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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2004
-------------------------------------------------
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 (I.R.S. Employer Identification No.)
incorporation or organization)
7 LASER LANE, WALLINGFORD, CT 06492
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(203) 269-1198
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [x] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [x]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING APRIL 30, 2004
- ----- --------------------------
COMMON STOCK,
$.01 PAR VALUE 9,818,782
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
PART I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of March 31, 2004 and December
31, 2003 3
Condensed consolidated statements of operations for the three months
ended March 31, 2004 and 2003 4
Condensed consolidated statements of cash flow for the three months
ended March 31, 2004 and 2003 5
Notes to condensed consolidated financial statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
Item 4 Controls and Procedures 19
PART II. Other Information:
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 23
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
ASSETS:
Current assets:
Cash and cash equivalents $ 2,925 $ 498
Receivables, net 7,788 9,074
Inventories 8,597 8,061
Deferred tax assets 2,340 2,340
Other current assets 309 509
-------- --------
Total current assets 21,959 20,482
-------- --------
Fixed assets, net 3,380 3,607
Goodwill 1,469 1,469
Deferred tax assets 684 684
Other assets 113 119
-------- --------
5,646 5,879
-------- --------
Total assets $ 27,605 $ 26,361
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan $ -- $ 90
Accounts payable 2,570 3,288
Accrued liabilities 3,206 2,892
Accrued restructuring expenses 480 480
Accrued patent license fees 478 408
Deferred revenue 1,489 1,537
-------- --------
Total current liabilities 8,223 8,695
-------- --------
Long-term portion of term loan -- 330
Long-term portion of accrued restructuring 1,514 1,645
Long-term portion of accrued patent license fees 750 750
Other long-term liabilities 588 692
-------- --------
2,852 3,417
-------- --------
Total liabilities 11,075 12,112
-------- --------
Mandatorily redeemable convertible preferred stock 3,922 3,902
-------- --------
Shareholders' equity:
Common stock 61 60
Additional paid-in capital 10,619 8,441
Retained earnings 3,017 1,769
Unamortized restricted stock compensation (1,202) (30)
Accumulated other comprehensive income 113 107
-------- --------
Total shareholders' equity 12,608 10,347
-------- --------
Total liabilities and shareholders' equity $ 27,605 $ 26,361
======== ========
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands, except per share data) 2004 2003
- ------------------------------------- ---- ----
Net sales $ 15,075 $ 9,012
Cost of sales 9,657 6,571
-------- --------
Gross profit 5,418 2,441
-------- --------
Operating expenses:
Engineering, design and product development 614 562
Selling and marketing 1,362 1,044
General and administrative 1,332 1,099
-------- --------
3,308 2,705
-------- --------
Operating income (loss) 2,110 (264)
-------- --------
Interest and other income (expense):
Interest, net (10) (46)
Other, net (3) --
-------- --------
(13) (46)
-------- --------
Income (loss) before income taxes 2,097 (310)
Income tax provision (benefit) 755 (112)
-------- --------
Net income (loss) 1,342 (198)
Dividends and accretion charges on
preferred stock (90) (90)
-------- --------
Net income (loss) available to common
shareholders $ 1,252 $ (288)
======== ========
Net income (loss) per common share:
Basic $ 0.14 $ (0.03)
Diluted 0.13 (0.03)
Shares used in per share calculation:
Basic 8,966 8,510
Diluted 9,800 8,510
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
(In thousands) 2004 2003
------- -------
Cash flows from operating activities:
Net income (loss) $ 1,342 $ (198)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash compensation expense 69 25
Depreciation and amortization 427 448
Deferred income taxes -- (120)
Gain on sale of equipment -- (1)
Changes in operating assets and liabilities:
Receivables 1,286 (634)
Inventories (536) (1,703)
Other current assets 200 12
Other assets -- (39)
Accounts payable (718) 354
Accrued liabilities and other liabilities 665 200
Accrued patent license fees 70 53
Accrued restructuring expenses (131) (353)
------- -------
Net cash provided by (used in) operating activities 2,674 (1,956)
------- -------
Cash flows from investing activities:
Purchases of fixed assets (194) (532)
Proceeds from sale of fixed assets -- 1
------- -------
Net cash used in investing activities (194) (531)
------- -------
Cash flows from financing activities:
Revolving bank loan borrowings, net -- 1,994
Term loan repayments (420) (25)
Proceeds from option and warrant exercises 435 5
Payment of cash dividends (74) (70)
------- -------
Net cash (used in) provided by financing activities (59) 1,904
------- -------
Effect of exchange rate changes 6 (13)
------- -------
Increase (decrease) in cash and cash equivalents 2,427 (596)
Cash and cash equivalents at beginning of period 498 902
------- -------
Cash and cash equivalents at end of period $ 2,925 $ 306
======= =======
See notes to condensed consolidated financial statements.
