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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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)
Registrant's telephone number, including area code 203-269-1198
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any other amendment
to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
----- -----
As of June 30, 2004 the aggregate market value of the registrant's issued and
outstanding voting stock held by non-affiliates of the registrant was
$291,700,000.
As of February 25, 2005, the registrant had outstanding 10,071,766 shares of
common stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders to be held on May 25,
2005 - Part III (Items 10-14).
PART I
ITEM 1. BUSINESS.
THE COMPANY
TransAct was incorporated in June 1996 and began operating as a stand-alone
business in August 1996 as a spin-off of the printer business that was formerly
conducted by certain subsidiaries of Tridex Corporation. We completed an initial
public offering on August 22, 1996.
TransAct Technologies Incorporated ("TransAct" or the "Company") designs,
develops, manufactures and markets transaction-based printers under the
ithaca(R) brand name. In addition, we market related consumables, spare parts
and service. Our printers are used worldwide to provide transaction records such
as receipts, tickets, coupons, register journals and other documents. We focus
on two core markets: (1) point-of-sale ("POS") and banking and (2) gaming and
lottery. We sell our products directly to original equipment manufacturers
("OEMs"), value-added resellers ("VARs"), selected distributors and directly to
end-users. Our product distribution spans across the Americas, Europe, the
Middle East, Africa, the Caribbean Islands and the South Pacific. We have one
primary operating facility located in Ithaca, New York, seven sales offices
located in the United States (including our new global gaming and lottery
headquarters and western region service center in Las Vegas, NV), and a European
sales and service center in the United Kingdom. Our executive offices and
eastern region service center are located at 7 Laser Lane, Wallingford, CT
06492, with a telephone number of (203) 269-1198.
FINANCIAL INFORMATION ABOUT SEGMENTS
We have assessed our operating and reportable segments and have determined
that we operate in one reportable segment, the design, development, manufacture
and marketing of transaction-based printers and printer-related products.
PRODUCTS AND SERVICES
Printers
TransAct designs, develops, assembles and markets a broad array of
transaction-based printers utilizing inkjet, thermal and impact printing
technology for applications requiring up to 60 character columns, primarily in
the POS and banking, and gaming and lottery markets. Our printers are
configurable and offer customers the ability to choose from a variety of
features and functions. Options typically include interface configuration, paper
cutting devices, paper handling capacities and cabinetry color. In addition to
our configurable printers, we manufacture custom printers for certain OEM
customers. In collaboration with these customers, we provide engineering and
manufacturing expertise for the design and development of specialized printers
POS and banking: Our POS and banking printers include hundreds of optional
configurations that can be selected to meet particular customer needs. We
believe that this is a significant competitive strength, as it allows us to
satisfy a wide variety of printing applications that our customers request. In
the POS market, we sell several models of printers utilizing inkjet, thermal and
impact printing technology. Our printers are used primarily by retailers in the
hospitality, restaurant (including fine dining, casual dining, and fast food)
and specialty retail industries to print receipts for consumers, validate
checks, or print on other inserted media. We also sell printers that are used by
banks, credit unions and other financial institutions to print and/or validate
receipts at bank teller stations.
Gaming and lottery: In the lottery portion of our gaming and lottery
market, we supply lottery printers to GTECH, our largest customer and the
world's largest provider of lottery terminals, with an approximately 70% market
share. These printers are designed for high-volume, high-speed printing of
lottery tickets for various lottery applications.
In the gaming portion of our gaming and lottery market, we sell several
models of printers used in slot machines and video lottery terminals that print
tickets instead of issuing coins at casinos and racetracks worldwide. These
printers utilize thermal printing technology and can print tickets in monochrome
or two-color (depending upon the model), and offer various other features such
as jam resistant bezels and a dual port interface that will allow casinos to
print two-color coupons/promotions. We also sell printers using impact printing
technology for use mainly in video lottery terminals and other gaming devices.
1
Service
Through our recently-established TransAct Services Group, we proactively
market the sale of consumable products (including inkjet cartridges, ribbons and
paper), replacement parts and maintenance services for all of our products. Our
maintenance services include the sale of extended warranties, multi-year
maintenance contracts, 24-hour guaranteed replacement product service, and other
repair services for our printer products. Within the United States, we provide
repair services through our eastern region service center in Wallingford, CT and
our western region service center in Las Vegas, NV. Internationally, we provide
repair services through our European service center located in Doncaster, United
Kingdom, and other partners strategically located around the world.
We also provide customers with telephone sales and technical support, and a
personal account representative to handle orders, shipping and general
information. Technical and sales support personnel receive training on all of
our manufactured products and our services.
Product Warranty
Our printers generally carry up to a two-year limited warranty against
defects in material and workmanship, Defective equipment may be returned to any
of our service centers, or our manufacturing facility in Ithaca, NY, for repair
or replacement during the applicable warranty period.
PRODUCTION, MANUFACTURING AND SOURCES AND AVAILABILITY OF RAW MATERIALS
We design our products to optimize product performance, quality,
reliability and durability. These designs combine cost efficient materials,
sourcing and assembly methods with high standards of workmanship. We final
assemble our products in our Ithaca, NY facility largely on a configure-to-order
basis using components that have been sourced from around the world. Our
manufacturing engineers work closely with our new product engineers and vendors
during the development of new products. As a result, this collaboration
increases manufacturing efficiency by specifying materials and designing
manufacturing processes in conjunction with new product design.
We procure component parts and subassemblies for use in the manufacture of
our products. Critical component parts and subassemblies include inkjet, thermal
and impact printheads, printing/cutting mechanisms, power supplies, motors,
injection molded plastic parts, circuit boards and electronic components, which
are obtained from domestic and foreign suppliers at competitive prices. We
typically maintain several sources for our component parts and subassemblies to
reduce the risk of parts shortages or unavailability. However, we could
experience temporary disruption if certain suppliers ceased doing business with
us, as described below.
Okidata Americas, Inc. ("Okidata"), is the sole supplier for a printer
component kit consisting of a printhead, control board and carriage (the "Oki
Kit"), that is used in all of our ithaca(R) brand impact printers. The loss of
the supply of Oki Kits would have a material adverse effect on TransAct. We have
a supply agreement with Okidata to provide Oki Kits until June 8, 2005. Prices
under this agreement are fixed, but may be changed by Okidata after providing
180 days written notice.
Hewlett-Packard Company ("HP") is the sole supplier of inkjet cartridges
that are used in all of our inkjet printers. The loss of the supply of HP inkjet
cartridges would have a material adverse effect on the sale of our inkjet
printers. We have a supply agreement with HP to purchase inkjet cartridges until
February 1, 2006 at fixed prices.
We believe our relations with Okidata and HP are in good standing and have
received no indication that these supply agreements will not be renewed beyond
the respective expiration dates of the current contracts. We cannot be certain,
however, that these supply agreements will be renewed, or if renewed, that the
terms will be as favorable as those under the current contracts.
2
PATENTS AND PROPRIETARY INFORMATION
We have significantly expanded our patent portfolio over the past five
years, and expect to continue to do so in the future. We also believe our patent
portfolio will provide additional opportunities to license our intellectual
property in the future. We currently own ten patents, six of which we consider
material. The earliest expiration date of these ten patents is in 2008, with the
latest expiration date in 2021. Of the material patents, one patent covers
methods and apparatus for allowing a two-color printer to print images using
single pass technology by printing during both forward and reverse movement of
the print mechanism; another patent relates to our proprietary void and reprint
receipt printing method which is used in certain of our slot machine printers;
two patents prevent ticket jams resulting from player interference in certain of
our slot machine printers; and two other patents cover a method for converting a
full color image into a two-color image, plus a background color. We also have
sought patent protection for certain design features of 1) printers using inkjet
technology, 2) POS printers using thermal technology, and 3) thermal printers
for use in casino slot machines. We regard certain manufacturing processes and
designs to be proprietary and attempt to protect them through employee and
third-party nondisclosure agreements and similar means. It may be possible for
unauthorized third parties to copy certain portions of our products or to
reverse engineer or otherwise obtain and use, to our detriment, information that
we regard as proprietary. Moreover, the laws of some foreign countries do not
afford the same protection to our proprietary rights as do United States laws.
There can be no assurance that legal protections relied upon by the Company to
protect our proprietary position will be adequate or that our competitors will
not independently develop technologies that are substantially equivalent or
superior to our technologies.
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. In accordance with the terms of the
agreement, we paid the $900,000 royalty for past usage in full by January 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.
SEASONALITY
Retailers typically reduce purchases of new POS equipment in the fourth
quarter, due to the increased volume of consumer transactions in that holiday
period, and our sales of printers in the POS market historically have increased
in the third quarter and decreased in the fourth quarter. Similarly,
installations of lottery terminals are typically reduced in the fourth quarter
resulting in decreased sales of lottery printers.
CERTAIN CUSTOMERS
We currently have one ongoing OEM purchase agreement ("GTECH Thermal
Printer Agreement") with GTECH Corporation ("GTECH") that provides for the sale
of thermal on-line lottery printers and spares parts, at fixed prices, through
June 28, 2007. We also had a second purchase agreement ("GTECH Impact Printer
Agreement") that provided for the sale of impact on-line lottery printers and
spare parts through December 31, 2004. Because our new thermal on-line lottery
printer is a replacement for our impact on-line printer, we do not expect any
further shipments of impact on-line lottery printers beyond 2004. However, we do
expect to continue to sell spare parts to GTECH for the significant remaining
installed base of impact on-line lottery printers. Firm purchase orders for
printers under the GTECH Thermal Printer Agreement may be placed annually by
GTECH. Pursuant to the GTECH Thermal Printer Agreement, as of March 4, 2005, we
have received orders for approximately $2,000,000 of thermal printers for
delivery in 2005. We expect to receive additional orders from GTECH for thermal
printers during 2005. We also sell printers to GTECH for use in lottery
terminals at grocery store check-out lanes ("in-lane lottery printers"). Sales
of in-lane lottery printers are project-oriented, and, as such, we cannot
predict if and when future sales may occur. Sales to GTECH accounted for
approximately 16%, 19% and 27% of net sales in 2004, 2003 and 2002,
respectively.
We also provide printers to Harrah's and WMS Gaming for use in casino slot
machines throughout the United States. During 2004, sales to WMS Gaming
accounted for approximately 14% of net sales. During 2003, sales to Harrah's
accounted for approximately 12% of net sales.
BACKLOG
Excluding GTECH, our backlog of firm orders was approximately $2,650,000 as
of March 4, 2005, compared to $2,144,000 as of March 5, 2004. Our backlog from
GTECH was approximately $600,000 as of March 4, 2005, compared to $3,200,000 as
of March 5, 2004. Based on customers' current delivery requirements, we expect
to ship our entire current backlog during 2005.
3
COMPETITION
The market for transaction-based printers is extremely competitive, and we
expect such competition to continue in the future. We compete with a number of
companies, many of which have greater financial, technical and marketing
resources than us. We believe our ability to compete successfully depends on a
number of factors both within and outside our control, including durability,
reliability, quality, design capability, product customization, price, customer
support, success in developing new products, manufacturing expertise and
capacity, supply of component parts and materials, strategic relationships with
suppliers, the timing of new product introductions by us and our competitors,
general market, economic and political conditions and, in some cases, the
uniqueness of our products.
In the POS market, our major competitor is Epson America, Inc., which
controls a dominant portion of the POS markets into which we sell. We also
compete, to a much lesser extent, with Transaction Printer Group, Star Micronics
America, Inc., Citizen -- CBM America Corporation, and Korean Printer Solutions.
Certain competitors of ours have greater financial resources, lower costs
attributable to higher volume production and sometimes offer lower prices than
us.
In the lottery market (consisting principally of on-line lottery
transaction printing), we hold a leading position, based largely on our
long-term purchase agreements with GTECH, which controls approximately 70% of
the worldwide on-line lottery market. We compete in this market based solely on
our ability to provide specialized, custom-engineered products to GTECH.
In the gaming market (consisting principally of slot machine and video
lottery terminal transaction printing), we and our major competitor,
FutureLogic, Inc., comprise a substantial portion of the market. Certain of our
products sold for gaming applications compete based upon our ability to provide
highly specialized products, custom engineering and ongoing technical support.
Our strategy for competing in our markets is to continue to develop new
products and product line extensions, to increase our geographic market
penetration, to take advantage of strategic relationships, and to lower product
costs by sourcing certain products overseas. We expect to particularly focus on
(1) promoting our line of slot machine printers into the gaming market including
our newly launched Epic950(TM) thermal casino printer, (2) increasing sales of
our new iTherm(R)280 thermal POS printer and family of printers utilizing
Hewlett Packard's inkjet printing technology, including our BANKjet(R) line of
inkjet printers used in bank teller applications and (3) expanding our
consumables, spare parts and service business. Although we believe that our
products, operations and relationships provide a competitive foundation, there
can be no assurance that we will compete successfully in the future.
RESEARCH AND DEVELOPMENT ACTIVITIES
We spent approximately $2,715,000, $2,276,000 and $2,025,000 in 2004, 2003
and 2002, respectively, on engineering, design and product development efforts
in connection with specialized engineering and design to introduce new products
and to customize existing products. During 2005, we expect to focus the majority
of our research and development activities on the continuing development and
enhancement of (1) our family of printers for the POS and banking market
utilizing inkjet and thermal printing technology and, to a lesser extent, (2)
our ticket-issuing printers for use in the casino market.
ENVIRONMENT
We are not aware of any material noncompliance with federal, state and
local provisions that have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment.
EMPLOYEES
As of February 25, 2005, TransAct Technologies and our subsidiaries
employed 197 persons, of whom 160 were full-time and 37 were temporary
employees. None of our employees is unionized, and we consider our relationships
with our employees to be good.
4
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
We have foreign operations primarily from TransAct Technologies Ltd., a
wholly-owned subsidiary located in the United Kingdom, which had sales to its
customers of $1,000,000, $1,068,000, and $738,000, (primarily to Fujitsu for
sales and service of printers used in the British Post Office) in 2004, 2003 and
2002, respectively. We had export sales from our domestic operations of
approximately $5,423,000, $3,663,000 and $3,968,000 in 2004, 2003 and 2002,
respectively. Total international sales, which include sales from our foreign
subsidiary and export sales from our domestic operations, were approximately
$6,423,000, $4,731,000 and $4,706,000 in 2004, 2003 and 2002, respectively.
ADDITIONAL INFORMATION
We make available free of charge through our internet website,
WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC.
We maintain a Code of Business Conduct that includes our code of ethics
that is applicable to all employees, including our Chief Executive Officer,
Chief Financial Officer and Controller. This Code, which requires continued
observance of high ethical standards such as honesty, integrity and compliance
with the law in the conduct of our business, is available for public access on
our internet website.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instructions G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 25, 2005.
The following is a list of the names and ages of all executive officers of
the registrant, indicating all positions and offices with the registrant held by
each such person and each person's principal occupations and employment during
at least the past five years.
Name Age Position
---- --- --------
Bart C. Shuldman 47 Chairman of the Board, President and Chief Executive
Officer
Steven A. DeMartino 35 Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
Michael S. Kumpf 55 Executive Vice President - Engineering
BART C. SHULDMAN has been Chief Executive Officer, President and a Director
of the Company since its formation in June 1996. Previously, Mr. Shuldman served
as President of Magnetec and later the combined operations of Magnetec and
Ithaca from August 1993 until June 1996. In February 2001, Mr. Shuldman was
elected Chairman of the Board.
STEVEN A. DEMARTINO was named as TransAct's Executive Vice President, Chief
Financial Officer, Treasurer and Secretary on June 1, 2004. Previously, Mr.
DeMartino served as Senior Vice President, Finance and Information Technology
from October 2001 to May 2004, Vice President and Corporate Controller from
January 1998 to October 2001, and Corporate Controller from August 1996 to
December 1997. Prior to joining TransAct, Mr. DeMartino was a self-employed
financial consultant from May 1996 to August 1996. Prior thereto, Mr. DeMartino
served as Controller of Copart, Inc. from September 1994 to May 1996. Mr.
DeMartino is a certified public accountant.
