expenses was the result of a
revision to 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
approximately $900,000 to reflect the longer period of time then projected
to sublease our Wallingford, CT facility. Based on this revised estimate,
we had projected estimated sublease income beginning October 1, 2004.
After expanded efforts in 2003, we determined that because of the
continuing regional decline in the commercial real estate market during
2003, it was unlikely that we would be able to sublease our Wallingford, CT
manufacturing facility, which has a lease term that expires in March 2008.
As a result, during the fourth quarter of 2003, we increased our
restructuring accrual by $1,270,000 to provide for the remaining
non-cancelable lease payments and related costs associated with the
manufacturing facility. This increase represented the reversal of estimated
sublease income for the remainder of the lease term. In addition, we
determined that we will not terminate several employees originally included
in the Consolidation. As a result, we reversed the remaining $142,000 of
accrued restructuring expenses in 2003 related to employee severance and
termination expenses, as we completed all required payments for such
expenses by December 31, 2003.
34
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES (CONTINUED)
The following table summarizes the activity recorded in the
restructuring accrual during 2003, 2002 and 2001.
Year ended December 31,
(In thousands) 2003 2002 2001
-------- --------- -------
Accrual balance, beginning of year $ 1,718 $ 3,002 $ 105
-------- --------- -------
Business consolidation and
restructuring expenses:
Employee severance and
termination expenses (1) (142) 75 2,070
Facility closure and consolidation
expenses (2) 1,270 883 1,251
-------- --------- -------
1,128 958 3,321
-------- --------- -------
Cash payments (721) (2,242) (424)
-------- --------- -------
Accrual balance, end of year $ 2,125 $ 1,718 $ 3,002
======== ========= =======
(1) Employee severance and termination related expenses are the estimated
termination salaries, benefits, outplacement, counseling services and
other related expenses expected to be paid to employees who are
involuntarily terminated.
(2) Facility closure and consolidation expenses are the estimated costs to
close the Wallingford, CT facility including lease termination expenses and
other related expenses, in accordance with the restructuring plan. The
Wallingford facility closure was substantially completed by December 31,
2001.
At December 31, 2003 and 2002, $1,645,000 and $818,000, respectively,
of the restructuring accrual was classified as part of long-term
liabilities. This represents the portion of non-cancelable lease
termination costs and other costs expected to be paid beyond one year.
The following table summarizes the components of all charges related
to the Consolidation.
Year ended December 31,
(In thousands) 2003 2002 2001
------- -------- -------
Business consolidation and
restructuring expenses $ 1,128 $ 958 $ 3,321
Accelerated depreciation and asset
disposal losses (1) - - 775
------- ------- -------
Total business consolidation,
restructuring and related charges $ 1,128 $ 958 $ 4,096
======= ======= =======
(1) Represents accelerated depreciation ($680) and asset disposal losses ($95)
on certain leasehold improvements and other fixed assets incurred during
2001, due to the closing of the Wallingford facility. These charges are
included in general and administrative expenses during the year ended
December 31, 2001.
35
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREMENT SAVINGS PLAN
On April 1, 1997, we established the TransAct Technologies Retirement
Savings Plan (the "401(k) Plan"), a defined contribution plan under Section
401(k) of the Internal Revenue Code. All full-time employees are eligible
to participate in the 401(k) Plan at the beginning of the calendar quarter
immediately following their date of hire. We match employees' contributions
at a rate of 50% of employees' contributions up to the first 6% of the
employees' compensation contributed to the 401(k) Plan. Our matching
contributions were $174,000, $158,000 and $204,000 in 2003, 2002 and 2001,
respectively.
10. 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 our common stock and the creation of other liens. We were in
compliance with all financial covenants of the Banknorth Credit Facility at
December 31, 2003.
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 10) 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.
As of December 31, 2003, we had no outstanding borrowings on the
revolving credit line and $420,000 outstanding on the term loan. We repaid
the remaining balance on the term loan in January 2004. Undrawn commitments
under the Banknorth Credit Facility were approximately $11,500,000 at
December 31, 2003. However, our maximum additional available borrowings
under the facility were limited to approximately $6,100,000 at December 31,
2003 based on the borrowing base of our collateral. Annual principal
payments on the term loan are $90,000.
As a result of the refinancing, we recorded a charge of approximately
$103,000 in 2003 related to the write-off of unamortized deferred financing
costs from the prior credit facility with LaSalle.