5
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS
TransAct Technologies Incorporated ("TransAct"), which has headquarters in
Wallingford, CT and its primary operating facility in Ithaca, NY, operates
in one industry segment, transaction-based printers and related products.
TransAct designs, develops, manufactures and markets transaction-based
printers under the Ithaca(R) and Magnetec(R) brand names. In addition, 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 ("OEMs"), value-added
resellers, 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.
In our opinion, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly TransAct's financial
position as of March 31, 2004, the results of our operations for the three
months ended March 31, 2004 and 2003, and our cash flows for the three
months ended March 31, 2004 and 2003. The December 31, 2003 condensed
consolidated balance sheet has been derived from the audited financial
statements at that date. These interim financial statements should be read
in conjunction with the audited financial statements for the year ended
December 31, 2003 included in our Annual Report on Form 10-K.
The financial position and results of operations of our foreign
subsidiary are measured using local currency as the functional currency.
Assets and liabilities of such subsidiary have been translated at end of
period exchange rates, and related revenues and expenses have been
translated at weighted average exchange rates. Transaction gains and
losses are included in other income.
The results of operations for the three months ended March 31, 2004
are not necessarily indicative of the results to be expected for the full
year.
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 were 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 received
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. All
amounts within the accompanying condensed consolidated financial
statements and footnotes reflect the stock split on a retroactive basis.
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACCOUNTING FOR 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 stock options. Since the exercise price
of employee stock options granted by the Company equals the market price
of the underlying stock on the date of grant, no compensation expense is
recorded. 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").
During the three months ending March 31, 2004, we granted 50,000
shares of restricted stock to key employees under the 1996 Stock Plan.
Deferred compensation of $1,241,000 was recorded with respect to these
grants and will be recognized into expense over the 5 year vesting period.
The following table illustrates the effect on net income (loss),
compensation expense and net income (loss) per share as if the
Black-Scholes fair value method pursuant to FAS 123 had been applied to
our stock plans. For the 2003 periods presented, stock-based compensation
expense determined under the fair value method has been adjusted to
properly reflect related tax effects.
Three months ended
March 31,
2004 2003
---- ----
(In thousands, except per share data)
Net income (loss) available to common
shareholders:
Net income (loss) available to common
shareholders, as reported $ 1,252 $ (288)
Add: Stock-based compensation expense
included in reported net income,
net of tax 44 16
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (70) (205)
--------- ---------
Pro forma net income (loss) 1,226 (477)
========= =========
Net income (loss) per share:
Basic:
As reported $ 0.14 $ (0.03)
Pro forma 0.14 (0.06)
Diluted:
As reported $ 0.13 $ (0.03)
Pro forma 0.13 (0.06)
During the three months ended March 31, 2004, we received cash
proceeds of approximately $435,000 from the issuance of approximately
73,000 shares of common stock resulting from stock option and warrant
exercises. We also recorded a related tax benefit which was credited to
Additional Paid-In Capital of approximately $503,000 in the three months
ended March 31, 2004, resulting from subsequent employee stock sales.