MICHAEL S. KUMPF was appointed Executive Vice President of Engineering in
March 2002. He served as Senior Vice President, Engineering from June 1996 to
March 2002 and Vice President, Engineering of Ithaca from 1991 until June 1996.
5
ITEM 2. PROPERTIES.
Our operations are currently conducted at the facilities described below.
In January 2005, we entered a five-year lease for a 13,700 square foot facility
in Las Vegas, Nevada. The new facility will serve as our global gaming and
lottery headquarters and will house our west coast POS and Banking sales unit.
The facility will also serve as the our new western region service center and
will provide service to our growing base of installed printers in the region.
In February 2001, we announced plans to establish a global engineering and
manufacturing center at our Ithaca, NY facility. As part of this strategic
decision, we consolidated all manufacturing and engineering from our
Wallingford, CT facility into our existing Ithaca, NY facility. Our corporate
headquarters and our eastern region service center are still located in the
Wallingford, CT facility. Although we are actively seeking to sublease our
Wallingford, CT facility, in 2003 we determined that because of the continuing
regional decline in the commercial real estate market, it was unlikely that we
would be able to sublease our facility. As such, we increased our restructuring
accrual at December 31, 2003 to provide for the remaining non-cancelable lease
payments and other related costs for this facility through the expiration of the
lease (March 31, 2008). The restructuring accrual was further adjusted at
December 31, 2004 based on the estimated facility costs through the end of the
lease.
Size Owned or Lease Expiration
Location Operations Conducted (Approx. Sq. Ft.) Leased Date
- -------- -------------------- ----------------- -------- ----------------
Wallingford, Connecticut Executive offices and 49,000 Leased March 31, 2008
service center
Ithaca, New York Manufacturing facility 74,000 Leased June 30, 2007
Las Vegas, Nevada Service center and gaming 13,600 Leased January 31, 2010
and lottery sales
headquarters
Doncaster, United Kingdom Sales office and service 2,800 Leased August 1, 2009
center
Georgia (2), Missouri, New York Five regional sales 750 Leased Various
and Texas offices
We believe that our facilities generally are in good condition, adequately
maintained and suitable for their present and currently contemplated uses.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of the year covered by this report.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the Nasdaq National Market under the symbol
TACT. Prior to September 2004, our stock was traded on the Nasdaq SmallCap
Market. In April 2004, we completed a three-for-two stock split of our common
stock effected in the form of a stock dividend. All amounts in the table below
reflect the stock split on a retroactive basis. As of February 25, 2005, there
were 669 holders of record of the common stock. The high and low sales bid
quotations of the common stock reported during each quarter of the years ended
December 31, 2004 and 2003 were as follows:
Year Ended Year Ended
December 31, 2004 December 31, 2003
----------------- -----------------
High Low High Low
------ ------ ------ ------
First Quarter $26.00 $13.67 $ 3.78 $ 2.60
Second Quarter 34.00 19.13 9.26 3.37
Third Quarter 32.89 15.00 11.93 7.83
90
Fourth Quarter 29.28 19.30 18.27 10.55
No dividends on common stock have been declared except for a cash dividend
paid in lieu of fractional shares resulting from our three-for-two stock split
in April 2005, and we do not anticipate declaring dividends in the foreseeable
future. Our credit agreement with Banknorth N.A. restricts the payment of cash
dividends on our common stock for the term of the agreement.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following is summarized from our audited financial statements of the past
five years:
Year Ended December 31,
-----------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Statement of Operations Data:
Net sales $59,847 $52,098 $39,461 $43,974 $53,720
Gross profit 22,042 15,543 10,216 9,774 14,142
Operating expenses 13,591 12,855 11,200 17,060 14,296
Operating income (loss) 8,451 2,688 (984) (7,286) (154)
Net income (loss) 5,458 1,528 (692) (4,922) (344)
Net income (loss) available
to common shareholders 5,236 1,087 (1,050) (5,280) (664)
Net income (loss) per share:
Basic 0.55 0.13 (0.12) (0.63) (0.08)
Diluted 0.51 0.12 (0.12) (0.63) (0.08)
December 31,
-----------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Balance Sheet Data:
Total assets $34,099 $26,361 $22,030 $25,791 $27,619
Working capital 20,325 11,787 8,798 8,366 13,631
Long-term debt, excluding
current portion -- 330 2,791 5,344 5,944
Redeemable convertible
preferred stock -- 3,902 3,824 3,746 3,668
Shareholders' equity 23,715 10,347 6,545 7,315 12,191
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
FORWARD LOOKING STATEMENTS
Certain statements included in this report, including without limitation
statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements generally can be identified by the use of
forward-looking terminology, such as "may", "will", "expect", "intend",
"estimate", "anticipate", "believe", "project" or "continue" or the negative
thereof or other similar words. 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 significant vendors; the ability to recruit and retain
quality employees as we grow; 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.
OVERVIEW
The year 2004 was a successful year for TransAct, highlighted by the
following achievements:
- Increased revenues by $7,749,000, or 15% over 2003
- Increased operating income by $5,763,000 over 2003
- Reported record net income of $5,458,000 and diluted earnings per
share of $0.51
- Repaid all our outstanding bank debt
- Finished the year with $8.6 million of cash and cash equivalents
We continue to focus on sales growth in our two core markets, point of sale
("POS") and banking and gaming and lottery, and in our newly created TransAct
Services Group, to drive increased profitability. During 2004, our total net
sales grew by 15% to approximately $59,847,000. See the table below for a
breakdown of our sales.
Change
Year ended Year ended -------------
(In thousands) December 31, 2004 December 31, 2003 $ %
- -------------- ----------------- ----------------- ------ ----
Printers - POS and banking $17,664 29.5% $14,027 26.9% $3,637 25.9%
Printers - Gaming and lottery 32,144 53.7% 29,528 56.7% 2,616 8.9%
------- ----- ------- ----- ------
Subtotal - printers 49,808 83.2% 43,555 83.6% 6,253 14.4%
Services and consumables 10,039 16.8% 8,543 16.4% 1,496 17.5%
------- ----- ------- ----- ------
Total net sales $59,847 100.0% $52,098 100.0% $7,749 14.9%
======= ===== ======= ===== ======
We experienced substantial growth in the POS and banking market in 2004,
primarily in the U.S., despite continued overall economic weakness. We expect
this upward trend to continue in the POS and banking market during 2005,
although mostly in the second half of 2005. Our POS and banking printer sales
increased by 26% to $17,664,000 due primarily to growing sales of our POSjet(R)
and Bankjet(R) lines of inkjet printers. During 2003, we announced wins from two
major financial services companies for shipments of over 19,000 Bankjet(R)
printers to upgrade bank teller applications, which we began to ship in 2003 and
substantially completed shipping during 2004. Given our success in 2003 and
2004, and in light of the renewed focus we see banks placing on branch banking,
we plan to more proactively seek opportunities with other banks and credit
unions for upgrading bank teller systems, if and when they arise. In 2005, we
also plan to add two new regional sales people, broaden our product portfolio
with the planned launch of two new products, and increase our focus on selling
through our distribution and reseller channels. With the global POS printer
market of approximately $800 million, we have many opportunities for market
share gains, primarily through increasing and enhancing our product portfolio,
increasing geographic coverage, and growing our customer base.
8
Our focus in the gaming and lottery market is two-fold. On the lottery
side, we continue to hold a leading position based on our long-term purchase
agreement with GTECH Corporation ("GTECH"), our largest customer and the world's
largest provider of lottery terminals, with an approximate 70% market share.
GTECH has been our customer since 1995, and we continue to maintain a good
relationship with them. Currently, we fulfill substantially all of GTECH's
printer requirements for lottery terminal installations and upgrades. During
2004, total sales to GTECH were approximately $9,474,000, compared to $9,766,000
in 2003, representing a decrease of approximately 3 percentage points of total
revenue from 2003. Based on existing orders and expected future demand for our
lottery printers based on input from GTECH, we expect overall sales to GTECH in
2005 to be modestly higher than the 2004 level. Our sales to GTECH each year are
directly dependent on the timing and number of new and upgraded lottery terminal
installations GTECH performs. Our sales to GTECH are not indicative of GTECH's
overall business or revenue.
On the gaming side, our focus lies primarily in supplying printers for use
in slot machines in casinos and racetracks. During 2004, we continued to benefit
from the conversion of traditional coin-issuing slot machines to ticket-issuing
slot machines by casinos and racetracks across the United States. As a result,
sales of our gaming printers increased by 16%. We expect this trend to continue
into 2005, as casinos continue to expand and convert their slot machines, and
state governments gain approval for slot machines at racetracks. In addition, we
expect to gain market share in the United States due to our relationship with
IGT, the world's largest slot machine manufacturer, and the launch of our new
Epic950(TM) thermal casino printer. Overall, the adoption and rollout of the
ticket-in/ticket-out initiative continues, and we expect a substantial portion
of the over 700,000 slot machines in North America to be fitted with a printer
within the next two to three years. Beginning in 2005, we expect growth from
gaming sales internationally as well, as markets such as Europe and Australia
begin to adopt ticket printing for their slot machines. We also plan to broaden
our sales coverage in the gaming and lottery market during 2005 to exploit the
rollout of the ticket-in/ticket-out initiative with the addition of two new
sales people.
Our services and consumables products, which include the repair of printers
and the sale of spare parts and consumables (paper, ribbons and inkjet
cartridges), offer a substantial growth opportunity and recurring revenue stream
for TransAct. Our services and consumables products revenue has grown to
$10,039,000, 16.8% of net sales in 2004, an increase of over 17% from 2003.
During 2005, we plan to more actively promote and dedicate increased resources
to our services and consumables products in an effort to substantially increase
the volume of sales. We have added four dedicated sales people, implemented a
specialized software system, and improved our sales lead tracking and
prospecting processes to enable us to better cross-sell our services and
consumables products to our customers. We also have established (in early 2005)
two new service centers - a western region service center in Las Vegas, NV and
an eastern region service center in Wallingford, CT - to provide national
service coverage to our customers. In addition, we believe that the increasing
sales of our inkjet printers will lead to a growing installed base that will
drive substantially higher inkjet cartridge sales in 2005 and beyond.
Operationally, gross margin and operating margin were significantly
improved and reached record highs in 2004. However, we expect to strategically
invest $2.5 million in the growth elements of our business during 2005. We
expect that this investment will accelerate our revenue growth and with our
operating leverage, should lead to a doubling of revenue and a tripling of
diluted earnings per share from 2004 to 2008. We anticipate that this investment
will be made across three areas: an incremental $1.2 million investment in sales
and marketing; a $400,000 incremental investment in engineering expenses for the
development of new products, four of which we expect to launch in 2005; and a
$900,000 investment in operations expenses related to the opening and staffing
of our new service center in Las Vegas and the hiring of additional services
personnel in our Wallingford service center, as we broaden our reach and
aggressively pursue the high margin opportunities of the TransAct Services
business.
We reported both record net income and earnings per share (diluted) for
2004. We also generated sufficient cash during 2004 to repay all outstanding
borrowings under our credit facility, and accumulated over $8.6 million of cash
on our balance sheet as of December 31, 2004.
9
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America. These principles require the use of estimates,
judgments and assumptions. Such estimates and judgments are based upon
historical experience and certain assumptions that are believed to be reasonable
in the particular circumstances. Those judgments affect both balance sheet items
and income statement categories. Our estimates include those related to revenue
recognition, allowance for doubtful accounts, inventory obsolescence, the
valuation of deferred tax assets and liabilities, goodwill impairment, warranty
obligations, restructuring accruals, contingent liabilities and foreign currency
translation. We evaluate our assumptions on an ongoing basis by comparing actual
results with our estimates. Actual results may differ from the original
estimates. The following accounting policies are those that we believe to be
most critical in the preparation of our financial statements.
REVENUE RECOGNITION - Our typical contracts include the sale of printers,
which are sometimes accompanied by separately-priced extended warranty
contracts. We also sell spare parts, consumables, and other repair services
(sometimes pursuant to multi-year product maintenance contracts), which are not
included in the original printer sale and are ordered by the customer as needed.
We recognize revenue pursuant to the guidance within SAB 104, "Revenue
Recognition". Specifically, revenue is recognized when evidence of an
arrangement exists, delivery (based on shipping terms which are generally FOB
shipping point) has occurred, the selling price is fixed and determinable, and
collectibility is reasonably assured. We provide for an estimate of product
returns and price protection based on historical experience at the time of
revenue recognition.
Revenue related to extended warranty and product maintenance contracts is
recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"), "Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts."
Pursuant to FTB 90-1, revenue related to separately priced product maintenance
contract is deferred and recognized over the term of the maintenance period. We
record deferred revenue for amounts received from customers for maintenance
contracts prior to the maintenance period.
Our customers have the right to return products that do not function
properly within a limited time after delivery. We monitor and track product
returns and record a provision for the estimated future returns based on
historical experience. Returns have historically been within expectations and
the provisions established, but we cannot guarantee that we will continue to
experience return rates consistent with historical patterns.
We offer some of our customers price protection as an incentive to carry
inventory of our product. These price protection plans provide that if we lower
prices, we will credit them for the price decrease on inventory they hold. Our
customers typically carry limited amounts of inventory, and we infrequently
lower prices on current products. As a result, the amounts paid under these
plans have been minimal. However, we cannot guarantee that this minimal level
will continue.
ACCOUNTS RECEIVABLE - We have standardized credit granting and review
policies and procedures for all customer accounts, including: credit reviews of
all new customer accounts; ongoing credit evaluations of current customers;
credit limits and payment terms based on available credit information; and
adjustments to credit limits based upon payment history and the customer's
current credit worthiness. We also provide an estimate of doubtful accounts
based on historical experience and specific customer collection issues. Our
allowance for doubtful accounts as of December 31, 2004 was $175,000, or 1.9% of
outstanding accounts receivable, which we feel is appropriate considering the
overall quality of the accounts receivable. While credit losses have
historically been within expectations and the reserves established, we cannot
guarantee that our credit loss experience will continue to be consistent with
historical experience. As of December 31, 2004, we had accounts receivable
balances due from WMS Gaming, BlueStar (a POS distributor) and GTECH of 18%, 14%
and 10%, respectively, of the total balance due, and no other customer accounts
receivable balance exceeded 10%. As of December 31, 2003, we had an accounts
receivable balance due from Harrah's of 31%, and no other customer accounts
receivable balance exceeded 10%.
INVENTORY - Our inventories are valued at the lower of cost or market. We
assess market value based on historical usage and estimates of future demand.
Assumptions are reviewed at least quarterly and adjustments are made, as
necessary, to reflect changed market conditions. Should circumstances change and
we determine that additional inventory is subject to obsolescence, additional
write-downs of inventory could result in a charge to income. As of December 31,
2004, our net inventory included a reserve of $2,010,000, or 19.9% of gross
inventory to write inventory down to lower of cost or market. Reserves remained
at approximately the same level as in 2003.
10
INCOME TAXES - In preparing our consolidated financial statements, we are
required to estimate income taxes in each of the jurisdictions in which we
operate. This involves estimating the actual current tax exposure together with
assessing temporary differences between the tax basis of certain assets and
liabilities and their reported amounts in the financial statements, as well as
net operating losses, tax credits and other carryforwards. These differences
result in deferred tax assets and liabilities, which are included within our
consolidated balance sheets. We then assess the likelihood that the deferred tax
assets will be realized from future taxable income, and to the extent that we
believe that realization is not likely, we establish a valuation allowance.
Significant judgment is required in determining the provision for income
taxes and, in particular, any valuation allowance recorded against our deferred
tax assets. On a quarterly basis, we evaluate the recoverability of our deferred
tax assets based upon historical results and forecasted taxable income over
future years, and match this forecast against the basis differences, deductions
available in future years and the limitations allowed for net operating loss and
tax credit carryforwards to ensure that there is adequate support for the
realization of the deferred tax assets. While we have considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event we were to determine that we
would not be able to realize all or part of our deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged as a reduction
to income in the period such determination was made. Likewise, should we
determine that we would be able to realize future deferred tax assets in excess
of its net recorded amount, an adjustment to the deferred tax assets would
increase net income in the period such determination was made.