Prior to the Banknorth Credit Facility, we operated under a
three-year, $13.5 million credit facility (the "LaSalle Credit Facility")
with LaSalle, which expired upon signing of the Banknorth Credit Facility
in August 2003. The LaSalle Credit Facility provided a $12 million
revolving credit line, a $0.5 million term loan and a $1 million equipment
loan facility. Borrowings under the revolving credit line originally bore a
floating rate of interest at LaSalle's prime rate. Borrowings under both
the term loan and equipment loan originally bore a floating rate of
interest at LaSalle's prime rate plus 0.50%. Borrowings under the LaSalle
Credit Facility were collateralized by a lien on all the personal property
assets of the Company. We had no borrowings under the equipment loan during
the term of the facility.
36
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BORROWINGS (CONTINUED)
On November 12, 2002, we amended the LaSalle Credit Facility. Under
the terms of the amendment ("LaSalle Amendment No. 3"), LaSalle (1) waived
compliance with the minimum EBITDA, minimum tangible net worth and fixed
charge coverage ratio financial covenants as of September 30, 2002 and (2)
revised these covenants to exclude the effect of $900,000, of the total
$912,000, of restructuring charges incurred in the third quarter. 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.
11. COMMITMENTS AND CONTINGENCIES
At December 31, 2003, we were lessee on operating leases for equipment
and real property. The terms of certain leases provide for escalating rent
payments in later years of the lease as well as payment of minimum rent and
real estate taxes. Rent expense was approximately $1,096,000, $975,000 and
$983,000 in 2003, 2002 and 2001, respectively. Minimum aggregate rental
payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2003
are as follows: $952,000 in 2004; $972,000 in 2005; $966,000 in 2006;
$955,000 in 2007; $647,000 in 2008; and $1,797,000 thereafter. Such
payments include those related to the lease of our Wallingford, CT
manufacturing facility.
12. PATENT LICENSE FEES
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
third party competitor. In an effort to resolve this matter, we originally
offered to pay approximately $160,000, while the other party sought payment
of up to $950,000. We recorded a charge of $160,000 in cost of sales in the
fourth quarter of 2002 related to this matter. Based on the likely outcome
of current negotiations, we recorded an additional charge of $740,000 in
the fourth quarter of 2003 related to usage prior to January 1, 2003.
Although settlement negotiations are continuing, we believe that the total
accrual of $900,000 reflects the best estimate of the expense related to
the pre-2003 usage of this third party patented technology. We also accrued
estimated royalty payments for usage of this technology after January 1,
2003. We have classified approximately $750,000 of our total accrual
related to this matter as a long-term liability based on the likely payment
schedule resulting from our current negotiations.
13. STOCK INCENTIVE PLANS AND WARRANTS
STOCK INCENTIVE PLANS. We currently have three primary stock incentive
plans: the 1996 Stock Plan which provides for the grant of awards to
officers and other key employees of the Company, the 1996 Directors' Stock
Plan which provides for non-discretionary awards to non-employee directors,
and the 2001 Employee Stock Plan which provides for the grant of awards to
key employees of the Company and other non-employees who may provide
services to the Company. The plans generally provide for awards in the form
of: (i) incentive stock options, (ii) non-qualified stock options, (iii)
shares of restricted stock, (iv) restricted units, (v) stock appreciation
rights or (vi) limited stock appreciation rights. However, the 2001
Employee Stock Plan does not provide for incentive stock option awards.
Options granted under these plans are at prices equal to 100% of the fair
market value of the common stock at the date of grant. Options granted have
a ten-year term and generally vest over a three- to five-year period,
unless automatically accelerated for certain defined events. At December
31, 2003, we have reserved 1,150,000, 140,000 and 150,000 shares of common
stock for issuance under the 1996 Stock Plan, the 1996 Directors' Stock
Plan, and the 2001 Employees Stock Plan, respectively.
37
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
OPTION EXCHANGE OFFER. In November 2001, we announced an offer to
certain officers to exchange outstanding employee stock options having an
exercise price of $9.00 or more per share in return for new stock options
to be granted by the Company (the "Exchange Offer"). Pursuant to the
Exchange Offer, the option holder received a commitment for the grant of
one new option for each option tendered and accepted for exchange, no
sooner than six months and one day from November 16, 2001. A total of
215,000 options were accepted for exchange under the Exchange Offer and
were canceled in November 2001 (and treated as canceled in 2001 in the
table below). The new options were granted on May 17, 2002, and vested 25%
immediately upon grant with the remainder vesting 25% annually over the
next three years. The new options were granted at an exercise price equal
to the fair market value of our common stock on the date of grant. There
was no compensation expense recorded as a result of the Exchange Offer.