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORIES
The components of inventories are:
March 31, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
Raw materials and component parts $8,177 $7,947
Work-in-process -- --
Finished goods 420 114
------ ------
$8,597 $8,061
====== ======
4. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the accrued
product warranty liability during the three months ended March 31, 2004
and 2003.
Three months ended
March 31,
(In thousands) 2004 2003
- -------------- ---- ----
Balance, beginning of period $ 495 $ 644
Additions related to warranties issued 175 115
Warranty costs incurred (143) (134)
----- -----
Balance, end of period $ 527 $ 625
===== =====
Approximately $147,000 and $169,000 of the accrued product warranty
liability is classified as other long -term liabilities at March 31, 2004
and December 31, 2003, respectively. The current portion of the accrued
product warranty liability is included in accrued liabilities in the
accompanying balance sheet.
5. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING
In February 2001, 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 continue to apply 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.
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING (CONTINUED)
The following table summarizes the activity recorded in accrued
restructuring expenses during the three months ended March 31, 2004 and
2003.
Three Months Ended
March 31,
(In thousands) 2004 2003
- -------------- ---- ----
Accrual balance, beginning of
period $ 2,125 $ 1,718
Business consolidation and
restructuring expenses -- --
Cash payments (131) (353)
------- -------
Accrual balance, end of period $ 1,994 $ 1,365
======= =======
At March 31, 2004 and December 31, 2003, approximately $1,514,000
and $1,645,000, respectively, of the restructuring accrual was classified
within long-term liabilities. This represents the portion of
non-cancelable lease termination costs and other costs expected to be paid
beyond one year.
6. 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 the settlement negotiations have not been
finalized, 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 at March 31, 2004 and December 31, 2003
related to this matter as a long-term liability based on the likely
payment schedule resulting from our current negotiations.
9
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. EARNINGS PER SHARE
For the three months ended March 31, 2004 and 2003, earnings per
share, which reflects the impact of the 3 for 2 stock split discussed in
Note 1, was computed as follows (in thousands, except per share amounts):
Three Months Ended
(In thousands, except per share amounts)) March 31,
2004 2003
---- ----
Net income (loss) $ 1,342 $ (198)
Dividends and accretion on preferred stock (90) (90)
------- -------
Net income (loss) available to common
shareholders $ 1,252 $ (288)
======= =======
Shares:
Basic: Weighted average common shares
outstanding 8,966 8,510
Add: Dilutive effect of outstanding
options 834 --
as determined by the treasury stock method
------- -------
Diluted: Weighted average common and
common equivalent shares outstanding 9,800 8,510
======= =======
Net income (loss) per common share:
Basic 0.14 (0.03)
Diluted 0.13 (0.03)
Due to our reported net loss in the three months ended March 31,
2003, all potentially dilutive securities, including both in-the-money and
out-of-the-money stock options and warrants that amounted to 782,000
shares 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 666,665
shares of common stock), as the effect would have been anti-dilutive. Also
excluded from the diluted earnings per share calculation in the three
months ended March 31, 2004 are 56,333 shares of unvested restricted
stock, as the effect would have been anti-dilutive.
8. LONG-TERM DEBT
During the first quarter of 2004, we repaid the remaining $420,000
balance outstanding on our term loan. Accordingly, we currently have no
outstanding debt obligations.
9. SUBSEQUENT EVENT
In April 2004, all shareholders of our Series B Preferred Stock
converted all their preferred shares into common stock. Under the
conversion, a total of 666,665 new shares of common stock were issued. As
a result, dividends in the amount of approximately $16,000 were paid to
the preferred shareholders through the date of the conversion, and no
future dividend payments are required.
10
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In December 2003, the
FASB issued FASB Interpretation No. 46R, "Consolidation of Variable
Interest Entities" ("FIN 46R"). FIN 46R requires a company to consolidate
a variable interest entity ("VIE") if it has a majority of the risks,
rewards or both of that entity. FIN 46R became 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.