As of December 31, 2004, we recorded a net deferred tax asset of
approximately $2,643,000 and a valuation allowance of $193,000, primarily on a
portion of our foreign tax credits. We will need to recognize approximately $7.5
million in future taxable income in order to realize all of our deferred tax
assets at December 31, 2004. Based on our projection of future taxable income,
no additional valuation allowance is considered necessary. Should circumstances
change and we determine that some or all of the deferred taxes would not be
realized, a valuation allowance would be recorded, resulting in a charge to
income in the period such determination is made.
GOODWILL - We test the impairment of goodwill each year, or more frequently
if events or changes in circumstances indicate that the carrying value may not
be recoverable. We completed our last assessment as of December 31, 2004.
Factors considered that may trigger an impairment review are: significant
underperformance relative to expected historical or projected future operating
results; significant changes in the manner of use of acquired assets or the
strategy for the overall business; significant negative industry or economic
trends; and significant decline in market capitalization relative to net book
value. Goodwill amounted to $1,469,000 at December 31, 2004 and we have
determined that no goodwill impairment has occurred.
RESTRUCTURING - In February 2001, we announced plans to establish a global
engineering and manufacturing center at our Ithaca, NY facility. As part of this
strategic decision, we undertook a plan to consolidate all manufacturing and
engineering into our existing Ithaca, NY facility and close our Wallingford, CT
manufacturing facility (the "Consolidation"). However, our Company headquarters
and a service center remain in Wallingford, CT. Our technology shift to inkjet
and thermal printing from dot matrix impact printing dramatically reduced the
labor content in our printers, and therefore, lowered the required production
capacity. As of December 31, 2001, we successfully transferred substantially all
our Wallingford product lines to Ithaca, NY, with the exception of a service
center that remains in Connecticut. The closing of the Wallingford manufacturing
facility resulted in the termination of employment of approximately 70
production, administrative and management employees.
In connection with the Consolidation of manufacturing facilities in 2001,
we recorded significant accruals. Through December 31, 2004, we have incurred
approximately $6.0 million of expenses associated with the Consolidation,
including severance pay, stay bonuses, employee benefits, moving expenses,
non-cancelable lease payments, and other costs, of which approximately ($0.2
million), $1.1 million and $1.0 million were recognized in 2004, 2003 and 2002,
respectively. Management has made reasonable estimates of such costs and
expenses. However, if actual costs differ from the estimates, charges or credits
to income could result in the period the adjustments are determined. We changed
our estimate of the restructuring accrual related to the Wallingford, CT
facility resulting in additional restructuring expense in 2002 and 2003, and a
reversal of restructuring expense in 2004. We do not expect to incur any
additional restructuring expenses related to the Consolidation. See the
"Liquidity and Capital Resources" section for a discussion of the expected
impact of the Consolidation on our future results of operations and cash flows.
11
WARRANTY - We generally warranty our products for up to 24 months and
record the estimated cost of such product warranties at the time the sale is
recorded. Estimated warranty costs are based upon actual past experience of
product returns and the related estimated cost of labor and material to make the
necessary repairs. If actual future product return rates or the actual costs of
material and labor differ from the estimates, adjustments to the accrued
warranty liability and related warranty expense would be made.
CONTINGENCIES - We record an estimated liability related to contingencies
based on our estimates of the probable outcomes pursuant to FAS 5. On a
quarterly basis, we assess the potential liability related to pending
litigation, audits and other contingencies and confirm or revise estimates and
reserves as appropriate.
ACCUMULATED OTHER COMPREHENSIVE INCOME - Stockholders' equity contains
certain items classified as other comprehensive income, including foreign
currency translation adjustments related to our non-U.S. subsidiary that has a
designated functional currency other than the U.S. dollar. We are required to
translate the subsidiary functional currency financial statements to U.S.
dollars using a combination of historical, month-end and weighted average
foreign exchange rates. This combination of rates creates the foreign currency
translation adjustments component of other comprehensive income.
(A) RESULTS OF OPERATIONS
(I) YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
NET SALES. Net sales, which include printer sales and sales of spare parts,
consumables and repair services, by market for the years ended December 31, 2004
and 2003 were as follows:
Change
Year ended Year ended -------------
(In thousands) December 31, 2004 December 31, 2003 $ %
- -------------- ----------------- ----------------- ------ ----
Point of sale and banking $25,124 42.0% $20,745 39.8% $4,379 21.1%
Gaming and lottery 34,723 58.0% 31,353 60.2% 3,370 10.7%
------- ----- ------- ----- ------
$59,847 100.0% $52,098 100.0% $7,749 14.9%
======= ===== ======= ===== ======
International* $ 6,423 10.7% $ 4,731 9.1% $1,692 35.8%
======= ===== ======= ===== ======
* International sales do not include sales of printers made to domestic
distributors or other domestic customers who in turn ship those printers to
international destinations.
Net sales for 2004 increased $7,749,000, or 15%, from 2003 due to higher
shipments into both our POS and banking and gaming and lottery market. Overall,
international sales increased 36% due largely to increased sales of our casino
printers into Europe and Australia.
Point of sale and banking: Sales of our POS products worldwide increased
approximately $4,379,000, or 21%, from 2003.
Change
Year ended Year ended -------------
(In thousands) December 31, 2004 December 31, 2003 $ %
- -------------- ----------------- ----------------- ------ ----
Domestic $21,010 83.6% $16,510 79.6% $4,500 27.3%
International 4,114 16.4% 4,235 20.4% (121) (2.9%)
------- ----- ------- ----- ------
$25,124 100.0% $20,745 100.0% $4,379 21.1%
======= ===== ======= ===== ======
Domestic POS revenue increased 27% due largely to significantly higher
sales of our POSjet(R) and BANKjet(R) lines of inkjet printers, and increasing
sales of our iTherm(R)280 thermal printer. Sales of inkjet printers increased by
approximately 48% in 2004 compared to 2003, as we shipped our Bankjet(R) line of
inkjet printers to two major financial services companies to upgrade bank teller
stations. We completed almost all shipments related to the upgrade during 2004.
In addition, we reported higher service, spare parts and consumables revenue in
2004 compared to 2003.
12
International POS and banking product revenue decreased by approximately 3%
due primarily to sales of our thermal fiscal printer in Europe in 2003 that did
not repeat in 2004. We discontinued our thermal fiscal printer in 2004 and do
not expect any future shipments.
We expect sales into the POS market for the first quarter of 2005 to be
consistent with those reported for the fourth quarter of 2004. However, we
expect full year sales for 2005 to be modestly higher than those reported during
2004, with more significant growth in the second half of 2005.Gaming and
lottery: Sales of our gaming and lottery products increased by $3,370,000, or
11%, from 2003, primarily due to significantly stronger sales of our slot
machine and video lottery terminal ("VLT") printers, somewhat offset by lower
sales of lottery printers to GTECH.
Change
Year ended Year ended ----------------
(In thousands) December 31, 2004 December 31, 2003 $ %
- -------------- ----------------- ----------------- ------ -----
Domestic $32,414 93.4% $30,857 98.4% $1,557 5.0%
International 2,309 6.6% 496 1.6% 1,813 365.5%
------- ----- ------- ----- ------
$34,723 100.0% $31,353 100.0% $3,370 10.7%
======= ===== ======= ===== ======
Change
Year ended Year ended ----------------
(In thousands) December 31, 2004 December 31, 2003 $ %
- -------------- ----------------- ----------------- ------ ----
Gaming $25,249 72.7% $21,587 68.9% $3,662 17.0%
Lottery 9,474 27.3% 9,766 31.1% (292) (3.0%)
------- ----- ------- ----- ------
$34,723 100.0% $31,353 100.0% $3,370 10.7%
======= ===== ======= ===== ======
Sales of our gaming products, which include video lottery terminal ("VLT")
and slot machine printers used in casinos and racetracks ("racinos"), and
related spare parts and repairs, increased 17% from 2003. This increase resulted
primarily from increased installations of our casino printers, primarily for use
in slot machines at casinos throughout North America, Europe and Australia that
print receipts instead of issuing coins ("ticket-in, ticket-out" or "TITO")
Although we expect the softness in domestic casino printer sales that we
experienced in December 2004 to continue into the first half of 2005, we
expect sales or our gaming products to increase in 2005 compared to 2004 as IGT
integrates our new Epic 950(TM) printer and casinos and other venues in Europe
and Australia accelerate the adoption of ticket printing in the second half of
2005.
Total sales to GTECH, which included impact and thermal on-line lottery
printers, impact in-lane lottery printers (primarily found at checkout counters
of certain grocery stores), and spare parts revenue, decreased by 3% to
approximately $9,474,000, or 16% of net sales, in 2004, compared to $9,766,000,
or 19% of net sales, in 2003.
See the table below for an analysis of revenues from GTECH.
Year ended
December 31,
----------------
(In thousands, except %) 2004 2003
- ------------------------ ------ -------
Impact on-line lottery printers and spare parts $3,466 $1,596
Thermal on-line lottery printers 6,008 8,000
In-lane lottery printers -- 170
------ ------
$9,474 $9,766
====== ======
% of consolidated net sales 16% 19%
In July 2002, we entered into a 5-year agreement with GTECH to provide a
newly designed thermal on-line lottery printer. We shipped approximately
$6,008,000 and $8,000,000 of these printers during 2004 and 2003, respectively.
Based on existing orders and expected future demand based on input from GTECH,
we expect overall sales to GTECH in 2005 to be modestly higher than the 2004
level. Our sales to GTECH each year are directly dependent on the timing and
number of new and upgraded lottery terminal installations GTECH performs. Our
sales to GTECH are not indicative of GTECH's overall business or revenue.
Sales to GTECH of impact on-line lottery printers and spare parts totaled
approximately $3,466,000 in 2004, compared to $1,596,000 in 2003. Because our
thermal on-line lottery printer is a replacement for our impact on-line lottery
printer, we do not expect any further shipments of impact on-line lottery
printers to GTECH beyond 2004. However, we do expect to
13
continue to sell spare parts to GTECH for the significant remaining installed
base of impact on-line lottery printers. Shipments of in-lane lottery printers
totaled approximately $170,000 in 2003, and we made no shipments of such
printers in 2004. Since sales of in-lane lottery printers are project-oriented,
we cannot predict if and when future sales may occur.
International gaming and lottery product sales increased $1,813,000 to
$2,309,000, from 2003. Such sales represented 7% and less than 2% of total sales
into our gaming and lottery market during 2004 and 2003, respectively. We
experienced growth in international gaming revenue in 2004 as markets in Europe
and Australia begin to adopt and roll out ticket printing in slot machines. We
expect more substantial growth in 2005, as we expect sales or our gaming
printers related to the rollout of ticket printing to accelerate in Europe and
Australia, especially in the second half of 2005.
GROSS PROFIT. Gross profit is measured as revenue less cost of goods sold.
Cost of goods sold includes primarily the cost of all raw materials and
component parts, direct labor, and the associated overhead. Gross profit
increased by $6,499,000, or 42%, to $22,042,000, and gross margin increased to
36.8% from 29.8% due primarily to a more favorable sales mix of higher margin
products and continued reductions in component and sub-component costs in 2004
compared to 2003. Both gross profit and gross margin for 2004 benefited from a
substantial increase in the volume of sales (15%) and a more favorable sales
mix, including increased sales of higher margin gaming and lottery printers in
2004 compared to 2003. Gross profit in 2003 was impacted by a charge of
$740,000, or 1.4% of net sales, related to a royalty payable to Seiko Epson for
past usage of certain technology (see "Contingent Liabilities" in Liquidity and
Capital Resources). Although we expect gross margin for the first quarter of
2005 to be substantially lower than the full year 2005 level due to the lower
expected volume of sales in the quarter, we expect gross margin for 2005 to be
at approximately the same level as that reported for 2004.
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 $439,000, or 19%, to $2,715,000, primarily due to (1)
compensation related expenses (approximately $100,000) and (2) expenses incurred
in the fourth quarter of 2004 related to IGT's integration and attainment of
jurisdictional approvals for our new Epic950(TM) thermal casino printer on all
of IGT's slot platforms worldwide (the "IGT Integration") (approximately
$350,000). We expect to incur an additional $150,000 in expenses in the first
quarter of 2005 related to the IGT Integration. Engineering and product
development expenses increased as a percentage of net sales to 4.5% from 4.4%,
primarily due to expenses related to the IGT Integration, largely offset by a
higher sales volume in 2004 compared to 2003. We expect engineering and product
development expenses to increase in 2005 as we plan to add staff and utilize
more contract engineering services to continue increasing product development to
expand our families of inkjet printers for the POS market and ticket-issuing
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 $143,000, or 3%, to
$5,111,000, due primarily to higher recruitment, compensation and travel
expenses related to additional sales and marketing staff, including expenses
associated with the opening of our new gaming and lottery headquarters and
western region service center in Las Vegas, to support our growing gaming
printer sales (approximately $700,000). Such increases were largely offset by
lower (1) print advertising and other promotional marketing expense
(approximately $110,000), (2) sales commissions (approximately $180,000), and
(3) expenses at our UK facility (approximately $270,000) due largely to a staff
reduction. Selling and marketing expenses decreased as a percentage of net sales
to 8.5% from 9.5%, due primarily to higher volume of sales in 2004 compared to
2003. We expect selling and marketing expenses to increase significantly in
2005, as we plan to increase and broaden our sales coverage in the POS and
banking market and the gaming and lottery market with the addition of new sales
staff and enhanced marketing programs, as well as establish our new TransAct
Services business unit with a new dedicated sales force and two new service
centers in Las Vegas, NV and Wallingford, CT. We believe this investment is
necessary in 2005 to achieve our sales growth strategy for 2005 and beyond.
14
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 $1,507,000, or 34%, due largely
to higher professional expenses, including those related to compliance with the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), and additional finance staff (and
associated recruiting fees) related to Sarbanes Oxley. We incurred approximately
$650,000 of external expenses directly related to compliance with Sarbanes-Oxley
during 2004. In addition, during 2004 we expensed approximately $110,000 of
costs we incurred in conducting due diligence related to our proposed
acquisition of TPG, Inc., as the proposed acquisition was terminated. We also
incurred approximately $95,000 of one-time listing fees related to our move back
onto the Nasdaq National Market from the Nasdaq SmallCap Market. General and
administrative expenses increased as a percentage of net sales to 10.0% from
8.6%, due primarily to the factors listed above, partially offset by a higher
volume of sales in 2004 compared to 2003. We expect general and administrative
expenses to increase slightly in 2005.
BUSINESS CONSOLIDATION AND RESTRUCTURING. We recorded a reversal of expense
of $225,000, and a charge of $1,128,000 related to the Consolidation in 2004 and
2003, respectively. These amounts were substantially the result of revisions to
our original estimate for non-cancelable lease payments included in the
restructuring accrual. As of December 31, 2004, we have provided for the
estimated remaining non-cancelable lease payments and other related costs for
this facility through the expiration of the lease (March 31, 2008).
We do not expect to incur any further restructuring expenses related to the
Consolidation. See "Consolidation Expenses" in Liquidity and Capital Resources.
OPERATING INCOME. During 2004, we reported operating income of $8,451,000,
or 14.1% of net sales, compared to $2,688,000, or 5.2% of net sales, in 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 (primarily general and administrative expenses) in 2004
compared to 2003. Operating income for 2004 included a reversal of expense
related to the Consolidation ($225,000) and a charge related to the IGT
Integration ($350,000). Operating income for 2003 included a charge related to
the Consolidation ($1,128,000) and a royalty payable to Seiko-Epson for past
usage of certain technology ($740,000).
INTEREST. We recorded net interest income of $4,000 in 2004 compared to net
interest expense of $210,000 in 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 do not expect to draw on our revolving borrowings
as we expect to continue to generate cash from operations during 2005. During
2005, we expect to report increasing net interest income as our cash balance
increases throughout the year. See "Liquidity and Capital Resources" below for
more information.
WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into a
new credit facility with Banknorth N.A., which replaced an existing facility
with LaSalle Business Credit, Inc. ("LaSalle"). We recorded a charge of
approximately $103,000 in the third quarter of 2003 related to the write-off of
unamortized deferred financing costs from our prior credit facility with
LaSalle. Our new credit facility with Banknorth contains more favorable terms
than those contained in our prior facility with LaSalle.
