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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: June 30, 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 JULY 30, 2004
- ----- -------------------------
COMMON STOCK, $.01 PAR VALUE 9,928,689
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
PART I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of June 30, 2004 and December
31, 2003 .................................................................. 3
Condensed consolidated statements of operations for the three and six
months ended June 30, 2004 and 2003 ....................................... 4
Condensed consolidated statements of cash flow for the six months ended
June 30, 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 ............................................................. 11
Item 4 Controls and Procedures ................................................... 20
PART II. Other Information:
Item 5 Submission of Matters to a Vote of Security Holders ....................... 21
Item 6 Exhibits and Reports on Form 8-K .......................................... 21
Signatures .............................................................................. 22
Certifications .......................................................................... 24
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
ASSETS:
Current assets:
Cash and cash equivalents ............................. $ 5,011 $ 498
Receivables, net ...................................... 8,395 9,074
Inventories ........................................... 8,682 8,061
Deferred tax assets ................................... 2,340 2,340
Other current assets .................................. 249 509
-------- --------
Total current assets ................................ 24,677 20,482
-------- --------
Fixed assets, net ........................................ 3,245 3,607
Goodwill ................................................. 1,469 1,469
Deferred tax assets ...................................... 684 684
Other assets ............................................. 105 119
-------- --------
5,503 5,879
-------- --------
Total assets ............................................. $ 30,180 $ 26,361
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan .......................... $ -- $ 90
Accounts payable ...................................... 3,370 3,288
Accrued liabilities ................................... 3,100 2,892
Accrued restructuring expenses ........................ 480 480
Accrued patent license fees ........................... 442 408
Deferred revenue, current portion ..................... 1,617 1,537
-------- --------
Total current liabilities ........................... 9,009 8,695
-------- --------
Long-term portion of term loan ........................... -- 330
Long-term portion of accrued restructuring ............... 1,424 1,645
Long-term portion of accrued patent license fees ......... -- 750
Other long-term liabilities .............................. 689 692
-------- --------
2,113 3,417
-------- --------
Total liabilities ..................................... 11,122 12,112
-------- --------
Redeemable convertible preferred stock ................... -- 3,902
-------- --------
Shareholders' equity:
Common stock .......................................... 68 60
Additional paid-in capital ............................ 15,645 8,441
Retained earnings ..................................... 4,461 1,769
Unamortized restricted stock compensation ............. (1,227) (30)
Accumulated other comprehensive income ................ 111 107
-------- --------
Total shareholders' equity .......................... 19,058 10,347
-------- --------
Total liabilities and shareholders' equity ............... $ 30,180 $ 26,361
======== ========
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
(In thousands, except per share data) 2004 2003 2004 2003
- ------------------------------------- ---- ---- ---- ----
Net sales ..................................... $ 14,694 $ 13,378 $ 29,769 $ 22,390
Cost of sales ................................. 9,077 9,166 18,734 15,737
-------- -------- -------- --------
Gross profit .................................. 5,617 4,212 11,035 6,653
-------- -------- -------- --------
Operating expenses:
Engineering, design and product
development .............................. 548 545 1,162 1,107
Selling and marketing ...................... 1,218 1,264 2,580 2,308
General and administrative ................. 1,563 1,119 2,895 2,218
-------- -------- -------- --------
3,329 2,928 6,637 5,633
-------- -------- -------- --------
Operating income .............................. 2,288 1,284 4,398 1,020
-------- -------- -------- --------
Interest and other income (expense):
Interest, net .............................. (2) (76) (12) (122)
Other, net ................................. 2 (26) (1) (26)
-------- -------- -------- --------
-- (102) (13) (148)
-------- -------- -------- --------
Income before income taxes .................... 2,288 1,182 4,385 872
Income tax provision .......................... 823 395 1,578 283
-------- -------- -------- --------
Net income .................................... $ 1,465 $ 787 $ 2,807 $ 589
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Net income available to common shareholders ... $ 1,421 $ 641 $ 2,578 $ 367
Shares used in per share calculation .......... 9,620 8,606 9,292 8,559
Basic earnings per share - common stock ....... $ 0.15 $ 0.07 $ 0.28 $ 0.04
Basic earnings per share - preferred stock .... -- 0.02 0.02 0.03
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders ... $ 1,421 $ 641 $ 2,578 $ 367
Shares used in per share calculation .......... 10,447 9,070 10,133 8,845
Diluted earnings per share - common stock ..... $ 0.14 $ 0.07 $ 0.25 $ 0.04
Diluted earnings per share - preferred stock .. -- 0.02 0.02 0.03
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------
(In thousands) 2004 2003
- -------------- ---- ----
Cash flows from operating activities:
Net income ...................................................... $ 2,807 $ 589
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash compensation expense ............................... 142 39
Depreciation and amortization ............................... 822 867
Deferred income taxes ....................................... -- 267
Gain on sale of equipment ................................... -- (1)
Changes in operating assets and liabilities:
Receivables ............................................... 679 (4,739)
Inventories ............................................... (621) (1,495)
Other current assets ...................................... 260 14
Other assets .............................................. 1 71
Accounts payable .......................................... 82 345
Accrued liabilities and other liabilities ................. 742 645
Accrued restructuring expenses ............................ (221) (492)
------- -------
Net cash provided by (used in) operating activities ..... 4,693 (3,890)
------- -------
Cash flows from investing activities:
Purchases of fixed assets ....................................... (447) (872)
Proceeds from sale of fixed assets .............................. -- 331
------- -------
Net cash used in investing activities ......................... (447) (541)
------- -------
Cash flows from financing activities:
Revolving bank loan borrowings, net ............................. -- 3,435
Term loan repayments ............................................ (420) (50)
Proceeds from option and warrant exercises ...................... 826 552
Payment of cash dividends ....................................... (91) (140)
Payment of expenses related to preferred stock conversion and
registration of common stock .................................. (52) --
------- -------
Net cash provided by financing activities ................... 263 3,797
------- -------
Effect of exchange rate changes .................................... 4 25
------- -------
Increase (decrease) in cash and cash equivalents ................... 4,513 (609)
Cash and cash equivalents at beginning of period ................... 498 902
------- -------
Cash and cash equivalents at end of period ......................... $ 5,011 $ 293
======= =======
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.