PARTICIPATING SECURITIES AND THE TWO CLASS METHOD UNDER FASB
STATEMENT NO. 128: In April 2004, the Emerging Issues Task Force reached
consensus on EITF Issue No. 03-6, "Participating Securities and the Two
Class Method under FASB Statement No. 128" (EITF 03-6). EITF 03-6
addresses a number of questions regarding the computation of earnings per
share by companies that have issued securities other than common stock
that contractually entitle the holder to participate in dividends and
earnings of the company when, and if, it declares dividends on its common
stock. EITF 03-6 also provides further guidance in applying the two-class
method of calculating earnings per share, clarifying what constitutes a
participating security and how to apply the two-class method of computing
earnings per share once it is determined that a security is participating,
including how to allocate undistributed earnings to such a security. EITF
03-6 is effective for fiscal periods beginning after March 31, 2004 and
requires retroactive restatement of prior earnings per share amounts. The
Company is currently evaluating the effect of adopting EITF 03-6.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America. The presentation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets
and liabilities. Our estimates include those related to revenue recognition,
inventory obsolescence, the valuation of deferred tax assets and liabilities,
depreciable lives of equipment, warranty obligations, contingent liabilities and
restructuring accruals. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. For a complete description of our accounting policies, see Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Critical Accounting Policies and Estimates," included in our Form
10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
NET SALES. Net sales by market for the current and prior year's quarter were as
follows:
Three months ended Three months ended Change
(In thousands) March 31, 2004 March 31, 2003 $ %
-------------- -------------- -------------- --- ---
Point of sale and banking $ 6,885 45.7% $ 4,331 48.1% $ 2,554 59.0%
Gaming and lottery 8,190 54.3% 4,681 51.9% 3,509 75.0%
------------------ ------------------ -------
$15,075 100.0% $ 9,012 100.0% $ 6,063 67.3%
================== ================== =======
International* $ 1,216 8.1% $ 1,066 11.8% $ 150 14.1%
================== ================== =======
- -----------
* International sales do not include those sales made to domestic customers who
in turn ship those printers to international destinations.
Three months ended Three months ended Change
(In thousands) March 31, 2004 March 31, 2003 $ %
-------------- -------------- -------------- --- ---
Printers - POS and banking $ 5,006 33.2% $ 2,779 30.8% $ 2,227 80.1%
Printers - Gaming and lottery 7,618 50.5% 4,271 47.4% 3,347 78.4%
------------------- ------------------- -------
Subtotal - printers 12,624 83.7% 7,050 78.2% 5,574 79.1%
Services and consumables 2,451 16.3% 1,962 21.8% 489 24.9%
=================== =================== =======
Total net sales $15,075 100.0% $ 9,012 100.0% $ 6,063 67.3%
=================== =================== =======
12
Net sales for the first quarter of 2004 increased $6,063,000, or 67%, from the
same period last year due to significantly higher printer shipments
(approximately $5,574,000, or 79%) into both our gaming and lottery market and
point of sale and banking ("POS") market. Sales of our services and consumables
products, which include the repair of printers and the sale of spare parts and
consumables (paper, ribbons and inkjet cartridges), also increased by $489,000,
or 25%, as our installed base of printers grows and we continue to aggressively
pursue these sales. Overall, international sales increased by $150,000, or 14%.
POINT OF SALE AND BANKING: Sales of our POS products worldwide increased
approximately $2,554,000, or 59%.