OTHER EXPENSE. Other expense for 2004 and 2003 primarily included
transaction exchange losses recorded by our UK subsidiary due to the
strengthening of the British pound against the U.S. dollar.
INCOME TAXES. We recorded an income tax provision of $2,979,000 and
$725,000 in 2004 and 2003, respectively, at an effective rate of 35.3% and
32.2%, respectively. The lower effective rate in 2003 reflects a favorable
outcome of a state tax audit, benefits from certain tax credits, and utilization
of state net operating loss carryforwards not previously anticipated. We expect
to record income taxes at an effective rate of approximately 36.5% during 2005.
15
NET INCOME. We reported net income in 2004 of $5,458,000, or $0.51 per
diluted share compared to net income of $1,528,000, or $0.12 per diluted share
in 2003. Earnings per share have 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 2004 were approximately $86,000, and
there will be no dividends or allocation of earnings to preferred shareholders
beyond 2004, as the preferred stock was converted to common stock in April 2004.
All share and per share amounts reflect the April 2004 stock split on a
retroactive basis. In December 2004, the FASB issued Accounting Standard No. 123
(revised 2004), "Share-Based Payment" ("FAS123R"), which requires the
recognition of compensation expense for share-based compensation (including
shares issued under employee stock purchase plans, stock options and restricted
stock) over the period in which the share-based compensation vests. We expect
the adoption of FAS 123R to have a material impact on our results of operations
and earnings per share.
(II) YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET SALES. Net sales, which include printer sales and sales of spare parts,
consumables and repair services, by market for the years ended December 31, 2003
and 2002 were as follows:
Change
Year ended Year ended -------------
(In thousands) December 31, 2003 December 31, 2002 $ %
- -------------- ----------------- ----------------- ------- ---
Point of sale and banking $20,745 39.8% $18,475 46.8% $ 2,270 12%
Gaming and lottery 31,353 60.2% 20,986 53.2% 10,367 49%
------- ----- ------- ----- -------
$52,098 100.0% $39,461 100.0% $12,637 32%
======= ===== ======= ===== =======
International $ 4,731 9.1% $ 4,706 11.9% $ 25 1%
======= ===== ======= ===== =======
Net sales for 2003 increased $12,637,000, or 32%, from 2002 largely due to
significantly higher shipments into our gaming and lottery market, as well as
increased shipments into our POS market. Overall, international sales remained
relatively flat in 2003 compared to 2002.
Point of sale and banking: Sales of our POS products worldwide increased
approximately $2,270,000, or 12%, from 2002.
Change
Year ended Year ended -----------
(In thousands) December 31, 2003 December 31, 2002 $ %
- -------------- ----------------- ----------------- ------ --
Domestic $16,510 79.6% $14,119 76.4% $2,391 17%
International 4,235 20.4% 4,356 23.6% (121) (3%)
------- ----- ------- ----- ------
$20,745 100.0% $18,475 100.0% $2,270 12%
======= ===== ======= ===== ======
Domestic POS revenue increased 17% due largely to significantly higher
sales of our POSjet(R) and Bankjet(R) lines of inkjet printers. Sales of such
inkjet printers increased by approximately 187% in 2003 compared to 2002. The
overall increase in domestic POS revenue is largely attributable to (1)
shipments of our Bankjet(R) line of inkjet printers to two major financial
services companies to upgrade bank teller stations, (2) increased shipments of
our POSjet(R) line of inkjet printers, including shipments to one of the world's
largest casual dining restaurant chains for use in their food and beverage
service operations, and (3) significantly higher service, spare parts and
consumables (mostly replacement inkjet cartridges) revenue.
International POS revenue decreased 3% due primarily to lower sales of our
thermal fiscal printers in Europe (approximately $800,000). Lower thermal fiscal
printer sales were largely offset by (1) higher sales of printers (approximately
$300,000) through our expanding network of international distributors and (2)
higher service, spare parts and consumables revenue (approximately $400,000),
largely resulting from a service contract related to printers shipped for the
British Post Office in prior years. Such service contract expires in the second
quarter of 2005, and provides quarterly revenue of approximately $250,000.
16
Gaming and lottery: Sales of our gaming and lottery products increased by
$10,367,000, or 49%, from 2002, primarily due to significantly stronger sales of
our slot machine and video lottery terminal ("VLT") printers, somewhat offset by
lower sales of lottery printers to GTECH.
Change
Year ended Year ended -------------
(In thousands) December 31, 2003 December 31, 2002 $ %
- -------------- ----------------- ----------------- ------- ---
Domestic $30,857 98.4% $20,636 98.3% $10,221 50%
International 496 1.6% 350 1.7% 146 42%
------- ----- ------- ----- -------
$31,353 100.0% $20,986 100.0% $10,367 49%
======= ===== ======= ===== =======
Change
Year ended Year ended -------------
(In thousands) December 31, 2003 December 31, 2002 $ %
- -------------- ----------------- ----------------- ------- ---
Gaming $21,587 68.9% $10,277 49.0% $11,310 110%
Lottery 9,766 31.4% 10,709 51.0% (943) (9%)
------- ----- ------- ----- -------
$31,353 100.0% $20,986 100.0% $10,367 49%
======= ===== ======= ===== =======
Sales of our gaming products, which include video lottery terminal ("VLT")
and slot machine printers used in casinos and racetracks ("racinos"), and
related spare parts and repairs, more than doubled from 2002. This increase
resulted primarily from significantly increased installations of our casino
printers, primarily for use in slot machines at casinos throughout North America
that print receipts instead of issuing coins ("ticket-in, ticket-out" or
"TITO").
Total sales to GTECH, which included impact and thermal on-line lottery
printers, impact in-lane lottery printers (primarily found at checkout counters
of certain grocery stores), and spare parts revenue, decreased by $943,000 to
approximately $9,750,000, or 19% of net sales, in 2003, compared to $10,700,000,
or 27% of net sales, in 2002.
See the table below for an analysis of revenues from GTECH.
Year ended
December 31,
----------------
(In thousands, except %) 2003 2002
- ------------------------ ------ -------
Impact on-line lottery printers and spare parts $1,596 $10,032
Thermal on-line lottery printers 8,000 --
In-lane lottery printers 170 677
------ -------
$9,766 $10,709
====== =======
% of consolidated net sales 19% 27%
Sales to GTECH of impact on-line lottery printers and spare parts totaled
approximately $1,596,000 in 2003, compared to $10,032,000 in 2002. Shipments of
in-lane lottery printers totaled approximately $170,000 in 2003 compared to
$677,000 in 2002. Since sales of in-lane lottery printers are project-oriented,
we cannot predict if and when future sales may occur. In July 2002, we entered
into a 5-year agreement with GTECH to provide a newly designed thermal on-line
lottery printer. During 2003, we shipped approximately $8,000,000 of these
printers. We made no shipments of thermal on-line lottery printers during 2002.
International gaming and lottery product sales increased slightly from
2002. Such sales represented less than 2% of total sales into this market during
2003 and 2002.
GROSS PROFIT. Gross profit increased by $5,327,000, or 52%, to $15,543,000,
and gross margin increased to 29.8% from 25.9%. Both gross profit and gross
margin for 2003 benefited from a substantial increase in the volume of sales
(32%) and a more favorable sales mix, including increased sales of higher margin
gaming and lottery printers in 2003 compared to 2002. Gross profit included a
charge of $740,000, or 1.4% of net sales, and $160,000, or 0.4% of net sales,
related to a royalty payment to Seiko-Epson for past usage of certain
technology. (see "Contingent Liabilities" in Liquidity and Capital Resources) in
2003 and 2002, respectively.
17
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
development expenses primarily include salary and payroll related expenses for
our engineering staff, depreciation and design expenses (including prototype
printer expense, outside design and testing services and supplies). Such
expenses increased $251,000, or 12%, to $2,276,000, primarily due to higher (1)
compensation related expenses (approximately $80,000) and (2) expenses
(including travel) related largely to the development of our new thermal on-line
lottery printer for GTECH and our iTherm(R)280 thermal POS printer ($170,000).
Engineering and product development expenses decreased as a percentage of net
sales to 4.4% from 5.1%, primarily due to significantly higher sales volume in
2003 compared to 2002.
SELLING AND MARKETING. Selling and marketing expenses primarily include
salaries and payroll related expenses for our sales and marketing staff, sales
commissions, travel expenses, expenses associated with the lease of sales
offices, advertising, trade show expenses and other promotional marketing
expenses. Selling and marketing expenses increased by $941,000, or 23%, to
$4,968,000, due primarily to higher (1) sales commissions resulting from
increased sales in 2003 compared to 2002 (approximately $440,000), (2)
compensation related expenses, including additional sales staff and expenses
associated with the opening of a new sales office in Las Vegas, to support our
growing gaming printer sales (approximately $250,000), (3) selling expenses at
our UK facility due largely to the unfavorable impact of exchange rates in the
period (approximately $140,000) and (4) marketing expenses (approximately
$100,000). Selling and marketing expenses decreased as a percentage of net sales
to 9.5% from 10.2%, due primarily to higher volume of sales in 2003 compared to
2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
include: salaries and payroll related expenses for our executive, accounting,
human resource and information technology staff; expenses for our corporate
headquarters; professional and legal expenses; and telecommunication expenses.
General and administrative expenses increased by $293,000, or 7%, to $4,483,000.
During 2003 we incurred higher legal expenses (approximately $250,000) related
to our growing patent portfolio and a royalty payable to Seiko-Epson for past
usage of certain technology. In addition, incentive compensation increased by
approximately $130,000. These increases were somewhat offset by staff reductions
resulting from the Consolidation (approximately $80,000). General and
administrative expenses decreased as a percentage of net sales to 8.6% from
10.6%, due primarily to higher volume of sales in 2003 compared to 2002.
BUSINESS CONSOLIDATION AND RESTRUCTURING. We incurred $1,128,000 and
$958,000 of expenses related to the Consolidation in 2003 and 2002,
respectively. These expenses were substantially the result of revisions to our
original estimate for non-cancelable lease payments included in the
restructuring accrual. During the third quarter of 2002, based on regional
softness in demand in the commercial real estate market, we increased our
restructuring accrual by $900,000 to reflect the longer period of time then
projected to sublease our Wallingford, CT facility. The accrual at December 31,
2002 reflected estimated sublease income after September 30, 2004. After
expanded efforts during 2003, we determined that because of the continuing
regional decline in the commercial real estate market in 2003, it was unlikely
that we would be able to sublease our Wallingford, CT facility. As such, we
increased our restructuring accrual, which represents the reversal of estimated
sublease income, in the fourth quarter of 2003 by $1,128,000 to provide for the
remaining non-cancelable lease payments and other related costs for this
facility through the expiration of the lease (March 31, 2008).
OPERATING INCOME (LOSS). During 2003, we reported operating income of
$2,688,000, or 5.2% of net sales, compared to an operating loss of $984,000, or
2.5% of net sales, in 2002. The significant increase in our operating income was
due largely to higher gross profit on higher sales, partially offset by higher
operating expenses (primarily selling and marketing expenses) in 2003 compared
to 2002. Operating income (loss) for 2003 and 2002 included charges related to
the Consolidation ($1,128,000 and $958,000, respectively) and a royalty payable
to Seiko-Epson for past usage of certain technology ($740,000 and $160,000,
respectively).
INTEREST. We reported interest expense of $219,000 in 2003 compared to
$217,000 in 2002. Interest income decreased by $16,000 to $9,000 in 2003. The
decrease in interest income was largely attributable to a higher level of
invested cash in 2002 resulting from the receipt of an advance payment of
approximately $5.8 million from a major customer in advance of printer
shipments, the proceeds of which were used to repay outstanding revolving
borrowings in 2002. At December 31, 2003, we had no outstanding revolving
borrowings and $420,000 outstanding under a term loan that we repaid during
January 2004.
18
WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into a
new credit facility with Banknorth N.A., which replaced an existing facility
with LaSalle Business Credit, Inc. ("LaSalle"). We recorded a charge of
approximately $103,000 in the third quarter of 2003 related to the write-off of
unamortized deferred financing costs from our prior credit facility with
LaSalle.
OTHER INCOME (EXPENSE). Other expense for 2003 primarily included
transaction exchange loss recorded by our UK subsidiary. Other income for 2002
included a one-time gain of $145,000 resulting from the receipt of 2,146 shares
of common stock from our health insurance company, Anthem, Inc., upon its
demutualization. We sold these shares during the third quarter of 2002. This
gain was partially offset by approximately $50,000 of transaction exchange loss
recorded by our UK subsidiary during 2002, due to the strengthening of the
British pound against the dollar.
INCOME TAXES. We recorded an income tax provision of $725,000 at an
effective rate of 32.2% in 2003, and an income tax benefit of $390,000 at an
effective rate of 36.0% in 2002. The lower effective rate in 2003 reflects a
favorable outcome of a state tax audit, benefits from certain tax credits, and
utilization of state net operating loss carryforwards not previously
anticipated.
NET INCOME (LOSS). We reported net income in 2003 of $1,528,000, or $0.12
per diluted share. This compares to a net loss in 2002 of $692,000, or $0.12 per
diluted share. Earnings per share have been retroactively restated for adoption
of EITF 03-6 "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. All share and per share amounts reflect the April 2004
stock split on a retroactive basis.
(B) LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: During 2004, we significantly improved our operating results. We
reported record levels of gross margin, operating margin, and earnings per
share. We also finished the year with no outstanding bank debt and $8.6 million
of cash and cash equivalents. Looking forward, we expect to generate
approximately $8 to $9 million in cash from operations during 2005 and have
between $13 and $14 million of cash on our balance sheet at the end of 2005. We
also expect to earn increasing interest income on our available cash balance
throughout 2005.
Operating activities: The following significant factors affected our cash
provided by operations of $8,344,000 in 2004:
- We reported net income of $5,458,000.
- We recorded depreciation, amortization and non-cash compensation
expense of $1,925,000.
- Accounts payable increased by $516,000 due to the timing of
payments and increased inventory purchases resulting from ahigher
volume of sales.
- Accrued liabilities, including accrued patent license fees,
increased by $1,180,000, after recognition of a reduction in
taxes payable of $2,332,000 related to employee stock sales. The
increase was due primarily to higher compensation related
accruals and an increase in deferred revenue on extended warranty
contracts and other customer prepayments.
- Accrued restructuring expenses decreased by $671,000. (See
"Consolidation Expenses" below).
Investing activities: Our capital expenditures were approximately
$1,178,000 and $1,261,000 in 2004 and 2003, respectively. Expenditures in 2004
primarily included new product tooling, and to a lesser extent, computer
hardware and software. We expect to significantly increase our capital
expenditures in 2005 to approximately $4,000,000, which is substantially higher
than in recent years. During 2005, we expect to invest in three significant
projects: (1) the purchase and implementation of Oracle software; (2) office
renovations to our Ithaca, NY facility; and (3) office renovations to our new
gaming and lottery headquarters and western region service center in Las Vegas,
NV. We believe these projects will provide us with improved efficiency and will
enable us to streamline and more cost effectively manage our business as it
grows in size, number of locations and overall complexity. In addition to these
projects, we also expect to continue our focus on product development and the
purchase of tooling for new products and enhanced versions of our existing
products.
19
Financing activities: We generated approximately $902,000 from financing
activities during 2004, largely due to proceeds from stock option, warrant and
stock purchase plan exercises (approximately $1,515,000), somewhat offset by the
repayment of our term loan (approximately $420,000), payments of cash dividends
on our preferred stock and common stock (related to cash in lieu of partial
shares resulting from our stock split) (approximately $91,000) and payments of
expenses (approximately $102,000) related to conversion of the preferred stock
into common stock and the subsequent registration of the resulting common stock.
WORKING CAPITAL
Our working capital increased to $20,325,000 at December 31, 2004 from
$11,787,000 at December 31, 2003. The current ratio also increased to 3.32 to 1
at December 31, 2004 from 2.36 to 1 at December 31, 2003. The increase in both
working capital and the current ratio was largely due to significantly higher
cash balance (approximately $8,130,000) from cash generated during the year. We
also maintained flat accounts receivable and inventory balances on higher sales.