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. These accounting principles were applied on a basis
consistent with those of the consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December
31, 2003. 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 June 30, 2004, the results of our operations for
the three and six months ended June 30, 2004 and 2003, and our cash flows
for the six months ended June 30, 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 and six months ended June
30, 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, all 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 and six months ending June 30, 2004, we granted
3,000 and 78,000 shares of restricted stock, respectively, to key
employees under the 1996 Stock Plan. Deferred compensation of $98,000 and
$1,339,000 was recorded with respect to these grants in the three and six
months ended June 30, 2004, respectively, and will be recognized into
expense over the five-year vesting period.
The following table illustrates the effect on net income,
compensation expense and net income 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 Six months ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
(In thousands, except per share data)
Net income available to common shareholders:
Net income available to common shareholders,
as reported .................................. $ 1,421 $ 641 $ 2,578 $ 367
Add: Stock-based compensation expense included
in reported net income, net of tax ........... 46 9 90 25
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax ................... (15) (53) (85) (258)
--------- --------- --------- ---------
Pro forma net income available to common
shareholders ............................... $ 1,452 $ 597 $ 2,583 $ 134
========= ========= ========= =========
Net income per share:
Basic:
Common Stock:
As reported ................................. $ 0.15 $ 0.07 $ 0.27 $ 0.04
Pro forma ................................... 0.15 0.07 0.28 0.02
Preferred Stock:
As reported ................................. $ -- $ 0.02 $ 0.02 $ 0.03
Pro forma ................................... -- 0.02 0.02 0.03
Diluted:
Common Stock:
As reported ................................. $ 0.14 $ 0.07 $ 0.25 $ 0.04
Pro forma ................................... 0.14 0.07 0.25 0.02
Preferred Stock:
As reported ................................. $ -- $ 0.02 $ 0.02 $ 0.03
Pro forma ................................... -- 0.02 0.02 0.03
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACCOUNTING FOR STOCK-BASED COMPENSATION (CONT)
During the three and six months ended June 30, 2004, we received
cash proceeds of approximately $390,000 and $826,000, respectively, from
the issuance of approximately 85,000 and 179,000 shares of common stock
resulting from stock option and warrant exercises. We also recorded a
related tax benefit that was credited to Additional Paid-In Capital of
approximately $670,000 and $1,173,000 in the three and six months ended
June 30, 2004, respectively, resulting from subsequent employee stock
sales.
3. INVENTORIES
The components of inventories are:
June 30, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
Raw materials and component parts .. $ 8,387 $ 7,947
Finished goods ..................... 295 114
--------- ---------
$ 8,682 $ 8,061
========= =========
4. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the accrued
product warranty liability during the three and six months ended June 30,
2004 and 2003.
Three months ended Six months ended
June 30, June 30,
-------- --------
(In thousands) 2004 2003 2004 2003
- -------------- ---- ---- ---- ----
Balance, beginning of period ............ $ 527 $ 625 $ 495 $ 644
Additions related to warranties issued .. 130 80 305 195
Warranty costs incurred ................. (141) (104) (284) (238)
----- ----- ----- -----
Balance, end of period .................. $ 516 $ 601 $ 516 $ 601
===== ===== ===== =====
Approximately $145,000 and $169,000 of the accrued product warranty
liability are classified as other long-term liabilities at June 30, 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 relating to the consolidation. The remaining
accrued restructuring balance relates to lease and other occupancy costs
related to our Wallingford facility
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 and six months ended June 30, 2004
and 2003.
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
(In thousands) 2004 2003 2004 2003
- -------------- ---- ---- ---- ----
Accrual balance, beginning of period ... $ 1,994 $ 1,365 $ 2,125 $ 1,718
Business consolidation and
restructuring expenses ............... -- -- -- --
Cash payments .......................... (90) (139) (221) (492)
------- ------- ------- -------
Accrual balance, end of period ......... $ 1,904 $ 1,226 $ 1,904 $ 1,226
======= ======= ======= =======
At June 30, 2004 and December 31, 2003, approximately $1,424,000 and
$1,645,000, respectively, of the restructuring accrual was classified
within long-term liabilities. This represents the portion of
non-cancelable lease and other costs expected to be paid beyond one year.
6. PATENT LICENSE FEES
During the second quarter of 2004, we signed a cross licensing agreement
with Seiko Epson. Under the agreement, Seiko Epson received a license to
three of our patents, and we received a license to eighteen of Seiko
Epson's patents relating to printing applications for the point of sale
and banking markets. In addition, we agreed to pay $900,000 as a royalty
for the usage of certain Seiko Epson technology prior to January 1, 2003.
