1UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
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FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
-------------------------------------------------------2003
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
.
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Commission file number: 0-21121
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TRANSACT TECHNOLOGIES INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1456680
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 LASER LANE, WALLINGFORD, CT 06492
- --------------------------------- -------------------------------------DELAWARE 06-1456680
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
7 LASER LANE, WALLINGFORD, CT 06492
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(Address of principal executive offices) (Zip Code)
offices)
Registrant's telephone number, including area code 203-269-1198
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Securities registered pursuant to Section 12 (b) of the Act:
NONE
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Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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(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(X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any other amendment
to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ( ) No (X)
As of MARCH 16, 2001June 30, 2003 the aggregate market value of the registrant's issued and
outstanding voting stock held by non-affiliates of the registrant was
$22,100,000.$63,900,000.
As of MARCH 16, 2001March 5, 2004, the registrant had outstanding 5,620,3276,020,648 shares of common
stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the Annual Meeting of Shareholders to be held on May 23,
200126,
2004 - Part III.III (Items 10-14).
2
PART I
GENERALITEM 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 and
related products under the
Ithaca(R), and Magnetec(R) and TransAct.com brand names. The Company'sIn 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. The Company
focusesWe focus on five verticaltwo core markets: (1) point-of-sale and banking
("POS"), and (2) gaming and lottery,
kiosk, financial services and Internet. The Company sells itslottery. We sell our products directly to end users, original
equipment manufacturers ("OEMs"), value-added resellers ("VARs") and, selected
distributors primarily inand directly to end-users. Our product distribution spans across
the United States, Canada,Americas, Europe, the Middle East, Africa, the Caribbean Islands and Latin America. TransAct has twothe
South Pacific. We have one primary operating facilitiesfacility located in
Wallingford, Connecticut and Ithaca, New
York, five sales offices located in the United States, and one sales office and
service depot in the United Kingdom. ITEM 1. BUSINESS.
(A)Our executive offices are located at 7
Laser Lane, Wallingford, CT 06492 with a telephone number of (203) 269-1198.
GENERAL DEVELOPMENT OF BUSINESS
The year 2003 was a pivotal, and successful, year for TransAct,
highlighted by the following achievements:
- Increased revenues by $12,637,000, or 32% over 2002
- Increased operating income by $3,672,000
- Reported our first profitable year since 1999 with
net income of $1,528,000
- Repaid all our revolving bank borrowings
We continue to focus on sales growth in our two core markets, point of
sale and banking ("POS") and gaming and lottery, to drive increased
profitability.
The POS market remained soft in 2003 due to continued lower capital
spending by users of POS products and overall economic weakness, primarily in
the U.S. We expect to see some improvement in the POS market during 2004,
although not until the second half of 2004. Despite weakness of the market in
2003, our POS printer sales increased by 8.7% due primarily to growing sales of
our POSjet(R) and Bankjet(R) line of inkjet printers. During 2003, we announced
wins from two major financial services companies for shipments of over 19,000
Bankjet(R) printers to upgrade bank teller applications, which we began operatingto ship
in 2003 and expect to complete shipping during 2004. Given our success in 2003
and in light of the renewed focus we see banks placing on branch banking, we
plan to more proactively seek opportunities with other banks for upgrading bank
teller systems, if and when they arise. Our long-term strategy in the POS market
is to capture at least 20% market share, or approximately $200 million in sales,
primarily through increasing and enhancing our product portfolio, increasing
geographic coverage, and growing our customer base.
Our focus in the gaming and lottery market is two-fold. On the lottery
side, we continue to hold a leading position based on our long-term purchase
agreements with GTECH Corporation ("GTECH"), our largest customer and the
world's largest provider of lottery terminals, with an approximately 70% market
share. GTECH has been our customer since 1995, and we continue to maintain a
good relationship with them. Currently, we fulfill substantially all of GTECH's
printer requirements for lottery terminal installations and upgrades. Our sales
to GTECH each year are directly dependent on the timing and number of
new and upgraded lottery terminal installations GTECH performs.
On the gaming side, our focus lies primarily in supplying printers for
use in slot machines in casinos. During 2003, we benefited from the increasing
number of casinos that began to convert traditional coin-issuing slot machines
into ticket-issuing slot machines. As a result, sales of our gaming and lottery
printers increased by over 50%. We expect this trend to continue into 2004, as
more casinos convert their slot machines. The adoption and rollout of the
ticket-in/ticket-out initiative is happening and we expect all 700,000 slot
machines in North America to be fitted with a stand-alone businessprinter within the next two to
four years. We also expect growth from gaming sales internationally, beginning
in August 1996 to
operatelate 2004, as markets such as Australia and Europe evaluate the printer business that was formerly conducted by certain subsidiaries
of Tridex Corporation. TransAct completed an initial public offering on August
22, 1996. In April 1999, the Company formed and incorporated a new wholly-owned
subsidiary, TransAct.Com. Through TransAct.com, the Company plans to explore
leveraging its inkjet printing technology into the expanding online, e-commerce
market.
On February 15, 2001, the Company announced plans to establish a global
engineering and manufacturing center at its Ithaca, NY facility. As partuse of this
strategic decision,technology for their slot machines.
1
Our services and consumables products, which include the Companyrepair of
printers and the sale of spare parts and consumables (paper, ribbons and inkjet
cartridges), offer a substantial growth opportunity and recurring revenue stream
for TransAct. Our services and consumables products revenue has grown to
$8,543,000 and 16.4% of net sales in 2003, an increase of over 22% from 2002.
During 2004, we plan to more actively promote and dedicate increased resources
to our services and consumables products in an effort to substantially increase
the volume of sales. We have implemented a specialized software system, improved
our sales lead tracking and prospecting processes, and instituted incentive
schemes for our sales people to enable us to better cross-sell our services and
consumables products to our customers. We also believe that the increasing sales
of our inkjet printers will consolidatedrive substantially higher inkjet cartridge sales in
2004 and beyond.
Operationally, gross margin and operating margin were significantly
improved. We expect to see further gross margin and operating margin improvement
in 2004 as the volume of sales increases and we continue to focus on controlling
expenses. We reported net income for 2003 - the first time since 1999. We also
generated sufficient cash during 2003 to repay all manufacturing and
engineering into its existing Ithaca, NYoutstanding revolving
borrowings under our credit facility, and close its Wallingford, CT
facility by the endhad almost $500,000 of 2001. Production is planned to continue at the
Wallingford facility until the endcash on our
balance sheet as of 2001, with individual product lines
scheduled to move over the course of 2001. The closing of the Wallingford
facility is expected to result in the termination of employment of approximately
70 employees.
(B)December 31, 2003.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
TransAct hasWe have assessed itsour operating and reportable segments and have
determined that it operateswe operate in one reportable segment, the design, development,
manufacture and marketing of transaction-based printers and printer-related
products.
(C) NARRATIVE DESCRIPTION OF BUSINESS
(i) PRINCIPAL PRODUCTS AND SERVICES
TransAct designs, develops, manufactures and markets a broad array of
transaction-based printers utilizing dot matrix,inkjet, thermal and inkjetimpact printing
technology for applications requiring up to 60 character columns, primarily in
each of its
five vertical markets:the POS and gaming and lottery kiosk, financial services and
Internet. The Company'smarkets. Our printers are configurable whichand offer
customers the ability to choose from a variety of features and functions.
Options typically include PC board configuration, paper cutting devices, paper
handling capacities and number of print stations.cabinetry color. In addition to itsour configurable
printers, TransAct
manufactureswe manufacture custom printers for certain OEM customers. In
collaboration with these customers, the Company provideswe provide engineering and manufacturing
expertise for the design and development of specialized printers. 2
3
The Company also manufactures and sells document transport mechanisms
which deliver the finished printed output to the consumer in unattended
applications, such as ATMs and kiosks. In addition,
the Company offerswe offer inkjet cartridges, printer ribbons, paper and replacement parts for all
of itsour products.
The Company providesWe provide customers with telephone sales and technical support, a
personal account representative forto handle orders, shipping and general
information, and expedited shipping for orders of itsour configurable and custom
products. Technical and sales support personnel receive training inon all of the
Company'sour
products and services manufactured at their facility. The Company'smanufactured. Our printers generally carry up to a one- or
two-year limited warranty; extended warranties are available for purchase on selected printers to
supplement the original warranty. (ii) STATUS OF PRODUCT REQUIRING MATERIAL INVESTMENT
None.
(iii)Service contracts for the repair and
maintenance of printers beyond the original warranty period are also available
for purchase.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal materials used in manufacturing are copper wire, magnetic
metals,inkjet, thermal and
impact printheads, injection molded plastic parts, formedformed/stamped metal parts,
circuit boards and electronic components. Although the Companywe could experience temporary
disruption if certain suppliers ceased doing business with the Company, the Company'sus, our requirements
generally are available from a number of sources, except as described below.
Okidata Division of Oki America,Americas, Inc. ("Okidata"), is the sole supplier for a printer
component kit consisting of a printhead, control board and carriage (the "Oki
Kit"), whichthat is used in all of the Company'sour Ithaca(R) brand impact printers. The loss of
the supply of Oki Kits would have a material adverse effect on the Company. TransAct hasTransAct. We have
a supply agreement with Okidata to provide Oki Kits until May 2001 at aJune 8, 2005. Prices
under this agreement are fixed, price through May 2001. The Company
andbut may be changed by Okidata are currently negotiating for future supplies and pricing.after providing
180 days written notice.
Hewlett-Packard Company ("HP") is the sole supplier of inkjet
cartridges whichthat are used in all of the Company'sour inkjet printers. The loss of the supply
of HP inkjet cartridges would have a material adverse effect on the sale of the
Company'sour
inkjet printers. TransAct hasWe have a supply agreement with HP to purchase inkjet
cartridges until JuneFebruary 1, 20012005 at a fixed price. The Company and HP are
currently negotiating for future supplies and pricing. TransAct believes itsprices.
2
We believe our relations with Okidata and HP are good and hashave
received no indication that either of thethese supply agreements will not be renewed beyond
the respective expiration dates of the current contracts. TransActWe cannot be certain,
however, that either of thethese supply agreements will be renewed, or if renewed, that the
terms will be as favorable as those under the current contracts.
(iv) PATENTS AND PROPRIETARY INFORMATION
We have significantly expanded our patent portfolio over the past four
years, and expect to continue to do so in the future. We also believe our patent
portfolio will provide additional opportunities to license our intellectual
property in the future. We currently own eight patents, four of which we
consider material. The Company owns severalearliest expiration date of these eight patents is in
2008 with the latest expiration date in 2020. Of the material patents, one
of which it considers material.
That patent covers an automated paper cut-off device,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 a feature offered
onused in certain of the Company's POS printers. The Companyour 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 hashave sought patent and
other
protection for certain design features of its new family of1) printers utilizingusing inkjet printing technology. The Company regardstechnology,
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 attemptsattempt 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 the
Company'sour products or to reverse engineer or
otherwise obtain and use, to the
Company'sour detriment, information that the Company regardswe regard as
proprietary. Moreover, the laws of some foreign countries do not afford the same
protection to the Company'sour proprietary rights as do United States laws. There can be no
assurance that legal protections relied upon by the Company to protect itsour
proprietary position will be adequate or that the Company'sour competitors will not
independently develop technologies that are substantially equivalent or superior
to our technologies.
In November 2002, the Company's technologies.
3
4
(v), (vi)Company was advised that certain POS printers
sold by us since late 1999 may use technology covered by recently issued patents
of a third party competitor. In an effort to resolve this matter, we originally
offered to pay approximately $160,000, while the other party sought payment of
up to $950,000. We recorded a charge of $160,000 in cost of sales in the fourth
quarter of 2002 related to this matter. Based on the likely outcome of current
negotiations, we recorded an additional charge of $740,000 in the fourth quarter
of 2003 related to usage prior to January 1, 2003. Although settlement
negotiations are continuing, we believe that the total accrual of $900,000 (the
"Patent Resolution Payment") reflects the best estimate of the expense related
to the pre-2003 usage of this third party patented technology. We also accrued
estimated royalty payments for usage of this technology after January 1, 2003.
SEASONALITY AND PRACTICES RELATING TO WORKING CAPITAL ITEMS
Retailers typically reduce purchases of new POS equipment in the fourth
quarter, due to the increased volume of consumer transactions in thatthe holiday
period, and the
Company'sour sales of printers in the POS market historically have increased
in the third quarter and decreased in the fourth quarter. Similarly,
installations of lottery terminals are typically reduced in the fourth quarter
resulting in decreased sales of lottery printers. However, the Company haswe did not experiencedexperience
material seasonality in itsour total net sales, due to offsettingsignificant growth in sales
in other markets.
(vii)from our gaming market (for which we have not experienced seasonality). As a
result, we experienced little impact from the mild seasonality of our POS and
lottery market.
CERTAIN CUSTOMERS
The Company has anWe currently have two ongoing OEM purchase agreementagreements with GTECH
Corporation ("GTECH") to provide. The first OEM purchase agreement ("GTECH Impact Printer
Agreement") provides for the sale of impact on-line lottery printers and spare
parts through December 31, 2004. The second OEM purchase agreement ("GTECH
Thermal Printer Agreement") provides for the sale of thermal on-line lottery
printers and spares parts, at fixed prices, to be
negotiated, through July 2004.June 28, 2007. Firm purchase
orders for printers under either agreement may be placed annually by GTECH.
For 2001,Pursuant to orders placed under the Company has received an orderGTECH Impact Printer Agreement, we have
orders for approximately $14,000,000$2,000,000 of impact on-line lottery printers for
delivery between Mayduring the second and December 2001. The Companythird quarters of 2004. Because our new thermal
on-line lottery printer is a replacement for our impact on-line printer, we do
not expect any further shipments of impact on-line lottery printers in 2004
beyond the third quarter. Additionally, pursuant to the GTECH Thermal Printer
Agreement, we have received orders for approximately $1,800,000 worth of thermal
printers for delivery in 2004. We expect to receive additional orders from GTECH
for thermal printers during 2004. We also sellssell 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 22.1%19%, 27% and 31.8%33% of net sales in 20002003, 2002 and 1998,2001,
respectively.
The Company made no
on-line lottery printer shipments to GTECH during 1999. The CompanyWe also providesprovide printers to ICL PathwayHarrah's for use in casino slot machines
throughout the British Post Office.United States. During 2000,2003, sales to ICL PathwayHarrah's accounted for
approximately 20.2%12% of net sales. The
Company completed shippingWe have received orders for approximately
$2,200,000 from Harrah's of printers for delivery in 2004. We expect to ICL Pathwayreceive
additional orders from them for use in the British Post
Office in February 2001 and no further shipments are expected. The Company had
no sales to any one customer greater than 10% of net sales in 1999.
(viii)printers during 2004.
3
BACKLOG
The Company'sOur backlog of firm orders was approximately $18,100,000$5,344,000 as of March 16, 20015,
2004, including approximately $3,200,000 and $19,900,000$500,000 to GTECH and Harrah's,
respectively, compared to $7,628,000 as of March 17, 2000.14, 2003, including
approximately $4,300,000 to GTECH and none to Harrah's. Based on customers'
current delivery requirements, TransAct expectswe expect to fill itsour entire current backlog
of
approximately $18,100,000 during 2001.
(ix) MATERIAL PORTION OF BUSINESS SUBJECT TO RENEGOTIATION OF PROFITS
None.
(x)2004.
COMPETITION
The market for transaction-based printers is extremely competitive, and
the Company expectswe expect such competition to intensifycontinue in the future. The Company
competesWe compete with a number
of companies, many of which have greater financial, technical and marketing
resources than the Company. TransAct believes itsus. We believe our ability to compete successfully depends on a
number of factors both within and outside itsour 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 the Companyus and itsour competitors,
general market, economic and economicpolitical conditions and, in some cases, the
uniqueness of itsour products.
4
5
Three ofIn the Company's competitors,POS market, our major competitor is Epson America, Inc., which
controls a dominant portion of the POS markets into which we sell. We also
compete, to a much lesser extent, with Axiohm Transaction Solutions, and Star
Micronics America, Inc. together control
approximately 70% of the United States market for POS printers, a market in
which the Company's strategy calls for increased market share. Another principal
competitor in the POS market is, Citizen -- CBM America Corporation.Corporation, and Korean Printer
Solutions. Certain competitors of the Companyours have greater financial resources, lower
costs attributable to higher volume production, and off-shore manufacturing locations,
andsometimes offer lower prices
than us.
In the Company from timelottery 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 time.provide specialized, custom-engineered products to GTECH.
In the gaming market (consisting principally of slot machine and video
lottery financial servicesterminal transaction printing), we and kiosk markets, no
single supplier holdsour major competitor,
FutureLogic, Inc., comprise a dominant position.substantial portion of the market. We also
compete, to a lesser extent, with JCM American Corporation and Money Controls, a
division of Coin Acceptors, Inc. (Coinco). Certain of the Company'sour products sold for
gaming and lottery, kiosk and financial service applications compete based upon the Company'sour ability to provide highly specialized
products, custom engineering and ongoing technical support.
The Company'sOur strategy for competing in itsour markets is to continue to develop new
products and product line extensions, to increase itsour geographic market
penetration, and to take advantage of strategic relationships. The
Company expectsrelationships, and to lower product
costs by sourcing certain products overseas. We expect to particularly focus on
gaining(1) promoting our line of slot machine printers into the gaming market, acceptance for its(2)
increasing sales of our new iTherm(TM)280 thermal POS printer and family of
printers utilizing Hewlett Packard's inkjet printing technology.technology, and (3)
expanding our consumables, spare parts and service business. Although the Company believeswe believe
that itsour products, operations and relationships provide a competitive
foundation, there can be no assurance that the Companywe will compete successfully in the
future.
(xi) RESEARCH AND DEVELOPMENT ACTIVITIES
The CompanyWe spent approximately $3,481,000, $3,235,000$2,276,000, $2,025,000 and $3,642,000$3,070,000 in 2000, 19992003,
2002 and 1998,2001, respectively, on engineering, design and product development
efforts in connection with specialized engineering and design to introduce new
products and to customize existing products. During 2001, the
Company expects2004, we expect to focus the
majority of itsour research and development activities on the continuing
development and enhancement of (1) aour family of printers for the POS market
utilizing Hewlett Packard's inkjet and thermal printing technology and (2) new voucher-issuingour ticket-issuing
printers for use in the casino market.
(xii) ENVIRONMENT
The Company isWe are not aware of any material noncompliance with federal, state and
local provisions whichthat have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment.
(xiii) EMPLOYEES
As of March 16, 2001,12, 2004, TransAct Technologies and itsour subsidiaries
employed 205201 persons, of whom 190148 were full-time and 1553 were temporary
employees. None of the Company'sour employees is unionized, and the Company
considers itswe consider our relationships
with itsour employees to be good.
(D)4
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
The Company hasGEOGRAPHIC 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 $11,164,000, $700,000$1,068,000, $738,000, and $4,990,000$1,791,000 (primarily to Fujitsu for
sales and service of printers used in 2000, 1999the British Post Office) in 2003, 2002 and
1998,2001, respectively. The CompanyWe had export sales to itsour customers from itsour domestic
operations of approximately $5,156,000, $7,807,000,$3,663,000, $3,968,000 and $3,396,000$6,131,000 in 2000, 19992003, 2002
and 1998,2001, respectively. 5
6
(E)Total international sales, which include sales from our
foreign subsidiary and export sales from our domestic operations, were
approximately $4,731,000, $4,706,000 and $7,922,000 in 2003, 2002 and 2001,
respectively.
ADDITIONAL INFORMATION
We make available free of charge through our internet website,
WWW.TRANSACT-TECH.COM, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC.
We maintain a Code of Business Conduct that is applicable to all
employees, including our Chief Executive Officer, Chief Financial Officer and
Controller. This Code, which requires continued observance of high ethical
standards such as honesty, integrity and compliance with the law in the conduct
of our business, is available for public access on our internet website.
EXECUTIVE OFFICERS OF THE REGISTRANT
AS OF DECEMBER 31, 2000Pursuant to General Instructions G(3) of form 10-K, the following list
is included as an unnumbered item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 26, 2004.
The following is a list of the names and ages of all executive officers
of the registrant, indicating all positions and offices with the registrant held
by each such person and each person's principal occupations and employment
during at least the past five years.
Name Age Position
---- --- --------
Thomas R. Schwarz 64Bart C. Shuldman 46 Chairman of the Board, Bart C. Shuldman 43 President and Chief Executive Officer
and Director
Richard L. Cote 5962 Executive Vice President, Chief Financial Officer, Treasurer, Secretary
and Director
MarkJames B. GoebelStetson 46 Executive Vice President - Sales and Marketing
Michael S. Kumpf 54 Executive Vice President - Engineering
Steven A. DeMartino 34 Senior Vice President - General Manger (Wallingford, CT facility)
Michael S. Kumpf 51 Senior Vice President - Engineering
Lucy H. Staley 50 Senior Vice President - General Manager (Ithaca, NY facility)
James B. Stetson 43 Senior Vice President - Sales
Catherine J. Dawson 33 Vice President - Marketing
Steven A. DeMartino 31 Vice PresidentFinance and Corporate ControllerInformation Technology
THOMAS R. SCHWARZ, Chairman of the Board, has been a Director of the
Company since its formation in June 1996. Mr. Schwarz was Chairman and Chief
Executive Officer of Grossman's Inc., a retailer of building materials, from
1990 until his retirement in 1994. Mr. Schwarz is a Director of Tridex,
Foilmark, Inc., Tanaka Growth Fund, Lebhar-Friedman Publishing Company and
Yorkshire Global Restaurants. In February 2001, Mr. Schwarz resigned from his
position as Chairman of the Board, but remains a director of the Company.