DEFERRED TAXES
As of December 31, 2004, we had a net deferred tax asset of approximately
$2,643,000. In order to utilize this deferred tax asset, we will need to
generate approximately $7.5 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
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 the $900,000 royalty for past usage in full by January
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.
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, and 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.
On November 12, 2004, we amended our $12.5 million Banknorth Credit
Facility. Under the terms of the agreement, we renewed, through July 2005, our
$1.0 million equipment loan, which had expired on July 31, 2004. The amendment
also revised certain other terms of the revolving credit facility.
The borrowing base of the revolving credit line under the 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.
As of December 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 $12,500,000 at December 31, 2004. However,
our maximum additional available borrowings under the facility were limited to
approximately $9,700,000 at December 31, 2004 based on the borrowing base of our
collateral. We were in compliance with all financial covenants of the Banknorth
Credit Facility at December 31, 2004.
20
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. As a result of the
conversion, a total 666,665 new shares of common stock were issued. 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.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $13,368,000 to $23,715,000 at December
31, 2004 from $10,347,000 at December 31, 2003. The increase was primarily due
to the following for the year ended December 31, 2004: (1) net income available
to common shareholders of $5,458,000, (2) the conversion of our preferred stock
into common stock, net of costs of $3,824,000 (3) proceeds of approximately
$1,379,000 from the issuance of approximately 322,000 shares of common stock
from stock option exercises and purchase from our employee stock purchase plan,
and (4) an increase in additional paid in capital of approximately $2,332,000
resulting from the recording of a tax benefit from tax deductions arising from
stock option exercises.
CONSOLIDATION EXPENSES
During 2001 through 2004, we incurred approximately $5,957,000 of business
consolidation, restructuring and related expenses 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.
After expanded efforts to sub-lease our facility 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. In
2004, we revised our estimate of the amount of remaining non-cancelable lease
payments and related costs associated with the manufacturing facility, which
resulted in the reversal of approximately $225,000 of accrued restructuring
expenses.
We paid approximately $446,000, $721,000 and $2,242,000 of expenses related
to the Consolidation in 2004, 2003 and 2002, respectively. We expect to pay
approximately $420,000 per year from 2005 through 2007, and the remaining
$200,000 in 2008. These payments from 2005 through 2008 relate primarily to
lease and occupancy costs in our Wallingford, CT facility.
21
CONTRACTUAL OBLIGATIONS
TransAct's contractual obligations as of December 31, 2004 were as follows:
Less than More than
(In thousands) Total 1 year 1-3 years 3-5 years 5 years
- -------------- ------- --------- --------- --------- ---------
Operating lease obligations $ 6,817 $ 999 $ 2,173 $ 1,850 $ 1,795
Purchase obligations 15,797 14,066 1,731 -- --
Purchase obligations are for purchases made in the normal course of
business to meet operational requirements, primarily of raw material and
component part inventory.
RESOURCE SUFFICIENCY
We believe that cash 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.
(C) IMPACT OF INFLATION
TransAct believes that its business has not been affected to a significant
degree by inflationary trends because of the low rate of inflation during the
past three years, nor does it believe it will be significantly affected by
inflation during 2005.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the investment of our available cash and cash equivalents. In accordance with
our investment policy, we strive to achieve above market rates of return in
exchange for accepting a prudent amount of incremental risk, which includes the
risk of interest rate movements. Risk tolerance is constrained by an overriding
objective to preserve capital. An effective increase or decrease of 10% in
interest rates would not have a material effect on our results of operations or
cash flows.
FOREIGN CURRENCY EXCHANGE RISK
A substantial portion of our sales are denominated in U.S. dollars and, as
a result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made. This exposure may change over time as business
practices evolve and could have a material adverse impact on our financial
results in the future. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material impact on our future results
of operations or cash flows.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
Number
------
Report of Independent Registered Public Accounting Firm 24
TransAct Technologies Incorporated consolidated financial statements:
Consolidated balance sheets as of December 31, 2004 and 2003 25
Consolidated statements of operations for the years ended
December 31, 2004, 2003 and 2002 26
Consolidated statements of changes in shareholders' equity and
comprehensive income (loss) for the years ended December 31,
2004, 2003 and 2002 27
Consolidated statements of cash flows for the years ended
December 31, 2004, 2003 and 2002 28
Notes to consolidated financial statements 29
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of TransAct Technologies
Incorporated:
We have completed an integrated audit of TransAct Technologies Incorporated's
2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
TransAct Technologies Incorporated and its subsidiaries (the "Company") at
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 15, 2005
24
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, December 31,
2004 2003
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 8,628 $ 498
Receivables, net 8,910 9,074
Inventories 8,074 8,061
Refundable income taxes 510 130
Deferred tax assets 2,370 2,340
Other current assets 586 379
------- -------
Total current assets 29,078 20,482
------- -------
Fixed assets, net 3,177 3,607
Goodwill 1,469 1,469
Deferred tax assets 274 684
Other assets 101 119
------- -------
5,021 5,879
------- -------
Total assets $34,099 $26,361
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan $ 0 $ 90
Accounts payable 3,804 3,288
Accrued liabilities 3,395 2,892
Accrued restructuring expenses 420 480
Accrued patent license fees 417 408
Deferred revenue 717 1,537
------- -------
Total current liabilities 8,753 8,695
------- -------
Long-term portion of term loan -- 330
Accrued restructuring expenses 1,034 1,645
Accrued patent license fees -- 750
Accrued product warranty 153 169
Deferred revenue 444 523
------- -------
1,631 3,417
------- -------
Total liabilities 10,384 12,112
------- -------
Commitments and contingencies (Note 11)
Series B Redeemable convertible preferred stock, $0.01 par
value, 8,000 shares authorized, none and 4,000 shares
issued and outstanding (liquidation preference of
$4,098 as of December 31, 2003) -- 3,902
------- -------
Shareholders' equity:
Preferred stock, $0.01 par value, 4,792,000
authorized, none issued and outstanding -- --
Preferred stock, Series A, $0.01 par value, 200,000
authorized, none issued and outstanding -- --
Common stock, $0.01 par value, 20,000,000 authorized,
10,037,766 and 8,952,650 shares issued and outstanding 100 60
Additional paid-in capital 17,401 8,441
Retained earnings 7,112 1,769
Unamortized restricted stock compensation (1,067) (30)
Accumulated other comprehensive income 169 107
------- -------
Total shareholders' equity 23,715 10,347
------- -------
Total liabilities, redeemable convertible preferred stock
and shareholders' equity $34,099 $26,361
======= =======
See accompanying notes to consolidated financial statements.
25
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
---------------------------
2004 2003 2002
------- ------- -------
Net sales $59,847 $52,098 $39,461
Cost of sales 37,805 36,555 29,245
------- ------- -------
Gross profit 22,042 15,543 10,216
------- ------- -------
Operating expenses:
Engineering, design and product development 2,715 2,276 2,025
Selling and marketing 5,111 4,968 4,027
General and administrative 5,990 4,483 4,190
Business consolidation and restructuring (225) 1,128 958
------- ------- -------
13,591 12,855 11,200
------- ------- -------
Operating income (loss) 8,451 2,688 (984)
------- ------- -------
Other income (expense):
Interest expense (44) (219) (217)
Interest income 48 9 25
Write-off of deferred financing costs -- (103) --
Other, net (18) (122) 94
------- ------- -------
(14) (435) (98)
------- ------- -------
Income (loss) before income taxes 8,437 2,253 (1,082)
Income tax provision (benefit) 2,979 725 (390)
------- ------- -------
Net income (loss) 5,458 1,528 (692)
Dividends and accretion charges on preferred
stock (111) (358) (358)
Earnings allocated to preferred shareholders (111) (83) --
------- ------- -------
Net income (loss) available to common
shareholders $ 5,236 $ 1,087 $(1,050)
======= ======= =======
Net income (loss) per common share:
Basic $ 0.55 $ 0.13 $ (0.12)
Diluted $ 0.51 $ 0.12 $ (0.12)
Shares used in per share calculation:
Basic 9,593 8,689 8,454
Diluted 10,231 9,335 8,454
See accompanying notes to consolidated financial statements.
26
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
Unamortized Loan Accumulated
Common Stock Additional Restricted Receivable Other Total
------------------ Paid-in Retained Stock from Comprehensive Comprehensive
Shares Amount Capital Earnings Compensation Officer Income (Loss) Total Income (Loss)
---------- ------ ---------- -------- ------------ ---------- ------------- ------- -------------
Balance, December 31, 2001 8,527,155 $ 57 $ 6,303 $ 1,649 $ (286) $ (330) $ (78) $ 7,315
Cancellation of
restricted stock (900) -- (5) -- 5 -- -- --
Issuance of shares from
exercise of
stock options 39,150 -- 111 -- -- -- -- 111
Issuance of shares from
employee
stock purchase plan 7,274 -- 19 -- -- -- -- 19
Amortization of
restricted stock
compensation -- -- -- -- 184 -- -- 184
Tax charge related to
restricted
stock vested -- -- (120) -- -- -- -- (120)
Dividends paid on
preferred stock -- -- -- (280) -- -- -- (280)
Accretion of preferred
stock discount and
issuance costs -- -- -- (78) -- -- -- (78)
Comprehensive income
(loss):
Foreign currency -- -- -- -- -- -- 86 86 86
translation adj
Net loss -- -- -- (692) -- -- -- (692) (692)
---------- ---- ------- ------ ------- ----- ---- ------- ------
Balance, December 31, 2002 8,572,679 57 6,308 599 (97) (330) 8 6,545 (606)
======
Issuance of shares from
exercise of
stock options 357,906 3 1,355 -- -- -- -- 1,358
Issuance of shares from
employee
stock purchase plan 3,130 -- 9 -- -- -- -- 9
Issuance of shares from
exercise of
common stock
warrants 18,935 -- -- -- -- -- -- --
Amortization of
restricted
stock compensation -- -- -- -- 67 -- -- 67
Tax benefit related to
employee stock sales -- -- 769 -- -- -- -- 769
Dividends paid on
preferred stock -- -- -- (280) -- -- -- (280)
Accretion of preferred
stock discount and
issuance costs -- -- -- (78) -- -- -- (78)
Repayment of loan from
officer -- -- -- -- -- 330 -- 330
Comprehensive income:
Foreign currency
translation adj. -- -- -- -- -- -- 99 99 99
Net income -- -- -- 1,528 -- -- -- 1,528 1,528
---------- ---- ------- ------ ------- ----- ---- ------- ------
Balance, December 31, 2003 8,952,650 60 8,441 1,769 (30) -- 107 10,347 1,627
Cancellation of
restricted stock (3,000) -- (72) -- 72 -- -- --
Issuance of shares from
exercise of
stock options 321,947 3 1,376 -- -- -- -- 1,379
Issuance of shares from
employee
stock purchase plan 3,706 -- 47 -- -- -- -- 47
Issuance of shares from
exercise of common
stock warrants 15,000 -- 90 90
Issuance of shares from
conversion of
preferred stock, net
of issuance and
registration costs 666,665 6 3,818 -- -- -- -- 3,824
Issuance of restricted
stock 81,000 1 1,399 -- (1,400) -- -- --
Amortization of
restricted stock
compensation -- -- -- -- 291 -- -- 291
Tax benefit related to
employee stock sales -- -- 2,332 -- -- -- -- 2,332
Redemption of partial
shares of common
stock in connection
with the 3:2 stock
split (202) 30 (30) -- -- -- --
Dividends paid on
preferred stock -- -- -- (91) -- -- -- (91)
Accretion of preferred
stock discount and
issuance costs
Comprehensive
income: -- -- -- (24) -- -- -- (24)
Foreign currency
translation adj. -- -- -- -- -- -- 62 62 62
Net income -- -- -- 5,458 -- -- -- 5,458 5,458
---------- ---- ------- ------ ------- ----- ----- ------- ------
Balance, December 31, 2004 10,037,766 $100 $17,401 $7,112 $(1,067) $ -- $ 169 $23,715 $5,520
========== ==== ======= ====== ======= ===== ===== ======= ======
See accompanying notes to consolidated financial statements.
27
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLDIATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
---------------------------
2004 2003 2002
------- ------- -------
Cash flows from operating activities:
Net income (loss) $ 5,458 $ 1,528 $ (692)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Non-cash compensation expense 291 67 184
Write-off of deferred bank financing costs -- 103 --
Depreciation and amortization 1,634 1,656 1,935
Deferred income taxes 380 162 968
Loss (gain) on sale of fixed assets -- (1) --
Changes in operating assets and liabilities:
Receivables 164 (5,035) 8
Inventories (13) 374 2,198
Refundable income taxes (380) 98 (228)
Other current assets (207) (52) (115)
Other assets (8) (8) (63)
Accounts payable 516 305 80
Accrued liabilities, deferred revenue and
other liabilities 1,920 1,212 528
Accrued patent license fees (741) 998 160
Accrued restructuring expenses (671) 407 (1,284)
------- ------- -------
Net cash provided by operating activities 8,343 1,814 3,679
------- ------- -------
Cash flows from investing activities:
Purchases of fixed assets (1,178) (1,261) (577)
Proceeds from sale of fixed assets -- 1 --
Repayment of loan receivable from officer -- 330 --
------- ------- -------
Net cash used in investing activities (1,178) (930) (577)
------- ------- -------
Cash flows from financing activities:
Revolving bank loan repayments, net -- (2,541) (2,453)
Term loan borrowings -- 450 --
Term loan repayments (420) (380) (100)
Proceeds from option exercises, employee
stock purchase plan, and common stock
warrants 1,516 1,364 130
Payment of cash dividends (91) (280) (280)
Payment of preferred stock conversion (102) -- --
and registration expense ------- ------- -------
Net cash provided by (used in) financing
activities 903 (1,387) (2,703)
------- ------- -------
Effect of exchange rate changes 62 99 86
------- ------- -------
Increase (decrease) in cash and cash equivalents 8,130 (404) 485
Cash and cash equivalents, beginning of period 498 902 417
------- ------- -------
Cash and cash equivalents, end of period $ 8,628 $ 498 $ 902
======= ======= =======
Supplemental cash flow information:
Interest paid $ 44 $ 226 $ 252
Income taxes paid (refunded), net 379 229 (975)
Non-cash financing activities:
Conversion of preferred stock to common
stock $ 3,926 $ -- $ --
Tax benefit related to employee stock sales 2,332 769 --
Accretion of preferred stock discount and
issuance costs 24 78 78
Issuance of restricted stock 1,400 -- --
See accompanying notes to consolidated financial statements.
28
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
TransAct Technologies Incorporated ("TransAct"), which has its
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 services. Our
printers are used worldwide to provide transaction records such as
receipts, tickets, coupons, register journals and other documents. We focus
on two core markets: point-of-sale and banking ("POS") and gaming and
lottery. We sell our products to original equipment manufacturers ("OEM"),
value-added resellers, selected distributors, as well as directly to
end-users. Our product distribution spans across the Americas, Europe, the
Middle East, Africa, the Caribbean Islands and the South Pacific.
We design, develop, manufacture and market a broad array of
transaction-based printers utilizing inkjet, thermal and impact printing
technology for applications requiring up to 60 character columns in each of
its vertical markets. Our printers are configurable, which offer customers
the ability to choose from a variety of features and functions. Options
typically include printed circuit board configuration, paper cutting
devices, paper handling capacities and cabinetry color. In addition to our
configurable printers, we manufacture custom printers for certain OEM
customers. In collaboration with these customers, we provide engineering
and manufacturing expertise for the design and development of specialized
printers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK SPLIT: 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 share and per-share amounts within the accompanying
financial statements and footnotes reflect the stock split.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements were prepared on a consolidated basis to include the accounts of
TransAct and its wholly-owned subsidiaries. All intercompany accounts,
transactions and unrealized profit were eliminated in consolidation.