We had accrued for the $900,000 royalty for past usage as of December 31,
2003. In accordance with the terms of the agreement, we will pay the
royalty for past usage in full by the first quarter of 2005. Under the
agreement, we continue to pay royalties on a quarterly basis related to
the sales of licensed printers, which is reflected in cost of sales.
7. EARNINGS PER SHARE
Beginning this quarter, the Company applies the consensus set forth
in EITF 03-06 "Participating Securities and the Two-Class Method under
FASB Statement No. 128, Earnings Per Share", which requires the two-class
method of computing earnings per share when participating securities, such
as our redeemable preferred stock, are outstanding. The two-class method
is an earnings allocation formula that determines earnings per share for
common stock and participating securities based upon an allocation of
earnings as if all of the earnings for the period had been distributed in
accordance with participation rights on undistributed earnings. This
guidance impacted the calculation of earnings per share for the three and
six months ended June 30, 2004 and also requires retroactive restatement
of earnings per share presented for the three and six months ended June
30, 2003.
9
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. EARNINGS PER SHARE (CONT)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
BASIC EARNINGS PER SHARE:
Net income ........................................ $ 1,465 $ 787 $ 2,807 $ 589
Dividends and accretion charges on
preferred stock ................................ (21) (89) (111) (179)
Earnings allocation to preferred shareholders ..... (23) (57) (118) (43)
-------- -------- -------- --------
Net income available to common shareholders ....... $ 1,421 $ 641 $ 2,578 $ 367
======== ======== ======== ========
Weighted average common shares outstanding ........ 9,620 8,606 9,292 8,559
Basic earnings per share - common stock ........... $ 0.15 $ 0.07 $ 0.28 $ 0.04
Basic earnings per share - preferred stock ........ -- $ 0.02 $ 0.02 $ 0.03
DILUTED EARNINGS PER SHARE:
Net income available to common shareholders ....... $ 1,421 $ 641 $ 2,578 $ 367
======== ======== ======== ========
Weighted average common shares outstanding ........ 9,620 8,606 9,292 8,559
Dilutive effect of outstanding options and
restricted stock as determined by the treasury
stock method .................................... 827 464 841 286
-------- -------- -------- --------
Shares used in per share calculation .............. 10,447 9,070 10,133 8,845
Diluted earnings per share - common stock ......... $ 0.14 $ 0.07 $ 0.25 $ 0.04
Diluted earnings per share - preferred stock ...... -- $ 0.02 $ 0.02 $ 0.03
For the three months and six months ended June 30, 2004 and 2003,
earnings per share calculations assumed no conversion of the convertible
mandatorily redeemable preferred stock (which was converted into 666,665
shares of common stock, partly on April 20 and the remainder on April 26,
2004), as the effect would have been anti-dilutive.
8. SIGNIFICANT TRANSACTIONS
In April 2004, all holders 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, we
paid approximately $17,000 of cash dividends to the preferred shareholders
through the date of the conversion, and no future dividend payments are
required.
On June 18, 2004, we filed a registration statement on Form S-3 to
register 666,665 shares of common stock for offer and sale from time to
time by our former preferred shareholders. We will not receive any
proceeds from sales of common stock by the selling shareholders. We also
recorded issuance costs of $52,000 related to the conversion and
registration as a decrease in Additional Paid-In Capital.
10
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; 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 JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 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) June 30, 2004 June 30, 2003 $ %
- -------------- ------------- ------------- - -
Point of sale and banking .. $ 6,275 42.7% $ 4,808 35.9% $ 1,467 30.5%
Gaming and lottery ........... 8,419 57.3% 8,570 64.1% (151) (1.8%)
------- ----- ------- ----- -------
$14,694 100.0% $13,378 100.0% $ 1,316 9.8%
======= ===== ======= ===== =======
International * .............. $ 1,375 9.4% $ 1,318 9.9% $ 57 4.3%
======= ===== ======= ===== =======
* International sales do not include sales of printers made to
domestic distributors or other customers who in turn ship those
printers to international destinations.
Net sales by product type for the current and prior year's quarter were as
follows:
Three months ended Three months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
------------- ------------- - -
Printers - POS and banking ..... $ 4,623 31.5% $ 3,141 23.4% $ 1,482 47.2%
Printers - Gaming and lottery .. 7,674 52.2% 7,967 59.6% (293) (3.7%)
------- ----- ------- ----- ------- ---
Subtotal - printers .......... 12,297 83.7% 11,108 83.0% 1,189 10.7%
Services and consumables ....... 2,397 16.3% 2,270 17.0% 127 5.6%
------- ----- ------- ----- -------
Total net sales .............. $14,694 100.0% $13,378 100.0% $ 1,316 9.8%
======= ===== ======= ===== =======
11
Net sales for the second quarter of 2004 increased $1,316,000, or 10%, from the
same period last year due to significantly higher printer shipments (an increase
of approximately $1,482,000, or 47%) into our point of sale and banking ("POS")
market, in part offset by slightly lower shipments (a decrease of approximately
$293,000, or 4%) into our gaming and lottery 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
$127,000, or 6%, as our installed base of printers grows and we continue to
aggressively pursue these sales. Overall, international sales increased by
$57,000, or 4%.