EMPLOYEE STOCK PURCHASE PLAN: In May 2000, our shareholders approved
the Employee Stock Purchase Plan (the "ESPP"), under which 50,000 shares of
our common stock are available for issuance to employees beginning June 1,
2000. All full-time employees are eligible to participate in the ESPP at
the beginning of each six-month period (the "Offering Period"), which
begins on June 1 and December 1. Eligible employees may elect to withhold
up to 5% of their salary to purchase shares of our common stock at a price
equal to 85% of the fair market value of the stock on the first or last day
of each Offering Period, whichever is lower. The ESPP will terminate at the
earlier of May 31, 2005 or the date on which all 50,000 shares available
for issuance under the ESPP have been sold. We sold 2,087, 4,849 and 6,443
shares of common stock under the ESPP during 2003, 2002 and 2001,
respectively. At December 31, 2003, 31,794 shares remained available for
sale.
The 1996 Stock Plan, 1996 Directors' Stock Plan and 2001 Employee
Stock Plan option activity is summarized below:
Year Ended December 31,
2003 2002 2001
------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- --------- -------- --------
Outstanding at beginning of
period: 945,400 $ 6.30 742,750 $ 6.95 919,000 $ 8.34
Granted 68,000 8.76 366,750 5.47 189,500 5.67
Exercised (238,604) 5.68 (26,100) 4.24 (53,500) 4.37
Canceled (25,760) 5.72 (138,000) 7.97 (312,250) 10.71
-------- -------- -------- --------- -------- -------
Outstanding at end of period 749,036 $ 6.74 945,400 $ 6.30 742,750 $ 6.95
======== ======== ======== ========= ======== =======
Options exercisable at end of
period 361,753 $ 7.08 429,845 $ 6.81 383,350 $ 7.34
======== ======== ======== ========= ======== =======
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Weighted- Weighted- Weighted-
Outstanding at Average Average Exercisable at Average
December 31, Exercise Remaining December 31, Exercise
Range of Exercise Prices 2003 Price Contractual Life 2003 Price
-------------- -------- ---------------- -------------- ---------
(In years)
$ 2.50 - $ 5.00 112,521 $ 4.40 7.2 48,403 $ 4.02
5.01 - 7.50 374,765 5.67 8.0 130,200 5.70
7.51 - 10.00 188,600 8.63 3.7 158,000 8.57
10.01 - 15.00 71,150 10.63 7.2 25,150 10.75
15.01 - 25.00 2,000 24.12 9.8 - 10.75
------- -------
749,036 6.74 6.72 361,753 7.08
======= =======
38
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for the grants made during the years ended December 31, 2003, 2002 and
2001.
Year Ended December 31,
2003 2002 2001
---- ---- ----
Risk-free interest rate 2.6% 4.5% 4.6%
Dividend yield 0% 0% 0%
Expected volatility factor 82.1% 83.3% 85.5%
Expected option term 5.8 years 6.4 years 6.1 years
Weighted average fair value of options granted during period $6.09 $4.12 $4.25
RESTRICTED STOCK: Under the 1996 Stock Plan, we have granted shares of
restricted common stock, for no consideration, to our officers, one outside
director and certain key employees. The 1996 Stock Plan restricted stock
activity is summarized below:
Year Ended December 31,
2003 2002 2001
---- ---- ----
Outstanding shares at beginning of period 46,666 89,360 83,320
Granted - - 20,000
Vested (35,333) (42,094) (10,960)
Canceled - (600) (3,000)
------ ------ ------
Outstanding shares at end of period 11,333 46,666 89,360
====== ====== ======
The weighted average fair value of restricted stock granted was $4.75
for 2001. No restricted stock was granted during 2003 and 2002. Of the
11,333 shares of restricted stock outstanding at December 31, 2003, 3,000
shares vest over a five-year period, 3,333 shares vest over a three-year
period and 5,000 shares vest over a two-year period. Under certain
conditions, vesting may be automatically accelerated. Upon issuance of the
restricted stock, unearned compensation equivalent to the market value at
the date of grant is charged to shareholders' equity and subsequently
amortized over the vesting period. Compensation expense of $67,000,
$184,000 and $264,000 was recorded during 2003, 2002 and 2001,
respectively. In the first quarter of 2004, we issued 50,000 shares of
restricted stock to our officers and certain key employees. These shares
vest over a five-year period.