BART C. SHULDMAN has been Chief Executive Officer, President and a
Director of the Company since its formation in June 1996. Previously, Mr.
Shuldman served as President of Magnetec and later the combined operations of
Magnetec and Ithaca from August 1993 until June 1996. In February 2001, Mr.
Shuldman was elected Chairman of the Board.
RICHARD L. COTE has been Executive Vice President, Chief Financial
Officer, Treasurer, Secretary and a Director of the Company since its formation
in June 1996. Prior thereto, he served as Senior Vice President and Chief
Financial Officer of Tridex from September 1993 to June 1996. MARK B. GOEBEL, SeniorOn June 1, 2004,
Mr. Cote will step down as Executive Vice President, - General Manager (Wallingford,
CT facility), joined TransAct in November 1993 as Engineering Manager. From
April 1994, Mr. Goebel served as Vice President-Engineering until he was
appointed Senior Vice President of Engineering of Wallingford,Chief Financial Officer,
Treasurer, Secretary and an officerDirector of the Company,Company. Mr. Cote will continue in January 2000. In November 2000, Mr. Goebel was named Senior Vice
President - General Managera
consulting capacity through the end of the Wallingford, CT facility.
MICHAEL S. KUMPF, Senior Vice President-Engineering since June 1996,
served as Vice President of Engineering of Ithaca from 1991 until June 1996.
LUCY H. STALEY, Senior Vice President-General Manager (Ithaca, NY
facility) since June 1996, served as a Vice President of Ithaca from 1984 until
June 1996.2004.
JAMES B. STETSON was appointed Executive Vice President, Sales and
Marketing in November 2001, and served as Senior Vice President of Worldwide
Sales of the Company infrom February 2000 to November 2001, and served as Vice President of Sales, Latin
America from October 1997 to February 2000. Prior to joining TransAct, Mr.
Stetson served as Vice President and Sales Manager at Gekay Sales and Service
Company from 1995 until October 1997.
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CATHERINE J. DAWSON joined TransAct in June 1998 asMICHAEL S. KUMPF was appointed Executive Vice President of Marketing, and was appointed an officer of the Company on January 1, 2000. Prior
to joining TransAct, Ms. DawsonEngineering
in March 2002. He served as Product Marketing Manager for the
visual systems division of 3M CorporationSenior Vice President, Engineering from MarchJune 1996 to
March 1998,2002 and as
a Senior Marketing AnalystVice President, Engineering of Ithaca from 1991 until June 1994 to March 1996.
5
STEVEN A. DEMARTINO, a certified public accountant, joined TransAct as
Corporate Controller in August 1996 and was appointed an officer of the Company
in January 1998, and Vice President in December 1999.1999, and Senior Vice President,
Finance and Information Technology in October 2001. Prior to joining TransAct,
Mr. DeMartino was a self-employed financial consultant from May 1996 to August
1996. Prior thereto, Mr. DeMartino served as Controller of NER/Copart, Inc. from
September 1994 to May 1996. On June 1, 2004, Mr. DeMartino will succeed Mr. Cote
as TransAct's Executive Vice President, Chief Financial Officer, Treasurer and
Secretary.
ITEM 2. PROPERTIES.
The Company'sOur operations are currently conducted at the facilities described
below. In February 2001, the Companywe announced plans to establish a global engineering
and manufacturing center at itsour Ithaca, NY facility. As part of this strategic
decision, the Company will consolidatewe consolidated all manufacturing and engineering from our
Wallingford, CT facility into itsour existing Ithaca, NY facility and close itsfacility. Our corporate
headquarters are still located in the Wallingford, CT facility. Although we are
actively seeking to sublease our Wallingford, CT facility, byin 2003 we determined
that because of the end of 2001. The Company expects tocontinuing regional decline in the commercial real estate
market, it was unlikely that we would be able to sublease the
Wallingford facilityour facility. As such,
we increased our restructuring accrual at December 31, 2003 to provide for the
remaining termnon-cancelable lease payments and other related costs for this
facility through the expiration of the lease however there can be
no assurance that(March 31, 2008). The increase in
the Company will be successful in doing so.restructuring accrual includes the reversal of estimated sublease income for
the remainder of the lease term.
In connection with the consolidation of facilities into Ithaca, we
added approximately 10,000 square feet of manufacturing space and 3,000 square
feet of office space to our Ithaca facility during 2002.
Size Owned or Lease Expiration
Location Operations Conducted (Approx. Sq. Ft.) Leased Date
- -------- -------------------- ----------------- ------ ----
Wallingford, Connecticut Manufacturing facility andExecutive offices 49,000 Leased March 31, 2008
executive offices
Ithaca, New York Manufacturing facility 59,00074,000 Leased June 30, 2007
Doncaster, United Kingdom Sales office and service 2,800 Leased August 1, 2009
depot
Georgia Florida, Illinois,(2), Nevada, New York and Five (5) regional sales 600750 Leased Various
and
Texas offices
The Company believesWe believe that itsour 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.
76
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS.
The Company'sMATTERS AND
ISSUERS PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the Nasdaq NationalSmallCap Market under the
symbol TACT. As of March 16, 2001,12, 2004, there were 896675 holders of record of the
common stock. The high and low sales pricesbid quotations of the common stock reported
during each quarter of the years ended December 31, 20002003 and 19992002 were as
follows:
Year Ended Year Ended
December 31, 20002003 December 31, 19992002
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter $10.25 $6.03 $3.63 $2.56$ 5.67 $ 3.90 $ 6.70 $ 3.90
Second Quarter 11.38 8.00 6.81 2.7513.89 5.05 7.00 4.51
Third Quarter 11.50 5.75 8.00 5.5017.90 11.75 5.99 3.60
Fourth Quarter 8.25 3.88 9.06 5.2527.40 15.82 5.12 3.91
No dividends on common stock have been declared, and the Company doeswe do not
anticipate declaring dividends in the foreseeable future. The Company'sOur credit agreement
with Webster BankBanknorth N.A. restricts the payment of cash dividends on itsour common stock
for the term of the agreement.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Because the Company was wholly-owned by Tridex until August 22, 1996,
the Selected Financial Data which appear below with respect to the year ended
December 31, 1996 may not necessarily reflect the results of operations or
financial position of the Company or what the results of operations would have
been if the Company had been a stand alone entity during 1996.
Year Ended December 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $53,720 $44,889 $52,239 $58,400 $42,134$ 52,098 $ 39,461 $ 43,974 $ 53,720 $ 44,889
Gross profit 15,543 10,216 9,774 14,142 11,754
13,826 18,173 13,933Operating expenses 12,855 11,200 17,060 14,296 11,719
Operating income (loss) 2,688 (984) (7,286) (154) 35 2,148 7,831 5,233
Net income (loss) 1,528 (692) (4,922) (344) 324 1,206 4,893 3,340
Net income (loss) available
to common shareholders 1,170 (1,050) (5,280) (664) 324 1,206 4,893 3,340
Net income (loss) per share
(pro forma for 1996):share:
Basic 0.20 (0.19) (0.95) (0.12) 0.06
0.20 0.72 0.57
Diluted 0.19 (0.19) (0.95) (0.12) 0.06 0.20 0.71 0.57
December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
1998 1997 1996
--------- ---- ---- ---- ----
Balance Sheet Data:
Total assets $26,361 $22,030 $25,791 $27,619 $25,684
$23,788 $24,699 $20,784Working capital 11,787 8,798 8,366 13,631 11,094
Long-term debt, excluding
current portion 330 2,791 5,344 5,944 7,100
5,075 -Redeemable convertible
preferred stock 3,902 3,824 3,746 3,668 -
Shareholders' equity:
Preferred 3,668 - - - -
Commonequity 10,347 6,545 7,315 12,191 12,207 12,177 17,903 14,407
87
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
FORWARD LOOKING STATEMENTS
Certain statements included in this report, including without
limitation statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are not historical facts are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All forward-looking statements involve risks and uncertainties,
including, but not limited to, customer acceptance and market share gains, both
domestically and internationally, in the face of substantial competition from
competitors that have broader lines of products and greater financial resources;
introduction of new products into the marketplace by competitors; successful
product development; dependence on significant customers; dependence on third
parties for sales inoutside the United States including Australia, New Zealand,
Europe and Latin America; economic and political conditions in the United
States, Australia, New Zealand, Europe and Latin America; marketplace acceptance
of new products; risks associated with foreign operations; the Company's ability to successfully
consolidate its operations into its Ithaca, NY facility;Patent Resolution Payment;
availability of third-party components at reasonable prices; and the absence of
price wars or other significant pricing pressures affecting the Company'sour products in the
United States orand abroad. Actual results may differ materially from those
discussed in, or implied by, the forward-looking statements. PLANT CONSOLIDATION DURING 2001The forward-looking
statements speak only as of the date of this report and we assume no duty to
update them to reflect new, changing or unanticipated events or circumstances.
OVERVIEW
The year 2003 was a pivotal, and successful, year for TransAct,
highlighted by the following achievements:
- Increased revenues by $12,637,000, or 32% over 2002
- Increased operating income by $3,672,000
- Reported our first profitable year since 1999 with
net income of $1,528,000
- Repaid all our revolving bank borrowings
We continue to focus on sales growth in our two core markets, point of
sale and banking ("POS") and gaming and lottery, to drive increased
profitability. During 2003, our total net sales grew by over 32% to
approximately $52,098,000. See the table below for a breakdown of our sales.
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
-------------- ----------------- ----------------- ----------------
Printers - POS $14,027 26.9% $12,900 32.7% $ 1,127 8.7%
Printers - Gaming and lottery 29,528 56.7% 19,578 49.6% 9,950 50.8%
------- ----- ------- ----- -------
Subtotal - printers 43,555 83.6% 32,478 82.3% 11,077 34.1%
Services and consumables 8,543 16.4% 6,983 17.7% 1,560 22.3%
------- ----- ------- ----- -------
Total net sales $52,098 100.0% $39,461 100.0% $12,637 32.0%
======= ===== ======= ===== =======
The POS market remained soft in 2003 due to continued lower capital
spending by users of POS products and overall economic weakness, primarily in
the U.S. We expect to see some improvement in the POS market during 2004,
although not until the second half of 2004. Despite weakness of the market in
2003, our POS printer sales increased by 8.7% due primarily to growing sales of
our POSjet(R) and Bankjet(R) line of inkjet printers. During 2003, we announced
wins from two major financial services companies for shipments of over 19,000
Bankjet(R) printers to upgrade bank teller applications, which we began to ship
in 2003 and expect to complete shipping during 2004. Given our success in 2003
and in light of the renewed focus we see banks placing on branch banking, we
plan to more proactively seek opportunities with other banks for upgrading bank
teller systems, if and when they arise. Our long-term strategy in the POS market
is to capture at least 20% market share, or approximately $200 million in sales,
primarily through increasing and enhancing our product portfolio, increasing
geographic coverage, and growing our customer base.
Our focus in the gaming and lottery market is two-fold. On the lottery
side, we continue to hold a leading position based on our long-term purchase
agreements with GTECH Corporation ("GTECH"), our largest customer and the
world's largest provider of lottery terminals, with an approximately 70% market
share. GTECH has been our customer since 1995, and we continue to maintain a
good relationship with them. Currently, we fulfill substantially all of GTECH's
printer requirements for lottery terminal installations and upgrades. During
2003, total sales to GTECH were approximately $9,750,000, representing a
decrease of approximately 9% from 2002. Based on existing orders and expected
future demand based on input from GTECH, we expect overall sales to GTECH in
2004 to be slightly below the 2003 level. Our sales to GTECH each year are
directly dependent on the timing and number of new and upgraded lottery terminal
installations GTECH performs.
8
On the gaming side, our focus lies primarily in supplying printers for
use in slot machines in casinos. During 2003, we benefited from the increasing
number of casinos that began to convert traditional coin-issuing slot machines
into ticket-issuing slot machines. As a result, sales of our gaming and lottery
printers increased by over 50%. We expect this trend to continue into 2004, as
more casinos convert their slot machines. The adoption and rollout of the
ticket-in/ticket-out initiative is happening and we expect all 700,000 slot
machines in North America to be fitted with a printer within the next two to
four years. We also expect growth from gaming sales internationally, beginning
in late 2004, as markets such as Australia and Europe evaluate the use of this
technology for their slot machines.
Our services and consumables products, which include the repair of
printers and the sale of spare parts and consumables (paper, ribbons and inkjet
cartridges), offer a substantial growth opportunity and recurring revenue stream
for TransAct. Our services and consumables products revenue has grown to
$8,543,000 and 16.4% of net sales in 2003, an increase of over 22% from 2002.
During 2004, we plan to more actively promote and dedicate increased resources
to our services products in an effort to substantially increase the volume of
sales. We have implemented a specialized software system, improved our sales
lead tracking and prospecting processes, and instituted incentive schemes for
our sales people to enable us to better cross-sell our services products to our
customers. We also believe that the increasing sales of our inkjet printers will
drive substantially higher inkjet cartridge sales in 2004 and beyond.
Operationally, gross margin and operating margin were significantly
improved. We expect to see further gross margin and operating margin improvement
in 2004 as the volume of sales increases and we continue to focus on controlling
expenses. We reported net income for 2003 - the first time since 1999. We also
generated sufficient cash during 2003 to repay all outstanding revolving
borrowings under our credit facility, and had almost $500,000 of cash on our
balance sheet as of December 31, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America. These principles require the use of estimates,
judgments and assumptions. Such estimates and judgments are based upon
historical experience and certain assumptions that are believed to be reasonable
in the particular circumstances. Those judgments affect both balance sheet items
and income statement categories. Our estimates include those related to revenue
recognition, inventory obsolescence, the valuation of deferred tax assets and
liabilities, depreciable lives of equipment, warranty obligations, and
restructuring accruals. We evaluate our assumptions on an ongoing basis by
comparing actual results with our estimates. Actual results may differ from the
original estimates. The following accounting policies are those that we believe
to be most critical in the preparation of our financial statements.
REVENUE RECOGNITION - Our typical contracts include the sale of
printers, which are sometimes accompanied by separately-priced extended warranty
contracts. We also sell spare parts, consumables, and other repair services
(sometimes pursuant to multi-year product maintenance contracts) which are not
included in the original printer sale and are ordered by the customer as needed.
We recognize revenue pursuant to the guidance within SAB 104, "Revenue
Recognition". Specifically, revenue is recognized when evidence of an
arrangement exists, delivery (based on shipping terms which are generally FOB
shipping point) has occurred, the selling price is fixed and determinable, and
collectibility is reasonably assured. We provide for an estimate of product
returns and price protection based on historical experience at the time of
revenue recognition.
Revenue related to extended warranty and product maintenance contracts
is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"), "Accounting
for Separately Priced Extended Warranty and Product Maintenance Contracts."
Pursuant to FTB 90-1, revenue related to separately priced product maintenance
contract is deferred and recognized over the term of the maintenance period. We
record deferred revenue for amounts received from customers for maintenance
contracts prior to the maintenance period.
Our customers have the right to return products that do not function
properly within a limited time after delivery. We monitor and track product
returns and record a provision for the estimated future returns based on
historical experience. Returns have historically been within expectations and
the provisions established, but we cannot guarantee that we will continue to
experience return rates consistent with historical patterns.
We offer some of our customers price protection as an incentive to
carry inventory of our product. These price protection plans provide that if we
lower prices, we will credit them for the price decrease on inventory they hold.
Our customers typically carry limited amounts of inventory, and we infrequently
lower prices on current products. As a result, the amounts paid under these
plans have been minimal. However, we cannot guarantee that this minimal level
will continue.
9
ACCOUNTS RECEIVABLE - We have standardized credit granting and review
policies and procedures for all customer accounts, including: credit reviews of
all new customer accounts; ongoing credit evaluations of current customers;
credit limits and payment terms based on available credit information; and
adjustments to credit limits based upon payment history and the customer's
current credit worthiness. We also provide an estimate of doubtful accounts
based on historical experience and specific customer collection issues. Our
allowance for doubtful accounts as of December 31, 2003 was $100,000, or 1.1% of
outstanding accounts receivable, which we feel is appropriate considering the
overall quality of the accounts receivable. While credit losses have
historically been within expectations and the reserves established, we cannot
guarantee that our credit loss experience will continue to be consistent with
historical experience. As of December 31, 2003, we had an accounts receivable
balance due from Harrah's (casinos) of 31% of the total balance due. No other
customer accounts receivable balance exceeded 10%.
INVENTORY - Our inventories are valued at the lower of cost or market.
We assess market value based on historical usage and estimates of future demand.
Assumptions are reviewed at least quarterly and adjustments are made, as
necessary, to reflect changed market conditions. Should circumstances change and
we determine that additional inventory is subject to obsolescence, additional
write-downs of inventory could result in a charge to income. As of December 31,
2003, our net inventory included a reserve to write inventory down to lower of
cost or market of $1,950,000, or 19.5% of gross inventory. Reserves increased
significantly in 2002 and remained at that level during 2003 due to several
products that were discontinued during that time period.
INCOME TAXES - In preparing our consolidated financial statements, we
are required to estimate income taxes in each of the jurisdictions in which we
operate. This involves estimating the actual current tax exposure together with
assessing temporary differences between the tax basis of certain assets and
liabilities and their reported amounts in the financial statements, as well as
net operating losses, tax credits and other carryforwards. These differences
result in deferred tax assets and liabilities, which are included within our
consolidated balance sheets. We then assess the likelihood that the deferred tax
assets will be realized from future taxable income, and to the extent that we
believe that realization is not likely, we establish a valuation allowance.
Significant judgment is required in determining the provision for
income taxes and, in particular, any valuation allowance recorded against our
deferred tax assets. On a quarterly basis, we evaluate the recoverability of our
deferred tax assets based upon historical results and forecasted taxable income
over future years, and match this forecast against the basis differences,
deductions available in future years and the limitations allowed for net
operating loss and tax credit carryforwards to ensure that there is adequate
support for the realization of the deferred tax assets. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged
as a reduction to income in the period such determination was made. Likewise,
should we determine that we would be able to realize future deferred tax assets
in excess of its net recorded amount, an adjustment to the deferred tax assets
would increase net income in the period such determination was made.
As of December 31, 2003, we recorded a net deferred tax asset of
approximately $3,024,000 and a valuation allowance of $331,000, primarily on a
portion of our foreign tax credits, research and development credits and certain
state net operating loss carryforwards. We will need to recognize approximately
$8.0 million in future taxable income in order to realize all of our deferred
tax assets at December 31, 2003. Based on our projection of future taxable
income, no additional valuation allowance is considered necessary. Should
circumstances change and we determine that some or all of the deferred taxes
would not be realized, a valuation allowance would be recorded resulting in a
charge to income in the period the determination is made.
GOODWILL - We test the impairment of goodwill each year, or whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. We completed our last assessment as of December 31, 2003. Factors
considered that may trigger an impairment review are: significant
underperformance relative to expected historical or projected future operating
results; significant changes in the manner of use of acquired assets or the
strategy for the overall business; significant negative industry or economic
trends; and significant decline in market capitalization relative to net book
value. Goodwill amounted to $1,469,000 at December 31, 2003.
RESTRUCTURING - In February 2001, the Companywe announced plans to establish a
global engineering and manufacturing center at itsour Ithaca, NY facility. As part
of this strategic decision, the Company willwe undertook a plan to consolidate all manufacturing
and engineering into itsour existing Ithaca, NY facility and close itsour Wallingford,
CT manufacturing facility by the end of 2001 (the "Consolidation"). The Company'sHowever, our Company
headquarters remains in Wallingford, CT. Our technology shift to inkjet and
thermal printing from dot matrix impact printing has dramatically reduced the
labor content in our printers, and therefore, lowerslowered the required production
capacity. Production is plannedAs of December 31, 2001, we successfully transferred substantially all
our Wallingford product lines to continue atIthaca, NY, with the exception of a small
service depot that remains in Connecticut. The closing of the Wallingford
manufacturing facility untilresulted in the endtermination of 2001, with individual product lines
scheduled to move over the courseemployment of
2001. The Company estimates that the
non-recurring costsapproximately 70 production, administrative and management employees.