POINT OF SALE AND BANKING:
Sales of our POS products worldwide increased approximately $1,467,000, or 31%.
Three months ended Three months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
- -------------- ------------- ------------- - -
Domestic ........ $5,275 84.1% $3,881 80.7% $1,394 35.9%
International ... 1,000 15.9% 927 19.3% 73 7.9%
------ ----- ------ ----- ------
$6,275 100.0% $4,808 100.0% $1,467 30.5%
====== ===== ====== ===== ======
Domestic POS revenue increased to $5,275,000, representing a $1,394,000, or 36%,
increase from the second quarter of 2003, due largely to significantly higher
sales of our POSjet(R) and Bankjet(R) lines of inkjet printers, and increasing
sales of our recently launched iTherm(TM)280 thermal printer. Sales of our
POSjet(R) line of inkjet printers increased by approximately 182% in the second
quarter of 2004 compared to the second 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 second
quarter of 2004 compared to the second quarter of 2003.
International POS product shipments increased by approximately $73,000, or 8%,
to $1,000,000, due primarily to higher service, spare parts and consumables
revenue.
We expect sales into the POS market for the third quarter of 2004 to be somewhat
lower than those reported for the second quarter of 2004 and the third quarter
of 2003, due primarily to the substantial completion of shipments of our
Bankjet(R) line of inkjet printers to two major financial services companies to
upgrade bank teller stations. Sales of our banking printers are project-oriented
and will vary from quarter to quarter based on the number and size of projects,
and the timing of installation of our printers. Based on shipments made through
the second quarter, we have substantially met our annual expectation of sales of
our banking printers for 2004. We are currently pursuing new opportunities for
sales of our Bankjet(R) lines of inkjet printers for shipment in 2005.
GAMING AND LOTTERY:
Sales of our gaming and lottery products decreased by $151,000, or 2%, from the
second quarter a year ago, primarily due to a shift in timing of orders for
lottery printers from GTECH from the second quarter of 2004 to the fourth
quarter of 2004 and the first quarter of 2005.
Three months ended Three months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
- -------------- ------------- ------------- - -
Domestic ........ $8,044 95.5% $8,179 95.4% $ (135) (1.7%)
International ... 375 4.5% 391 4.6% (16) (4.1%)
------ ----- ------ ----- ------
$8,419 100.0% $8,570 100.0% $ (151) (1.8%)
====== ===== ====== ===== ======
Three months ended Three months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
------------- ------------- - -
Gaming ........ $ 6,520 77.4% $ 5,227 61.0% $ 1,293 24.7%
Lottery ....... 1,899 22.6% 3,343 39.0% (1,444) (43.2%)
------- ----- ------- ----- -------
$ 8,419 100.0% $ 8,570 100.0% $ (151) (1.8%)
======= ===== ======= ===== =======
12
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 $1,293,000, or
25%, to $6,520,000. 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 sales of our casino printers to
continue to increase during the remainder of 2004 compared to the comparable
period in 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 the comparable period in 2003.
Total sales to GTECH Corporation ("GTECH") (a worldwide lottery terminal
provider and major customer), which included impact and thermal on-line lottery
printers, and spare parts revenue, decreased by $1,444,000 to approximately
$1,899,000, or 13% of net sales, in the second quarter of 2004, compared to
$3,343,000, or 25% of net sales, in the second quarter of 2003, primarily due to
a shift in timing of orders for thermal lottery printers from GTECH from the
second quarter of 2004 to the fourth quarter of 2004 and the first quarter of
2005.
In July 2002, we entered into a 5-year agreement with GTECH to provide a newly
designed thermal on-line lottery printer. As of June 30, 2004, we have received
orders from GTECH for approximately $3.1 million of these thermal printers that
we expect to ship over the remaining six months of 2004, although in higher
volumes during the fourth quarter than in the third quarter, as GTECH shifted a
significant portion of its forecast for thermal lottery printers from the second
and third quarters of 2004 into the fourth quarter. Despite this shift by GTECH,
we still 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 shipped approximately $700,000 of these orders during the second
quarter of 2004, and expect to ship the remaining $1.3 million during the third
quarter of 2004. We do not expect any further shipments of impact on-line
lottery printers beyond 2004, as GTECH has substantially replaced our legacy
impact on-line lottery printer with our newly designed thermal on-line lottery
printer.
See the table below for an analysis of revenues from GTECH:
Three months ended
(In thousands, except %) June 30,
2004 2003
------ ------
Impact on-line lottery printers and spare parts $1,233 $ 350
Thermal on-line lottery printers 666 2,993
------ ------
$1,899 $3,343
====== ======
% of consolidated net sales 13% 25%
International sales into the gaming and lottery market decreased $16,000, to
$375,000 in the second quarter of 2004, in line with our expectations. Although
we expect international sales into the gaming and lottery market to remain
relatively flat in the third quarter of 2004 compared to the second quarter of
2004, we expect moderate growth in these sales during the fourth quarter of
2004, with more significant growth in 2005 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 $1,405,000, or 33%, and gross margin
increased to 38.2% from 31.5%, due primarily to higher dollar volume of sales, a
more favorable sales mix, and continued reductions in component costs in the
second quarter of 2004 compared to the second quarter of 2003. We expect gross
margin for the remainder of 2004 to be consistent with the gross margin reported
for the first half of 2004.