WARRANTS: On April 7, 2000, in connection with the sale of the
Preferred Stock, we issued to our investment advisors, McFarland Dewey &
Co. ("McFarland"), warrants to purchase from the Company up to 10,000
shares of common stock at an exercise price of $9.00 per share. The
warrants are exercisable through April 7, 2005.
39
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCKHOLDER RIGHTS PLAN
In December 1997, the Board of Directors adopted a Stockholder Rights
Plan declaring a distribution of one right (the "Rights") for each
outstanding share of our common stock to shareholders of record at December
15, 1997. Initially, each of the Rights will entitle the registered holder
to purchase from the Company one one-thousandth of a share of Series A
Preferred Stock, $0.01 par value, at a price of $69 per one one-thousandth
of a share. The Rights, however, will not become exercisable unless and
until, among other things, any person or group of affiliated persons
acquires beneficial ownership of 15 percent or more of the then outstanding
shares of the Company's Common Stock. If a person, or group of persons,
acquires 15 percent or more of the outstanding Common Stock of the Company
(subject to certain conditions and exceptions more fully described in the
Rights Agreement), each Right will entitle the holder (other than the
person, or group of persons, who acquired 15 percent or more of the
outstanding Common Stock) to purchase Preferred Stock of the Company having
a market value equal to twice the exercise price of the Right. The Rights
are redeemable, under certain circumstances, for $0.0001 per Right and will
expire, unless earlier redeemed, on December 2, 2007.
On February 16, 1999, we amended its Stockholder Rights Plan to remove
the provision in the plan that stipulated that the plan may be modified or
redeemed only by those members of the Board of Directors who are defined as
continuing directors.
15. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
Year Ended December 31,
(In thousands) 2003 2002 2001
---- ---- ----
Current:
Federal $ 1,121 $(1,493) $ (62)
State 94 25 -
Foreign 131 110 56
------- ------- -------
1,346 (1,358) (6)
Deferred: ------- ------- -------
Federal (554) 987 (2,523)
State (67) (19) (219)
Foreign - - -
------- ------- -------
(621) 968 (2,742)
------- ------- -------
Total income tax provision (benefit) $ 725 $ (390) $(2,748)
======= ======= =======
At December 31, 2003, we have $3,265,000 of state net operating loss
carryforwards that begin to expire in 2005. We also have approximately
$300,000 in federal research and development tax credit carryforwards that
expire in 2020. We had foreign income before taxes of $475,000, $386,000
and $232,000 in 2003, 2002 and 2001, respectively.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Our gross deferred tax assets and liabilities were comprised of
the following:
40
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES (CONTINUED)
December 31,
(In thousands) 2003 2002
------- -------
Gross deferred tax assets:
Net operating losses $ 96 $ 188
Accrued restructuring expenses 854 635
Inventory reserves 720 749
Deferred revenue 761 533
Foreign tax and other credits 627 668
Accrued license fees 428 59
Other liabilities and reserves 443 612
------- -------
3,929 3,444
Valuation allowance (331) (439)
------- -------
Net deferred tax assets $ 3,598 $ 3,005
======= =======
Gross deferred tax liabilities:
Depreciation $ 511 $ 558
Other 63 33
------- -------
Net deferred tax liabilities $ 574 $ 591
======= =======
Based on tax law changes, we carried our federal net operating losses
back to prior years and received a tax refund of approximately $1,061,000
in 2002, and expect to receive an additional refund of approximately
$104,000 in the first quarter of 2004. During 2003 and 2002, we recorded a
valuation allowance of $331,000 and $439,000 on a portion of our foreign
tax credits, research and development credits and certain state net
operating loss carryforwards. Based on future financial projections, we
have determined that it is more likely than not that the existing net
deferred tax asset will be realized, and no additional valuation allowance
is considered necessary.