10
Through December 31, 2003, we have incurred approximately $6.2 million
of expenses associated with the Consolidation, including severance pay, stay
bonuses, employee benefits, moving expenses, non-cancelable lease payments, and
other costs, will beof which approximately $1.1 million, $1.0 million and $4.1 million
were recognized in the $3.02003, 2002 and 2001, respectively. We do not expect to $3.5 million range and will be recognized during
2001. The Company expectsincur
any additional restructuring expenses related to the Consolidation will provide approximately $4.0
million in annual cost savings, compared to 2000, beginning in 2002.beyond 2003.
See the "Liquidity and Capital Resources" section for a discussion of the
expected impact of the Consolidation on the Company'sour future results of operations and
cash flows.
In connection with the Consolidation of manufacturing facilities in
2001, we recorded significant accruals. These accruals comprised severance pay,
stay bonuses, employee benefits, non-cancelable lease payments and certain other
expenses. Management has made reasonable estimates of such costs and expenses.
However, if actual costs differ from the estimates, charges or credits to income
could result in the period the adjustments are determined. In 2002 and 2003, we
changed our estimate of sublease income on the Wallingford, CT facility,
resulting in additional restructuring expense.
WARRANTY - We generally warranty our products for up to 24 months and
record the estimated cost of such product warranties at the time the sale is
recorded. Estimated warranty costs are based upon actual past experience of
product returns and the related estimated cost of labor and material to make the
necessary repairs. If actual future product return rates or the actual costs of
material and labor differ from the estimates, adjustments to the accrued
warranty liability would be made.
CONTINGENCIES - We record an estimated liability related to
contingencies based on our estimates of the probable outcomes. On a quarterly
basis, we assess the potential liability related to pending litigation, audits
and other contingencies and confirm or revise estimates and reserves as
appropriate.
In November 2002, we were advised that certain POS printers sold by us
since late 1999 may use technology covered by recently issued patents of a third
party competitor. In an effort to resolve this matter, we originally offered to
pay approximately $160,000, while the other party sought payment of up to
$950,000. We recorded a charge of $160,000 in cost of sales in the fourth
quarter of 2002 related to this matter. Based on the likely outcome of current
negotiations, we recorded an additional charge of $740,000 in the fourth quarter
of 2003 related to usage prior to January 1, 2003. Although settlement
negotiations are continuing, we believe that the total accrual of $900,000 (the
"Patent Resolution Payment") reflects the best estimate of the expense related
to the pre-2003 usage of this third party patented technology. We also accrued
estimated royalty payments for usage of this technology after January 1, 2003.
ACCUMULATED OTHER COMPREHENSIVE INCOME - Stockholders' equity contains
certain items classified as other comprehensive income, including foreign
currency translation adjustments related to our non-U.S. subsidiary company that
has a designated functional currency other than the U.S. dollar. We are required
to translate the subsidiary functional currency financial statements to U.S.
dollars using a combination of historical, month-end and weighted average
foreign exchange rates. This combination of rates creates the foreign currency
translation adjustments component of other comprehensive income.
(A) RESULTS OF OPERATIONS
(i) YEAR ENDED DECEMBER 31, 20002003 COMPARED TO YEAR ENDED DECEMBER 31,
19992002
NET SALES. Net sales by market for the years ended December 31, 20002003
and 19992002 were as follows:
Year ended Year ended Change
(In thousands) December 31, 20002003 December 31, 1999
----------------- -----------------2002 $ %
----------------------- ----------------------- -----------------------
Point of sale $29,396 54.7% $26,653 59.4%and banking $20,745 39.8% $18,475 46.8% $ 2,270 12%
Gaming and lottery 19,298 35.9 8,782 19.5
Other 5,026 9.4 9,454 21.131,353 60.2% 20,986 53.2% 10,367 49%
------- ------- ------- ------- -------
$52,098 100.0% $39,461 100.0% $12,637 32%
======= ======= ======= ======= =======
International $ 4,731 9.1% $ 4,706 11.9% $ 25 1%
======= ======= ======= ======= =======
Net sales for 2003 increased $12,637,000, or 32%, from 2002 largely due
to significantly higher shipments into our gaming and lottery market, as well as
increased shipments into our POS market. Overall, international sales remained
relatively flat in 2003 compared to 2002.
11
Point of sale and banking: Sales of our POS products worldwide increased
approximately $2,270,000, or 12%, from 2002.
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
----------------------- ----------------------- ----------------
Domestic $16,510 79.6% $14,119 76.4% $ 2,391 17%
International 4,235 20.4% 4,356 23.6% (121) (3%)
------- ----- ------- ----- $53,720-------
$20,745 100.0% $44,889$18,475 100.0% $ 2,270 12%
======= ===== ======= ===== =======
9
10
NetDomestic POS revenue increased 17% due largely to significantly higher
sales for the year ended December 31, 2000of our POSjet(R) and Bankjet(R) lines of inkjet printers. Sales of such
inkjet printers increased $8,831,000, or
20%,by approximately 187% in 2003 compared to $53,720,000 from $44,889,0002002. The
overall increase in 1999 duedomestic 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 intoof
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 and gaming and lottery markets, partiallyrevenue decreased 3% due primarily to lower sales of
our thermal fiscal printers in Europe (approximately $800,000). Lower thermal
fiscal printer sales were largely offset by (1) higher sales (approximately
$300,000) through our expanding network of international distributors and (2)
higher service, spare parts and consumables revenue (approximately $400,000),
largely resulting from a decrease in sales in
the Company's other markets. International sales increasedservice contract related to $16,320,000, or
30.4% of net sales in 2000, from $8,507,000, or 19.0% of net sales in 1999.
Point of sale: Sales of the Company's POS printers increased
$2,743,000, or 10%. International POS printer shipments increased approximately
$9,387,000 due to the resumption of printer shipments to ICL Pathwayshipped for the
British Post Office project. Shipmentsin prior years. Such service contract expires in the second
quarter of printers for this project totaled2005, and provides quarterly revenue of approximately $10,700,000 in 2000. The Company did not make any printer
shipments related to this project in 1999. The Company completed shipping
printers$250,000. We
are currently negotiating for the British Post Office projectrenewal of this contract upon its expiration,
however, there can be no assurance that we will be successful. We also continue
to actively seek additional distribution partners in February 2001both Latin America and
no further
shipments are expected. WhileEurope in order to increase our breadth of coverage and future sales in these
regions.
We expect sales into the Company expectsPOS market for the first quarter of 2004 to replacebe
consistent with those reported for the fourth quarter of 2003. However, we
expect full year sales for the
British Post Office project with sales of other POS and gaming and lottery
printers in 2001, if the Company is unable2004 to do so, the absence of such sales
would have a material adverse impact on the Company's operations and financial
resultsbe modestly higher than those reported during
2001. The increase in international shipments for the British
Post Office project was offset by a net decrease of approximately $1,300,000 of
printer shipments to other customers primarily in Europe and Latin America.
Domestic POS printer shipments decreased by approximately $6,644,000,
due primarily to continued softness in demand from the Company's domestic
distributors.2003.
Gaming and lottery: Sales of the Company'sour gaming and lottery printersproducts increased
$10,516,000,by $10,367,000, or 120%49%, from 1999.2002, primarily due to significantly stronger sales
of our slot machine and video lottery terminal ("VLT") printers, somewhat offset
by lower sales of lottery printers to GTECH.
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
----------------------- ----------------------- -----------------
Domestic $30,857 98.4% $20,636 98.3% $10,221 50%
International 496 1.6% 350 1.7% 146 42%
----------------------- ----------------------- -------
$31,353 100.0% $20,986 100.0% $10,367 49%
======================= ======================= =======
Year ended Year ended Change
(In thousands) December 31, 2003 December 31, 2002 $ %
------------------- -------------------- ----------------
Gaming $ 21,587 68.9% $ 10,277 49.0% $ 11,310 110%
Lottery 9,766 31.4% 10,709 51.0% (943) (9%)
-------- ----- -------- ----- --------
$ 31,353 100.0% $ 20,986 100.0% $ 10,367 49%
======== ===== ======== ===== ========
Sales of our gaming products, which include video lottery terminal
("VLT") and slot machine printers used in casinos and racetracks ("racinos"),
and related spare parts and repairs, more than doubled from 2002. This net increase
resulted primarily from a
numbersignificantly increased installations of factors. The primary effect on the revenue in this market during 2000
was the resumption of shipments to GTECH of the Company's on-line lotteryour casino
printers, that totaled $11,400,000 compared to no on-line lottery printer
shipments during 1999. In addition, the Company's new slot machine printer added
approximately $2,800,000 to revenue in 2000. The new slot machine printer is primarily for use in Indianslot machines at casinos in Californiathroughout North America
that print receipts instead of issuing coins ("ticket-in, ticket-out" or
"TITO"). Based on existing orders and casinos in Nevada. The
Company expectssales opportunities for TITO printers, we
expect sales of its slot machineour casino printers to grow significantlycontinue to increase in 2001.
Offsetting2004, as more
regulatory approvals for racinos are expected to be obtained and more casinos
are expected to convert to ticket-in, ticket-out slot machines. Also, due to
government budget shortfalls, many states have approved (such as New York and
Oklahoma) or are considering VLT initiatives as a means of raising revenue. As
such, we also expect sales of our VLT printers to increase in 2004 compared to
2003 due to these initiatives.
12
Total sales to GTECH, which included impact and thermal on-line lottery
printers, impact in-lane lottery printers (primarily found at checkout counters
of certain grocery stores), and spare parts revenue, decreased by $943,000 to
approximately $9,750,000, or 19% of net sales, in 2003, compared to $10,700,000,
or 27% of net sales, in 2002.
See the sales increases noted above wastable below for an analysis of revenues from GTECH.
Year ended
(In thousands, except %) December 31,
2003 2002
------- -------
Impact on-line lottery printers and spare parts $ 1,596 $10,032
Thermal on-line lottery printers 8,000 -
In-lane lottery printers 170 677
------- -------
$ 9,766 $10,709
======= =======
% of consolidated net sales 19% 27%
Sales to GTECH of impact on-line lottery printers and spare parts
totaled approximately $1,596,000 in 2003, compared to $10,032,000 in 2002. We
have approximately $2,000,000 of orders from GTECH for impact on-line lottery
printers for delivery in the second and third quarters of 2004. Because our
thermal on-line lottery printer is a decrease of
approximately $2,400,000 inreplacement for our impact on-line lottery
printer, we do not expect any further shipments of impact on-line lottery
printers for use in video lottery
terminals (VLTs), primarily due to2004 beyond the absence in 2000 of sales into the South
Carolina market, which banned VLTs in October 1999. The absence of VLT printer
sales for the South Carolina market was partially offset by increased sales of
these printers into other jurisdictions. Also, salesthird quarter. Shipments of in-lane lottery printers
totaled approximately $170,000 in 2003 compared to GTECH did not recur$677,000 in 2000, resulting in a decrease in2002. Since sales of $1,100,000.
Sales
of in-lane lottery printers are project-oriented, and the Companywe cannot predict if and when
future sales may occur. The Company received an order fromIn July 2002, we entered into a 5-year agreement with
GTECH in January 2001 approximating
$14,000,000 for additionalto 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 which willduring 2002. Based on existing orders and
expected future demand based on input from GTECH, we expect sales of our thermal
on-line lottery printers in 2004 to be deliveredslightly less than those reported in
2003.
International gaming and lottery product sales increased slightly from
May to December 2001.
Other: Sales2002. Such sales represented less than 2% of total sales into this market during
2003 and 2002. However, we expect growth in international gaming revenue,
beginning in late 2004, as markets such as Australia and Europe evaluate the Company's printers into other markets decreased
$4,428,000, or 47% from 1999 due to decreased shipmentsuse
of printers used in
automated teller machines, decreased shipments of printersthis technology for use in bank
teller applications, and the absence of shipments of the Company's thermal kiosk
printers for use in a Canadian government application.
10
11their slot machines.
GROSS PROFIT. Gross profit increased $2,388,000,by $5,327,000, or 20%52%, to
$14,142,000$15,543,000, and gross margin increased to 29.8% from $11,754,00025.9%. Both gross profit
and gross margin for 2003 benefited from a substantial increase in 1999 due primarilythe volume of
sales (32%) and a more favorable sales mix, including increased sales of higher
margin gaming and lottery printers in 2003 compared to 2002. Gross profit
included a charge of $740,000, or 1.4% of net sales, and $160,000, or 0.4% of
net sales, related to the Patent Resolution Payment (see "Contingent
Liabilities" in Liquidity and Capital Resources) in 2003 and 2002, respectively.
We expect gross margin for 2004 to be approximately 32-33%, as we gain operating
leverage on higher expected sales volume in 2000. The gross
margin remained essentially the same at 26.3% in 20002004 compared to 26.2% in 1999.
The Company expects its gross margin in 2001, before the impact of the
Consolidation, to remain relatively consistent with 2000.2003.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
development expenses primarily include salary and payroll related expenses for
our engineering staff, depreciation and design expenses (including prototype
printer expense, outside design and testing services and supplies). Such
expenses increased $246,000,$251,000, or 8%12%, to $3,481,000 from $3,235,000 in
1999. The increase in spending was$2,276,000, primarily due to increasedhigher (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 design expenses related to inkjet printers, including additional engineering
staff. Theseour iTherm(TM)280 thermal POS printer ($170,000).
Engineering and product development expenses decreased as a percentage of net
sales to 6.5%4.4% from 7.2%5.1%, primarily due to significantly higher sales volume in
20002003 compared to 1999. The Company expects its2002. We expect engineering design and product development expenses to
decrease slightly during
2001,increase in 2004 as we plan to add staff to continue increasing product
development to expand our families of inkjet printers for the Company reduces engineering activity atPOS market and
ticket-issuing printers for the Wallingford, CT
facility in preparation for its closing on December 31, 2001.casino market.
13
SELLING AND MARKETING. Selling and marketing expenses primarily include
salaries and payroll related expenses for our sales and marketing staff, sales
commissions, travel expenses, expenses associated with the lease of sales
offices, advertising, trade show expenses and other promotional marketing
expenses. Selling and marketing expenses increased $1,199,000,by $941,000, or 31%23%, to
$5,086,000$4,968,000, due primarily to higher (1) sales commissions resulting from
$3,887,000increased sales in 1999,2003 compared to 2002 (approximately $440,000), (2)
compensation related expenses, including additional sales staff and increasedexpenses
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 8.7% in 1999. Such expenses increased by
approximately $1,400,00010.2%, due primarily to marketing and promotional activities
related to the launchhigher volume of the Company's new family of printers utilizing inkjet
printing technologysales in April 2000, including additional marketing staff. This
increase was somewhat offset by lower sales commissions resulting from a
decrease in sales eligible for commissions in 20002003 compared to
1999. The Company
expects that2002. We expect selling and marketing expenses for 2001 will be relatively
consistent with thoseto increase modestly in 2004, as
we plan to add sales staff to help grow our sales and increase our breadth of
2000, as the Company plans to continue a similar level
of marketing and promotional activities to support the existing inkjet product,
as well as a new inkjet printer expected to be introduced during 2001.coverage in our markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
primarily include: salaries and payroll related expenses for our executive,
accounting, human resource and information technology staff; expenses for our
corporate headquarters; professional and legal expenses; and telecommunication
expenses. General and administrative expenses increased by $943,000,$293,000, or 21%7%, to
$5,540,000 in 2000$4,483,000. During 2003 we incurred higher legal expenses (approximately
$250,000) related to our growing patent portfolio and the Patent Resolution
Payment. In addition, incentive compensation increased by approximately
$130,000. These increases were somewhat offset by staff reductions resulting
from $4,597,000 in 1999,the Consolidation (approximately $80,000). General and increased slightlyadministrative
expenses decreased as a percentage of net sales to 10.3%8.6% from 10.2%. The10.6%, due
primarily to higher volume of sales in 2003 compared to 2002. We expect general
and administrative expenses to increase primarily resulted from (1) highersomewhat in 2004, due largely to planned
expenses resulting fromrelated to required compliance with the Company's upgradeSarbanes-Oxley Act of its telecommunications system, (2) an increase2002 and
additional finance staff related to our CFO transition plan and growth in administrative compensation-relatedour
overall business.
BUSINESS CONSOLIDATION AND RESTRUCTURING. We incurred $1,128,000 and
$958,000 of expenses and (3) higher professional
expenses.
PROVISION FOR RESTRUCTURING. During the year ended December 31, 2000,
the Company recorded a provision for restructuring of $189,000 to cover
severance costs related to the downsizingConsolidation 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 the Company's manufacturing
facility in Wallingford, Connecticut. At December 31,
2000, approximately
$105,0002002 reflected estimated sublease income after September 30, 2004. After
expanded efforts during 2003, we determined that because of the continuing
regional decline in the commercial real estate market in 2003, it was unlikely
that we would be able to sublease our Wallingford, CT facility. As such, we
increased our restructuring accrual, which represents the reversal of estimated
sublease income, in the fourth quarter of 2003 by $1,128,000 to provide for the
remaining non-cancelable lease payments and other related costs for this
facility through the expiration of the lease (March 31, 2008).
We do not expect to incur any further restructuring expenses remained accrued.related to
the Consolidation beyond 2003. See "Consolidation Expenses" in Liquidity and
Capital Resources).
OPERATING INCOME (LOSS). The Company incurredDuring 2003, we reported operating income of
$2,688,000, or 5.2% of net sales, compared to an operating loss of $154,000$984,000, or
2.5% of net sales, in 2000 compared to2002. The significant increase in our operating income of $35,000 in 1999. The operating
loss was
primarily the result ofdue largely to higher gross profit on higher sales, partially offset by higher
operating expenses including planned(primarily selling and marketing expenses) in 2003 compared
to 2002. Operating income (loss) for 2003 and product development expenses2002 included charges related to
the launch of the
Company's new inkjet printer, higher generalConsolidation ($1,128,000 and administrative expenses,$958,000, respectively) and the restructuring provision recorded in 2000.
OTHER INCOME. In 1999, the Company recorded a one-time pre-tax gain of
$770,000 related to the favorable settlement of a lawsuit with GTECH.
11
12Patent
Resolution Payment ($740,000 and $160,000, respectively).
INTEREST. NetWe reported interest expense increasedof $219,000 in 2003 compared to
$649,000 from $399,000$217,000 in 1999 due2002. Interest income decreased by $16,000 to increased average outstanding borrowings on the Company's line of
credit and$9,000 in 2003. The
decrease in interest income was largely attributable to a higher average borrowing ratelevel of
invested cash in 2000 compared2002 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 1999.repay outstanding revolving
borrowings in 2002. At December 31, 2003, we had no outstanding revolving
borrowings and $420,000 outstanding under a term loan, that we repaid during
January 2004. We expect to generate cash during 2004, and, as a result, expect
to report interest income on our available cash in 2004. See "Liquidity and
Capital Resources" below.below for more information.
WRITE-OFF OF DEFERRED FINANCING COSTS. In August 2003, we entered into
a new credit facility with Banknorth N.A., which replaced an existing facility
with LaSalle Business Credit, Inc. ("LaSalle"). We recorded a charge of
approximately $103,000 in the third quarter of 2003 related to the write-off of
unamortized deferred financing costs from our prior credit facility with
LaSalle. Our new credit facility with Banknorth contains more favorable terms
that those contained in our prior facility with LaSalle, which we believe will
result in significant costs savings during the term of the new credit facility.
14
OTHER INCOME (EXPENSE). Other expense for 2003 primarily included
transaction exchange loss recorded by our UK subsidiary. Other income for 2002
included a one-time gain of $145,000 resulting from the receipt of 2,146 shares
of common stock from our health insurance company, Anthem, Inc., upon its
demutualization. We sold these shares during the third quarter of 2002. This
gain was partially offset by approximately $50,000 of transaction exchange loss
recorded by our UK subsidiary during 2002, due to the strengthening of the
British pound against the dollar.
INCOME TAXES. As a resultWe recorded an income tax provision of the Company's loss before income taxes$725,000 at an
effective rate of 32.2% in 2000, the Company recorded2003, and an income tax benefit of $448,000, or$390,000 at an
effective rate of 56.6%, compared36.0% in 2002. The lower effective rate in 2003 reflects a
favorable outcome of a state tax audit, benefits from certain tax credits, and
utilization of state net operating loss carryforwards not previously
anticipated. We expect to anrecord income tax provision of $102,000 in 1999, ortaxes at an effective rate of
24%. The abnormally high effective tax benefit rate in 2000
and the low effective tax rate in 1999 are primarily due to the recognition of
certain tax credits and the benefit from the Company's foreign sales corporation
on relatively low pre-tax amounts.approximately 36% during 2004.
NET INCOME (LOSS). The Company incurred aWe reported net lossincome in 2003 of $344,000 for
2000,$1,528,000, or
$0.12$0.19 per share (basic and diluted),(diluted) after giving effect to $264,000$358,000 of dividends and
accretion charges and a one-time beneficial conversion charge of
approximately $56,000 on preferred stock issued in April of 2000.stock. This compares to a net incomeloss in 2002 of
$324,000,$692,000, or $0.06$0.19 per share (basic(diluted) after giving effect to $358,000 of
dividends and diluted) in 1999.accretion charges on preferred stock. Both per-share amounts are
after giving effect to $358,000 of dividends and accretion charges on preferred
stock. In 2001,future quarters, dividends and accretion charges on preferred stock
will be $360,000,approximately $90,000, before the effect of any conversion or redemption
of the preferred stock.