13
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 $3,000, or less than 1%. Such expenses decreased as a percentage of
net sales to 3.7% from 4.1%, due primarily to a higher volume of sales in the
second quarter of 2004 compared to the second quarter of 2003. We expect
engineering and product design development expenses for the third quarter of
2004 to be consistent with those reported in the second quarter of 2004.
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 decreased by $46,000, or 4%, due
primarily to lower print advertising and other promotional marketing expenses
(approximately $40,000) and lower expenses at our UK facility due to a staff
reduction (approximately $70,000), offset by higher 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 $40,000) and recruitment expenses related to adding sales
and marketing staff (approximately $25,000). Selling and marketing expenses
decreased as a percentage of net sales to 8.3% from 9.4%, due primarily to
higher volume of sales in the second quarter of 2004 compared to the second
quarter of 2003. We expect selling and marketing expenses to be slightly higher
in the third quarter of 2004 compared to the second quarter of 2004, as we plan
to add management level sales and marketing staff to more focus our efforts and
continue to grow our sales in each of 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 $444,000, or 40%, 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. In addition, during the second quarter, we
expensed approximately $110,000 of costs we incurred in conducting due diligence
related to our proposed acquisition of TPG, Inc. as the proposed transaction was
terminated. General and administrative expenses increased as a percentage of net
sales to 10.6% from 8.4% due primarily to the factors listed above, partly
offset by a higher volume of sales in the second quarter of 2004 compared to the
second quarter of 2003. We expect general and administrative expenses to
continue to increase in the third and fourth quarters of 2004, largely due to
professional fees related to compliance with Sarbanes-Oxley. We expect to incur
approximately $600,000 to $700,000 of internal (new finance staff) and external
expenses directly related to compliance with Sarbanes-Oxley for the full year of
2004.
OPERATING INCOME. During the second quarter of 2004 we reported operating income
of $2,288,000, or 15.6% of net sales, compared to $1,284,000, or 9.6% of net
sales in the second quarter of 2003. The substantial increase in our operating
income and operating margin was due largely to higher gross profit on higher
sales, partially offset by higher operating expenses in the second quarter of
2004 compared to that of 2003. Although our operating expenses increased by 14%
while our sales increased by 10% in the second quarter of 2004 compared to the
second quarter of 2003, we still significantly improved our operating margin by
63% to almost 16%. This improvement demonstrates the substantial operating
leverage we have in our business that we expect to continue for the remainder of
2004.
INTEREST. Net interest expense decreased to $2,000 from $76,000 in the second
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 report net interest income as we expect the interest earned on our
cash balances to exceed our interest expense of approximately $10,000 per
quarter related to interest on unused borrowings under our revolving credit
line. See "Liquidity and Capital Resources" below for more information.
INCOME TAXES. We recorded an income tax provision of $823,000 and $395,000 in
the second quarter of 2004 and 2003, respectively, at an effective rate of 36.0%
and 33.4%, respectively. The lower effective tax rate in the 2003 period
reflects a favorable outcome of a state tax audit.
14
NET INCOME. We reported net income during the second quarter of 2004 of
$1,465,000, or $0.14 per diluted share (of preferred and common stock) compared
to net income of $787,000, or $0.09 per diluted share (of preferred and common
stock) for the second quarter of 2003. Earnings per share has been retroactively
restated for adoption of EITF 03-06 "Participating Securities and the Two-Class
Method under FASB Statement No. 128, Earnings Per Share", which requires the
two-class method of computing earnings per share. The two-class method is an
earnings allocation formula that determines earnings per share for common stock
and participating securities based upon an allocation of earnings as if all of
the earnings for the period had been distributed in accordance with
participation rights on undistributed earnings. Dividends paid in the second
quarter of 2004 were approximately $17,000, and there will be no preferred stock
dividend payments 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."
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
NET SALES. Net sales by market for the current and prior year's six month period
are as follows:
Six months ended Six months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
---------------- ---------------- ----------------
Point of sale and banking $ 13,160 44.2% $ 9,139 40.8% $ 4,021 44.0%
Gaming and lottery 16,609 55.8% 13,251 59.2% 3,358 25.3%
---------------- ---------------- -------
$ 29,769 100.0% $ 22,390 100.0% $ 7,379 33.0%
================ ================ =======
International * $ 2,591 8.7% $ 2,384 10.6% $ 207 8.7%
================ ================ =======
* International sales do not include sales of printers made to
distributors or other domestic customers who in turn ship those printers
to international destinations.
Net sales by product type for the current and prior year's quarter were as
follows:
Six months ended Six months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
---------------- ---------------- -------------
Printers - POS and banking $ 9,629 32.3% $ 5,920 26.4% $3,709 62.7%
Printers - Gaming and lottery 15,292 51.4% 12,238 54.7% 3,054 25.0%
---------------- ---------------- ------
Subtotal - printers 24,921 83.7% 18,158 81.1% 6,763 37.2%
Services and consumables 4,848 16.3% 4,232 18.9% 616 14.6%
---------------- ---------------- ------
Total net sales $ 29,769 100.0% $ 22,390 100.0% $7,379 33.0%
================ ================ ======
Net sales for the first half of 2004 increased $7,379,000, or 33%, from the
prior year's first half due to significantly higher printer shipments
(approximately $6,763,000, or 37%) into both our gaming and lottery market and
POS and banking 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 $616,000, or 15%, as
our installed base of printers grows and we continue to aggressively pursue
these sales. Overall, international sales increased by $207,000, or 9%, due
primarily to higher international shipments of our gaming printers.