Three months ended Three months ended Change
(In thousands) March 31,20004 March 31, 2003 $ %
-------------- -------------- --- ---
Domestic $ 5,965 86.6% $ 3,269 75.5% $ 2,696 82.5%
International 920 13.4% 1,062 24.5% (142) (13.4%)
-------------------- -------------------- -------
$ 6,885 100.0% $ 4,331 100.0% $ 2,554 59.0%
==================== ==================== =======
Domestic POS revenue increased to $5,965,000, representing a $2,696,000, or 82%,
increase from the first quarter of 2003, due largely to significantly higher
sales of our POSjet(R) and Bankjet(R) lines of inkjet printers. Sales of our
POSjet(R) line of inkjet printers increased by approximately 534% in the first
quarter of 2004 compared to the first quarter of 2003. The increase is largely
attributable to shipments of our Bankjet(R) line of inkjet printers to two major
financial services companies to upgrade bank teller stations. In addition, we
reported higher service, spare parts and consumables revenue in the first
quarter of 2004 compared to the first quarter of 2003.
International POS printer shipments decreased by approximately $142,000, or 13%,
to $920,000, due primarily to lower sales of our printers through our network of
international distributors, somewhat offset by higher service, spare parts and
consumables revenue.
We expect sales into the POS market for the second quarter of 2004 to be
consistent with those reported for the first quarter of 2004 and higher than
those reported in the second quarter of 2003, due to continued growth in sales
of our POSjet(R) and Bankjet(R) lines of inkjet printers and expected sales of
our newly-introduced iTherm(TM) 280 high-speed, two-color thermal printer. We
remain cautiously optimistic that economic conditions will continue to improve
and sales of our POS products will increase in the second half of 2004.
GAMING AND LOTTERY:
Sales of our gaming and lottery products increased by $3,509,000, or 75%, from
the first quarter a year ago, primarily due to significantly higher shipments of
our slot machine printers, and to a lesser extent, higher shipments of on-line
lottery printers to GTECH.
Three months ended Three months ended Change
(In thousands) March 31, 2004 March 31, 2003 $ %
- -------------- -------------- -------------- --- ---
Domestic $7,894 96.4% $4,677 99.9% $3,217 68.8%
International 296 3.6% 4 0.1% 292 NM
------------------- ------------------- ------
$8,190 100.0% $4,681 100.0% $3,509 75.0%
=================== =================== ======
Three months ended Three months ended Change
(In thousands) March 31, 2004 March 31, 2003 $ %
- -------------- -------------- -------------- --- ---
Gaming $6,650 81.2% $3,929 83.9% $2,721 69.3%
Lottery 1,540 18.8% 752 16.1% 788 104.8%
------------------- ------------------- ------
$8,190 100.0% $4,681 100.0% $3,509 75.0%
=================== =================== ======
NM - Not meaningful
Sales of our gaming products, which include video lottery terminal ("VLT")
printers and slot machine printers used in casinos and racetracks ("racinos"),
and related spare parts and repairs, increased by approximately $2,721,000 to
$6,650,000. This increase resulted primarily from significantly increased
installations of our casino printers, primarily for use in slot machines at
casinos throughout North America that print receipts instead of issuing coins
("ticket-in, ticket-out" or "TITO"). Based on existing orders and sales
opportunities for TITO printers, we expect
13
sales of our casino printers to continue to increase during the remainder of
2004 compared to 2003, as more casinos are expected to convert to TITO slot
machines. Also, due to state government budget shortfalls, many states have
approved or are considering VLT initiatives as a means of raising revenue. As a
result, we also expect sales of our VLT printers to increase during the
remainder of 2004 compared to 2003.
Total sales to GTECH Corporation ("GTECH") (a worldwide lottery terminal
provider and major customer), which included impact and thermal on-line lottery
printers, impact in-lane lottery printers, and spare parts revenue, increased by
$788,000 to approximately $1,540,000, or 10% of net sales, in the first quarter
of 2004, compared to $752,000, or 8% of net sales, in the first quarter of 2003.
In July 2002, we entered into a 5-year agreement with GTECH to provide a newly
designed thermal on-line lottery printer. We have received orders from GTECH for
approximately $3.1 million of these thermal printers, which we expect to ship
over the remaining nine months of 2004, although in higher volumes during the
third and fourth quarters. We anticipate receiving orders from GTECH for
additional thermal on-line lottery printers for delivery in 2004. We also
received orders from GTECH for approximately $2.0 million of our legacy impact
on-line lottery printer for shipment during the second and third quarters of
2004. We made no in-lane lottery printer shipments in the first quarter of 2004
or 2003. Due to the project-by-project nature of sales of impact on-line lottery
printers and in-lane lottery printers, we cannot predict if and when any future
orders for these printers may occur.