(ii) YEAR ENDED DECEMBER 31, 19992002 COMPARED TO YEAR ENDED DECEMBER 31,
19982001
NET SALES. Net sales by market for the years ended December 31, 19992002
and 19982001 were as follows:
Year ended Year ended Change
(In thousands) December 31, 19992002 December 31, 19982001 $ %
--------------------- ----------------- -----------------
Point of sale $26,653 59.4% $27,778 53.2%and banking $18,475 46.8% $24,105 54.8% $(5,630) (23%)
Gaming and lottery 8,782 19.5 20,113 38.5
Other 9,454 21.1 4,348 8.320,986 53.2% 19,869 45.2% 1,117 6%
----- ------- ----- -------
-----
$44,889$39,461 100.0% $52,239$43,974 100.0% $(4,513) (10%)
===== ======= ===== =======
International $ 4,706 11.9% $ 7,922 18.0% $(3,216) (41%)
===== ======= ===== =======
Net sales for the year ended December 31, 19992002 decreased $7,350,000,$4,513,000, or 14%10%, to $44,889,000 from $52,239,000 in 19982001 largely due
to decreasedlower shipments into theour POS andmarket, partially offset by higher sales into
our gaming and lottery markets,market. Overall, international sales decreased by
$3,216,000 or 41%, primarily due a reduction in (1) revenue related to the
British Post Office project (approximately $400,000), (2) kiosk printer
shipments for use in a Canadian government application (approximately
$1,500,000), (3) shipments of our thermal fiscal printer in Europe
(approximately $1,000,000) and (4) POS revenue through distribution in Europe
and Latin America (approximately $500,000), partially offset by an increase in
the
Company's other markets.international sales of our gaming and lottery printers (approximately $300,000).
Point of sale:sale and banking: Sales of the Company'sour POS printersproducts worldwide
decreased approximately $1,125,000,$5,630,000, or 4%23%.
Year ended Year ended Change
(In thousands) December 31, 2002 December 31, 2001 $ %
-------------------- -------------------- -----------------
Domestic $ 14,119 76.4% $ 16,235 67.4% $ (2,116) (13%)
International 4,356 23.6% 7,870 32.6% (3,514) (45%)
--------- ------- ----------- ------- ---------
$ 18,475 100.0% $ 24,105 100.0% $ (5,630) (23%)
========= ======= =========== ======= =========
Domestic POS product revenue decreased $2,116,000, or 13%, as we
experienced softness in demand from our domestic distributors, particularly in
the first and third quarters of 2002. Sales of our kiosk and ATM printers and
related spare parts also declined by approximately $900,000. Due to steadily
declining sales and low anticipated future sales, we decided to no longer sell
such printers after 2002. Sales in 2002 included increasing sales of our POSjet
line of inkjet printers.
15
International POS printer shipments decreased approximately $1,660,000 due largely45% for
several reasons. First, sales to the absence of printer shipments for the
British Post Office project. Shipments for this project totaled approximately
$4,600,000 in 1998. The absence of printer shipmentsICL Pathway for the British Post Office
project, was largely offset by increasedwhich included printer shipments, to Europespare parts and Latin
America through the Company's distribution partner, Okidata. Domestic POS
printer shipments increasedservice revenue,
declined by approximately $535,000 due largely$400,000 to increased
domestic demand$1,800,000 in 2002. We completed shipping
printers for the Company's POS printers inBritish Post Office project during the thirdfirst quarter of 1999,
particularly its thermal receipt printer.
12
13
Gaming2001,
and lottery: Sales of the Company's gamingexpect no future sales for this project, other than spare parts and lottery printers
decreased approximately $11,331,000, or 56%, from 1998. The overall decrease
primarily reflects a decrease of approximately $15,800,000 inservice.
Secondly, shipments of the
Company's on-line lottery printers and spare partsour thermal fiscal printer in Europe declined by
approximately $1,000,000 to GTECH. The Company did not
make any shipments$950,000 in 2002. Thirdly, during 2001, we shipped
approximately $1,500,000 of on-line lottery printers, other than spares, to GTECH in
1999. The decrease in sales of printers for use in on-line lottery terminals was
largely offset by (1) an increase of approximately $300,000 of sales of in-lane
and other lottery printers to GTECH and (2) an increase of approximately
$3,900,000 in shipments of printers for use in VLTs, primarily for use in South
Carolina's video poker industry. During 1998, shipments of VLT printers were
significantly lower due to uncertainty in South Carolina's video poker industry
concerning the industry's continued future in the state. In October 1999, the
Supreme Court of South Carolina upheld legislation to prohibit the use of video
poker machines beginning July 1, 2000.
Other: Sales of the Company's printers into other markets increased
$5,106,000, or 117% from 1998 due largely to increased shipments of printers
(approximately $2,400,000) used in automated teller machines. Additionally,
sales into the Company's other markets increased due to shipments of printers to
a new customer for use in a bank teller application and resumed shipments of
approximately $1,400,000 of the Company'sour thermal kiosk printers for use in a Canadian
government application. NoWe made no shipments of these kiosk printers were made
in 1998.2002. We do
not expect to make any future shipments for this application. Lastly, we
experienced a decrease of approximately $500,000 in sales through distribution,
primarily in Latin America, and to a lesser extent, in Europe.
Gaming and lottery: Sales into the gaming and lottery market increased
by $1,117,000, or 6%, from 2001, primarily due to stronger sales of our video
lottery terminal ("VLT") and slot machine printers, largely offset by lower
sales of lottery printers to GTECH.
Year ended Year ended Change
(In thousands) December 31, 2002 December 31, 2001 $ %
--------------------- ---------------------- ------------------
Domestic $ 20,636 98.3% $ 19,817 98.3% $ 819 4%
International 350 1.7% 52 1.7% 298 573%
---------- ----- ---------- ----- ---------
$ 20,986 100.0% $ 19,869 100.0% $ 1,117 6%
========== ===== ========== ===== =========
Year ended Year ended Change
(In thousands) December 31, 2002 December 31, 2001 $ %
----------------------- ------------------------ ------------------
Gaming $ 10,277 49.0% $ 5,413 27.2% $ 4,864 90%
Lottery 10,709 51.0% 14,456 72.8% (3,747) (26%)
---------- ----- ---------- ----- ---------
$ 20,986 100.0% $ 19,869 100.0% $ 1,117 6%
========== ===== ========== ===== =========
Sales of our gaming printers, which included VLT and slot machine
printers, and related spare parts and repairs, increased by approximately
$4,864,000, or 90%. The increase in gaming printer sales resulted from two
factors; (1) increased installations of our VLT printers in West Virginia and
other states, including approximately $1,600,000 of sales of a custom printer to
one customer and (2) increased sales of our casino printers, primarily for use
in slot machines at casinos throughout North America that print receipts instead
of issuing coins ("ticket-in, ticket-out").
Shipments to GTECH, which included on-line and in-lane lottery printers
and spare parts revenue, decreased $3,747,000, or 26%. See the table below for
an analysis of revenues from GTECH. Since sales of in-lane lottery printers are
project-oriented, we cannot predict if and when future sales may occur.
Year ended
(In thousands, except %) December 31,
2002 2001
------- -------
Impact on-line lottery printers and spare parts $10,032 $14,253
In-lane lottery printers 677 203
------- -------
$10,709 $14,456
======= =======
% of consolidated net sales 27% 27%
GROSS PROFIT. Gross profit decreased $2,072,000,increased by $442,000, or 15%5%, to
$11,754,000
from $13,826,000 in 1998 due primarily to lower sales volume in 1999 compared to
1998. The$10,216,000, and the gross margin slightly declinedalso increased to 26.2%25.9% from 26.5%22.2%. Both gross
profit and gross margin for 2002 benefited from improved sales mix and cost
reductions resulting from the Consolidation.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product
development expenses decreased $407,000,$1,045,000, or 11%34%, to $3,235,000 from $3,642,000
in 1998. This decrease is primarily due to (1) a reduction in engineering staff
resulting from the downsizing$2,025,000, and reorganization of the Company's manufacturing
facility in Wallingford, Connecticut in December 1998 and (2) unusually high
expenses related to development of certain of the Company's thermal printers in
1998. These reductions were somewhat offset by increased product development and
design expenses, primarily for new products in the POS market, including
expenses related to the development of printers utilizing inkjet printing
technology. Engineering and product development expenses increasedalso
decreased as a percentage of net sales to 7.2%5.1% from 7.0%,. This decrease is
primarily due largely to lower salesa reduction in 1999
comparedengineering staff at our Wallingford, CT
facility due to 1998.the Consolidation.
16
SELLING AND MARKETING. Selling and marketing expenses increased
$607,000,decreased
$543,000, or 19%12%, to $3,887,000 from $3,280,000 in 1998,$4,027,000, and increased as a
percentage of net sales to 8.7% from 6.3%. Such expenses increased due primarily
to (1) higher sales commissions resulting from an increase in sales eligible for
commissions in 1999 compared to 1998 and (2) additional marketing staff related
to the establishment of a corporate marketing department in the second half of
1998.
13
14
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $141,000, or 3% to $4,597,000 in 1999 from $4,456,000 in 1998. The
increase primarily resulted from higher depreciation expense largely from the
purchase of new computer and telecommunications hardware and software, partially
offset by a reduction in staff resulting from the downsizing and reorganization
of the Company's manufacturing facility in Wallingford, CT in December 1998.
General and administrative expenses increaseddecreased as a percentage of net sales to
10.2% from 8.5%, primarily10.4%. Such expenses decreased mostly due to lower sales in 1999 comparedplanned
promotional and advertising expenses and staff reductions resulting from the
Consolidation.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by $1,909,000, or 31%, to 1998.
PROVISION FOR RESTRUCTURING. During the year ended December 31, 1998,
the Company recorded a provision for restructuring of $300,000 to cover
severance costs related to the downsizing$4,190,000, and reorganization of the Company's
manufacturing facility in Wallingford, Connecticut.
OPERATING INCOME. Operating income decreased $2,113,000 to $35,000 from
$2,148,000 in 1998. Operating income as a percentage of
net sales declined to 0.1%10.6% from 4.1%,13.9%. The decrease primarily resulted from (1) staff
reductions resulting from the Consolidation and (2) the inclusion in 2001 of
$680,000 of accelerated depreciation on certain assets located at the Company's
Wallingford, CT facility (primarily leasehold improvements and computer
equipment) whose useful lives were shortened as a result of the Consolidation.
BUSINESS CONSOLIDATION AND RESTRUCTURING. We incurred $958,000 of
expenses related to the Consolidation in 2002. These expenses were substantially
the result of a revision to our estimate for non-cancelable lease payments
included in the restructuring accrual at September 30, 2002. Based on regional
softness in demand in the commercial real estate market, we increased our
restructuring accrual by $900,000 to reflect the longer period of time then
projected to sublease our Wallingford, CT facility. The accrual at December 31,
2002 reflected estimated sublease income after September 30, 2004.
During 2001, we incurred approximately $3,321,000 of Consolidation
expenses, which primarily included a portion of employee severance and
termination related expenses and facility closure and consolidation expenses
(including moving expenses, estimated non-cancelable lease payments and other
costs). See "Consolidation Expenses" in Liquidity and Capital Resources).
OPERATING LOSS. During 2002, we reported an operating loss of $984,000,
or 2.5% of net sales, compared to an operating loss of $7,286,000, or 16.6% of
net sales, in 2001. The reduction in our operating loss was due primarily to (1)
less gross profit onsignificantly reduced operating expenses as a direct result of the
Consolidation, (2) lower sales volume,
(2) increased selling and marketingConsolidation expenses and (3) $350,000higher gross margin.
INTEREST. Net interest expense decreased by $205,000 to $192,000 in
2002, due largely to a significant reduction in our average outstanding
borrowings under our revolving bank facility resulting from significantly lower
inventories (approximately $2,200,000), receipt of nonrecurring
costs relatedan advance payment from a
customer, and to the GTECH product line.a lesser extent, lower interest rates.
OTHER INCOME. Other income for the year ended December 31, 19992002 includes a one-time gain of
$770,000 related$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 favorable settlementstrengthening of a
lawsuit with GTECH.
INTEREST. Net interest expense increased to $399,000 from $353,000the British pound against the dollar,
mostly in 1998 due to increased average outstanding borrowings on the Company's linesecond quarter of credit and a higher average borrowing rate in 1999 compared to 1998.2002.
INCOME TAXES. The provision forWe recorded an income taxes for the year ended
December 31, 1999 reflectstax benefit of $390,000 and
$2,748,000 in 2002 and 2001, respectively, at an effective tax rate of 24% compared to 34%approximately
36.0% in the
prior year. The significant declineeach period.
NET LOSS. We reported a net loss in the Company's effective tax rate largely
resulted from the amplified impact2002 of the recognition of certain tax credits
compared to a relatively low income before taxes in 1999.
NET INCOME. Net income for 1999 was $324,000,$692,000, or $0.06$0.19 per
share (basic and diluted), as compared after giving effect to $1,206,000,$358,000 of dividends and
accretion charges on preferred stock. This compares to a net loss of $4,922,000,
or $0.20$0.95 per share (basic and diluted) after giving effect to $358,000 of
dividends and accretion charges on preferred stock in 1998.2001. In future quarters,
dividends and accretion charges on preferred stock will be approximately
$90,000, before the effect of any conversion or redemption of the preferred
stock.
17
(B) LIQUIDITY AND CAPITAL RESOURCES
The Company generatedCASH FLOW
Overview: During 2003, we significantly improved our operating results.
We reported our first profitable year since 1999 and as of December 31, 2003
reported no revolving bank debt. Looking forward, we expect to generate
approximately $5 to $6 million in cash from operations during 2004 and have
between $4 and $5 million of $333,000, $2,033,000cash on our balance sheet at the end of 2004. We
also expect to earn interest income on our available cash balance throughout
2004.
Operating activities: The following significant factors affected our
cash provided by operations of $1,814,000 in 2003:
- We reported net income of $1,528,000.
- We recorded depreciation, amortization and $4,047,000non-cash
compensation expense of $1,723,000.
- Accounts receivable increased by $5,035,000 because of
significantly higher sales in 2000, 1999 and 1998, respectively. The decrease in cash generated
from operations in 2000the fourth quarter of 2003
compared to 1999 resulted largelythe fourth quarter of 2002.
- Inventories decreased by $374,000, despite a significant
increase in sales, due to improved inventory management.
- Accounts payable increased by $305,000 due to the timing of
payments and increased inventory purchases resulting from (1)a
higher receivables at December 31, 2000volume of sales.
- Accrued liabilities increased by $1,172,000, primarily due to
higher compensation related accruals and (2) fundingan increase in
deferred revenue on extended warranty contracts and other
customer prepayments.
- Accrued license fees increased by $1,038,000 related to the
Patent Resolution Payment (see "Contingent Liabilities"
below).
- Accrued restructuring expenses increased by $407,000. (See
"Consolidation Expenses" below).
Investing activities: We used approximately $930,000 of cash for
investing activities in 2003 compared to using $577,000 in 2002. Our capital
expenditures were approximately $1,261,000 and $577,000 in 2003 and 2002,
respectively. Expenditures in 2003 primarily included new product tooling
(largely for our new thermal on-line lottery printer for GTECH and our
newly-introduced iTherm(TM)280 thermal POS printer), and to a lesser extent,
computer equipment. We expect capital expenditures for 2004 to be approximately
$1,600,000, primarily for tooling for new products and enhanced versions of our
existing products. During the second quarter of 2003, we received cash proceeds
of $330,000, plus accrued interest, from an officer of the Company'sCompany in repayment
of an outstanding loan.
Financing activities: We used approximately $1,387,000 in financing
activities during 2003, largely due to net loss in
2000. The Company'srepayments under our revolving credit
facility (approximately $2,541,000) and payments of cash dividends on our
preferred stock (approximately $280,000), largely offset by proceeds from stock
option exercises (approximately $1,364,000) and net term loan borrowings
(approximately $70,000).
WORKING CAPITAL
Our working capital increased to $13,631,000$11,787,000 at December 31, 20002003 from
$11,094,000$8,798,000 at December 31, 1999.2002. The current ratio also increased to 3.542.36 to 1
at December 31, 20002003 from 2.902.20 to 1 at December 31, 1999. Both the2002. The increase in both
working capital and the current ratio werewas largely due to (1)significantly higher
receivables at December 31, 2000 resulting from(approximately $5,035,000) due to higher sales volume in the fourth quarter
of 20002003 compared to the fourth quarter of 19992002, partially offset by higher
accrued expenses (approximately $1,046,000), mostly due to an increase in
compensation related accruals and (2) a higher
cash balancedeferred revenue, at the end of 2003 compared
to 2002.
DEFERRED TAXES
As of December 31, 2000.
142003, we had a net deferred tax asset of
approximately $3,024,000. In order to utilize this deferred tax asset, we will
need to generate approximately $8.0 million of taxable income in future years.
Based on future projections of taxable income, we have determined that it is
more likely than not that the existing net deferred tax asset will be realized.
18
15CONTINGENT LIABILITIES
In November 2002, the Company was advised that certain POS printers
sold by us since late 1999 may use technology covered by recently issued patents
of a third party competitor. In an effort to resolve this matter, we originally
offered to pay approximately $160,000, while the other party sought payment of
up to $950,000. We recorded a charge of $160,000 in cost of sales in the fourth
quarter of 2002 related to this matter. Based on the likely outcome of current
negotiations, we recorded an additional charge of $740,000 in the fourth quarter
of 2003 related to usage prior to January 1, 2003. Although settlement
negotiations are continuing, we believe that the total accrual of $900,000 (the
"Patent Resolution Payment") reflects the best estimate of the expense related
to the pre-2003 usage of this third party patented technology. We also accrued
estimated royalty payments for usage of this technology after January 1, 2003.
CREDIT FACILITY AND BORROWINGS
On September 21, 2000, the CompanyAugust 6, 2003, we entered into a two-year revolvingnew $12.5 million credit facility
(the "Webster"Banknorth Credit Facility") with Webster Bank ("Webster")
expiring on September 21, 2002.Banknorth N.A. The WebsterBanknorth Credit
Facility replaced a previousour prior credit facility (the "LaSalle Credit Facility) with
Fleet National Bank. Under the WebsterLaSalle Business Credit, Inc. ("LaSalle"). The Banknorth Credit Facility
the
Companyprovides for an $11.5 million revolving credit line expiring on July 31, 2006,
and a $1 million equipment loan facility which may borrow up to $12 million, based on certain financial criteria of the
Company at the time of any borrowing, to fund working capital.be drawn down through July
31, 2004. Borrowings under the Webster Credit Facilityrevolving credit line bear a floating rate of
interest at the higherprime rate. Borrowings under the equipment loan bear a floating
rate of interest at the "Prime Rate" as published in The Wall Street Journal or one-half of one
percent (1/2%) over the federal fundsprime rate (as defined in the Webster Credit
Facility)plus 0.25%. Under certain circumstances, the Companywe
may select a fixed interest rate for a specified period of time of up to 90180
days on borrowings based on the current LIBOR rate (as adjusted as specified inplus 2.75% and 3.0% under the
Webster Credit Facility)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 2.5%,
which may be reduced to 2.25% on July 1, 2001 if there is no Event of Default
(as defined in3.0% for borrowings under the Webster Credit Facility). The Company willequipment loan
facility. We also pay a fee of three-eighths of one percent (3/8%)0.25% on unused borrowing capacityborrowings under the Webster Credit Facility.revolving
credit line. Borrowings under the WebsterBanknorth Credit Facility are secured by a
lien on substantially all the assets of the Company. The WebsterBanknorth Credit facility alsoFacility imposes
certain quarterly financial covenants on the Company and restricts the payment
of dividends on its common stock and the creation of other liens.
The Companyborrowing base of the revolving credit line under Banknorth Credit
Facility is based on the lesser of (a) $11.5 million or (b) 85% of eligible
accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of
eligible raw material inventory plus 50% of eligible finished goods inventory,
less (ii) a $1,000,000 reserve pending the determination of the Patent
Resolution Payment (see Note 10 to the Consolidated Financial Statements) and
less (iii) a $40,000 credit reserve.
Concurrent with the signing of the Banknorth Credit Facility, we
borrowed $450,000 under the equipment loan facility. Principal payments for any
borrowings under the equipment loan facility are due in equal installments plus
accrued interest based on a sixty month amortization schedule on the first day
of each month beginning September 1, 2003, with the unpaid principal balance due
on the earlier of (1) July 31, 2008 or (2) acceleration of the indebtedness
under the revolving credit line or the equipment line due to an event of
default.
We recorded a charge of approximately $103,000 in the third quarter of
2003 related to the write-off of unamortized deferred financing costs from our
prior credit facility with LaSalle. Our new credit facility with Banknorth
contains more favorable terms than those contained in our prior facility with
LaSalle.