POINT OF SALE AND BANKING:
Sales of our POS products worldwide increased approximately $4,021,000, or 44%.
Six months ended Six months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
---------------- ---------------- -----------------
Domestic $11,240 85.4% $ 7,150 78.2% $ 4,090 57.2%
International 1,920 14.6% 1,989 21.8% (69) (3.5%)
---------------- ---------------- --------
$13,160 100.0% $ 9,139 100.0% $ 4,021 44.0%
================ ================ ========
15
Domestic POS printer sales increased to $11,240,000, representing a $4,090,000,
or 57%, increase from the first half of 2003, due primarily 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 300% in the
first half of 2004 compared to the first half 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 half
of 2004 compared to the first half of 2003.
International POS product shipments decreased by approximately $69,000, or 4%,
to $1,920,000, due primarily to lower sales of our printers through our network
of international distributors (primarily in Europe and Latin America), somewhat
offset by higher service, spare parts and consumables revenue
We expect sales into the POS market for the third quarter of 2004 to be somewhat
lower than those reported for the second quarter of 2004 and the third quarter
of 2003, due primarily to the substantial completion of shipments of our
Bankjet(R) line of inkjet printers to two major financial services companies to
upgrade bank teller stations. Sales of our banking printers are project-oriented
and will vary from quarter to quarter based on the number and size of projects,
and the timing of installation of our printers. Based on shipments made through
the second quarter, we have substantially met our annual expectation of sales of
our banking printers for 2004. We are currently pursuing new opportunities for
sales of our Bankjet(R) lines of inkjet printers for shipment in 2005.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers increased by $3,358,000, or 25%, from
the first half of 2003, primarily due to significantly higher shipments of our
slot machine printers, somewhat offset by lower printer shipments of on-line
lottery printers to GTECH.
Six months ended Six months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
---------------- ---------------- --------------------
Domestic $ 15,938 96.0% $ 12,856 97.0% $ 3,082 24.0%
International 671 4.0% 395 3.0% 276 69.9%
---------------- ---------------- ---------
$ 16,609 100.0% $ 13,251 100.0% $ 3,358 25.3%
================ ================ =========
Six months ended Six months ended Change
(In thousands) June 30, 2004 June 30, 2003 $ %
---------------- ---------------- --------------------
Gaming $ 13,170 79.3% $ 9,156 69.1% $ 4,014 43.8%
Lottery 3,439 20.7% 4,095 30.9% (656) (16.0%)
---------------- ---------------- ---------
$ 16,609 100.0% $ 13,251 100.0% $ 3,358 25.3%
================ ================ =========
Sales of our gaming products, which include VLT and slot machine printers, and
related spare parts and repairs, increased by approximately $4,014,000, or 44%.
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
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, and spare parts revenue, decreased by $656,000 to approximately
$3,439,000, or 12% of net sales, in the first half of 2004, compared to
$4,095,000, or 18% of net sales, in the first half of 2003, primarily due to a
shift in timing of orders for thermal lottery printers from GTECH from the
second quarter of 2004 to the fourth quarter of 2004 and the first quarter of
2005.
In July 2002, we entered into a 5-year agreement with GTECH to provide a newly
designed thermal on-line lottery printer. As of June 30, 2004, we have received
orders from GTECH for approximately $3.1 million of these thermal printers that
we expect to ship over the remaining six months of 2004, although in higher
volumes during the fourth quarter than in the third quarter, as GTECH shifted a
significant portion of its forecast for thermal lottery printers
16
from the second and third quarters of 2004 into the fourth quarter. Despite this
shift by GTECH, we still 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 shipped approximately $700,000 of these orders during the second
quarter of 2004, and expect to ship the remaining $1.3 million during the third
quarter of 2004. We do not expect any further shipments of impact on-line
lottery printers beyond 2004, as GTECH has substantially replaced our legacy
impact on-line lottery printer with our newly designed thermal on-line lottery
printer.
See the table below for an analysis of revenues from GTECH.
Six months ended
(In thousands, except %) June 30,
2004 2003
-------- --------
Impact on-line lottery printers and spare parts $ 1,559 $ 1,097
Thermal on-line lottery printers 1,880 2,998
-------- --------
$ 3,439 $ 4,095
======== ========
% of consolidated net sales 12% 18%
International sales into the gaming and lottery market increased $276,000, or
70%, to $671,000 in the first half of 2004. This increase is the result of our
decision to expand the distribution and sales of our gaming printers outside of
the United States (primarily in Europe and Australia). As such, we expect
international sales of our gaming printers to steadily grow in 2004, with more
significant growth in 2005.
GROSS PROFIT. Gross profit increased $4,382,000, or 66%, and gross margin
increased to 37.1% from 29.7%, due primarily to higher volume of sales, a more
favorable sales mix, and continued reductions in component costs in the first
half of 2004 compared to the first half of 2003. We expect gross margin for the
remainder of 2004 to be consistent with the gross margin reported for the first
half of 2004.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $55,000, or 5%, due primarily to higher compensation and
related expenses. Such expenses decreased as a percentage of net sales to 3.9%
from 4.9%, due primarily to a higher volume of sales in the first half of 2004
compared to the first half of 2003. We expect engineering and product design
development expenses for the second half of 2004 to be consistent with those
reported in the first half of 2004.