See the table below for an analysis of revenues from GTECH.
Three months ended
(In thousands, except %) March 31,
2004 2003
---- ----
Impact on-line lottery printers and spare parts $ 326 $ 747
Thermal on-line lottery printers 1,214 5
------ ------
$1,540 $ 752
====== ======
% of consolidated net sales 10% 8%
International sales into the gaming and lottery market increased $292,000, to
$296,000 in the first quarter of 2004. Although we expect international sales
into the gaming and lottery market to remain relatively flat in the second
quarter of 2004 compared to the first quarter of 2004, we expect moderate growth
in these sales during the second half of 2004 as the result of our decision to
expand the distribution and sales of our gaming printers outside of the United
States (primarily in Europe and Australia).
GROSS PROFIT. Gross profit increased $2,977,000, or 122%, and gross margin
increased to 35.9% from 27.1%, due primarily to higher volume of sales and a
more favorable sales mix, including increased sales of higher margin gaming and
lottery printers, in the first quarter of 2004 compared to the first quarter of
2003. We expect gross margin for the second quarter of 2004 to be somewhat lower
than that reported for the first quarter of 2004, as we expect to ship a legacy
printer to a significant customer at lower gross margin than on our typical
printers. We accepted the order for such printers to strategically build a
stronger relationship with that customer.
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 by $52,000, or 9%, due primarily to higher compensation related
expenses. Such expenses decreased as a percentage of net sales to 4.1% from
6.2%, due primarily to a higher volume of sales in the first quarter of 2004
compared to the first quarter of 2003. We expect engineering and product design
development expenses to increase in the second quarter of 2004 compared to the
first quarter of 2004, as we plan to expand our families of inkjet printers for
the POS market and TITO printers for the casino market.
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 $318,000, or 30%, due
primarily to higher (1) sales commissions resulting from higher sales in the
first quarter of 2004 compared to the first quarter of 2003 (approximately
$50,000), (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 $110,000) and (3)
recruitment expenses related to adding sales staff (approximately $125,000).
Selling and marketing expenses decreased as a percentage of net sales to 9.0%
from 11.6%, due primarily to higher volume of sales in the first quarter of 2004
compared to the first quarter of
14
2003. We expect selling and marketing expenses to be slightly higher in the
second quarter of 2004 compared to the first quarter of 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 $233,000, or 21%, due largely
to higher professional expenses, including those related to compliance with the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), and additional finance staff
related to our CFO transition plan. General and administrative expenses
decreased as a percentage of net sales to 8.8% from 12.2% due primarily to a
higher volume of sales in the first quarter of 2004 compared to the first
quarter of 2003. We expect general and administrative expenses to continue to
increase in the second quarter of 2004, largely due to professional fees related
to compliance with Sarbanes-Oxley.
OPERATING INCOME (LOSS). During the first quarter of 2004 we reported operating
income of $2,110,000, or 14.0% of net sales, compared to an operating loss of
($264,000), or (2.9%) of net sales in the first quarter of 2003. The significant
increase in our operating income was due largely to higher gross profit on
higher sales, partially offset by higher operating expenses in the first quarter
of 2004 compared to that of 2003. Although sales increased by 67% in the first
quarter of 2004 compared to the first quarter of 2003, operating expenses only
increased by 22%, which provided substantial operating leverage in first quarter
of 2004 that we expect to continue for the remainder of 2004.