As of December 31, 2003, we had $5,944,000 ofno outstanding borrowings on the
revolving credit line and $420,000 outstanding under this facilitythe term loan. Undrawn
commitments under the Banknorth Credit Facility were approximately $11,500,000
at December 31, 2000.2003. However, our maximum additional available borrowings under
the facility were limited to approximately $6,100,000 at December 31, 2003 based
on the borrowing base of our collateral. Annual principal payments on the term
loan are $90,000. We repaid the remaining balance on the term loan in January
2004. We were in compliance with all financial covenants of the Banknorth Credit
Facility at December 31, 2003.
Prior to the Banknorth Credit Facility, we operated under a three-year,
$13.5 million credit facility (the "LaSalle Credit Facility") with LaSalle which
was scheduled to expire on May 25, 2004. The LaSalle Credit Facility provided a
$12 million revolving credit line, a $0.5 million term loan and a $1 million
equipment loan facility. Borrowings under the LaSalle Credit Facility bore a
floating rate of interest based on LaSalle's prime rate.
On February 27, 2001, the CompanyNovember 12, 2002, we amended the WebsterLaSalle Credit Facility
toFacility. Under the
terms of the amendment ("LaSalle Amendment No. 3"), LaSalle (1) provide the Companywaived
compliance with the abilityminimum EBITDA, minimum tangible net worth and fixed charge
coverage ratio financial covenants as of September 30, 2002 and (2) revised
these covenants to borrow up to $1,500,000 in excessexclude the effect of $900,000, of the amount permitted undertotal $912,000, of
restructuring charges incurred in the Websterthird quarter. On March 24, 2003, we
amended the LaSalle Credit Facility's borrowing base
formulaFacility. Under the terms of the amendment ("Permitted Over-Formula Borrowing"LaSalle
Amendment No. 4"), LaSalle (1) waived compliance with the minimum EBITDA
covenant as of December 31, 2002, (2) revised this covenant and (2) revise certain other
financial covenants. The Permitted Over-Formula Borrowing is effective from March 1, 2001covenants through August 31, 2001.
On April 7, 2000May 2004 and (3) eliminated the Company sold 4,000 sharesavailability of the
$1 million equipment loan facility due to expire in May 2003.
19
PREFERRED STOCK
In connection with our 7% Series B Cumulative Convertible Redeemable
Preferred Stock (the "Preferred Stock"), we paid $280,000 of cash dividends in
2003, 2002 and 2001, and expect to Advance Capital Advisors, L.P. and its affiliate in consideration of $1,000pay $70,000 per share (the "Stated Value"), for a total of $4,000,000, less issuance costsquarter during 2004. We also
record non-cash accretion of approximately $200,000.$20,000 per quarter related to
preferred stock warrants and issuance costs. The Preferred Stockpreferred stock is convertible
at any time by the holders at a conversion price of $9.00 per common share. The
preferred stock is redeemable at the option of the holders on April 7, 2005 for
an aggregate of $4,000,000 plus any unpaid dividends. Upon a change of control,
as defined, holders have the right to redeem the Preferred Stock for an
aggregate of $8,000,000 plus any unpaid dividends.
In addition, the
Company2000, we issued warrants pro-rata to the Preferred Stock holders warrants to purchase
an aggregate of 44,444 shares of the Company'sour common stock at an exercise price of $9.00
per common share. TheOn July 8, 2003, the holders exercised their 44,444 warrants.
In lieu of cash consideration, we canceled 31,821 of their warrants valued at $175,000, are exercisable at any
time until April 7, 2005. The Preferred Stock is subject to mandatory conversion
intoin exchange
for the issuance of 12,623 shares of common stock.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $3,802,000 to $10,347,000 at December
31, 2003 from $6,545,000 at December 31, 2002. The increase was primarily due to
the Company'sfollowing for the year ended December 31, 2003: (1) net income available to
common shareholders of $1,170,000, (2) the repayment by an officer of an
outstanding loan of $330,000, (3) proceeds of approximately $1,364,000 from the
issuance of approximately 241,000 shares of common stock whenfrom stock option
exercises and purchase from our employee stock purchase plan, (4) an increase in
additional paid in capital of approximately $769,000 resulting from the
recording of a deferred tax asset from tax deductions arising from stock option
exercises and (5) an increase in accumulated other comprehensive income of
$99,000 due to translation adjustments from our U.K. subsidiary.
CONSOLIDATION EXPENSES
During 2001, we incurred approximately $4,096,000 of business
consolidation, restructuring and related charges as a result of the
Consolidation. These expenses primarily included employee severance and
termination related expenses, facility closure and consolidation expenses
(including moving expenses, estimated non-cancelable lease payments and other
costs) and accelerated depreciation and asset disposal losses on certain
leasehold improvements and other fixed assets. Although the Consolidation was
substantially completed in 2001, we incurred an additional $958,000 expenses
associated with the Consolidation during 2002. During 2002, we revised our
original estimate for future sublease payments included in the restructuring
accrual. Based on regional softness in demand in the commercial real estate
market, we increased the restructuring accrual by $900,000 to reflect the longer
period of time then projected to sublease our Wallingford, CT facility. After
expanded efforts in 2003, we determined that because of the continuing regional
decline in the commercial real estate market during 2003, it was unlikely that
we would be able to sublease our Wallingford, CT manufacturing facility, which
has a lease term that expires in March 2008. As a result, during the fourth
quarter of 2003, we increased our restructuring accrual by $1,270,000 to provide
for the remaining non-cancelable lease payments and related costs associated
with the manufacturing facility. This increase represented the reversal of
estimated sublease income for the remainder of the lease term. In addition, we
determined that we will not terminate several employees originally included in
the Consolidation. As a result, we reversed the remaining $142,000 of accrued
restructuring expenses in 2003 related to employee severance and termination
expenses, as we completed all required payments for such stock has tradedexpenses by December
31, 2003.
As a result of the Consolidation, we significantly lowered our cost
structure in 2002 and 2003, with annual cost savings of over $4 million compared
to 2001. We believe such cost savings will continue to contribute to additional
operating leverage in 2004. We do not expect to incur any additional
restructuring expense related to the Consolidation beyond 2003. See Note 8 to
the Consolidated Financial Statements for further detail.
Of the total of $6,182,000 of Consolidation expenses, approximately
$5,407,000 required or will require cash outlays. We paid approximately
$721,000, $2,242,000 and $424,000 of these costs in 2003, 2002 and 2001,
respectively. We expect to pay approximately $480,000 of these costs per year
from 2004 through 2007, and the remaining $100,000 in 2008. These payments from
2004 through 2008 relate primarily to lease and occupancy costs in our
Wallingford, CT facility.
20
CONTRACTUAL OBLIGATIONS
TransAct's contractual obligations as of December 31, 2003 were as
follows:
(In thousands) Total < 1 year 1-3 years 3-5 years > 5 years
- -------------- ----- -------- --------- ---------- ---------
Long term debt obligations $ 420 $ 90 $ 180 $ 150 $ 150
Operating lease obligations 6,289 952 1,938 1,602 1,797
Purchase obligations 19,255 16,384 2,871 - -
Long term debt obligations include originally scheduled payments on our
term loan with Banknorth as of December 31, 2003. We repaid the remaining
balance on the term loan ($420,000) in January 2004. Purchase obligations are
for purchases made in the normal course of business to meet operational
requirements, primarily of raw material and component part inventory.
RESOURCE SUFFICIENCY
We believe that cash flows generated from operations and borrowings
available under the Banknorth Credit Facility will provide sufficient resources
to meet our working capital needs, including costs associated with the
Consolidation and the Patent Resolution Payment, to finance our capital
expenditures and meet our liquidity requirements through at $35 per
share or more for a 30-day period ending on or after April 7, 2003, or for a
60-day period beginning on or after April 7, 2002. Theleast December 31,
2004.
Our Series B Preferred Stock is redeemable at the option of the holders
on or after April 7, 2005 at $1,000 per
share plus any unpaid dividends. On April 7, 2007, the Company has the right to
require (1) redemptionfor an aggregate of the Preferred Stock at $1,000 per share plus any
unpaid dividends or (2) conversion of the Preferred Stock at $9.00 per common
share. Upon a change of control (which the Company does not$4,000,000. We believe probable),
holders have the right to redeem the Preferred Stock for 200% of the Stated
Value plus any unpaid dividends. The holders of the Preferred Stock have certain
voting rights and are entitled to receive a cumulative annual dividend of $70
per share, payable quarterly, and have preference to any other dividends, if
any, paid by the Company.
The Company's capital expenditures were approximately $2,415,000,
$2,742,000 and $2,232,000 in 2000, 1999 and 1998, respectively. These
expenditures primarily included new product tooling, computer equipment, and
factory machinery and equipment. The Company's capital expenditures for 2001 are
expected to be approximately $2,000,000, a majority for new product tooling.
15
16
The Company estimates that the non-recurring costs associated with the
Consolidation will be approximately $3.0 to $3.5 million, and will be recognized
during 2001. Of these costs, approximately $2.5 to $3.0 million will require
future cash outlays. The Company expects to pay approximately $500,000 to
$800,000 in 2001 and the remainder in 2002.
The Company believes that cash
flows generated from operations and borrowings available under the WebsterBanknorth
Credit Facility as necessary, will also provide sufficient resources to meetsatisfy redemption of
the Company's working capital needs,Preferred Stock in 2005, if it were to occur. However, we may also consider
additional financing sources as appropriate, including costs associated with the Consolidation, finance its capital
expenditures and meet its liquidity requirements through December 31, 2001raising additional equity
capital.
(C) IMPACT OF INFLATION
TransAct believes that its business has not been affected to a
significant degree by inflationary trends because of the low rate of inflation
during the past three years.years, nor does it believe it will be significantly
affected by inflation during 2004.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company'sOur exposure to market risk for changes in interest rates relates
primarily to borrowings under the Company's Credit Facility with Webster
Bank.our revolving credit facility. These borrowings
bear interest at variable rates and the fair value of this indebtedness is not
significantly affected by changes in market interest rates. An effective
increase or decrease of 10% in the current effective interest rates under the Credit Facilityour
credit facility would not have a material effect on the
Company'sour results of operations or
cash flow.flows.
FOREIGN CURRENCY EXCHANGE RISK
A substantial portion of the Company'sour sales are denominated in U.S. dollars and,
as a result, the Company haswe 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 the Company'sour financial
results in the future. The Company doesWe 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 the Company'sour future results
of operations or cash flow.
16flows.
21
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page
Number
------
Report of Independent Accountants 18Auditors 23
TransAct Technologies Incorporated consolidated financial statements:
Consolidated balance sheets as of December 31, 20002003 and
December 31, 1999. 192002. 24
Consolidated statements of operations
for the years ended December 31, 2000, 19992003, 2002 and 1998. 202001. 25
Consolidated statements of changes in shareholders' equity and
comprehensive income (loss) for the years ended December 31, 2003,
2002 and 2001. 26
Consolidated statements of cash flows for the years ended
December 31, 2000, 19992003, 2002 and 1998. 21
Consolidated statement of changes in shareholders' equity for the period from December 31, 22
1997 through December 31, 2000.2001. 27
Notes to consolidated financial statements. 2328
1722
18
REPORT OF INDEPENDENT ACCOUNTANTSAUDITORS
To the Board of Directors and Shareholders
of TransAct Technologies IncorporatedIncorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in shareholders' equity and
comprehensive income (loss) and of cash flows, present fairly, in all material
respects, the financial position of TransAct Technologies Incorporated and its
subsidiaries at December 31, 20002003 and 1999,2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 20002003 in conformity with accounting principles generally accepted in the
United States.States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 27, 2001
1826, 2004, except for Note 21
which is as of March 4, 2004
23
19
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)thousands, except share data)
December 31, December 31,
2000 1999
---- ----2003 2002
------------ -----------
ASSETS:
Current assets:
Cash and cash equivalents $ 992498 $ 279902
Receivables, net (Note 4) 6,137 4,8639,074 4,039
Inventories (Note 5) 9,857 10,2578,061 8,435
Refundable income taxes 130 228
Deferred tax assets 1,205 1,1442,340 2,221
Other current assets 811 396379 327
-------- --------
Total current assets 19,002 16,93920,482 16,152
-------- --------
Fixed assets, net (Note 6) 6,794 6,7053,607 3,924
Goodwill net (Note 2) 1,678 1,8861,469 1,469
Deferred tax assets 684 193
Other assets 145 154119 292
-------- --------
8,617 8,7455,879 5,878
-------- --------
Total assets $ 27,61926,361 $ 25,68422,030
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY:
Current liabilities:
AccountCurrent portion of term loan $ 90 $ 100
Accounts payable $ 2,690 $ 3,0563,288 2,983
Accrued liabilities (Note 7) 2,681 2,7892,892 2,244
Accrued restructuring expenses 480 900
Accrued patent license fees 408 160
Deferred revenue 1,537 967
-------- --------
Total current liabilities 5,371 5,8458,695 7,354
-------- --------
Revolving bank loan payable - 2,541
Long-term debt (Note 9) 5,944 7,100
Other liabilities 445 532portion of term loan 330 250
Accrued restructuring expenses 1,645 818
Accrued patent license fees 750 -
Accrued product warranty 169 221
Deferred revenue 523 477
-------- --------
6,389 7,6323,417 4,307
-------- --------
Total liabilities 12,112 11,661
-------- --------
Commitments and contingencies
(Note 10)
Mandatorily redeemableSeries B Redeemable convertible preferred stock, Series B, 7%
cumulative convertible, $1,000 stated$0.01 par
value, 8,000 shares authorized, 4,000 shares issued and
outstanding (Note 15) 3,668 --(liquidation preference of $4,098 and $4,176
as of December 31,2003 and 2002) 3,902 3,824
-------- --------
Shareholders' equity (Notes 11equity:
Preferred stock, $0.01 par value, 4,792,000
authorized, none issued and 12):outstanding - -
Preferred stock, Series A, $0.01 par value, 5,000,000200,000
authorized, none issued and outstanding -- --- -
Common stock, $0.01 par value;value, 20,000,000 authorized;
5,607,827authorized,
5,968,433 and 5,576,8005,715,119 shares issued 56 56and outstanding 60 57
Additional paid-in capital 6,069 5,6568,441 6,308
Retained earnings 6,929 7,5921,769 599
Unamortized restricted stock compensation (477) (747)(30) (97)
Loan receivable from officer (330)- (330)
Accumulated other comprehensive income (56) (20)107 8
-------- --------
Total shareholders' equity 12,191 12,20710,347 6,545
-------- --------
Total liabilities, redeemable convertible preferred stock and
shareholders' equity $ 27,61926,361 $ 25,68422,030
======== ========
See accompanying notes to consolidated financial statements.
1924
20
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2000 1999 19982003 2002 2001
---- ---- ----
Net sales $ 53,72052,098 $ 44,88939,461 $ 52,23943,974
Cost of sales 39,578 33,135 38,41336,555 29,245 34,200
-------- -------- --------
Gross profit 14,142 11,754 13,82615,543 10,216 9,774
-------- -------- --------
Operating expenses:
Engineering, design and product development expenses 3,481 3,235 3,6422,276 2,025 3,070
Selling and marketing expenses 5,086 3,887 3,2804,968 4,027 4,570
General and administrative expenses 5,540 4,597 4,456
Provision for4,483 4,190 6,099
Business consolidation and restructuring (Note 15) 189 -- 3001,128 958 3,321
-------- -------- --------
14,296 11,719 11,67812,855 11,200 17,060
-------- -------- --------
Operating income (loss) (154) 35 2,1482,688 (984) (7,286)
-------- -------- --------
Other income (expense):
Interest net (649) (399) (353)expense (219) (217) (430)
Interest income 9 25 33
Write-off of deferred financing costs (103) - -
Other, net (Note 15) 11 790 32(122) 94 13
-------- -------- --------
(638) 391 (321)(435) (98) (384)
-------- -------- --------
Income (loss) before income taxes (792) 426 1,8272,253 (1,082) (7,670)
Income tax provision (benefit) (Note 13) (448) 102 621725 (390) (2,748)
-------- -------- --------
Net income (loss) (344) 324 1,2061,528 (692) (4,922)
Dividends and accretion charges on preferred
stock (Note 15) (320) -- --(358) (358) (358)
-------- -------- --------
Net income (loss) available to common
shareholders $ (664)1,170 $ 324(1,050) $ 1,206(5,280)
======== ======== ========
Net income (loss) per common share:
Basic $ (0.12)0.20 $ 0.06(0.19) $ 0.20
======== ======== ========(0.95)
Diluted $ (0.12)0.19 $ 0.06(0.19) $ 0.20
======== ======== ========
Weighted average common shares outstanding:(0.95)
Shares used in per share calculation:
Basic 5,504 5,565 6,163
======== ======== ========5,793 5,636 5,551
Diluted 5,504 5,614 6,170
======== ======== ========6,223 5,636 5,551
See accompanying notes to consolidated financial statements.
2025
21
TransAct Technologies IncorporatedTRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
(In thousands, except share data)
Unamortized
Common Stock Additional Restricted
------------------- Paid-in Retained Stock
Shares Amount Capital Earnings Compensation
------ ------ ------- -------- ------------
Balance, December 31, 2000 5,607,827 56 $ 6,069 $ 6,929 $ (477)
Issuance of restricted stock 20,000 - 95 - (95)
Cancellation of restricted stock (3,000) - (22) - 22
Issuance of shares from exercise of
stock options 53,500 1 233 - -
Issuance of shares from employee
stock purchase plan 6,443 - 28 - -
Amortization of restricted stock
compensation - - - - 264
Tax charge related to restricted
stock vested - - (100) - -
Dividends paid on preferred stock - - - (280) -
Accretion of preferred stock -
discount and issuance costs - - (78) - -
Comprehensive loss:
Foreign currency translation
adjustment - - - - -
Net loss - - - (4,922) -
--------- -------- ---------- ---------- ----------
Balance, December 31, 2001 5,684,770 57 6,303 1,649 (286)
Cancellation of restricted stock (600) - (5) - 5
Issuance of shares from exercise of
stock options 26,100 - 111 - -
Issuance of shares from employee
stock purchase plan 4,849 - 19 - -
Amortization of restricted stock
compensation - - - 184 -
Tax charge related to restricted
stock vested - - (120) - -
Dividends paid on preferred stock - - - (280) -
Accretion of preferred stock
discount and issuance costs - - - (78) -
Comprehensive income (loss):
Foreign currency translation
adjustment - - - - -
Net loss - - - (692) -
--------- -------- ---------- ---------- ----------
Balance, December 31, 2002 5,715,119 57 6,308 599 (97)
Issuance of shares from exercise of
stock options 238,604 3 1,355 - -
Issuance of shares from employee
stock purchase plan 2,087 - 9 - -
Issuance of shares from cashless
exercise of common stock
warrants 12,623 - - - -
Amortization of restricted stock
compensation - - - - 67
Tax benefit related to employee
stock sales - - 769 - -
Dividends paid on preferred stock - - - (280) -
Accretion of preferred stock
discount and issuance costs - - - (78) -
Repayment of loan from officer - - - - -
Comprehensive income:
Foreign currency translation
adjustment - - - - -
Net income - - - 1,528 -
--------- -------- ---------- ---------- ----------
Balance, December 31, 2003 5,968,433 $ 60 $ 8,441 $ 1,769 $ (30)
========= ======== ========== ========== ==========
Loan Accumulated
Receivable Other Total
from Comprehensive Comprehensive
Officer Income (Loss) Total Income (Loss)
------- ------------- ----- -------------
Balance, December 31, 2000 $ (330) $ (56) $ 12,191
Issuance of restricted stock - - -
Cancellation of restricted stock - - -
Issuance of shares from exercise of
stock options - 234 -
Issuance of shares from employee
stock purchase plan - - 28
Amortization of restricted stock
compensation - - 264
Tax charge related to restricted
stock vested - - (100)
Dividends paid on preferred stock - - (280)
Accretion of preferred stock
discount and issuance costs - - (78)
Comprehensive loss:
Foreign currency translation
adjustment - (22) (22) $ (22)
Net loss - - (4,922) (4,922)
----------- ---------- ---------- ------------
Balance, December 31, 2001 (330) (78) 7,315 (4,944)
============
Cancellation of restricted stock - - - -
Issuance of shares from exercise of
stock options - - 111
Issuance of shares from employee
stock purchase plan - - 19
Amortization of restricted stock
compensation 184 -
Tax charge related to restricted
stock vested - - (120)
Dividends paid on preferred stock - - (280)
Accretion of preferred stock
discount and issuance costs - (78) -
Comprehensive income (loss):
Foreign currency translation
adjustment - 86 86 86
Net loss - - (692) (692)
----------- ---------- ---------- ------------
Balance, December 31, 2002 (330) 8 6,545 (606)
============
Issuance of shares from exercise of
stock options - - 1,358
Issuance of shares from employee
stock purchase plan - - 9
Issuance of shares from cashless
exercise of common stock
warrants - - -
Amortization of restricted stock
compensation - - 67
Tax benefit related to employee
stock sales - - 769
Dividends paid on preferred stock - - (280)
Accretion of preferred stock
discount and issuance costs - - (78)
Repayment of loan from officer 330 - 330
Comprehensive income:
Foreign currency translation
adjustment - 99 99 99
Net income - - 1,528 1,528
----------- ---------- ---------- ------------
Balance, December 31, 2003 $ - $ 107 $ 10,347 $ 1,627
=========== ========== ========== ============
See accompanying notes to consolidated financial statements.