USE OF ESTIMATES: The accompanying consolidated financial statements
were prepared using estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses, and disclosure of
contingent assets and liabilities as of the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
29
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING: We apply the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("FAS 131"). We view our operations and manage our
business as one segment, the design, development, manufacture and sale of
transaction-based printers. Factors used to identify TransAct's single
operating segment include the organizational structure of the Company and
the financial information available for evaluation by the chief operating
decision-maker in making decisions about how to allocate resources and
assess performance. We operate predominantly in one geographical area, the
United States of America. See Note 19 for information regarding our
international operations. We provide the following disclosures of revenues
from products and services:
Year ended Year ended Year ended
(In thousands) December 31, 2004 December 31, 2003 December 31, 2002
- -------------- ----------------- ----------------- -----------------
Printers - POS $17,664 29.5% $14,027 26.9% $12,900 32.7%
Printers - Gaming and lottery 32,144 53.7% 29,528 56.7% 19,578 49.6%
------- ----- ------- ----- ------- -----
Subtotal - printers 49,808 83.2% 43,555 83.6% 32,478 82.3%
Services and consumables 10,039 16.8% 8,543 16.4% 6,983 17.7%
------- ----- ------- ----- ------- -----
Total net sales $59,847 100.0% $52,098 100.0% $39,461 100.0%
======= ===== ======= ===== ======= =====
CASH AND CASH EQUIVALENTS: We consider all highly liquid investments
with a maturity date of three months or less at date of purchase to be cash
equivalents.
INVENTORIES: Inventories are stated at the lower of cost (principally
standard cost which approximates actual cost on a first-in, first-out
basis) or market. We assess market value based on historical usage and
estimates of future demand in the market.
FIXED ASSETS: Fixed assets are stated at cost. Depreciation is
provided for primarily by the straight-line method over the estimated
useful lives. The estimated useful life of tooling is five years; machinery
and equipment is ten years; furniture and office equipment is five to ten
years; and computer equipment is three years. Leasehold improvements are
amortized over the shorter of the term of the lease or the useful life of
the asset. Costs related to repairs and maintenance are expensed as
incurred. Depreciation was $1,608,000, $1,579,000 and $1,843,000 in 2004,
2003 and 2002, respectively
GOODWILL: We adopted the provisions of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS
142") on January 1, 2002. Under FAS 142, goodwill is no longer amortized
and will be tested for impairment at least annually at the reporting unit
level.
FAS 142 requires that goodwill be tested annually for impairment, or
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. We have performed an impairment test as of
December 31, 2004 and determined that no impairment has occurred.
LONG-LIVED ASSETS: We evaluate our long-lived assets, which are
comprised primarily of fixed assets, for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset group to future
undiscounted net cash flows expected to be generated by the asset group. If
such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. We did not recognize any impairment
loss for long-lived assets in 2004, 2003 or 2002.
30
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION: Our typical contracts include the sale of
printers, which are sometimes accompanied by separately-priced extended
warranty contracts. We also sell spare parts, consumables, and other repair
services (sometimes pursuant to multi-year product maintenance contracts)
which are not included in the original printer sale and are ordered by the
customer as needed. We recognize revenue pursuant to the guidance within
SAB 104, "Revenue Recognition". Specifically, revenue is recognized when
evidence of an arrangement exists, delivery (based on shipping terms which
are generally FOB shipping point) has occurred, the selling price is fixed
and determinable, and collectibility is reasonably assured. We provide for
an estimate of product returns based on historical experience at the time
of revenue recognition.
Revenue related to extended warranty and product maintenance contracts
is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"),
"Accounting for Separately Priced Extended Warranty and Product Maintenance
Contracts." Pursuant to FTB 90-1, revenue related to separately priced
product maintenance contract is deferred and recognized over the term of
the maintenance period. We record deferred revenue for amounts received
from customers for maintenance contracts prior to the maintenance period.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
expose TransAct to concentrations of credit risk are limited to accounts
receivable. Sales to GTECH Corporation ("GTECH") (for lottery printers)
accounted for approximately 16%, 19% and 27% of net sales during 2004, 2003
and 2002, respectively. Sales to WMS Gaming (for sales of gaming printers)
accounted for approximately 14% of net sales during 2004, and sales to
Harrah's (for casino slot machine printers) accounted for approximately 12%
of net sales during 2003. As of December 31, 2004, we had accounts
receivable balances due from WMS Gaming (for sales of gaming printers),
BlueStar Distributing (for sales of POS printers) and from GTECH (for sales
of lottery printers) that accounted for 18%, 14% and 10%, respectively, of
the total accounts receivable. As of December 31, 2003, we had an accounts
receivable balance due from Harrah's of 31%, of the total accounts
receivable balance.
WARRANTY: We warrant our products for up to 27 months and record the
estimated cost of such product warranties at the time the sale is recorded.
Estimated warranty costs are based upon actual past experience of product
returns and the related estimated cost of labor and material to make the
necessary repairs.
The following table summarizes the activity recorded in the accrued
product warranty liability during 2004, 2003 and 2002:
Year ended December 31,
-----------------------
(In thousands) 2004 2003 2002
- -------------- ----- ----- -----
Balance, beginning of year $ 495 $ 644 $ 710
Additions related to warranties issued 610 409 394
Warranty costs incurred (508) (558) (460)
----- ----- -----
Balance, end of year $ 597 $ 495 $ 644
===== ===== =====
Approximately $153,000 and $169,000 of the accrued product warranty
liability were classified as long-term at December 31, 2004 and 2003,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses
include engineering, design and product development expenses incurred in
connection with specialized engineering and design to introduce new
products and to customize existing products, and are expensed as a
component of operating expenses as incurred. We spent approximately
$2,715,000, $2,276,000 and $2,025,000 on research and development expenses
in 2004, 2003 and 2002, respectively.
31
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRUCTURING: In 2001, we undertook a plan to consolidate all
manufacturing and engineering into our existing Ithaca, NY facility and
close our Wallingford, CT facility. We 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 restructuring expenses. See
Note 8.
INCOME TAXES: The income tax amounts reflected in the accompanying
financial statements are accounted for under the liability method in
accordance with FAS 109 "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled.
We assess the likelihood that net deferred tax assets will be realized from
future taxable income, and to the extent that we believe that realization
is not likely, we establish a valuation allowance.
FOREIGN CURRENCY TRANSLATION: The financial position and results of
operations of our foreign subsidiary in the United Kingdom are measured
using local currency as the functional currency. Assets and liabilities of
such subsidiary have been translated into U.S. dollars at the year-end
exchange rate, related revenues and expenses have been translated at the
weighted average exchange rate for the year, and shareholders' equity has
been translated at historical exchange rates. The resulting translation
gains or losses are recorded in stockholders' equity as a cumulative
translation adjustment, which is a component of accumulated other
comprehensive income. Foreign currency transaction gains and losses are
recognized in other income (expense) and have not been significant for all
periods presented.
STOCK-BASED COMPENSATION: We have elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations in accounting for its stock
options. Since the exercise price of employee stock options granted by the
Company equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded. We have adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended
by Statement of Financial Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123" ("FAS
148"). See Note 13 for additional disclosures related to our stock-based
compensation plans.
32
================================================================================
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table illustrates the effect on net income (loss),
compensation expense and income (loss) per share as if the Black-Scholes
fair value method described in FAS 123, "Accounting for Stock-Based
Compensation" had been applied to our stock plans.
Year Ended December 31,
-------------------------
(In thousands, except per share data) 2004 2003 2002
- ------------------------------------- ------ ------ -------
Net income (loss) available to common shareholders:
Net income (loss) available to common shareholders,
as reported $5,236 $1,087 $(1,050)
Add: Stock-based compensation expense included in
reported net income (loss), net of tax 205 43 118
Deduct: Stock-based compensation expense determined
under fair value based method for all awards, net of tax (390) (229) (753)
------ ------ -------
Pro forma net income (loss) available to common shareholders $5,051 $ 901 $(1,685)
====== ====== =======
Net income (loss) per share:
Basic:
As reported $ 0.51 $ 0.13 $ (0.12)
Pro forma 0.49 0.10 (0.20)
Diluted:
As reported $ 0.55 $ 0.12 $ (0.12)
Pro forma 0.53 0.10 (0.20)
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount for cash and
cash equivalents approximates fair value because of the short maturity of
these instruments. The carrying amount of receivables, other current
assets, other assets, accounts payable and accrued liabilities is a
reasonable estimate of fair value because of the short nature of the
transactions.
NET INCOME AND LOSS PER SHARE: We report net income or loss per share
in accordance with Financial Standard No. 128, "Earnings per Share (EPS)"
("FAS 128"). Under FAS 128, basic EPS, which excludes dilution, is computed
by dividing income or loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Net income or
loss available to common shareholders represents reported net income or
loss less accretion of redeemable convertible preferred stock and
allocation of preferred earnings. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. Diluted EPS includes
in-the-money options and warrants using the treasury stock method, and also
includes the assumed conversion of preferred stock using the if-converted
method, but only if dilutive. During a loss period, the assumed exercise of
in-the-money stock options and warrants and the conversion of convertible
preferred stock has an anti-dilutive effect, and therefore, these
instruments are excluded from the computation of dilutive EPS.
Beginning in the second quarter of 2004, the Company applied 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. EITF 03-6 became effective for reporting periods
beginning after March 31, 2004. This guidance impacted the calculation of
earnings per share for the year ended December 31, 2004 and also requires
retroactive restatement of earnings per share presented for the year ended
December 31, 2003. The guidance did not impact the year ended December 31,
2002, as the Company experienced a net loss in that year. Previously
reported earning per share amounts for 2003 have been restated as follows:
33
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Year Ended December 31, 2003
---------------------------------------
As previously Restated for
(In thousands, except per share amounts) reported, split adjusted EITF 03-6
- ---------------------------------------- ------------------------ ------------
Net income available to common shareholder $1,170 $1,087
Net income per common share
Basic $ 0.13 $ 0.13
Diluted $ 0.13 $ 0.12
Shares used in per share calculation
Basic 8,689 8,689
Diluted 9,335 9,335
Net income available to common shareholders for 2003 using the two class
method has been computed as follows:
Net income $1,528
Dividend and accretion chargers on preferred stock (358)
Earnings allocation to preferred shareholders (83)
------
Net income available to common shareholders $1,087
COMPREHENSIVE INCOME: Statement of Accounting Standard No. 130,
"Reporting Comprehensive Income" ("FAS 130"), requires that items defined
as comprehensive income or loss be separately classified in the financial
statements and that the accumulated balance of other comprehensive income
or loss be reported separately from accumulated deficit and additional
paid-in-capital in the equity section of the balance sheet. We include the
foreign currency translation adjustment related to our subsidiary in the
United Kingdom within our calculation of comprehensive income.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
INVENTORY COSTS: In November 2004, the FASB issued Accounting Standard
No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("FAS
151"). FAS 151 amends the guidance in Accounting Research Bulletin (ARB)
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Among other provisions, the new rule requires
that items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" as stated in
ARB No. 43. Additionally, FAS 151 requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal
capacity of the production facilities. FAS 151 is effective for fiscal
years beginning after June 15, 2005. We do not expect FAS 151 to have a
material impact on our financial statements.
34
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SHARE-BASED PAYMENT: In December 2004, the FASB issued Accounting
Standard No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R"). FAS
123R supersedes APB Opinion No. 25, and requires the determination of the
fair value (using an option pricing model) of share-based compensation,
including shares issued under employee stock purchase plans, stock options
and restricted stock, at the grant date and the recognition of compensation
expense over the period in which the share-based compensation vests. FAS
123R allows for either prospective recognition of compensation expense, or
retrospective recognition under which financial statements for prior
periods are adjusted. We are required to adopt the provisions of FAS 123R
effective July 1, 2005, at which time we will begin recognizing an expense
for unvested share-based compensation that has been issued or will be
issued after that date. We are currently evaluating the transition methods.
We expect the adoption of FAS 123R to have a material impact on our results
of operations and earnings per share.
TAX DEDUCTION ON QUALIFIED PRODUCTION ACTIVITIES: In December 2004,
the FASB issued Staff Position No. FAS 109-1, Application of FASB Statement
109, "Accounting for Income Taxes," to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004,
which provides guidance regarding the deduction for income from qualified
domestic production activities. The deduction will be phased in from 2005
through 2010. The deduction will be treated as a "special deduction" as
described in FASB Statement 109. As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the enactment
date. Rather, the impact of this deduction will be reported in the period
in which the deduction is claimed on our tax return. We have not yet
quantified the impact that this guidance will have on our financial
statements.
FOREIGN EARNINGS REPATRIATION: In December 2004, the FASB issued FASB
Staff Position No. 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004" ("FSP 109-2"), which provides guidance under FAS 109,
"Accounting for Income Taxes," with respect to recording the potential
impact of the repatriation provisions of the American Jobs Creation Act of
2004 (the "Jobs Act") on enterprises' income tax expense and deferred tax
liability. The Jobs Act was enacted on October 22, 2004. The Jobs Act
creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. FSP
109-2 states that an enterprise is allowed time beyond the financial
reporting period of enactment to evaluate the effect of the Jobs Act on its
plan for reinvestment or repatriation of foreign earnings for purposes of
applying FAS 109. The deduction is subject to a number of limitations and
uncertainty remains as to how to interpret certain provisions in the Act.
As such, we have not yet determined whether, and to what extent, we might
repatriate foreign earnings that have not yet been remitted to the U.S.
4. RECEIVABLES
Receivables are net of the allowance for doubtful accounts. The
reconciliation of the allowance for doubtful accounts is as follows:
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
(In thousands)
Balance at beginning of year $100 $ 78 $84
Doubtful accounts provision (reversal) 73 76 (2)
Accounts written off, net of recoveries 2 (54) (4)
---- ---- ----
Balance at end of year $175 $100 $78
==== ==== ====
5. INVENTORIES
The components of inventories are:
December 31,
---------------
(In thousands) 2004 2003
- -------------- ------ ------
Raw materials and component parts $7,869 $7,947
Finished goods 205 114
------ ------
$8,074 $8,061
====== ======
35
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. FIXED ASSETS
The components of fixed assets are:
December 31,
-------------------
(In thousands) 2004 2003
- -------------- -------- --------
Tooling, machinery and equipment $ 12,627 $ 11,843
Furniture, office and computer equipment 3,864 3,506
Leasehold improvements 522 486
-------- --------
17,013 15,835
Less: accumulated depreciation and amortization (13,836) (12,228)
-------- --------
$ 3,177 $ 3,607
======== ========
7. ACCRUED LIABILITIES
The components of accrued liabilities are:
December 31,
---------------
(In thousands) 2004 2003
- -------------- ------ ------
Payroll and fringe benefits $1,334 $1,087
Income taxes 735 560
Warranty - current portion 444 326
Rent and occupancy 336 331
Other 546 588
------ ------
$3,395 $2,892
====== ======
36
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES
In February 2001, we announced plans to establish a global engineering
and manufacturing center at our Ithaca, NY facility. As part of this
strategic decision, we undertook a plan to consolidate all manufacturing
and engineering into our existing Ithaca, NY facility and close our
Wallingford, CT manufacturing facility (the "Consolidation"). As of
December 31, 2001, substantially all Wallingford product lines were
successfully transferred to Ithaca, NY. We currently maintain our corporate
headquarters and a service center in Wallingford. The closing of the
Wallingford facility resulted in the termination of employment of
approximately 70 production, administrative and management employees. 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.
During 2001, we recorded expenses of approximately $4,096,000 related
to costs associated with the Consolidation, including severance pay, stay
bonuses, employee benefits, moving expenses, non-cancelable lease payments,
accelerated depreciation and other costs.
During 2002, we incurred an additional $958,000 of Consolidation
expenses. Approximately $900,000 of these expenses was the result of a
revision to our estimate for non-cancelable lease payments included in the
restructuring accrual. Based on regional softness in demand in the
commercial real estate market, we increased our restructuring accrual by
approximately $900,000 to reflect the longer period of time than projected
to sublease our Wallingford, CT facility. Based on this revised estimate,
we had projected estimated sublease income beginning October 1, 2004.