Differences between the U.S. statutory federal income tax rate and our
effective income tax rate are analyzed below:
Year Ended December 31,
2003 2002 2001
---- ---- ----
Federal statutory tax rate 34.0% (34.0)% (34.0)%
State income taxes, net of federal income taxes 1.2 (0.3) (0.9)
Tax benefit from tax credits, net of valuation allowance (10.6) (1.7)
Foreign rate differential - 9.5 -
Other (3.0) (0.6) 0.8
---- ----- -----
Effective tax rate 32.2% (36.0)% (35.8)%
==== ===== =====
41
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EARNINGS PER SHARE
For the years ended December 31, 2003, 2002 and 2001, earnings per
share were computed as follows (in thousands, except per share amounts):
Year Ended December 31,
2003 2002 2001
------- ------- -------
Net income (loss) $ 1,528 $ (692) $(4,922)
Dividends and accretion on preferred stock (358) (358) (358)
------- ------- -------
Net income (loss) available to common shareholders $ 1,170 $(1,050) $(5,280)
======= ======= =======
Shares:
Basic: Weighted average common shares outstanding 5,793 5,636 5,551
Add: Dilutive effect of outstanding options and
warrants as determined by the treasury stock method 430 - -
------- ------- -------
Diluted: Weighted average common and common
equivalent shares outstanding
6,223 5,636 5,551
======= ======= =======
Net income (loss) per common share:
Basic $ 0.20 $ (0.19) $ (0.95)
Diluted 0.19 (0.19) (0.95)
For the year ended, December 31, 2003, all potentially dilutive
shares, that were excluded from the earnings per share calculation,
consisted of out-of-the-money stock options and warrants, and amounted to
2,000 shares. Due to our reported net loss in the years ended December 31,
2002 and 2001, all potentially dilutive securities, including both
in-the-money and out-of-the-money stock options and warrants that amounted
to 597,000 and 539,000 shares, respectively, were excluded from the
earnings per share calculation, as the effect would have been antidilutive.
In addition, for all periods presented, earnings per share calculations
assumed no conversion of the convertible mandatorily redeemable preferred
stock (which is convertible into 444,444 shares of common stock), as the
effect would have been anti-dilutive.
17. SIGNIFICANT TRANSACTIONS
OTHER INCOME: In June 2002, we received 2,146 shares of common stock
from our health insurance company, Anthem, Inc., upon its demutualization.
We sold these shares in August 2002 for approximately $145,000, and
included this amount in Other Income.
LOAN TO OFFICER: On February 23, 1999, with the Board of Directors'
approval, we provided a $330,000 loan to an officer of the Company. The
loan was payable on February 23, 2004, and was a full recourse obligation
to the officer collateralized by 154,000 shares of our common stock, which
included 50,000 shares of restricted stock. The principal amount of the
loan was recorded as a deduction from shareholders' equity. In June 2003,
the officer of the Company repaid the outstanding loan of $330,000, plus
accrued interest of $113,000.
42
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. PREFERRED STOCK
On April 7, 2000 we sold 4,000 shares of 7% Series B Cumulative
Convertible Redeemable Preferred Stock (the "Preferred Stock") in
consideration of $1,000 per share (the "Stated Value"), for a total of
$4,000,000, less issuance costs. The Preferred Stock is convertible at any
time by the holders at a conversion price of $9.00 per common share. In
addition, we issued warrants pro-rata to the Preferred Stock holders to
purchase an aggregate of 44,444 shares of our common stock at an exercise
price of $9.00 per common share, exercisable until April 7, 2005. The
discount on the preferred stock related to the relative fair value of the
warrants of $175,000 is being accreted as a direct charge to retained
earnings ratably over 60 months. The Preferred Stock is subject to
mandatory conversion into shares of our common stock when such stock has
traded at $35 per share or more for a 30-day period ending on or after
April 7, 2003, or for a 60-day period beginning on or after April 7, 2002.
The Preferred Stock is redeemable at the option of the holders on or after
April 7, 2005 at $1,000 per share plus any unpaid dividends. On April 7,
2007, we have the right to require (1) redemption of the Preferred Stock at
$1,000 per share plus any unpaid dividends or (2) conversion of the
Preferred Stock at $9.00 per common share. Upon a change of control,
holders have the right to require us to redeem the Preferred Stock for 200%
of the Stated Value plus any unpaid dividends. The holders of the Preferred
Stock have certain voting rights and are entitled to receive a cumulative
annual dividend of $70 per share, payable quarterly and have preference to
any other dividends, if any, paid by the Company.
On July 8, 2003, the holders of the Preferred Stock exercised their
44,444 warrants to purchase common stock at $9 per share. In lieu of cash
consideration, we canceled 31,821 of their warrants in exchange for the
issuance of 12,62 shares of common stock.
19. INTERNATIONAL OPERATIONS
We have foreign operations primarily from TransAct Technologies Ltd.,
a wholly-owned subsidiary, which had sales to its customers of $1,068,000,
$738,000 and $1,791,000 in 2003, 2002 and 2001, respectively. We had sales
from the United States to our customers outside of the United States of
approximately $3,663,000, $3,968,000 and $6,131,000 in 2003, 2002 and 2001,
respectively.