26
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2000 1999 1998
---- ---- ----2003 2002 2001
------- ------- -------
Cash flows from operating activities:
Net income (loss) $ (344)1,528 $ 324 $ 1,206(692) $(4,922)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Non-cash compensation expense 67 184 264
Write-off of deferred bank financing costs 103 - -
Depreciation and amortization 2,750 2,238 2,0301,656 1,935 3,134
Deferred income taxes (78) (19) (415)162 968 (2,743)
Loss (gain) on disposalsale of equipment -- 11 8fixed assets (1) - 209
Changes in operating assets and liabilities:
Receivables (1,274) 371 2,082(5,035) 8 2,090
Inventories 400 (1,475) (174)374 2,198 (776)
Refundable income taxes 98 (228) -
Other current assets (415) 158 173(52) (115) 599
Other assets (162) (100) (134)(8) (63) (326)
Accounts payable (366) 858 (855)305 80 213
Accrued liabilities and other liabilities (178) (333) 1261,212 528 706
Accrued patent license fees 998 160 -
Accrued restructuring expenses 407 (1,284) 2,897
------- ------- -------
Net cash provided by operating activities 333 2,033 4,0471,814 3,679 1,345
------- ------- -------
Cash flows from investing activities:
Purchases of fixed assets (2,415) (2,742) (2,232)
Loans to officers 15 (345) --
Acquisition of Tridex Ribbon Business -- (295) --(1,261) (577) (1,382)
Proceeds from sale of fixed assets 217 -- 31 - 2
Repayment of loan receivable from officer 330 - -
------- ------- -------
Net cash used in investing activities (2,183) (3,382) (2,229)(930) (577) (1,380)
------- ------- -------
Cash flows from financing activities:
Bank line of creditRevolving bank loan repayments, net (2,541) (2,453) (950)
Term loan borrowings (repayments), net (1,156) 1,300 5,500450 - 500
Term loan repayments (380) (100) (50)
Proceeds from option exercises 175 24 2
Net proceeds from issuance of preferredand employee
stock 3,785 -- --purchase plan 1,364 130 262
Payment of cash dividends on preferred stock (205) -- --
Purchases of treasury stock -- (229) (7,170)
Tax benefit related to employee stock sales -- -- 3(280) (280) (280)
------- ------- -------
Net cash provided by (used in)used in financing
activities 2,599 1,095 (1,665)(1,387) (2,703) (518)
------- ------- -------
Effect of exchange rate changes on cash (36) (13) 299 86 (22)
------- ------- -------
Increase (decrease) in cash and cash
equivalents 713 (267) 155(404) 485 (575)
Cash and cash equivalents, at beginning of period 279 546 391902 417 992
------- ------- -------
Cash and cash equivalents, at end of period $ 992498 $ 279902 $ 546417
======= ======= =======
Supplemental cash flow information:
Interest paid $ 696226 $ 433252 $ 351403
Income taxes paid 74 171 561(refunded), net 229 (975) (637)
Non-cash financing activities:
Accretion of preferred stock discount and
issuance costs 78 78 78
See accompanying notes to consolidated financial statements.
2127
22
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
------ ------ ------- --------
Balance, December 31, 1997 6,610,300 68 14,975 6,062
Issuance of restricted stock 25,000 -- 228 --
Cancellation of restricted
stock (3,000) -- (36) --
Issuance of shares from
exercise of stock options 200 -- 2 --
Amortization of restricted
stock compensation -- -- -- --
Tax benefit related to
employee stock sales -- -- 3 --
---------- ---------- ---------- ----------
Purchase of treasury shares (1,003,000) -- -- --
Retirement of treasury
shares -- (12) (9,409) --
Comprehensive income:
Foreign currency
translation adjustment -- -- -- --
Net income -- -- -- 1,206
---------- ---------- ---------- ----------
Balance, December 31, 1998 5,629,500 56 5,763 7,268
Issuance of restricted stock 13,000 -- 98 --
Issuance of shares from
exercise of stock options 5,100 -- 24 --
Amortization of restricted
stock compensation -- -- -- --
Purchase of treasury shares (70,800) -- -- --
Retirement of treasury
shares -- -- (229) --
Issuance of loan to officer -- -- -- --
Comprehensive income:
Foreign currency
translation adjustment -- -- -- --
Net income -- -- -- 324
---------- ---------- ---------- ----------
Balance, December 31, 1999 5,576,800 56 5,656 7,592
Issuance of restricted stock 5,000 -- 44 --
Cancellation of restricted
stock (3,800) -- (36) --
Issuance of shares from
exercise of stock options 25,000 -- 150 --
Issuance of shares from
employee stock purchase plan 4,827 -- 24 --
Amortization of restricted
stock compensation -- -- -- --
Issuance of preferred stock
warrants -- -- 175 --
Deemed dividend on beneficial
conversion of preferred stock -- -- 56 (56)
Dividends paid on preferred
stock -- -- -- (205)
Accretion of preferred stock
warrants and issuance costs -- -- -- (58)
Comprehensive income:
Foreign currency
translation adjustment -- -- -- --
Net loss -- -- -- (344)
---------- ---------- ---------- ----------
Balance, December 31, 2000 5,607,827 $ 56 $ 6,069 $ 6,929
========== ========== ========== ==========
Unamortized Loan Accumulated
Restricted Receivable Other
Stock from Comprehensive Treasury
Compensation Officer Income Stock
------------ ------- ------ -----
Balance, December 31, 1997 (942) -- (9) (2,251)
Issuance of restricted stock (228) -- -- --
Cancellation of restricted
stock 36 -- -- --
Issuance of shares from
exercise of stock options -- -- -- --
Amortization of restricted
stock compensation 231 -- -- --
Tax benefit related to
employee stock sales -- -- -- --
Purchase of treasury shares -- -- -- (7,170)
Retirement of treasury
shares -- -- -- 9,421
Comprehensive income:
Foreign currency
translation adjustment -- -- 2 --
Net income -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31, 1998 (903) -- (7) --
Issuance of restricted stock (98) -- -- --
Issuance of shares from
exercise of stock options -- -- -- --
Amortization of restricted
stock compensation 254 -- -- --
Purchase of treasury shares -- -- -- (229)
Retirement of treasury
shares -- -- -- 229
Issuance of loan to officer -- (330) -- --
Comprehensive income:
Foreign currency
translation adjustment -- -- (13) --
Net income -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31, 1999 (747) (330) (20) --
Issuance of restricted stock (44) -- -- --
Cancellation of restricted
stock 36 -- -- --
Issuance of shares from
exercise of stock options -- -- -- --
Issuance of shares from
employee stock purchase plan -- -- -- --
Amortization of restricted
stock compensation 278 -- -- --
Issuance of preferred stock
warrants -- -- -- --
Deemed dividend on beneficial
conversion of preferred stock -- -- -- --
Dividends paid on preferred
stock -- -- -- --
Accretion of preferred stock
warrants and issuance costs -- -- -- --
Comprehensive income:
Foreign currency
translation adjustment -- -- (36) --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31, 2000 $ (477) $ (330) $ (56) $ --
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
22
23
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASISDESCRIPTION OF PRESENTATIONBUSINESS
TransAct Technologies Incorporated ("TransAct" or the "Company") began
operating as, which has a
stand-alone, publicly-held company in August 1996 to conduct
the printer business that was formerly operated by certain subsidiaries of
Tridex Corporation ("Tridex").
2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND PRODUCTS: TransAct, through its two operations, oneheadquarters in Wallingford, CT and the othera 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 and related
products under the Ithaca(R), and Magnetec(R) and TransAct.com brand names.
The Company'sIn 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. The Company focusesWe focus
on five verticaltwo core markets: point-of-sale and banking ("POS"), and gaming and
lottery, financial services, kiosk and Internet. The
Company sells itslottery. We sell our products directly to end users, original equipment manufacturers ("OEM"),
value-added resellers, and selected distributors, primarilyas well as directly to
end-users. We operate predominantly in the United States Canada,of America,
however, our product distribution spans across the Americas, Europe, the
Middle East, Africa, the Caribbean Islands and Latin America.
TransAct designs, develops, manufacturesthe South Pacific.
We design, develop, manufacture and marketsmarket 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. The Company'sOur printers are configurable, which offer customers
the ability to choose from a variety of features and functions. Options
typically include PCprinted circuit board configuration, paper cutting
devices, paper handling capacities and number of print stations.cabinetry color. In addition to itsour
configurable printers, TransAct manufactureswe manufacture custom printers for certain OEM
customers. In collaboration with these customers, the Company provideswe provide engineering
and manufacturing expertise for the design and development of specialized
printers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements were prepared on a consolidated basis to include the accounts of
the TransAct and its wholly-owned subsidiaries. All significant
intercompany accounts, transactions and unrealized profit were eliminated
in consolidation. Certain prior year amounts have been reclassified to
conform to the current year's presentation.
USE OF ESTIMATES: The preparation ofaccompanying consolidated financial statements
in conformity
with generally accepted accounting principles requires management to makewere prepared using estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and liabilitiesexpenses, and disclosure of
contingent assets and liabilities atas of the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates have been made
in areas including inventory valuation, estimated lives of fixed assets and
goodwill, deferred tax assets, accrued liabilities, allowance for doubtful
accounts and tax provisions (benefits). Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statementsSEGMENT 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 accountsorganizational structure of the Company and
its wholly-owned
subsidiaries, after eliminationthe 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 all material intercompany accountsAmerica. See Note 19 for information regarding our
international operations. We provide the following disclosures of revenues
from products and transactions.services:
Year ended Year ended Year ended
(In thousands) December 31, 2003 December 31, 2002 December 31, 2001
------------------ ----------------- ------------------
Printers - POS $ 14,027 26.9% $ 12,900 32.7% $ 18,887 43.0%
Printers - Gaming and lottery 29,528 56.7% 19,578 49.6% 18,965 43.1%
--------- ----- ------- ----- ---------- -----
Subtotal - printers 43,555 83.6% 32,478 82.3% 37,852 86.1%
Services and consumables 8,543 16.4% 6,983 17.7% 6,122 13.9%
--------- ----- -------- ----- ---------- -----
Total net sales $ 52,098 100.0% $ 39,461 100.0% $ 43,974 100.0%
========= ===== ======== ===== ========== =====
CASH AND CASH EQUIVALENTS: The Company considersWe consider all highly liquid investments with a
maturity date of three months or less at date of purchase to be cash
equivalents.
28
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES: Inventories are stated at the lower of cost (principally
standard cost which approximates actual cost on a first-in, first-out
basis) or market. We assess market value based on historical usage and
estimates of future demand in the market.
FIXED ASSETS: Fixed assets are stated at cost. Depreciation is
provided for primarily by the straight-line method over the estimated
useful lives. The estimated useful life of tooling is five years; machinery furniture
and equipment is threeten 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 amountedwas $1,579,000, $1,843,000 and $2,858,000 in 2003,
2002 and 2001, respectively. Depreciation for 2001 included $680,000 of
accelerated depreciation on certain leasehold improvements and other fixed
assets due to $2,176,000, $1,699,000the closing of our Wallingford, CT facility. As part of the
facility closing, we disposed of $2,114,000 and $1,546,000$895,000 of fixed assets at
cost, net of accumulated depreciation of $2,114,000 and $800,000 during
2002 and 2001, respectively. This resulted in 2000, 1999a loss on disposal of $0 and
1998,$95,000 in 2002 and 2001, respectively.
23
24
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL: Goodwill resulted fromWe adopted the provisions of Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS
142") on January 1, 2002. Under FAS 142, goodwill will no longer be
amortized and will be tested for impairment at least annually at the
reporting unit level.
Prior to the adoption of FAS 142 on January 1, 2002, we had been
amortizing goodwill related to the acquisition of (i)(1) Ithaca Peripherals,
Inc. ("Ithaca") in 1991 and (2) the (ii) ribbon business formerly conducted by
Tridex ("Tridex Ribbon Business") in 1999. The original amount applicable
to the Ithaca acquisition totaled $3,536,000 and iswas being amortized on the
straight-line method over 20twenty years. The original amount applicable to
the Tridex Ribbon Business acquisition totaled $180,000 and iswas being
amortized on the straight-line method over five years. AccumulatedWe recorded
amortization of goodwill was $2,038,000 and $1,830,000 atof approximately $134,000, net of taxes, during
2001.
FAS 142 requires that goodwill be tested annually for impairment, or
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. We have performed an impairment test as of
December 31, 20002003 and 1999, respectively. The Company periodically reviews goodwill to assess
recoverability based upon expectations of non-discounted cash flows from
operations of the acquired businesses. The Company believesdetermined that no impairment has occurred.
LONG-LIVED ASSETS: We evaluate our long-lived assets, which are
comprised primarily of goodwill exists at December 31, 2000.fixed assets, for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset group to future
undiscounted net cash flows expected to be generated by the asset group. If
such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. We did not recognize any impairment
loss for long-lived assets in 2003, 2002 or 2001, other than the assets
disposed of as part of the closing of our Wallingford, CT facility during
2001.
REVENUE RECOGNITION: SalesOur 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 fromrelated to extended warranty and product maintenance agreementscontracts
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
such agreementsthe maintenance period. We record deferred revenue for amounts received
from customers for maintenance contracts prior to the maintenance period.
29
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED): In December 2003, the SEC issued
Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104"), which
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104
rescinds accounting guidance in SAB 101 related to multiple-element
arrangements as servicesthis guidance has been superseded as a result of the
issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." The adoption of SAB 104 did not have a material impact on
our financial position or results of operations.
In November 2002, the Emerging Issues Task Force (EITF) issued EITF
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." This
issue addresses revenue recognition for arrangements with multiple
deliverables which should be considered as separate units of accounting if
the deliverables meet certain criteria as described in EITF 00-21. This
issue is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The adoption of EITF No. 00-21 did not have
a material impact on our financial statements.
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially
expose TransAct to concentrations of credit risk are performed.limited to accounts
receivable. Sales to GTECH Corporation ("GTECH") (for lottery printers)
and ICL Pathway (for the British Post
Office project) accounted for approximately 22%19%, 27% and 20%33% of net sales during 2000,2003, 2002
and 2001, respectively. No one customerSales to Harrah's (for casino slot machine
printers) accounted for more than 10%approximately 12% of net sales during 1999. Sales to one customer, GTECH,2003. As of
December 31, 2003, we had an accounts receivable balance due from Harrah's
(for sales of casino printers) that accounted for approximately 32%31% of net sales for the year endedtotal accounts
receivable. No other customer accounts receivable balance exceeded 10% of
the total balance due at December 31, 1998.
FOREIGN CURRENCY:2003.
WARRANTY: We warrant our products for up to 27 months and record the
estimated cost of such product warranties at the time the sale is recorded.
Estimated warranty costs are based upon actual past experience of product
returns and the related estimated cost of labor and material to make the
necessary repairs.
The financial positionfollowing table summarizes the activity recorded in the accrued
product warranty liability during 2003, 2002 and results of operations2001:
Year ended December 31,
(In thousands) 2003 2002 2001
------ ------ ------
Balance, beginning of year $ 644 $ 710 $ 603
Additions related to warranties issued 409 394 609
Warranty costs incurred (558) (460) (502)
------ ------ ------
Balance, end of year $ 495 $ 644 $ 710
====== ====== ======
Approximately $169,000 and $221,000 of the Company's foreign subsidiariesaccrued product warranty
liability were classified as long-term at December 31, 2003 and 2002,
respectively.
RESEARCH AND DEVELOPMENT EXPENSES: Research and development expenses
include engineering, design and product development expenses incurred in
connection with specialized engineering and design to introduce new
products and to customize existing products, and are measured using local currencyexpensed as a
component of operating expenses as incurred. We spent approximately
$2,276,000, $2,025,000 and $3,070,000 on research and development expenses
in 2003, 2002 and 2001, respectively.
RESTRUCTURING: In 2001, we undertook a plan to consolidate all
manufacturing and engineering into our existing Ithaca, NY facility and
close our Wallingford, CT facility. We have applied the functional currency. Assetsconsensus set forth
in EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and liabilities of such subsidiaries have been
translated at end of period exchange rates, and related revenues and
expenses have been translated at weighted average exchange rates.
Transaction gains (losses) are includedOther Costs to Exit an Activity (Including Certain Costs
Incurred in other income and amounted to
$(26,000), $11,000 and 17,000a Restructuring)" in 2000, 1999 and 1998, respectively.recognizing restructuring expenses. See
Note 8.
30
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES: The income tax amounts reflected in the accompanying
financial statements are accounted for under the liability method in
accordance with FAS 109 "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled.
We assess the likelihood that net deferred tax assets will be realized from
future taxable income, and to the extent that we believe that realization
is not likely, we establish a valuation allowance.
FOREIGN CURRENCY TRANSLATION: The financial position and results of
operations of our foreign subsidiary in the United Kingdom are measured
using local currency as the functional currency. Assets and liabilities of
such subsidiary have been translated into U.S. dollars at the year-end
exchange rate, related revenues and expenses have been translated at the
weighted average exchange rate for the year, and shareholders' equity has
been translated at historical exchange rates. The resulting translation
gains or (losses) are recorded in stockholders' equity as a cumulative
translation adjustment, which is a component of accumulated other
comprehensive income. Foreign currency transaction gains and losses are
recognized in Other Income (Expense) and have not been significant for all
periods presented.
STOCK-BASED COMPENSATION: The Company hasWe have elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations in accounting for its stock
options. Since the exercise price of employee stock options granted by the
Company generally equals the market price of the underlying stock on the
date of grant, no compensation expense is recorded. The Company hasWe have adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123").
See Note 11.
SEGMENT REPORTING: FASB Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131") requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that it is
used internally for evaluating segment performance and allocating
resources. The Company has assessed its operating and reportable segments
and determined that it operates in one reportable segment, as defined in FAS
131.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Financial Accounting
Standards Board issuedamended
by Statement of Financial Standards No. 133,148, "Accounting for Derivative InstrumentsStock-Based
Compensation - Transition and HedgingDisclosure - an amendment of FAS 123" ("FAS
148"). See Note 12 for additional disclosures related to our stock-based
compensation plans.
The following table illustrates the effect on net income (loss),
compensation expense and income (loss) per share as if the Black-Scholes
fair value method described in FAS 123, "Accounting for Stock-Based
Compensation" had been applied to our stock plans. For the years ended
December 31, 2002 and 2001, stock-based compensation expense determined
under the fair value method has been adjusted to properly reflect related
tax effects.
Year Ended December 31,
(In thousands, except per share data) 2003 2002 2001
---------- --------- ---------
Net income (loss) available to common shareholders:
Net income (loss) available to common shareholders,
as reported $ 1,170 $ (1,050) $ (5,280)
Add: Stock-based compensation expense included in
Reported net income (loss), net of tax 43 118 169
---------- --------- ---------
Deduct: Stock-based compensation expense determined (229) (753) (1,094)
under fair value based method for all awards, net of tax
Pro forma net income (loss) available to common shareholders $ 984 $ (1,685) $ (6,205)
========== ========= =========
Net income (loss) per share:
Basic:
As reported $ 0.20 $ (0.19) $ (0.95)
Pro forma 0.17 (0.30) (1.12)
Diluted:
As reported $ 0.19 $ (0.19) $ (0.95)
Pro forma 0.16 (0.30) (1.12)
31
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount for cash and
cash equivalents approximates fair value because of the short maturity of
these instruments. The carrying amount of receivables, other current
assets, other assets, accounts payable and accrued liabilities is a
reasonable estimate of fair value because of the short nature of the
transactions. The carrying value of long-term debt approximates the fair
value based upon the variable rate on that debt.
NET INCOME AND LOSS PER SHARE: We report net income or loss per share
in accordance with Financial Standard No. 128, "Earnings per Share (EPS)"
("FAS 128"). Under FAS 128, basic EPS, which excludes dilution, is computed
by dividing income or loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Net income or
loss available to common shareholders represents reported net income or
loss less accretion of redeemable convertible preferred stock. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. Diluted EPS includes in-the-money options and warrants using the
treasury stock method, and also includes the assumed conversion of
preferred stock using the if-converted method, but only if dilutive. During
a loss period, the assumed exercise of in-the-money stock options and
warrants and the conversion of convertible preferred stock has an
anti-dilutive effect, and therefore, these instruments are excluded from
the computation of dilutive EPS.