After expanded efforts in 2003, we determined that because of the
continuing regional decline in the commercial real estate market during
2003, it was unlikely that we would be able to sublease our Wallingford, CT
manufacturing facility, which has a lease term that expires in March 2008.
As a result, during the fourth quarter of 2003, we increased our
restructuring accrual by $1,270,000 to provide for the remaining
non-cancelable lease payments and related costs associated with the
manufacturing facility. This increase represented the reversal of estimated
sublease income for the remainder of the lease term. In addition, we did
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.
In December 2004, we determined that certain functions would be
relocated and/or expanded in our Wallingford, CT corporate offices. In
order to achieve the benefit of these changes, we expanded our use of space
in our current facility. Because of this increase in useful space in the
Wallingford facility, and because we have experienced lower than expected
operating and maintenance costs than previously estimated, we reversed
$225,000 of previously accrued reserve provided for the remaining
non-cancelable lease payments and related costs.
37
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES (CONTINUED)
The following table summarizes the activity recorded in the restructuring
accrual during 2004, 2003 and 2002.
Year ended December 31,
-------------------------
(In thousands) 2004 2003 2002
- -------------- ------ ------ -------
Accrual balance, beginning of year $2,125 $1,718 $ 3,002
------ ------ -------
Business consolidation and
restructuring expenses:
Employee severance and
termination expenses(1) -- (142) 75
Facility closure and consolidation
expenses(2) (225) 1,270 883
------ ------ -------
(225) 1,128 958
------ ------ -------
Cash payments (446) (721) (2,242)
------ ------ -------
Accrual balance, end of year $1,454 $2,125 $ 1,718
====== ====== =======
(1) Employee severance and termination related expenses are the estimated
termination salaries, benefits, outplacement, counseling services and other
related expenses expected to be paid to employees who are involuntarily
terminated.
(2) Facility closure and consolidation expenses are the estimated costs to
close the Wallingford, CT facility including lease termination expenses and
other related expenses, in accordance with the restructuring plan. The
Wallingford facility closure was substantially completed by December 31,
2001.
At December 31, 2004 and 2003, $1,034,000 and $1,645,000,
respectively, of the restructuring accrual was classified as part of
long-term liabilities. This represents the portion of non-cancelable lease
termination costs and other costs expected to be paid beyond one year.
9. RETIREMENT SAVINGS PLAN
On April 1, 1997, we established the TransAct Technologies Retirement
Savings Plan (the "401(k) Plan"), a defined contribution plan under Section
401(k) of the Internal Revenue Code. All full-time employees are eligible
to participate in the 401(k) Plan at the beginning of the calendar quarter
immediately following their date of hire. We match employees' contributions
at a rate of 50% of employees' contributions up to the first 6% of the
employees' compensation contributed to the 401(k) Plan. Our matching
contributions were $201,000, $174,000 and $158,000 in 2004, 2003 and 2002,
respectively.
38
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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 could have
been drawn down through July 31, 2004. Borrowings under the revolving
credit line bear a floating rate of interest at the prime rate. Borrowings
under the equipment loan bear a floating rate of interest at the prime rate
plus 0.25%. Under certain circumstances, we may select a fixed interest
rate for a specified period of time of up to 180 days on borrowings based
on the current LIBOR rate plus 2.75% and 3.0% under the revolving credit
facility and the equipment loan facility, respectively. In addition, we may
select a fixed interest rate based on the five-year Federal Home Loan Bank
of Boston rate plus 3.0% for borrowings under the equipment loan facility.
We also pay a fee of 0.25% on unused borrowings under the revolving credit
line. Borrowings under the Banknorth Credit Facility are secured by a lien
on all the assets of the Company. The Banknorth Credit Facility imposes
certain quarterly financial covenants on the Company and restricts the
payment of dividends on our common stock and the creation of other liens.
We were in compliance with all financial covenants of the Banknorth Credit
Facility at December 31, 2004. In 2003, we recorded a charge of
approximately $103,000 in 2003 related to the write-off of unamortized
deferred financing costs from the prior credit facility.
On November 12, 2004, we amended our $12.5 million Banknorth Credit
Facility. Under the terms of the agreement, we renewed, through July 2005,
our $1.0 million equipment loan, which had expired on July 31, 2004. The
amendment also revised certain other terms of the revolving credit
facility.
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) $40,000 credit reserve.
Concurrent with the signing of the Banknorth Credit Facility, we
borrowed $450,000 under the equipment loan facility which was paid in full
in 2004. We had $420,000 of outstanding borrowings under the term loan at
December 31, 2003 at an interest rate of 4.25%.
As of December 31, 2004, we had no outstanding borrowings on the
revolving credit line or the term loan. Undrawn commitments under the
Banknorth Credit Facility were approximately $12,500,000 at December 31,
2004. However, our maximum additional available borrowings under the
facility were limited to approximately $9,700,000 at December 31, 2004
based on the borrowing base of our collateral.
11. COMMITMENTS AND CONTINGENCIES
At December 31, 2004, we were lessee on operating leases for equipment
and real property. The terms of certain leases provide for escalating rent
payments in later years of the lease as well as payment of minimum rent and
real estate taxes. The Company records rent expense related to leases with
escalating rent payments on a straight-line basis over the term of the
lease. Rent expense was approximately $1,098,000, $1,096,000 and $975,000
in 2004, 2003 and 2002, respectively. Minimum aggregate rental payments
required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2004
are as follows: $999,000 in 2005; 1,088,000 in 2006; $1,085,000 in 2007;
$1,084,000 in 2008; $766,000 in 2009; and $1,795,000 thereafter. Such
payments include those related to the lease of our Wallingford, CT
manufacturing facility.
39
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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 have paid the
royalty for past usage in full in January 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.
13. STOCK INCENTIVE PLANS AND WARRANTS
STOCK INCENTIVE PLANS. We currently have three primary stock incentive
plans: the 1996 Stock Plan which provides for the grant of awards to
officers and other key employees of the Company, the 1996 Directors' Stock
Plan which provides for non-discretionary awards to non-employee directors,
and the 2001 Employee Stock Plan which provides for the grant of awards to
key employees of the Company and other non-employees who may provide
services to the Company. The plans generally provide for awards in the form
of: (i) incentive stock options, (ii) non-qualified stock options, (iii)
shares of restricted stock, (iv) restricted units, (v) stock appreciation
rights or (vi) limited stock appreciation rights. However, the 2001
Employee Stock Plan does not provide for incentive stock option awards.
Options granted under these plans are at prices equal to 100% of the fair
market value of the common stock at the date of grant. Options granted have
a ten-year term and generally vest over a three- to five-year period,
unless automatically accelerated for certain defined events. At December
31, 2004, we have reserved 1,725,000, 360,000 and 225,000 shares of common
stock for issuance under the 1996 Stock Plan, the 1996 Directors' Stock
Plan, and the 2001 Employees Stock Plan, respectively.
EMPLOYEE STOCK PURCHASE PLAN: In May 2000, our shareholders approved
the Employee Stock Purchase Plan (the "ESPP"), under which 75,000 shares of
our common stock are available for issuance to employees beginning June 1,
2000. All full-time employees are eligible to participate in the ESPP at
the beginning of each six-month period (the "Offering Period"), which
begins on June 1 and December 1. Eligible employees may elect to withhold
up to 5% of their salary to purchase shares of our common stock at a price
equal to 85% of the fair market value of the stock on the first or last day
of each Offering Period, whichever is lower. The ESPP will terminate at the
earlier of May 31, 2005 or the date on which all 75,000 shares available
for issuance under the ESPP have been sold. We sold 3,706, 3,130 and 7,274
shares of common stock under the ESPP during 2004, 2003 and 2002,
respectively. At December 31, 2004, 43,985 shares remained available for
sale.
40
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
The 1996 Stock Plan, 1996 Directors' Stock Plan and 2001 Employee
Stock Plan option activity is summarized below:
Year Ended December 31,
------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at beginning of
period: 1,123,533 $ 6.74 1,418,079 $4.20 1,114,104 $4.63
Granted 52,750 26.81 102,000 5.84 550,125 3.65
Exercised (321,947) 4.30 (357,906) 3.79 (39,150) 2.83
Canceled (40,672) 5.74 (38,640) 3.81 (207,000) 5.31
--------- ------ --------- ----- --------- -----
Outstanding at end of period 813,664 $ 5.96 1,123,533 $4.49 1,418,079 $4.20
========= ====== ========= ===== ========= =====
Options exercisable at end of
period 458,382 $ 4.67 542,630 $4.72 644,768 $4.54
========= ====== ========= ===== ========= =====
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Outstanding at Average Average Exercisable at Average
December 31, Exercise Remaining December 31, Exercise
Range of Exercise Prices 2004 Price Contractual Life 2004 Price
- ------------------------ -------------- --------- ---------------- -------------- ---------
(In years)
$ 2.00 - $ 5.00 510,877 $ 3.66 6.6 267,870 $ 3.62
5.01 - 7.50 233,787 6.11 4.0 176,262 5.95
7.51 - 10.00 14,250 8.12 3.0 13,250 8.04
10.01 - 25.00 19,000 16.24 9.0 1,000 16.08
25.01 - 35.00 35,750 31.66 9.4 -- --
------- -------
813,664 5.96 6.0 458,382 4.67
======= =======
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for the grants made during the years ended December 31, 2004, 2003 and
2002.
Year Ended December 31,
---------------------------------
2004 2003 2002
--------- --------- ---------
Risk-free interest rate 3.6% 2.6% 4.5%
Dividend yield 0% 0% 0%
Expected volatility factor 81.5% 82.1% 83.3%
Expected option term 8.9 years 5.8 years 6.4 years
Weighted average fair value of options granted during period $20.64 $6.09 $4.12
41
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
RESTRICTED STOCK: Under the 1996 Stock Plan, we have granted shares of
restricted common stock, for no consideration, to our officers, one outside
director and certain key employees. The 1996 Stock Plan restricted stock
activity is summarized below:
Year Ended December 31,
---------------------------
2004 2003 2002
------- ------- -------
Outstanding shares at beginning of period 16,999 69,999 134,040
Granted 81,000 -- --
Vested (15,499) (53,000) (63,141)
Canceled (3,000) -- (900)
------- ------- -------
Outstanding shares at end of period 79,500 16,999 69,999
======= ======= =======
We granted 81,000 shares of restricted stock during 2004 at weighted
average grant price of $17.28. No restricted stock was granted during 2003
or 2002. Of the 79,500 shares of restricted stock outstanding at December
31, 2004, 75,750 shares vest over a five-year period, 3,000 shares vest
over a three-year period and 750 shares vest over a one-year period. Under
certain conditions, vesting may be automatically accelerated. Upon issuance
of the restricted stock, unearned compensation equivalent to the market
value at the date of grant is charged to shareholders' equity and
subsequently amortized as compensation expense over the vesting period.
Compensation expense of $291,000, $67,000 and $184,000 was recorded during
2004, 2003 and 2002, respectively.
WARRANTS: On April 7, 2000, in connection with the sale of the
Preferred Stock, we issued to our investment advisors, McFarland Dewey &
Co. ("McFarland"), warrants to purchase from the Company up to 15,000
shares of common stock at an exercise price of $6.00 per share. These
warrants were exercised March 9, 2004 and are no longer outstanding as of
December 31, 2004.
14. STOCKHOLDER RIGHTS PLAN
In December 1997, the Board of Directors adopted a Stockholder Rights
Plan declaring a distribution of one right (the "Rights") for each
outstanding share of our common stock to shareholders of record at December
15, 1997. Initially, each of the Rights will entitle the registered holder
to purchase from the Company one one-thousandth of a share of Series A
Preferred Stock, $0.01 par value, at a price of $69 per one one-thousandth
of a share. The Rights, however, will not become exercisable unless and
until, among other things, any person or group of affiliated persons
acquires beneficial ownership of 15 percent or more of the then outstanding
shares of the Company's Common Stock. If a person, or group of persons,
acquires 15 percent or more of the outstanding Common Stock of the Company
(subject to certain conditions and exceptions more fully described in the
Rights Agreement), each Right will entitle the holder (other than the
person, or group of persons, who acquired 15 percent or more of the
outstanding Common Stock) to purchase Preferred Stock of the Company having
a market value equal to twice the exercise price of the Right. The Rights
are redeemable, under certain circumstances, for $0.0001 per Right and will
expire, unless earlier redeemed, on December 2, 2007.
On February 16, 1999, we amended the Stockholder Rights Plan to remove
the provision in the plan that stipulated that the plan may be modified or
redeemed only by those members of the Board of Directors who are defined as
continuing directors.
42
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
Year Ended December 31,
-------------------------
(In thousands) 2004 2003 2002
- -------------- ------ ------ -------
Current:
Federal $2,077 $1,121 $(1,493)
State 216 94 25
Foreign 306 131 110
------ ------ -------
2,599 1,346 (1,358)
------ ------ -------
Deferred:
Federal 363 (554) 987
State 17 (67) (19)
Foreign -- -- --
------ ------ -------
380 (621) 968
------ ------ -------
Total income tax provision (benefit) $2,979 $ 725 $ (390)
====== ====== =======
At December 31, 2004, we have $3,434,000 of state net operating loss
carryforwards that begin to expire in 2005, and $946,000 of federal net
operating loss carryforwards that expire in 2024. We also have approximately
$326,000 in federal research and development tax credit carryforwards that
expire in 2020. We had foreign income before taxes of $1,084,000, $475,000 and
$386,000 in 2004, 2003 and 2002, respectively.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Our gross deferred tax assets and liabilities were comprised of the
following:
December 31,
---------------
(In thousands) 2004 2003
- -------------- ------ ------
Gross deferred tax assets:
Net operating losses $ 423 $ 96
Accrued restructuring expenses 605 854
Inventory reserves 742 720
Deferred revenue 429 761
Foreign tax and other credits 649 627
Accrued license fees - 428
Other liabilities and reserves 636 443
------ ------
3,484 3,929
Valuation allowance (193) (331)
------ ------
Net deferred tax assets $3,291 $3,598
====== ======
Gross deferred tax liabilities:
Depreciation $ 540 $ 511
Other 107 63
------ ------
Net deferred tax liabilities $ 647 $ 574
====== ======
43
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES (CONTINUED)
Based on tax law changes, we carried our federal net operating losses
back to prior years and received a tax refund of approximately $1,061,000
in 2002, and received an additional refund of approximately $104,000 in the
first quarter of 2004. During 2004 and 2003, we recorded a valuation
allowance of $193,000 and $331,000 on a portion of our foreign tax credits,
research and development credits and certain state net operating loss
carryforwards. We have determined that it is more likely than not that the
remaining net deferred tax assets will be realized, and no additional
valuation allowance is considered necessary as of December 31, 2004.
Differences between the U.S. statutory federal income tax rate and our
effective income tax rate are analyzed below:
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- -----
Federal statutory tax rate 34.0% 34.0% (34.0)%
State income taxes, net of federal income taxes 1.0 1.2 (0.3)
Tax benefit from tax credits, net of valuation allowance (0.8) -- (10.6)
Foreign rate differential (0.7) -- 9.5
Other 1.8 (3.0) (0.6)
---- ---- -----
Effective tax rate 35.3% 32.2% (36.0)%
==== ==== =====
16. EARNINGS PER SHARE
For the years ended December 31, 2004, 2003 and 2002, earnings per
share were computed as follows (in thousands, except per share amounts):
Year Ended December 31,
--------------------------
2004 2003 2002
------- ------ -------
Net income (loss) $ 5,458 $1,528 $ (692)
Dividends and accretion on preferred stock (111) (358) (358)
Earnings allocation to preferred shareholders (111) (83) --
------- ------ -------
Net income (loss) available to common shareholders $ 5,236 $1,087 $(1,050)
======= ====== =======
Shares:
Basic: Weighted average common shares outstanding 9,593 8,690 8,454
Add: Dilutive effect of outstanding options and
warrants as determined by the treasury stock method 638 645 --
------- ------ -------
Diluted: Weighted average common and common
equivalent shares outstanding 10,231 9,335 8,454
======= ====== =======
Net income (loss) per common share:
Basic $ 0.55 $ 0.13 $ (0.12)
Diluted 0.51 0.12 (0.12)
44
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EARNINGS PER SHARE (CONTINUED)
For the years ended December 31, 2004 and December 31, 2003,
potentially dilutive shares that were excluded from the earnings per share
calculation, consisted of out-of-the-money stock options and warrants, and
amounted to 35,750 and 2,000 shares, respectively. Due to our reported net
loss in the year ended December 31, 2002, all potentially dilutive
securities, including both in-the-money and out-of-the-money stock options
and warrants that amounted to 597,000 shares were excluded from the
earnings per share calculation, as the effect would have been antidilutive.