SELLING AND MARKETING. Selling and marketing expenses increased by $272,000, or
12%, due primarily to higher (1) sales commissions resulting from higher sales
in the first half of 2004 compared to the first half of 2003 (approximately
$22,000), (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 $225,000) and (3)
recruitment expenses related to adding sales and marketing staff (approximately
$151,000). Such increases were partially offset by lower print advertising and
other promotional marketing expenses (approximately $40,000) and lower expenses
at our UK facility due to a staff reduction (approximately $70,000). Selling and
marketing expenses decreased as a percentage of net sales to 8.7% from 10.3%,
due primarily to higher volume of sales in the first half of 2004 compared to
the first half of 2003. We expect selling and marketing expenses to be slightly
higher in the third quarter of 2004 compared to the second quarter of 2004, as
we plan to add management level sales and marketing staff to more focus our
efforts and continue to grow our sales in each of our markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$677,000, or 31%, 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. In addition,
during the second quarter, we expensed approximately $110,000 of costs we
incurred in conducting due diligence related to our proposed acquisition of TPG,
Inc., as the proposed transaction was terminated. General and administrative
expenses decreased as a percentage of net sales to 9.7% from 9.9% due primarily
to the factors listed above, partly offset by a higher volume of sales in the
second quarter of 2004 compared to the second quarter of 2003. We expect general
and administrative expenses to continue to increase in the third and fourth
quarters of 2004, largely due to professional fees related to compliance with
Sarbanes-Oxley. We expect to incur approximately $600,000 to $700,000 of
internal (new finance staff) and external expenses directly related to
compliance with Sarbanes-Oxley for the full year of 2004.
17
OPERATING INCOME. During the first half of 2004 we reported operating income of
$4,398,000, or 14.8% of net sales, compared to $1,020,000, or 4.6% of net sales,
in the first half of 2003. The significant increase in our operating income and
operating margin was due largely to higher gross profit on higher sales,
partially offset by higher operating expenses in the first half of 2004 compared
to the same period of 2003. Although sales increased by 33% in the first half of
2004 compared to the first half of 2003, operating expenses only increased 18%,
which provided substantial operating leverage that we expect to continue for the
remainder of 2004.
INTEREST. Net interest expense decreased to $12,000 from $122,000 in the first
half 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 report net interest income as we expect the interest earned on our
cash balances to exceed our interest expense of approximately $10,000 per
quarter related to interest on unused borrowings under our revolving credit
line. See "Liquidity and Capital Resources" below for more information.
INCOME TAXES. We recorded an income tax provision of $1,578,000 and $283,000 in
the first half of 2004 and 2003, respectively, at an effective rate of 36.0% and
32.5%, respectively. The lower effective tax rate in the 2003 period reflects a
favorable outcome of a state tax audit.
NET INCOME. We reported net income during the first half of 2004 of $2,807,000,
or $0.27 per diluted share (of preferred and common stock) compared to net
income of $589,000, or $0.07 per diluted share (of preferred and common stock)
for the first half of 2003. Earnings per share has been retroactively restated
for adoption of EITF 03-06 "Participating Securities and the Two-Class Method
under FASB Statement No. 128, Earnings Per Share", which requires the two-class
method of computing earnings per share. The two-class method is an earnings
allocation formula that determines earnings per share for common stock and
participating securities based upon an allocation of earnings as if all of the
earnings for the period had been distributed in accordance with participation
rights on undistributed earnings. Dividends paid in the first half of 2004 were
approximately $86,000 and there will be no dividends beyond the first half 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 half of 2004, we significantly improved our operating
results, including cash flows, compared to 2003. We repaid our remaining
outstanding debt in January 2004 and ended the quarter with approximately $5.0
million in cash. Looking forward, we expect to generate approximately $6 to $8
million in cash from operations during 2004 and have between $6 and $8 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 $4,693,000 in the first half of 2004:
- We reported net income of $2,807,000
- We recorded depreciation, amortization and non-cash compensation
expense of $964,000
- Accounts receivable decreased by $679,000 due to timing of sales
during the quarter
- Inventories increased by $621,000, as we prepared for our expected
higher sales volume in 2004
- Other current assets decreased by $260,000 due primarily to receipts
of federal and state tax refunds in the first quarter of 2004
- Accrued liabilities and other liabilities increased by $742,000,
primarily due to an increase in income taxes payable resulting from
the tax provision recorded in the first half of 2004, largely offset
by payments of patent license fees to Seiko Epson
- Accrued restructuring expenses decreased by $221,000 due to payments
made for lease obligation costs
During the second quarter of 2004, we signed a cross licensing agreement with
Seiko Epson. Under the agreement, Seiko Epson received a license to three of our
patents, and we received a license to eighteen of Seiko Epson's patents relating
to printing applications for the point of sale and banking markets. In addition,
we agreed to pay $900,000 as a royalty for the usage of certain Seiko Epson
technology prior to January 1, 2003. We had accrued for the $900,000 royalty for
past usage as of December 31, 2003. In accordance with the terms of the
agreement, we paid $525,000 of the royalty in the second quarter of 2004, and
will pay the remaining $375,000 in the first quarter
18
of 2005. Under the agreement, we continue to pay royalties on a quarterly basis
related to the sales of licensed printers, which is reflected in cost of sales.