COMPREHENSIVE INCOME: Statement of Accounting Standard No. 130,
"Reporting Comprehensive Income" ("FAS 130"), requires that items defined
as comprehensive income or loss be separately classified in the financial
statements and that the accumulated balance of other comprehensive income
or loss be reported separately from accumulated deficit and additional
paid-in-capital in the equity section of the balance sheet. We include the
foreign currency translation adjustment related to our subsidiary in the
United Kingdom within our calculation of comprehensive income.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES: In September 2002,
the FASB issued Statement of Financial Standard No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("FAS 133"146")
in June 1998 which, as amended,. This
statement provides guidance on the recognition and measurement of
liabilities associated with exit or disposal activities and requires that
such liabilities be recognized when incurred. This statement is currently effective
for exit or disposal activities initiated on or after January 1, 20012003 and
does not impact the recognition of costs under our existing programs. We
accounted for our business consolidation and restructuring (Note 7) under
the Company.existing guidance in EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)". Accordingly, FAS
146 did not impact the timing or recognition of costs associated with our
current exit or disposal activities.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES: In
November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). The Company believes adoptioninterpretation
provides guidance on the guarantor's accounting and disclosure requirements
for guarantees, including indirect guarantees of FAS 133 will notindebtedness. The
accounting guidelines are applicable to guarantees issued after December
31, 2002, irrespective of the guarantor's fiscal year-end. However, the
disclosure requirements are effective for financial statements that end
after December 15, 2002. We adopted the disclosure provisions of FIN 45
related to our warranty obligations in the fourth quarter of 2002. (See
Note 2).
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). FIN 46 requires us to consolidate a variable interest
entity ("VIE") if we have a material impactmajority of the risks, rewards or both of that
entity. FIN 46 will be effective for most VIEs beginning in the fourth
quarter of 2003. TransAct has no investments in VIEs; therefore, FIN 46 had
no effect on the Company'sour financial position, results of operations
or cash flows.
24statements.
32
25
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITION
OnRECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In April 2003, the FASB
issued Statement of Accounting Standard No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("FAS 149"). FAS 149
clarifies when a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a financing
component that warrants special reporting in the statements of cash flows.
FAS 149 is generally effective for contracts entered into or modified after
June 30, 2003. The adoption of FAS 149 had no effect on our financial
statements
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY: In May 28, 1999,2003, the Company acquiredFASB issued Statement of
Accounting Standard No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" ("FAS 150"). FAS 150
changes the businessaccounting for certain financial instruments that, under
previous guidance, could be classified as equity or "mezzanine" equity,
including mandatorily redeemable instruments, by now requiring those
instruments to be classified as liabilities in the statement of financial
position. Further, FAS 150 requires disclosure regarding the terms of those
instruments and substantially
allsettlement alternatives. FAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the assetsbeginning of the Tridex Ribbon Business for total cash considerationfirst interim period beginning
after June 15, 2003. The adoption of approximately $295,000. The acquisition has been accounted for by the
purchase method of accounting. The purchased assets and liabilitiesFAS 150 did not have been recorded in the Company'sa material impact
on our financial statements at their estimated fair
values at the acquisition date. The results of operations of the acquired
company have been included with those of the Company since the date of
acquisition. The acquisition cost exceeded the fair value of the net assets
acquired by $180,000. Such goodwill is being amortized over a five-year
period on a straight-line basis. Prior to the acquisition, the Company
provided Tridex with space within its Wallingford, CT manufacturing
facility and certain support services for the Tridex Ribbon Business.statements.
4. RECEIVABLES
Receivables are net of the allowance for doubtful accounts. The
reconciliation of the allowance for doubtful accounts is as follows:
Year Ended December 31,
2000 1999 19982003 2002 2001
---- ---- ----
(In thousands)
Balance at beginning of periodyear $ 13278 $ 13984 $ 102107
Doubtful accounts provision (reversal) (24) - 4176 (2) 45
Accounts written off, net of recoveries (1) (7)(54) (4) (68)
------ ----------- ------
Balance at end of periodyear $ 107100 $ 13278 $ 13984
====== =========== ======
5. INVENTORIES
The components of inventories are:
December 31,
(In thousands) 2000 1999
---- ----2003 2002
------- --------
Raw materials and component parts $ 9,6037,947 $ 9,1988,339
Work-in-process 200 542- 1
Finished goods 54 517114 95
-------- --------
$ 9,8578,061 $ 10,2578,435
======== ========
6. FIXED ASSETS
The components of fixed assets are:
December 31,
(In thousands) 2000 1999
---- ----2003 2002
-------- --------
Tooling, machinery and equipment $10,974 $ 9,50111,843 $ 10,841
Furniture, office and computer equipment 3,811 3,7463,506 3,291
Leasehold improvements 749 660
------- -------
15,534 13,907486 465
-------- --------
15,835 14,597
Less: accumulated depreciation (8,740) (7,202)
------- -------and amortization (12,228) (10,673)
-------- --------
$ 6,7943,607 $ 6,705
======= =======3,924
======== ========
2533
26
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACCRUED LIABILITIES
The components of accrued liabilities are:
December 31,
(In thousands) 2000 1999
---- ----2003 2002
------- -------
Payroll and fringe benefits $ 3821,087 $ 521505
Income taxes accrued 765 653560 455
Warranty 657 638
Deferred revenue 108 129
Restructuring 105 - current portion 326 423
Rent and occupancy 331 326
Other 664 848588 535
------- -------
$ 2,6812,892 $ 2,7892,244
======= =======
8. EMPLOYEE BENEFIT PLANSACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES
In February 2001, we announced plans to establish a global engineering
and manufacturing center at our Ithaca, NY facility. As part of this
strategic decision, we undertook a plan to consolidate all manufacturing
and engineering into our existing Ithaca, NY facility and close our
Wallingford, CT manufacturing facility (the "Consolidation"). As of
December 31, 2001, substantially all Wallingford product lines were
successfully transferred to Ithaca, NY. We currently maintain our corporate
headquarters and a small service depot in Wallingford. The closing of the
Wallingford facility resulted in the termination of employment of
approximately 70 production, administrative and management employees. We
have applied the consensus set forth in EITF 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)" in
recognizing the accrued restructuring expenses.
During 2001, we recorded expenses of approximately $4,096,000 related
to costs associated with the Consolidation, including severance pay, stay
bonuses, employee benefits, moving expenses, non-cancelable lease payments,
accelerated depreciation and other costs.
During 2002, we incurred an additional $958,000 of Consolidation
expenses. Approximately $900,000 of these expenses was the result of a
revision to our estimate for non-cancelable lease payments included in the
restructuring accrual. Based on regional softness in demand in the
commercial real estate market, we increased our restructuring accrual by
approximately $900,000 to reflect the longer period of time then projected
to sublease our Wallingford, CT facility. Based on this revised estimate,
we had projected estimated sublease income beginning October 1, 2004.
After expanded efforts in 2003, we determined that because of the
continuing regional decline in the commercial real estate market during
2003, it was unlikely that we would be able to sublease our Wallingford, CT
manufacturing facility, which has a lease term that expires in March 2008.
As a result, during the fourth quarter of 2003, we increased our
restructuring accrual by $1,270,000 to provide for the remaining
non-cancelable lease payments and related costs associated with the
manufacturing facility. This increase represented the reversal of estimated
sublease income for the remainder of the lease term. In addition, we
determined that we will not terminate several employees originally included
in the Consolidation. As a result, we reversed the remaining $142,000 of
accrued restructuring expenses in 2003 related to employee severance and
termination expenses, as we completed all required payments for such
expenses by December 31, 2003.
34
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING EXPENSES (CONTINUED)
The following table summarizes the activity recorded in the
restructuring accrual during 2003, 2002 and 2001.
Year ended December 31,
(In thousands) 2003 2002 2001
-------- --------- -------
Accrual balance, beginning of year $ 1,718 $ 3,002 $ 105
-------- --------- -------
Business consolidation and
restructuring expenses:
Employee severance and
termination expenses (1) (142) 75 2,070
Facility closure and consolidation
expenses (2) 1,270 883 1,251
-------- --------- -------
1,128 958 3,321
-------- --------- -------
Cash payments (721) (2,242) (424)
-------- --------- -------
Accrual balance, end of year $ 2,125 $ 1,718 $ 3,002
======== ========= =======
(1) Employee severance and termination related expenses are the estimated
termination salaries, benefits, outplacement, counseling services and
other related expenses expected to be paid to employees who are
involuntarily terminated.
(2) Facility closure and consolidation expenses are the estimated costs to
close the Wallingford, CT facility including lease termination expenses and
other related expenses, in accordance with the restructuring plan. The
Wallingford facility closure was substantially completed by December 31,
2001.
At December 31, 2003 and 2002, $1,645,000 and $818,000, respectively,
of the restructuring accrual was classified as part of long-term
liabilities. This represents the portion of non-cancelable lease
termination costs and other costs expected to be paid beyond one year.
The following table summarizes the components of all charges related
to the Consolidation.
Year ended December 31,
(In thousands) 2003 2002 2001
------- -------- -------
Business consolidation and
restructuring expenses $ 1,128 $ 958 $ 3,321
Accelerated depreciation and asset
disposal losses (1) - - 775
------- ------- -------
Total business consolidation,
restructuring and related charges $ 1,128 $ 958 $ 4,096
======= ======= =======
(1) Represents accelerated depreciation ($680) and asset disposal losses ($95)
on certain leasehold improvements and other fixed assets incurred during
2001, due to the closing of the Wallingford facility. These charges are
included in general and administrative expenses during the year ended
December 31, 2001.
35
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RETIREMENT SAVINGS PLAN:PLAN
On April 1, 1997, the Companywe 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. The Company matchesWe match employees' contributions
at a rate of 50% of employees' contributions up to the first 5%6% of the
employees' compensation contributed to the 401(k) Plan. The Company'sOur matching
contributions were $203,000, $145,000$174,000, $158,000 and $159,000$204,000 in 2000, 19992003, 2002 and 1998,2001,
respectively.
During 199910. BORROWINGS
On August 6, 2003, we entered into a new $12.5 million credit facility
(the "Banknorth Credit Facility") with Banknorth N.A. The Banknorth Credit
Facility replaced our prior credit facility (the "LaSalle Credit Facility)
with LaSalle Business Credit, Inc. ("LaSalle"). The Banknorth Credit
Facility provides for an $11.5 million revolving credit line expiring on
July 31, 2006, and 1998,a $1 million equipment loan facility which may be drawn
down through July 31, 2004. Borrowings under the Company'srevolving credit line bear
a floating rate of matching
contributions wasinterest at the prime rate. Borrowings under the
equipment loan bear a floating rate of interest at the prime rate plus
0.25%. Under certain circumstances, we may select a fixed interest rate for
a specified period of time of up to 180 days on borrowings based on the
current LIBOR rate plus 2.75% and 3.0% under the revolving credit facility
and the equipment loan facility, respectively. In addition, we may select a
fixed interest rate based on the five-year Federal Home Loan Bank of Boston
rate plus 3.0% for borrowings under the equipment loan facility. We also
pay a fee of 0.25% on unused borrowings under the revolving credit line.
Borrowings under the Banknorth Credit Facility are secured by a lien on all
the assets of the Company. The Banknorth Credit Facility imposes certain
quarterly financial covenants on the Company and restricts the payment of
dividends on our common stock and the creation of other liens. We were in
compliance with all financial covenants of the Banknorth Credit Facility at
December 31, 2003.
The borrowing base of the revolving credit line under Banknorth Credit
Facility is based on the lesser of (a) $11.5 million or (b) 85% of eligible
accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of
eligible raw material inventory plus 50% of eligible finished goods
inventory, less (ii) a $1,000,000 reserve pending the employees' contributionsdetermination of the
Patent Resolution Payment (see Note 10) and less (iii) a $40,000 credit
reserve.
Concurrent with the signing of the Banknorth Credit Facility, we
borrowed $450,000 under the equipment loan facility. Principal payments for
any borrowings under the equipment loan facility are due in equal
installments plus accrued interest based on a sixty month amortization
schedule on the first day of each month beginning September 1, 2003, with
the unpaid principal balance due on the earlier of (1) July 31, 2008 or (2)
acceleration of the indebtedness under the revolving credit line or the
equipment line due to an event of default.
As of December 31, 2003, we had no outstanding borrowings on the
revolving credit line and $420,000 outstanding on the term loan. We repaid
the remaining balance on the term loan in January 2004. Undrawn commitments
under the Banknorth Credit Facility were approximately $11,500,000 at
December 31, 2003. However, our maximum additional available borrowings
under the facility were limited to approximately $6,100,000 at December 31,
2003 based on the borrowing base of our collateral. Annual principal
payments on the term loan are $90,000.
As a result of the refinancing, we recorded a charge of approximately
$103,000 in 2003 related to the write-off of unamortized deferred financing
costs from the prior credit facility with LaSalle.
Prior to the Banknorth Credit Facility, we operated under a
three-year, $13.5 million credit facility (the "LaSalle Credit Facility")
with LaSalle, which expired upon signing of the Banknorth Credit Facility
in August 2003. The LaSalle Credit Facility provided a $12 million
revolving credit line, a $0.5 million term loan and a $1 million equipment
loan facility. Borrowings under the revolving credit line originally bore a
floating rate of interest at LaSalle's prime rate. Borrowings under both
the term loan and equipment loan originally bore a floating rate of
interest at LaSalle's prime rate plus 0.50%. Borrowings under the LaSalle
Credit Facility were collateralized by a lien on all the personal property
assets of the Company. We had no borrowings under the equipment loan during
the term of the facility.
36
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BORROWINGS (CONTINUED)
On November 12, 2002, we amended the LaSalle Credit Facility. Under
the terms of the amendment ("LaSalle Amendment No. 3"), LaSalle (1) waived
compliance with the minimum EBITDA, minimum tangible net worth and fixed
charge coverage ratio financial covenants as of September 30, 2002 and (2)
revised these covenants to exclude the effect of $900,000, of the total
$912,000, of restructuring charges incurred in the third quarter. On March
24, 2003, we amended the LaSalle Credit Facility. Under the terms of the
amendment ("LaSalle Amendment No. 4"), LaSalle (1) waived compliance with
the minimum EBITDA covenant as of December 31, 2002, (2) revised this
covenant and certain other financial covenants through May 2004 and (3)
eliminated the availability of the $1 million equipment loan facility due
to expire in May 2003.
11. COMMITMENTS AND CONTINGENCIES
At December 31, 2003, we were lessee on operating leases for equipment
and real property. The terms of certain leases provide for escalating rent
payments in later years of the lease as well as payment of minimum rent and
real estate taxes. Rent expense was approximately $1,096,000, $975,000 and
$983,000 in 2003, 2002 and 2001, respectively. Minimum aggregate rental
payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2003
are as follows: $952,000 in 2004; $972,000 in 2005; $966,000 in 2006;
$955,000 in 2007; $647,000 in 2008; and $1,797,000 thereafter. Such
payments include those related to the lease of our Wallingford, CT
manufacturing facility.
12. PATENT LICENSE FEES
In November 2002, we were advised that certain POS printers sold by us
since late 1999 may use technology covered by recently issued patents of a
third party competitor. In an effort to resolve this matter, we originally
offered to pay approximately $160,000, while the other party sought payment
of up to $950,000. We recorded a charge of $160,000 in cost of sales in the
first 4%fourth quarter of 2002 related to this matter. Based on the likely outcome
of current negotiations, we recorded an additional charge of $740,000 in
the fourth quarter of 2003 related to usage prior to January 1, 2003.
Although settlement negotiations are continuing, we believe that the total
accrual of $900,000 reflects the best estimate of the employees' compensation contributedexpense related to
the 401(k) Plan.pre-2003 usage of this third party patented technology. We also accrued
estimated royalty payments for usage of this technology after January 1,
2003. We have classified approximately $750,000 of our total accrual
related to this matter as a long-term liability based on the likely payment
schedule resulting from our current negotiations.
13. STOCK INCENTIVE PLANS AND WARRANTS
STOCK INCENTIVE PLANS. We currently have three primary stock incentive
plans: the 1996 Stock Plan which provides for the grant of awards to
officers and other key employees of the Company, the 1996 Directors' Stock
Plan which provides for non-discretionary awards to non-employee directors,
and the 2001 Employee Stock Plan which provides for the grant of awards to
key employees of the Company and other non-employees who may provide
services to the Company. The plans generally provide for awards in the form
of: (i) incentive stock options, (ii) non-qualified stock options, (iii)
shares of restricted stock, (iv) restricted units, (v) stock appreciation
rights or (vi) limited stock appreciation rights. However, the 2001
Employee Stock Plan does not provide for incentive stock option awards.
Options granted under these plans are at prices equal to 100% of the fair
market value of the common stock at the date of grant. Options granted have
a ten-year term and generally vest over a three- to five-year period,
unless automatically accelerated for certain defined events. At December
31, 2003, we have reserved 1,150,000, 140,000 and 150,000 shares of common
stock for issuance under the 1996 Stock Plan, the 1996 Directors' Stock
Plan, and the 2001 Employees Stock Plan, respectively.
37
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
OPTION EXCHANGE OFFER. In November 2001, we announced an offer to
certain officers to exchange outstanding employee stock options having an
exercise price of $9.00 or more per share in return for new stock options
to be granted by the Company (the "Exchange Offer"). Pursuant to the
Exchange Offer, the option holder received a commitment for the grant of
one new option for each option tendered and accepted for exchange, no
sooner than six months and one day from November 16, 2001. A total of
215,000 options were accepted for exchange under the Exchange Offer and
were canceled in November 2001 (and treated as canceled in 2001 in the
table below). The new options were granted on May 17, 2002, and vested 25%
immediately upon grant with the remainder vesting 25% annually over the
next three years. The new options were granted at an exercise price equal
to the fair market value of our common stock on the date of grant. There
was no compensation expense recorded as a result of the Exchange Offer.
EMPLOYEE STOCK PURCHASE PLAN: In May 2000, the Company'sour shareholders approved
the Employee Stock Purchase Plan (the "ESPP"), under which 50,000 shares of
the Company'sour 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
beginbegins on June 1 and December 1. Eligible employees may elect to withhold
up to 5% of their salary to purchase shares of the Company'sour common stock at a price
equal to 85% of the fair market value of the stock on the first or last day
of each Offering Period, whichever is lower. The ESPP will terminate at the
earlier of May 31, 2005 or the date on which all 50,000 shares available
for issuance under the ESPP have been sold. During 2000, the CompanyWe sold 4,8272,087, 4,849 and 6,443
shares of common stock at $4.88 per share under the ESPP.ESPP during 2003, 2002 and 2001,
respectively. At December 31, 2000, 45,1732003, 31,794 shares remained available for
sale.
Compensation costs related to the ESPP
are immaterial.
9. BANK CREDIT AGREEMENT
On January 29, 1998, the Company entered into a $15,000,000 credit
facility with Fleet National Bank ("Fleet"). On May 7, 1999, the Company
replaced this facility with a new two-year $10,000,000 revolving credit
facility with Fleet (the "Fleet Credit Facility"). The Fleet Credit
Facility provided the Company with a $10,000,000 credit facility used to
fund working capital. Borrowings under the Fleet Credit facility bore
interest on outstanding borrowings at Fleet's prime rate and bore a
commitment fee ranging from 0.25% to 0.625% on any unused portion of the
Fleet Credit Facility. The Fleet Credit Facility also permitted the Company
to designate a LIBOR rate on outstanding borrowings with a margin ranging
from 1.50 to 2.25 percentage points over the market rate ("Margin"),
depending on the Company meeting certain ratios. Concurrent with the Fleet
Credit Facility, the Company entered into a swap agreement with Fleet under
which the Company fixed its interest rate at 5.63% plus the applicable
Margin for two years on $3,000,000 of outstanding borrowings under the
Fleet Credit Facility. The Fleet Credit Facility was secured by a lien on
substantially all the assets of the Company, imposed certain financial
covenants and restricted the payment of cash dividends and the creation of
liens.
26
27
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BANK CREDIT AGREEMENT (CONTINUED)
On March 14, 2000, the Company entered into a new two-year $13,000,000
revolving credit facility (the "New Fleet Credit Facility") with Fleet. The
New Fleet Credit Facility replaced the Fleet Credit Facility. The New Fleet
Credit Facility provided the Company with a $13,000,000 credit facility
used to fund working capital. Borrowings under the New Fleet Credit
facility bore interest on outstanding borrowings at Fleet's prime rate plus
a margin ranging from zero to 0.75 percentage points and bore a commitment
fee ranging from 0.375% to 0.75% on any unused portion of the New Fleet
Credit Facility. The New Fleet Credit Facility also permitted the Company
to designate a LIBOR rate on outstanding borrowings with a margin ranging
from 1.5 to 3.0 percentage points over the market rate, depending on the
Company meeting certain ratios. The New Fleet Credit Facility was secured
by a lien on substantially all the assets of the Company, imposed certain
financial covenants and restricted the creation of liens.