In addition, for all periods presented, earnings per share calculations
assumed no conversion of the convertible mandatorily redeemable preferred
stock (which is convertible into 666,665 shares of common stock), as the
effect would have been anti-dilutive.
17. LOAN TO OFFICER
On February 23, 1999, with the Board of Directors' approval,
we provided a $330,000 loan to an officer of the Company. The loan
was payable on February 23, 2004, and was a full recourse obligation
to the officer collateralized by 154,000 shares of our common stock, which
included 50,000 shares of restricted stock. The principal amount of the
loan was recorded as a deduction from shareholders' equity. In June 2003,
the officer of the Company repaid the outstanding loan of $330,000, plus
accrued interest of $113,000.
18. PREFERRED STOCK
On April 7, 2000 we sold 4,000 shares of 7% Series B Cumulative
Convertible Redeemable Preferred Stock (the "Preferred Stock") in
consideration of $1,000 per share (the "Stated Value"), for a total of
$4,000,000, less issuance costs. The Preferred Stock was convertible at any
time by the holders at a conversion price of $6.00 per common share. In
addition, we issued warrants pro-rata to the Preferred Stock holders to
purchase an aggregate of 66,666 shares of our common stock at an exercise
price of $6.00 per common share, exercisable until April 7, 2005. The
discount on the preferred stock related to the relative fair value of the
warrants of $175,000 was being accreted as a direct charge to retained
earnings ratably over 60 months. The holders of the Preferred Stock were
entitled to receive a cumulative annual dividend of $70 per share, payable
quarterly and had preference to any other dividends, if any, paid by the
Company.
On July 8, 2003, the holders of the Preferred Stock exercised their
66,666 warrants to purchase common stock at $6 per share. In lieu of cash
consideration, we canceled 47,731 of their warrants in exchange for the
issuance of 18,934 shares of common stock.
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. At
the time of the conversion, 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. The Company
recorded the costs of registering and issuing these shares as a deduction
in Additional Paid-In Capital.
19. INTERNATIONAL OPERATIONS
We have foreign operations primarily from TransAct Technologies Ltd.,
a wholly-owned subsidiary, which had sales to its customers of
approximately $1,000,000, $1,068,000 and $738,000 in 2004, 2003 and 2002,
respectively. We had sales from the United States to our customers outside
of the United States of approximately $5,423,000, $3,663,000 and $3,968,000
in 2004, 2003 and 2002, respectively. International sales do not include
sales of printers made to domestic distributors or other domestic customers
who in turn ship those printers to international destinations.
45
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Our quarterly results of operations for 2004 and 2003 are as follows:
Quarter Ended
-----------------------------------------------
(In thousands, except per share amounts) March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2004:
Net sales $15,075 $14,694 $15,482 $14,596
Gross profit 5,418 5,617 5,897 5,110
Net income 1,342 1,465 1,625 1,026
Net income available to common shareholders 1,165 1,421 1,625 1,026
Net income per share:
Basic 0.13 0.15 0.16 0.10
Diluted 0.12 0.14 0.15 0.10
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2003:
Net sales $9,012 $13,378 $15,048 $14,660
Gross profit 2,441 4,212 4,819 4,071
Net income (loss) (198) 787 1,140 (201)
Net income (loss) available to common shareholders (288) 641 976 (290)
Net income (loss) per share:
Basic (0.03) 0.07 0.11 (0.03)
Diluted (0.03) 0.07 0.10 (0.03)
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Attached as exhibits to this Form 10-K are certifications of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in
accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended
(the Exchange Act). This "Controls and Procedures" section includes information
concerning the controls and controls evaluation referred to in the
certifications. Part II, Item 8 of this Form 10-K sets forth the report of
PricewaterhouseCoopers LLP, our independent registered public accounting firm,
regarding its audit of TransAct's internal control over financial reporting as
of December 31, 2004 and of management's assessment of internal control over
financial reporting as of December 31, 2004 set forth below in this section.
This section should be read in conjunction with the certifications and the
PricewaterhouseCoopers LLP report for a more complete understanding of the
topics presented.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We conducted an evaluation of the effectiveness of the design and operation
of our "disclosure controls and procedures" (Disclosure Controls) as of the end
of the period covered by this Form 10-K. The controls evaluation was conducted
under the supervision and with the participation of management, including our
CEO and CFO. Disclosure Controls are controls and procedures designed to
reasonably assure that information required to be disclosed in our reports filed
under the Exchange Act, such as this Form 10-K, is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission's (SEC's) rules and forms. Disclosure Controls are also
designed to reasonably assure that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Our quarterly evaluation
of Disclosure Controls includes an evaluation of some components of our internal
control over financial reporting, and internal control over financial reporting
is also separately evaluated on an annual basis for purposes of providing the
management report which is set forth below.
The evaluation of our Disclosure Controls included a review of the
controls' objectives and design, the company's implementation of the controls
and the effect of the controls on the information generated for use in this Form
10-K. In the course of the controls evaluation, we reviewed identified data
errors, control problems or acts of fraud and sought to confirm that appropriate
corrective actions, including process improvements, were being undertaken. This
type of evaluation is performed on a quarterly basis so that the conclusions of
management, including the CEO and CFO, concerning the effectiveness of the
Disclosure Controls can be reported in our periodic reports on Form 10-Q and
Form 10-K. Many of the components of our Disclosure Controls are also evaluated
on an ongoing basis by personnel in our finance organization. The overall goals
of these various evaluation activities are to monitor our Disclosure Controls,
and to modify them as necessary. Our intent is to maintain the Disclosure
Controls as dynamic systems that change as conditions warrant.
Based upon the controls evaluation, our CEO and CFO have concluded that, as
of the end of the period covered by this Form 10-K, our Disclosure Controls were
effective to provide reasonable assurance that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified by the SEC, and that material
information relating to TransAct and our consolidated subsidiaries is made known
to management, including the CEO and CFO, particularly during the period when
our periodic reports are being prepared.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.
Management assessed our internal control over financial reporting as of
December 31, 2004. Management based its assessment on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
47
Based on our assessment, management has concluded that our internal control
over financial reporting was effective as of December 31, 2004 based on the COSO
criteria identified above, to provide reasonable assurance regarding the
reliablity of financial reporting and the preparation of financial statements
for external reporting purposes in accordance with generally accepted accounting
principles.
Our management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
The company's management, including the CEO and CFO, does not expect that
our Disclosure Controls and procedures or our internal control over financial
reporting will prevent or detect all error and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be met. The design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs.
Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
All information in response to this item is incorporated by reference from
the Proxy Statement sections entitled "Election of Directors" and "Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in "Executive Compensation" other than the
"Compensation Committee Report on Executive Compensation" of the Proxy Statement
is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information contained in "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is hereby incorporated herein by
reference.
48
Information regarding our equity compensation plans as of December 31, 2004
is as follows:
(c)Number of securities
(a) (b) remaining available for
Number of securities Weighted average future issuance under
to be issued upon exercise price of equity compensation
exercise of outstanding plans (excluding
outstanding options, options, warrants securities reflected
Plan category warrants and rights and rights in column (a))
- -------------------------------------- -------------------- ----------------- -----------------------
Equity compensation plans approved
by security holders:
1996 Stock Plan 588,899 $3.75 208,649
1996 Non-Employee Director Plan 206,250 9.99 112,500
2000 Employee Stock Purchase Plan -- -- 39,733
------- ----- -------
Total 795,149 $5.37 360,882
======= ===== =======
Equity compensation plans not approved
by security holders:
2001 Employee Stock Plan 98,015 5.94 41,859
======= ===== =======
The TransAct Technologies Incorporated 2001 Employee Stock Plan (the "2001
Employee Plan") was adopted by our Board of Directors, without approval of our
security holders, effective February 26, 2001. Under the 2001 Employee Plan, we
may issue non-qualified stock options, shares of restricted stock, restricted
units to acquire shares of common stock, stock appreciation rights and limited
stock appreciation rights to key employees of TransAct or any of our
subsidiaries and to non-employees who provide services to TransAct or any of our
subsidiaries. The 2001 Employee Plan is administered by our Compensation
Committee, which has the authority to determine the vesting period and other
similar restrictions and terms of awards, provided that the exercise price of
options granted under the plan may not be less than the fair market value of the
underlying shares on the date of grant. Awards may be issued under the 2001
Employee Plan with respect to up to 225,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in "Certain Relationships and Related
Transactions" of the Proxy Statement is hereby incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information contained in "Independent Auditors' Fees" of the Proxy
Statement is herby incorporated herein by reference.
49
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
THE FOLLOWING FINANCIAL STATEMENTS AND EXHIBITS ARE FILED AS PART OF THIS
REPORT:
Financial statements
(i) See Item 8.
(ii) Financial statement schedules
All schedules are omitted since the required information is either (a)
not present or not present in amounts sufficient to require submission
of the schedule or (b) included in the financial statements or notes
thereto.
(iii) List of exhibits
3.1(a) Certificate of Incorporation of the Company, filed with the (2)
Secretary of State of Delaware on June 17, 1996.
3.1(b) Certificate of Amendment of Certificate of Incorporation of the (4)
Company, filed with the Secretary of State of Delaware on June
4, 1997.
3.1(c) Certificate of Designation, Series A Preferred Stock, filed (5)
with the Secretary of State of Delaware on December 2, 1997.
3.1(d) Certificate of Designation, Series B Preferred Stock, filed (8)
with the Secretary of State of Delaware on April 6, 2000.
3.2 Amended and Restated By-laws of the Company. (6)
4.1 Specimen Common Stock Certificate. (2)
4.2 Amended and Restated Rights Agreement between TransAct and (5)
American Stock Transfer & Trust Company dated February 16,
1998.
10.1(x) 1996 Stock Plan, effective July 30, 1996. (3)
10.2(x) Non-Employee Directors' Stock Plan, effective August 22, 1996. (3)
10.3(x) 2000 Employee Stock Purchase Plan. (9)
10.4(x) 2001 Employee Stock Plan. (10)
10.5(x) Employment Agreement, dated July 31, 1996, by and between the (2)
Company and Bart C. Shuldman.
10.6(x) Employment Agreement, dated July 31, 1996, by and between the (2)
Company and Richard L. Cote.
10.7(x) Severance Agreement by and between TransAct and Michael S. (3)
Kumpf, dated September 4, 1996.
10.8(x) Severance Agreement by and between TransAct and Steven A. (1)
DeMartino, dated January 1, 2004.
10.9 Lease Agreement by and between Bomax Properties and Ithaca, (2)
dated as of March 23, 1992.
10.10 Second Amendment to Lease Agreement by and between Bomax (4)
Properties and Ithaca, dated December 2, 1996.
10.11 Agreement regarding the Continuation and Renewal of Lease by (13)
and between Bomax Properties, LLC and TransAct, dated July 18,
2001.
10.12 Lease Agreement by and between Pyramid Construction Company and (4)
Magnetec, dated July 30, 1997.
10.13 Lease Agreement by and between Las Vegas Airport Properties LLC (1)
and TransAct Technologies Incorporated dated December 2, 2004.
50
10.14 OEM Purchase Agreement by and between GTECH Corporation, (7)
TransAct Technologies and Magnetec Corporation commencing July
14, 1999. (Pursuant to Rule 24-b-2 under the Exchange Act, the
Company has requested confidential treatment of portions of
this exhibit deleted from the filed copy.)
10.15 OEM Purchase Agreement by and between GTECH Corporation and (12)
TransAct Technologies Incorporated commencing July 2, 2002.
(Pursuant to Rule 24-b-2 under the Exchange Act, the Company
has requested confidential treatment of portions of this
exhibit deleted from the filed copy.)
10.16 OEM Purchase Agreement by and between Okidata Americas, Inc. (11)
and TransAct, dated June 8, 2001. (Pursuant to Rule 24b-2 under
the Exchange Act, the Company has requested confidential
treatment of portions of this exhibit deleted from the filed
copy.)
10.17 OEM Purchase Agreement between Oki Data Americas, Inc. ("Oki (13)
Data") and TransAct Technologies Incorporated dated as of June
8, 2003. (Pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended, the Company has requested confidential
treatment of portions of this exhibit deleted from the filed
copy.)
10.18 Revolving Credit, Equipment Loan and Security Agreement between (13)
TransAct Technologies Incorporated and Banknorth N.A. dated
August 6, 2003.
10.19 First Amendment to Revolving Credit, Equipment Loan and (15)
Security Agreement dated as of November 12, 2004 between
TransAct Technologies Incorporated and Banknorth N.A.
10.20 License Agreement between Seiko Epson Corporation and TransAct (14)
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.)
10.21 Preferred Stock Purchase Agreement and Certificate of (8)
Designation dated as of March 20, 2000 between TransAct
Technologies Incorporated and Advance Capital Partners, L.P.
and affiliate 21.1 Subsidiaries of the Company. (1) 23.1
Consent of PricewaterhouseCoopers LLP. (1) 31.1 Certification
of Chief Executive Officer pursuant to Section 302 of the (1)
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section (1)
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. (1)
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. (1)
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
51
(1) These exhibits are filed herewith.
(2) These exhibits, which were previously filed with the Company's
Registration Statement on Form S-1 (No. 333-06895), are incorporated
by reference.
(3) These exhibits, which were previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September 30,
1996 (Commission File No. 000-21121), are incorporated by reference.
(4) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(Commission File No. 000-21121), are incorporated by reference.
(5) This exhibit, which was previously filed with the Company's Current
Report on Form 8-K filed February 18, 1999 (Commission File No.
000-21121), is incorporated by reference.
(6) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1998
(Commission File No. 000-21121), are incorporated by reference.
(7) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September 25,
1999 (Commission File No. 000-21121), is incorporated by reference.
(8) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended March 25, 2000,
is incorporated by reference.
(9) This exhibit, which was previously filed with the Company's
Registration Statement on Form S-8 (No. 333-49540), is incorporated
by reference.
(10) This exhibit, which was previously filed with the Company's Annual
Report on Form S-8 (No. 333-59570), is incorporated by reference.
(11) This exhibit, which was previously filed with the Company's Annual
Report on Form S-8 (No. 333-59570), is incorporated by reference.
(12) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2002, is
incorporated by reference.
(13) This exhibit, which was previously filed with the Company's Annual
Report on Form 10-Q for the year ended June 30, 2003, is
incorporated by reference.
(14) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2004, is
incorporated by reference.
(15) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September 30,
2004, is incorporated by reference.
(x) Management contract or compensatory plan or arrangement required to
be filed pursuant to Item 14(c).
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Bart C. Shuldman
------------------------------------
Bart C. Shuldman
Chairman of the Board, President and
Chief Executive Officer
Date: March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Bart C. Shuldman Chairman of the Board, President and March 16, 2005
- -------------------------- Chief Executive Officer
Bart C. Shuldman (Principal Executive Officer)
/s/ Steven A. DeMartino Executive Vice President, Chief Financial March 16, 2005
- -------------------------- Officer, Treasurer and Secretary
Steven A. DeMartino (Principal Financial and Accounting Officer)
/s/ Charles A. Dill Director March 16, 2005
- --------------------------
Charles A. Dill
/s/ Thomas R. Schwarz Director March 16, 2005
- --------------------------
Thomas R. Schwarz
/s/ Graham Y. Tanaka Director March 16, 2005
- --------------------------
Graham Y. Tanaka
53
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
- -------
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
10.8(x) Severance Agreement by and between TransAct and Steven A. DeMartino,
dated June 1, 2004.
10.13 Lease Agreement by and between Las Vegas Airport Properties LLC and
TransAct Technologies Incorporated dated December 2, 2004.
54