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Our quarterly results of operations for 2003 and 2002 (unaudited) are
as follows:
Quarter Ended
------------------------------------------------------------
(In thousands, except per share amounts) March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
2003:
Net sales $ 9,012 $ 13,378 $ 15,048 $ 14,660
Gross profit 2,441 4,212 4,819 4,071
Net income (loss) (198) 787 1,140 (201)
Net income (loss) available to common shareholders (288) 698 1,050 (290)
Net income (loss) per share:
Basic (0.05) 0.12 0.18 (0.05)
Diluted (0.05) 0.12 0.17 (0.05)
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
2002:
Net sales $ 10,525 $ 10,921 $ 8,852 $ 9,163
Gross profit 2,626 3,112 2,302 2,176
Net income (loss) (129) 289 (709) (143)
Net income (loss) available to common shareholders (219) 200 (799) (232)
Net income (loss) per share:
Basic and diluted (0.04) 0.04 (0.14) (0.04)
43
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. SUBSEQUENT EVENT
On March 4, 2004, we announced that our Board of Directors approved a
three-for-two stock split of our common stock to be effected in the form of
a 50 percent stock dividend. The additional shares will be payable April 2,
2004 to shareholders of record at the close of business on March 17, 2004.
As a result of the stock dividend, shareholders of record will be entitled
to receive one additional share of common stock for every two shares of
common stock held on the record date, and cash instead of any fractional
shares. No amounts within the financial statements and footnotes reflect
the stock split. The following table indicates our net income (loss) per
share had these amounts been adjusted for the stock split.
Year Ended December 31,
2003 2002 2001
---- ---- ----
(unaudited)
Net income (loss) per share:
Basic:
Historical $ 0.20 $ (0.19) $(0.95)
Pro forma, after adjusting for stock split 0.13 (0.12) (0.63)
Diluted:
Historical 0.19 (0.19) (0.95)
Pro forma, after adjusting for stock split 0.13 (0.12) (0.63)
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9a. CONTROLS AND PROCEDURES
TransAct's management is responsible for designing and implementing
disclosure controls and procedures to provide reasonable (not absolute)
assurances that desired control objectives are achieved including:
- Filing with the SEC all required disclosures within the time
limits specified by the SEC
- Providing all material information to our management,
including the CEO and CFO, to enable them to make timely
decisions about required disclosures.
When designing and evaluating controls and procedures, we make
assumptions about the likelihood of future events. At the same time, we make
judgments about the cost-benefit relationship of possible controls and
procedures. We cannot assure that this design will succeed in achieving its
stated goals under all potential future conditions. Similarly, we cannot assure
that our evaluation of controls will detect all control issues or instances of
fraud, if any.
We completed our review of disclosure controls and procedures under the
supervision of the Disclosure Committee, and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer.
Based on this review, the Chief Executive Officer and Chief Financial Officer
concluded that as of December 31, 2003 our disclosure controls and procedures
were effective to provide reasonable assurance that reports are filed or
submitted within the time limits specified by the SEC, and that information is
accumulated and communicated to management to allow timely decisions regarding
required disclosure. There was no change in our internal control over financial
reporting that occurred during 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Reference is made to the Certifications of the Chief Executive Officer
and Chief Financial Officer about these and other matters following the
signature page of this report
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information contained in "Election of Directors", "Code of Ethics" and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement (the "Proxy Statement") for its Annual Meeting of Shareholders which
is scheduled to be held on May 26, 2004 is hereby incorporated herein by
reference. Also, see information under "Executive Officers of Registrant" in
Item 1.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in "Executive Compensation" other than the
"Compensation Committee Report on Executive Compensation" of the Proxy Statement
is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information contained in "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is hereby incorporated herein by
reference.