INTEREST. Net interest expense decreased significantly to $13,000 from $52,000
in the first quarter of 2003, as we repaid all outstanding revolving borrowings
at December 31, 2003 and the remaining outstanding balance on our term loan in
January 2004. We expect revolving borrowings to remain at zero as we continue to
generate cash from operations through the remainder of 2004. During the
remainder of 2004, we expect to incur interest expense of approximately $10,000
per quarter related to interest on unused borrowings under our revolving credit
line, partially offset by interest income earned on our available cash balance.
See "Liquidity and Capital Resources" below for more information.
INCOME TAXES. We recorded an income tax provision of $755,000 in the first
quarter of 2004 and an income tax benefit of $112,000 in the first quarter of
2003, both at an effective rate of 36%.
NET INCOME (LOSS). We reported net income during the first quarter of 2004 of
$1,342,000, or $0.13 per share (diluted) after giving effect to $90,000 of
dividends and accretion charges on preferred stock. This compares to a net loss
of ($198,000), or ($0.03) per share (diluted) for the first quarter of 2003,
after giving effect to $90,000 of dividends and accretion charges on preferred
stock. Dividends in the second quarter of 2004 will be approximately $16,000 and
there will be no dividends beyond the second quarter of 2004, as the preferred
stock was converted to common stock in April 2004. See "Subsequent Event" under
"Notes to Condensed Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first quarter of 2004, we significantly improved our operating
results. We repaid our remaining outstanding debt in January 2004 and ended the
quarter with approximately $2.9 million in cash. 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 $2,674,000 in the first quarter of 2004:
- We reported net income of $1,342,000
- We recorded depreciation, amortization and non-cash compensation
expense of $496,000
- Accounts receivable decreased by $1,286,000 due to higher turnover
of receivables resulting from an improved collection effort and
timing of sales during the quarter
- Inventories increased by $536,000, as we prepared for our expected
higher sales volume in 2004
- Other current assets decreased by $200,000 due primarily to receipts
of federal and state tax refunds in the first quarter of 2004
15
- Accounts payable decreased by $718,000 due to the timing of payments
and increased inventory purchases in December in anticipation of
higher 2004 orders
- Accrued liabilities and other liabilities increased by $665,000,
primarily due to an increase in income taxes payable resulting from
the tax provision recorded in the first quarter of 2003
- Accrued restructuring expenses decreased by $131,000 due to payments
made for lease obligation costs (See "Consolidation Expenses" below)
Investing activities: Our capital expenditures were approximately $194,000 and
$532,000 in the first quarter of 2004 and 2003, respectively. Expenditures in
2004 primarily included new product tooling and computer hardware and software.
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.
Financing activities: We used approximately $59,000 in financing activities
during the first quarter of 2004, largely due to the repayment of our term loan
(approximately $420,000) and payments of cash dividends on our preferred stock
(approximately $70,000), largely offset by proceeds from stock option exercises
(approximately $435,000).
WORKING CAPITAL
Our working capital increased to $13,736,000 at March 31, 2004 from $11,787,000
at December 31, 2003. The current ratio also increased to 2.67 to 1 at March 31,
2004 from 2.36 to 1 at December 31, 2003. The increase in both working capital
and the current ratio was due largely to higher cash and cash equivalents
($2,925,000) and higher inventories ($8,597,000) somewhat offset by lower
receivables ($7,788,000) compared to December 31, 2003.
DEFERRED TAXES
As of March 31, 2004, 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 $8.4 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.
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 accrue
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
and less (iii) a $40,000 credit reserve.
16
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 were 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 March 31, 2004, we had no balances outstanding on the revolving credit
line and term loan, respectively. Undrawn commitments under the Banknorth Credit
Facility were approximately $11,500,000 at March 31, 2004. However, our maximum
additional available borrowings under the facility were limited to approximately
$8,100,000 at March 31, 2004 based on the borrowing base of our collateral. The
term loan was paid in full in January 2004. We were in compliance with all
financial covenants of the Banknorth Credit Facility at March 31, 2004.