As of June 30, 2004 and December 31, 2003, our restructuring accrual amounted to
$1,904,000 and $2,125,000, respectively. We expect to pay approximately $480,000
of these expenses per year from 2004 through 2007, and the remaining $74,000 in
2008. These payments from 2004 through 2008 relate primarily to lease obligation
costs for our Wallingford, CT facility.
Investing activities: Our capital expenditures were approximately $447,000 and
$872,000 in the first half of 2004 and 2003, respectively. Expenditures in 2004
primarily included new product tooling and computer hardware and software. We
expect capital expenditures for the full year 2004 to be approximately
$1,500,000, primarily for tooling for new products and enhanced versions of our
existing products.
Financing activities: We generated approximately $263,000 from financing
activities during the first six months of 2004, largely due to proceeds from
stock option exercises (approximately $826,000), largely offset by the repayment
of our term loan (approximately $420,000) and payments of cash dividends on our
preferred stock (approximately $91,000).
WORKING CAPITAL
Our working capital increased to $15,668,000 at June 30, 2004 from $11,787,000
at December 31, 2003. The current ratio also increased to 2.74 to 1 at June 30,
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
($4,513,000) and higher inventories ($621,000) somewhat offset by lower
receivables ($679,000) compared to December 31, 2003.
DEFERRED TAXES
As of June 30, 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.
CREDIT FACILITY AND BORROWINGS
On August 6, 2003, we entered into a $12.5 million credit facility (the
"Banknorth Credit Facility") with Banknorth N.A. 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%, which is included in interest
expense. 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
$40,000 credit reserve. Concurrent with the signing of the Banknorth Credit
Facility, we borrowed $450,000 under the equipment loan facility.
As of June 30, 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 June 30, 2004. However, our maximum
additional available borrowings under the facility were limited to approximately
$8,100,000 at June 30, 2004 based on the borrowing base of our collateral. We
were in compliance with all financial covenants of the Banknorth Credit Facility
at June 30, 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. In
April 2004, all holders 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 paid approximately $17,000
of cash dividends in the second quarter of 2004. No future dividend payments are
required beyond the second quarter of 2004. The conversion will result in a cash
savings of approximately $280,000 annually, as we will no longer pay dividends
previously required under the terms of the preferred stock. See Note 8 to the
Condensed Consolidated Financial Statements.
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SHAREHOLDERS' EQUITY
Shareholders' equity increased by $8,711,000 to $19,058,000 at June 30, 2004
from $10,347,000 at December 31, 2003. The increase was primarily due to the
following for the six months ended June 30, 2004: (1) the conversion by our
preferred shareholders of all shares of their preferred stock into common stock
($3,922,000), (2) net income of $2,807,000, less cash dividends on our preferred
stock of $91,000, (3) proceeds of approximately $826,000 from the issuance of
approximately 179,000 shares of common stock from stock option and warrant
exercises, (4) an increase in additional paid in capital of approximately
($1,173,000) resulting from the recording of a deferred tax asset from the sale
of employee stock from stock option exercises, and (5) compensation expense
related to restricted stock grants of $142,000.
CONTRACTUAL OBLIGATIONS
We have experienced no material changes in our contractual obligations outside
the ordinary course of business during the three or six months ended June 30,
2004.
RESOURCE SUFFICIENCY
We believe that our cash on hand and 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, to finance our capital expenditures and meet our liquidity
requirements through at least December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures was conducted under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer. Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were adequate
and designed to ensure that information required to be disclosed by the Company
in this report is recorded, processed, summarized and reported in a timely
manner, including that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses in internal
controls, during the period covered by this report.
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PART II. OTHER INFORMATION
ITEM 5. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 26, 2004.
Matters voted upon at the meeting and the number of votes cast for,
against, withheld or abstentions, are as follows:
(1) To consider and act upon a proposal to elect one Director to
serve until the 2007 Annual Meeting of Stockholders or until
the Director's successor has been duly elected and qualified.
Nominee was Graham Y. Tanaka. Votes cast were as follows
(counting the votes of common stock and Series B Preferred
Stock together as a single class):
For Withheld
Graham Y. Tanaka 9,008,321 178,655
(2) To ratify the selection of PricewaterhouseCoopers LLP as the
Company's independent registered public accounting firm for
2004. Votes cast were as follows (counting the votes of common
stock and Series B Preferred Stock together as a single
class): 9,147,331 shares for; 38,771 shares against; and 874
shares abstained.
The following directors continue to serve until the Annual Meeting
of Stockholders in the year 2005 or until their successors have been
duly elected and qualified: Bart C. Shuldman and Thomas R. Schwarz.
The following director continues to serve until the Annual Meeting
of Stockholders in the year 2006 or until the director's successor
has been duly elected and qualified: Charles A. Dill.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits filed herein
Exhibit 10.28 License Agreement between Seiko Epson
Corporation and TransAct Technologies
Incorporated dated May 17, 2004. (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.)
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 May 3, 2004 to
report under Items 7 and 12 a press release announcing
the Company's financial results for the quarter ended
March 31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
(Registrant)
August 12, 2004 /s/ Steven A. DeMartino
--------------------------------------------
Steven A. DeMartino
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
10.28 License Agreement between Seiko Epson Corporation and
TransAct Technologies Incorporated dated May 17, 2004.
(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.)
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
23