Information regarding our equity compensation plans as of December 31,
2003 is as follows:
Number of securities Weighted average
to be issued upon exercise price of
exercise of outstanding Number of securities
outstanding options, options, warrants remaining available
Plan category warrants and rights and rights for future issuance
- ------------------------------------- --------------------- ----------------- --------------------
Equity compensation plans approved
by security holders:
1996 Stock Plan 517,733 $6.19 195,150
1996 Non-Employee Director Plan 155,000 8.57 77,500
2000 Employee Stock Purchase Plan - - 31,794
------- ----- -------
Total 672,733 $6.74 304,444
======= ===== =======
Equity compensation plans not approved
by security holders:
2001 Employee Stock Plan 87,636 5.90 29,410
======= ===== =======
The TransAct Technologies Incorporated 2001 Employee Stock Plan (the
"2001 Employee Plan") was adopted by our Board of Directors, without approval of
our security holders, effective February 26, 2001. Under the 2001 Employee Plan,
we may issue non-qualified stock options, shares of restricted stock, restricted
units to acquire shares of common stock, stock appreciation rights and limited
stock appreciation rights to key employees of TransAct or any of our
subsidiaries and to non-employees who provide services to TransAct or any of our
subsidiaries. The 2001 Employee Plan is administered by our Compensation
Committee, which has the authority to determine the vesting period and other
similar restrictions and terms of awards, provided that the exercise price of
options granted under the plan may not be less than the fair market value of the
underlying shares on the date of grant. Awards may be issued under the 2001
Employee Plan with respect to up to 150,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in "Certain Relationships and Related
Transactions" of the Proxy Statement is hereby incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in "Independent Auditors' Fees" of the Proxy
Statement is herby incorporated herein by reference.
46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING FINANCIAL STATEMENTS AND EXHIBITS ARE FILED AS
PART OF THIS REPORT:
(i) Financial statements
See Item 8.
(ii) Financial statement schedules
All schedules are omitted since the required information is
either (a) not present or not present in amounts sufficient
to require submission of the schedule or (b) included in
the financial statements or notes thereto.
(iii) List of exhibits
3.1(a) Certificate of Incorporation of the Company, filed with the Secretary of State of (2)
Delaware on June 17, 1996.
3.1(b) Certificate of Amendment of Certificate of Incorporation of the Company, filed with (4)
the Secretary of State of Delaware on June 4, 1997.
3.1(c) Certificate of Designation, Series A Preferred Stock, filed with the Secretary of (5)
State of Delaware on December 2, 1997.
3.1(d) Certificate of Designation, Series B Preferred Stock, filed with the Secretary of (8)
State of Delaware on April 6, 2000.
3.2 Amended and Restated By-laws of the Company. (6)
4.1 Specimen Common Stock Certificate. (2)
4.2 Amended and Restated Rights Agreement between TransAct and American Stock Transfer & (5)
Trust Company dated February 16, 1998.
10.1 Tax Sharing Agreement dated as of July 31, 1996 between Tridex and TransAct. (3)
10.2(x) 1996 Stock Plan, effective July 30, 1996. (3)
10.3(x) Non-Employee Directors' Stock Plan, effective August 22, 1996. (3)
10.4(x) 2000 Employee Stock Purchase Plan (9)
10.5(x) 2001 Employee Stock Plan (11)
10.6 Lease Agreement by and between Bomax Properties and Ithaca, dated as of March 23, (2)
1992.
10.7 Second Amendment to Lease Agreement by and between Bomax Properties and Ithaca, (4)
dated December 2, 1996.
10.8 Agreement regarding the Continuation and Renewal of Lease by and between Bomax (14)
Properties, LLC and TransAct, dated July 18, 2001.
10.9 Lease Agreement by and between Pyramid Construction Company and Magnetec, dated July (4)
30, 1997.
10.10(x) Employment Agreement, dated July 31, 1996, by and between the Company and Bart C. (2)
Shuldman.
10.11(x) Employment Agreement, dated July 31, 1996, by and between the Company and Richard L. (2)
Cote.
10.12(x) Severance Agreement by and between TransAct and Michael S. Kumpf, dated September 4, (3)
1996.
10.13(x) Severance Agreement by and between TransAct and Steven A. DeMartino, dated January (6)
21, 1998.
10.14(x) Severance Agreement by and between TransAct and James B. Stetson, dated January 24, (10)
2001.
47
10.15 Loan Agreement by and between the Company and Bart C. Shuldman, dated July 1, 2001 (14)
10.16 Loan Agreement by and between the Company and Bart C. Shuldman, dated January, 2002 (15)
10.17 OEM Purchase Agreement by and between GTECH Corporation, TransAct Technologies and (7)
Magnetec Corporation commencing July 14, 1999. (Pursuant to Rule 24-b-2 under the
Exchange Act, the Company has requested confidential treatment of portions of this
exhibit deleted from the filed copy.)
10.18 OEM Purchase Agreement by and between GTECH Corporation and TransAct Technologies (16)
Incorporated commencing July 2, 2002. (Pursuant to Rule 24-b-2 under the Exchange
Act, the Company has requested confidential treatment of portions of this exhibit
deleted from the filed copy.)