PREFERRED STOCK
In connection with our 7% Series B Cumulative Convertible Redeemable Preferred
Stock (the "Preferred Stock"), we paid $70,000 of cash dividends per quarter. We
also recorded non-cash accretion of approximately $20,000 per quarter related to
preferred stock warrants and issuance costs. The preferred stock was convertible
at any time by the holders at a conversion price of $6.00 per common share. The
preferred stock was 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, the holders had the right to redeem the Preferred Stock for an
aggregate of $8,000,000 plus any unpaid dividends.
In April 2004, all shareholders of our Series B Preferred Stock converted all
their preferred shares into common stock. Under the conversion, a total 666,665
new shares of common stock were issued. As a result, we expect to pay
approximately $16,000 of cash dividends in the second quarter of 2004, with no
future dividend payments beyond the second quarter of 2004. The conversion will
result in a cash savings of approximately $280,000 annually, as TransAct will no
longer pay dividends previously required under the terms of the preferred stock.
See Note 10 to the Condensed Consolidated Financial Statements.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $2,261,000 to $12,608,000 at March 31, 2004
from $10,347,000 at December 31, 2003. The increase was primarily due to the
following for the three months ended March 31, 2004: (1) net income available to
common shareholders of $1,252,000, (2) proceeds of approximately $435,000 from
the issuance of approximately 73,000 shares of common stock from stock option
and warrant exercises, (3) an increase in additional paid in capital of
approximately $503,000 resulting from the recording of a deferred tax asset from
the sale of employee stock from stock option exercises, and (4) compensation
expense related to restricted stock grants of $69,000.
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.
We do not expect to incur any additional restructuring expense related to the
Consolidation.
As of March 31, 2004 and December 31, 2003, our restructuring accrual amounted
to $1,994,000 and $2,125,000, respectively. We expect to pay approximately
$480,000 of these expenses per year from 2004 through 2007, and the
17
remaining $74,000 in 2008. These payments from 2004 through 2008 relate
primarily to lease obligation costs for our Wallingford, CT facility.
CONTRACTUAL OBLIGATIONS
We have experienced no material changes in our contractual obligations outside
the ordinary course of business during the three months ended March 31, 2004.
RESOURCE SUFFICIENCY
We believe that cash flows generated from operations and borrowings available
under the Banknorth Credit Facility will provide sufficient resources to meet
our working capital needs, including costs associated with the Consolidation and
the Patent Resolution Payment, to finance our capital expenditures and meet our
liquidity requirements through at least December 31, 2005.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to
borrowings under our revolving credit facility. These borrowings bear interest
at variable rates and the fair value of this indebtedness is not significantly
affected by changes in market interest rates. An effective increase or decrease
of 10% in the current effective interest rates under our credit facility would
not have a material effect on our results of operations or cash flow.
FOREIGN CURRENCY EXCHANGE RISK
A substantial portion of our sales are denominated in U.S. dollars and, as a
result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made. This exposure may change over time as business
practices evolve and could have a material adverse impact on our financial
results in the future. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material impact on our future results
of operations or cash flow.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures was conducted under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer. Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were adequate
and designed to ensure that information required to be disclosed by the Company
in this report is recorded, processed, summarized and reported in a timely
manner, including that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses in internal
controls, during the period covered by this report.
19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits filed herein
Exhibit 31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
b. Reports on Form 8-K
1. A report on Form 8-K was furnished on March 23, 2004 to report
under Item 5 an event deemed of importance to security
holders, the transfer of all outstanding shares of the
Company's Series B Preferred Stock.
2. A report on Form 8-K was furnished on March 4, 2004 to report
under Items 7 and 12 a press release announcing the Company's
financial results for the year ended December 31, 2003.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
----------------------------------
(Registrant)
May 12, 2004 /s/ Richard L. Cote
--- ---------------------------------
Richard L. Cote
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
/s/ Steven A. DeMartino
--- -------------------------------
Steven A. DeMartino
Senior Vice President, Finance and Information
Technology
(Principal Accounting Officer)
21
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
-------
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
22