10.19 OEM Purchase Agreement by and between Okidata Americas, Inc. and TransAct, dated (14)
June 8, 2001. (Pursuant to Rule 24b-2 under the Exchange Act, the Company has
requested confidential treatment of portions of this exhibit deleted from the filed
copy.)
10.20 Preferred Stock Purchase Agreement and Certificate of Designation dated as of March (8)
20, 2000 between TransAct Technologies Incorporated and Advance Capital Partners,
L.P. and affiliate
10.21 Loan and Security Agreement dated as of May 25, 2001 among TransAct, LaSalle (12)
Business Credit, Inc. ("LaSalle") and the institutions from time to time a party
thereto.
10.22 Waiver and Amendment No. 1 to Loan and Security Agreement dated as of October 30, (13)
2001 among TransAct, LaSalle and the institutions from time to time a party thereto.
10.23 Amendment No. 2 to Loan and Security Agreement dated as of December 21, 2001 among (14)
TransAct, LaSalle and the institutions from time to time a party thereto.
10.24 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of November 12, (17)
2002 among TransAct, LaSalle and the institutions from time to time a party thereto.
10.25 Waiver and Amendment No. 4 to Loan and Security Agreement dated as of March 24, 2003 (18)
among TransAct, LaSalle and the institutions from time to time a party thereto.
10.26 OEM Purchase Agreement between Oki Data Americas, Inc. ("Oki Data") and TransAct (19)
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.)
10.27 Revolving Credit, Equipment Loan and Security Agreement between TransAct (19)
Technologies Incorporated and Banknorth N.A. dated August 6, 2003.
21.1 Subsidiaries of the Company. (1)
23.1 Consent of PricewaterhouseCoopers LLP. (1)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the (1)
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the (1)
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as (1)
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as (1)
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
48
(1) These exhibits are filed herewith.
(2) These exhibits, which were previously filed with the Company's
Registration Statement on Form S-1 (No. 333-06895), are
incorporated by reference.
(3) These exhibits, which were previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 1996 (Commission File No. 000-21121), are incorporated by
reference.
(4) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31,
1997 (Commission File No. 000-21121), are incorporated by
reference.
(5) This exhibit, which was previously filed with the Company's
Current Report on Form 8-K filed February 18, 1999 (Commission
File No. 000-21121), is incorporated by reference.
(6) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 (Commission File No. 000-21121), are incorporated by
reference.
(7) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September
25, 1999 (Commission File No. 000-21121), is incorporated by
reference.
(8) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended March 25,
2000, is incorporated by reference.
(9) This exhibit, which was previously filed with the Company's
Registration Statement on Form S-8 (No. 333-49540), is
incorporated by reference.
(10) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31,
2000, are incorporated by reference.
(11) This exhibit, which was previously filed with the Company's
Registration Statement on Form S-8 (No. 333-59570), is
incorporated by reference.
(12) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2001, is incorporated by reference.
(13) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2001, is incorporated by reference.
(14) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31,
2001, are incorporated by reference.
(15) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended March 31,
2002, is incorporated by reference.
(16) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2002, is incorporated by reference.
(17) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2002, is incorporated by reference.
(18) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31,
2002, are incorporated by reference.
(19) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2003, is incorporated by reference.
(x) Management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
(B) REPORTS ON FORM 8-K.
A report on Form 8-K was furnished on November 3, 2003 to report under
Items 7 and 9 a press release announcing the Company's financial results for the
quarter ended September 30, 2003 pursuant to Item 12 of Form 8-K.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
By: /s/ Bart C. Shuldman
---------------------------------
Bart C. Shuldman
Chairman of the Board, President
and Chief Executive Officer
Date: March 30, 2004
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Bart C. Shuldman Chairman of the Board, President and March 30, 2004
- ------------------------------------ Chief Executive Officer
Bart C. Shuldman (Principal Executive Officer)
/s/ Richard L. Cote Executive Vice President, Chief Financial March 30, 2004
- ------------------------------------ Officer, Treasurer, Secretary and Director
Richard L. Cote (Principal Financial Officer)
/s/ Steven A. DeMartino Senior Vice President, Finance March 30, 2004
- ------------------------------------ and Information Technology
Steven A. DeMartino (Principal Accounting Officer)
/s/ Charles A. Dill Director March 30, 2004
- ------------------------------------
Charles A. Dill
/s/ Thomas R. Schwarz Director March 30, 2004
- ------------------------------------
Thomas R. Schwarz
/s/ Graham Y. Tanaka Director March 30, 2004
- ------------------------------------
Graham Y. Tanaka
50
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
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 of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
51