On September 21, 2000, the Company entered into a two-year revolving
credit facility (the "Webster Credit Facility) with Webster Bank
("Webster") expiring on September 21, 2002. The Webster Credit Facility
replaced the New Fleet Credit Facility. Under the Webster Credit Facility,
the Company may borrow up to $12 million, based on certain financial
criteria of the Company at the time of any borrowing, to fund working
capital. Borrowings under the Webster Credit Facility bear a floating rate
of interest at the higher of the "Prime Rate" as published in The Wall
Street Journal or one-half of one percent (1/2%) over the federal funds
rate (as defined in the Webster Credit Facility) (9.5% at December 31,
2000). Under certain circumstances, the Company may select a fixed interest
rate for a specified period of up to 90 days on borrowings based on the
current LIBOR rate (as adjusted as specified in the Webster Credit
Facility) plus 2.5%, which may be reduced to 2.25% on July 1, 2001 if there
is no Event of Default (as defined in the Webster Credit Facility). The
Company will also pay a fee of three-eighths of one percent (3/8%) on
unused borrowing capacity under the Webster Credit Facility. Borrowings
under the Webster Credit Facility are secured by a lien on substantially
all the assets of the Company. The Webster Credit facility also imposes
certain financial covenants on the Company and restricts the payment of
dividends on its common stock and the creation of other liens. The Company
had $5,944,000 of outstanding borrowings under this facility at December
31, 2000.
10. COMMITMENTS AND CONTINGENCIES
At December 31, 2000, the Company was lessee on operating leases for
equipment and real property. The terms of certain leases provide for
escalating rent payments in later years of the lease as well as payment of
minimum rent and real estate taxes. Rent expense amounted to approximately
$991,000, $953,000 and $957,000 in 2000, 1999 and 1998, 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, 2000 are as follows: $891,000 in 2001; $871,000 in 2002;
$873,000 in 2003; $855,000 in 2004; $868,000 in 2005 and $1,663,000
thereafter.
The Company has a long-term purchase agreement for certain printer
components. Under the terms of the agreement, the Company receives
favorable pricing for volume purchases over the life of the contract. In
the event anticipated purchase levels are not achieved, the Company would
be subject to retroactive price increases on previous purchases. Management
currently anticipates achieving sufficient purchase levels to maintain the
favorable prices.
11. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS. On July 30, 1996, the Company adopted the 1996 Stock
Plan which provides for the grant of awards to officers and other key
employees of the Company, and the Directors' Stock Plan which provides for
non-discretionary awards to non-employee directors. The plans 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.
Options granted 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 five-year period, unless automatically accelerated
for certain defined events. At December 31, 2000, the Company has reserved
1,150,000 and 110,000 shares of common stock for issuance under the 1996
Stock Plan and Directors' Stock Plan, respectively.
27
28
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS AND WARRANTS (CONTINUED)
During the fourth quarter of 1998, the Company approved the
cancellation and reissuance of certain outstanding options under the 1996
Stock Plan. Under the program, holders of outstanding options as of
December 10, 1998, excluding the Company's executive officers, obtained in
substitution for existing options new options for the same number of
shares. The new options, totaling 190,600, are exercisable at a price of
$4.75 per share, the fair market value of the common stock on the reissue
date. The new options maintain the vesting schedule established by the
canceled option. These 190,600 options have been treated as canceled and
granted in 1998 in the table below.
The 1996 Stock Plan, 1996 Directors' Stock Plan and Directors'2001 Employee
Stock Plan option activity is summarized below:
Year Ended December 31,
2000 1999 1998
---- ---- ----2003 2002 2001
------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ ------------- -------- -------- --------- -------- --------
Outstanding at beginning of
period: 818,100 $7.89 752,300 $8.04 542,600 $10.97945,400 $ 6.30 742,750 $ 6.95 919,000 $ 8.34
Granted 190,500 9.86 104,500 5.86 428,100 5.7568,000 8.76 366,750 5.47 189,500 5.67
Exercised (25,000) 6.05 (5,100) 4.75 (200) 8.50(238,604) 5.68 (26,100) 4.24 (53,500) 4.37
Canceled (64,600) 7.53 (33,600) 5.07 (218,200) 10.83(25,760) 5.72 (138,000) 7.97 (312,250) 10.71
-------- -------- -------- --------- -------- ------- ----- ------- ----- ------- ------
Outstanding at end of period 919,000 $8.34 818,100 $7.89 752,300749,036 $ 8.046.74 945,400 $ 6.30 742,750 $ 6.95
======== ======== ======== ========= ======== ======= ===== ======= ===== ======= ======
Options exercisable at end of
period 436,580 $8.19 296,140 $8.33 165,360361,753 $ 8.287.08 429,845 $ 6.81 383,350 $ 7.34
======== ======== ======== ========= ======== ======= ===== ======= ===== ======= ======
Options Outstanding Options Exercisable
------------------- -------------------------------------------------------------- ---------------------------
Weighted- Weighted- Weighted-
Outstanding at Average Average Exercisable at Average
December 31, Exercise Remaining December 31, Exercise
Range of Exercise Prices 20002003 Price Contractual Life 20002003 Price
------------------------ ---- ------------------- -------- ---------------- ---- ------------------- ---------
(In years)
$ 2.50 - $ 5.00 238,400 $4.28 6.1 139,740 $4.40112,521 $ 4.40 7.2 48,403 $ 4.02
5.01 - 7.50 84,300 6.17374,765 5.67 8.0 18,400 6.15130,200 5.70
7.51 - 10.00 344,800 8.76 6.1 208,840 8.64188,600 8.63 3.7 158,000 8.57
10.01 - 12.50 145,000 10.22 9.1 4,900 11.69
12.51 - 15.00 45,500 13.75 5.8 28,100 13.7571,150 10.63 7.2 25,150 10.75
15.01 - 17.50 61,000 16.38 6.6 36,600 16.3825.00 2,000 24.12 9.8 - 10.75
------- -------
749,036 6.74 6.72 361,753 7.08
======= =======
The Company applies APB 25 and related interpretations in accounting
for its long-term incentive stock plans. Accordingly, no compensation cost
has been recognized for its stock options.
Had compensation expense been recognized based on the fair value of
the options at their grant dates, as prescribed in FAS 123, the Company's
net income (loss) and net income (loss) per share would have been as
follows:
2838
29
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11.13. STOCK OPTIONSINCENTIVE PLANS AND WARRANTS (CONTINUED)
Year Ended December 31,
2000 1999 1998
---- ---- ----
(In thousands, except per share data)
Net income (loss) available to common shareholders:
As reported $ (664) $ 324 $ 1,206
Pro forma under FAS 123 (1,171) (422) 747
Net income (loss) per share:
Basic and diluted:
As reported (0.12) 0.06 0.20
Pro forma under FAS 123 (0.21) (0.08) 0.12
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, 2000, 19992003, 2002 and
1998.2001.
Year Ended December 31,
2000 1999 19982003 2002 2001
---- ---- ----
Risk-free interest rate 6.3% 5.8% 4.9%2.6% 4.5% 4.6%
Dividend yield 0% 0% 0%
Expected volatility factor 83.1% 78.0% 78.1%82.1% 83.3% 85.5%
Expected option term 7.15.8 years 7.56.4 years 106.1 years
Weighted average fair value of options granted during period $7.78 $4.55 $ 4.69$6.09 $4.12 $4.25
RESTRICTED STOCK: Under the 1996 Stock Plan, the Company haswe have granted shares of
restricted common stock, for no consideration, to itsour officers, one outside
director and certain key employees. The 1996 Stock Plan restricted stock
activity is summarized below:
Year Ended December 31,
2000 1999 19982003 2002 2001
---- ---- ----
Outstanding shares at beginning of period 95,080 91,440 78,80046,666 89,360 83,320
Granted 5,000 13,000 25,000- - 20,000
Vested (12,960) (9,360) (9,360)(35,333) (42,094) (10,960)
Canceled (3,800) - (600) (3,000)
------ ------ ------
Outstanding shares at end of period 83,320 95,080 91,44011,333 46,666 89,360
====== ====== ======
The weighted average fair value of restricted stock granted was $4.75
for 2001. No restricted stock was granted during 2003 and 2002. Of the
83,32011,333 shares of restricted stock outstanding at December 31, 2000, 29,3202003, 3,000
shares vest over a five-year period, while 54,0003,333 shares vest at the end ofover a five-yearthree-year
period and 5,000 shares vest over a two-year period. Under certain
conditions, vesting may be automatically accelerated. Upon issuance of the
restricted stock, unearned compensation equivalent to the market value at
the date of grant is charged to a separate component of shareholders' equity and subsequently
amortized over the vesting period. AmortizationCompensation expense of $277,000, $254,000$67,000,
$184,000 and $231,000$264,000 was recorded during 2000, 19992003, 2002 and 1998,2001,
respectively. WARRANTS: On August 22, 1996,In the Company sold to the underwritersfirst quarter of its initial public offering, for nominal consideration, a warrant to
purchase from the Company up to 115,0002004, we issued 50,000 shares of
commonrestricted stock at an
exercise price of $10.20 per share. The warrant is exercisable until
August 20, 2001.to our officers and certain key employees. These shares
vest over a five-year period.
WARRANTS: On April 7, 2000, in connection with the sale of the
Preferred Stock, the Companywe issued to itsour investment advisors, McFarland Dewey &
Co. ("McFarland"), warrants to purchase from the Company up to 10,000
shares of common stock at an exercise price of $9.00 per share. The
warrants are exercisable through April 7, 2005.
2939
30
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.14. 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 the Company'sour 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, the Companywe amended its Stockholder Rights Plan to remove
the provision in the plan that stipulated that the plan may be modified or
redeemed only by those members of the Board of Directors who are defined as
continuing directors.
13.15. INCOME TAXES
The components of the income tax provision (benefit) are as follows:
Year Ended December 31,
2000 1999 1998(In thousands) 2003 2002 2001
---- ---- ----
(In thousands)
Current:
Federal $ (561)1,121 $(1,493) $ 88 $ 779(62)
State 43 18 12694 25 -
Foreign 194 12 131 110 56
------- ------- -------
(324) 118 1,0361,346 (1,358) (6)
Deferred: ------- ------- -------
Deferred:
Federal (94) (37) (371)(554) 987 (2,523)
State (34) 18 (44)(67) (19) (219)
Foreign 4 3 --- - -
------- ------- -------
(124) (16) (415)(621) 968 (2,742)
------- ------- -------
Total income tax provision (benefit) $ (448)725 $ 102 $ 621(390) $(2,748)
======= ======= =======
The CompanyAt December 31, 2003, we have $3,265,000 of state net operating loss
carryforwards that begin to expire in 2005. We also have approximately
$300,000 in federal research and development tax credit carryforwards that
expire in 2020. We had foreign income before taxes of $665,000, $65,000$475,000, $386,000
and $435,000$232,000 in 2000, 19992003, 2002 and 1998,2001, respectively.
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. The Company'sOur gross deferred tax assets and liabilities were comprised of
the following:
December 31,
(In thousands) 2000 1999
---- ----
Gross deferred tax assets:
Liabilities and reserves $1,435 $1,320
====== ======
Gross deferred tax liabilities:
Depreciation $ 576 $ 539
====== ======
3040
31
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.15. INCOME TAXES (CONTINUED)
December 31,
(In thousands) 2003 2002
------- -------
Gross deferred tax assets:
Net operating losses $ 96 $ 188
Accrued restructuring expenses 854 635
Inventory reserves 720 749
Deferred revenue 761 533
Foreign tax and other credits 627 668
Accrued license fees 428 59
Other liabilities and reserves 443 612
------- -------
3,929 3,444
Valuation allowance (331) (439)
------- -------
Net deferred tax assets $ 3,598 $ 3,005
======= =======
Gross deferred tax liabilities:
Depreciation $ 511 $ 558
Other 63 33
------- -------
Net deferred tax liabilities $ 574 $ 591
======= =======
Based on tax law changes, we carried our federal net operating losses
back to prior years and received a tax refund of approximately $1,061,000
in 2002, and expect to receive an additional refund of approximately
$104,000 in the first quarter of 2004. During 2003 and 2002, we recorded a
valuation allowance of $331,000 and $439,000 on a portion of our foreign
tax credits, research and development credits and certain state net
operating loss carryforwards. Based on future financial projections, we
have determined that it is more likely than not that the existing net
deferred tax asset will be realized, and no additional valuation allowance
is considered necessary.
Differences between the U.S. statutory federal income tax rate and the
Company'sour
effective income tax rate are analyzed below:
Year Ended December 31,
2000 1999 19982003 2002 2001
---- ---- ----
Federal statutory tax rate 34.0% (34.0)% 34.0% 34.0%(34.0)%
State income taxes, net of federal income taxes 1.2 (0.3) 13.2 6.0
Non-deductible purchase accounting adjustments 9.9 41.6 4.4
Tax benefit from foreign sales corporation (3.1) -- (2.2)(0.9)
Tax benefit from tax credits, (22.9) (60.0) (5.8)net of valuation allowance (10.6) (1.7)
Foreign rate differential (3.5) (1.6) (0.9)- 9.5 -
Other (2.7) (3.2) (1.5)(3.0) (0.6) 0.8
---- ----- ---- ---------
Effective tax rate (56.6)32.2% (36.0)% 24.0% 34.0%(35.8)%
==== ===== ==== =========
14. DISCLOSURE REGARDING FAIR VALUE OF41
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL INSTRUMENTS
The carrying amountSTATEMENTS
16. EARNINGS PER SHARE
For the years ended December 31, 2003, 2002 and 2001, earnings per
share were computed as follows (in thousands, except per share amounts):
Year Ended December 31,
2003 2002 2001
------- ------- -------
Net income (loss) $ 1,528 $ (692) $(4,922)
Dividends and accretion on preferred stock (358) (358) (358)
------- ------- -------
Net income (loss) available to common shareholders $ 1,170 $(1,050) $(5,280)
======= ======= =======
Shares:
Basic: Weighted average common shares outstanding 5,793 5,636 5,551
Add: Dilutive effect of outstanding options and
warrants as determined by the treasury stock method 430 - -
------- ------- -------
Diluted: Weighted average common and common
equivalent shares outstanding
6,223 5,636 5,551
======= ======= =======
Net income (loss) per common share:
Basic $ 0.20 $ (0.19) $ (0.95)
Diluted 0.19 (0.19) (0.95)
For the year ended, December 31, 2003, all potentially dilutive
shares, that were excluded from the earnings per share calculation,
consisted of out-of-the-money stock options and warrants, and amounted to
2,000 shares. Due to our reported net loss in the years ended December 31,
2002 and 2001, all potentially dilutive securities, including both
in-the-money and out-of-the-money stock options and warrants that amounted
to 597,000 and 539,000 shares, respectively, were excluded from the
earnings per share calculation, as the effect would have been antidilutive.
In addition, for cash and cash equivalents approximates fair
value becauseall periods presented, earnings per share calculations
assumed no conversion of the short maturityconvertible mandatorily redeemable preferred
stock (which is convertible into 444,444 shares of common stock), as the
effect would have been anti-dilutive.
17. SIGNIFICANT TRANSACTIONS
OTHER INCOME: In June 2002, we received 2,146 shares of common stock
from our health insurance company, Anthem, Inc., upon its demutualization.
We sold these instruments. The carryingshares in August 2002 for approximately $145,000, and
included this amount in Other Income.
LOAN TO OFFICER: On February 23, 1999, with the Board of receivables, other current assets, other assets, accounts payable
and accrued liabilities isDirectors'
approval, we provided a reasonable estimate of fair value because$330,000 loan to an officer of the short natureCompany. The
loan was payable on February 23, 2004, and was a full recourse obligation
to the officer collateralized by 154,000 shares of the transactions.our common stock, which
included 50,000 shares of restricted stock. The carrying value of long-term debt
approximates the fair value based upon the variable rate on that debt.
Off-balance sheet derivative financial instruments include
interest-rate swaps. At December 31, 1999, interest-rate swaps, held for
purposes other than trading, had a fair value settlement of $35,000, based
on the underlying principal amount of $3,000,000. The Company sold its
interest-rate swap during 2000.
15. SIGNIFICANT TRANSACTIONS
RESTRUCTURING: During the
fourth quarterloan was recorded as a deduction from shareholders' equity. In June 2003,
the officer of 2000 and fourth quarter of
1998, the Company recorded a restructuring chargerepaid the outstanding loan of $189,000 and $300,000,
respectively, for severance costs related to the downsizing and
reorganization$330,000, plus
accrued interest of its manufacturing facility in Wallingford, CT. Severance
costs resulted from the reduction of 11 and 14 employees in 2000 and 1999,
respectively. At December 31, 2000, approximately $105,000 of restructuring
expenses remained accrued.$113,000.
42
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. PREFERRED STOCK SALE:
On April 7, 2000 the Companywe sold 4,000 shares of 7% Series B Cumulative
Convertible Redeemable Preferred Stock (the "Preferred Stock") to Advance Capital Advisors, L.P. and its affiliate in
consideration of $1,000 per share (the "Stated Value"), for a total of
$4,000,000, less issuance costs. The Preferred Stock is convertible at any
time by the holders at a conversion price of $9.00 per common share. In
addition, the Companywe issued warrants pro-rata to the Preferred Stock holders to
purchase an aggregate of 44,444 shares of the Company'sour common stock at an exercise
price of $9.00 per common share. The warrants, valued
at $175,000, areshare, exercisable at any time until April 7, 2005, and will be2005. The
discount on the preferred stock related to the relative fair value of the
warrants of $175,000 is being accreted as a direct charge to preferred stockretained
earnings ratably over 60 months. The Preferred Stock is subject to
mandatory conversion into shares of the Company'sour common stock when such stock has
traded at $35 per share or more for a 30-day period ending on or after
April 7, 2003, or for a 60-day period beginning on or after April 7, 2002.
The Preferred Stock is redeemable at the option of the holders on or after
April 7, 2005 at $1,000 per share plus any unpaid dividends. On or after April 7,
2007, the Company haswe have the right to require (1) redemption of the Preferred Stock at
$1,000 per share plus any unpaid dividends or (2) conversion of the
Preferred Stock at $9.00 per common share. Upon a change of control,
(which the Company does not believe probable), holders have the right to require us to redeem the Preferred Stock for 200%
of the Stated Value plus any unpaid dividends. The holders of the Preferred
Stock have certain voting rights and are entitled to receive a cumulative
annual dividend of $70 per share, payable quarterly and have preference to
any other dividends, if any, paid by the Company.
31
32
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SIGNIFICANT TRANSACTIONS (CONTINUED)
PREFERRED STOCK SALE (CONTINUED): Concurrent withOn July 8, 2003, the issuanceholders of the Preferred Stock the Company recorded a beneficial conversion charge. The
beneficial conversion charge was calculated as the difference between the
assigned fair value of the Preferred Stock and the fair value of the
related common stock, as of April 7, 2000, into which the Preferred Stock
was immediately convertible. Accordingly, a deemed preferred dividend of
approximately $56,000 as of the issuance date has been recognized as a
chargeexercised their
44,444 warrants to retained earnings and net loss attributable to common
shareholders, and as an increase to additional paid-in capital.
GTECH LAWSUIT SETTLEMENT: On June 25, 1999, the Company commenced a
lawsuit in the United States District Court for the District of Rhode
Island against GTECH for misappropriation of trade secrets, breach of
contract and related claims, seeking injunctive relief and compensatory and
punitive damages. On July 15, 1999, GTECH and the Company signed a new
five-year agreement under which the Company will be the exclusive
manufacturer and supplier to GTECH of an impact printer for use in GTECH's
Isys(R) online lottery terminal. As part of the agreement, GTECH agreed to
pay the Company $1 million for past design efforts, development costs and
manufacturing interruption costs and agreed to place a non-cancelable order
for delivery of a minimum of approximately $8 million of printers in the
year 2000. In connection with the execution of this agreement, the parties
agreed to have all claims under the lawsuits dismissed and filed dismissal
stipulations to terminate the federal and state lawsuits. As a result of
the settlement, the Company reported $770,000 ($1 million cash settlement,
less $230,000 of directly-related expenses) in other income during 1999.
LOAN TO OFFICER: On February 23, 1999, with the Board of Directors'
approval, the Company provided a $330,000 loan to an officer of the
Company. The loan proceeds were used to purchase 104,000 shares of the
Company's common stock on the open market during January and February 1999.
The loan is payable on February 23, 2004, and is a full recourse obligation
to the officer secured by 154,000 shares of the Company's common stock,
which includes 50,000 shares of restricted stock. The loan bears interest
at a rate equivalent to the Company's average borrowing rate under its
current credit facility, and is payable annually. The principal amount of
the loan is deducted from shareholders' equity.
STOCK REPURCHASE PROGRAM: During November 1997, the Board of Directors
approved the repurchase of up to 500,000 shares of the Company's common stock at a price of no more than $12$9 per share. During May, August and
October 1998,In lieu of cash
consideration, we canceled 31,821 of their warrants in exchange for the
Board approved the repurchaseissuance of an additional 500,000,
250,000 and 250,000 shares, respectively, bringing the total authorized to
1.5 million shares. The Company acquired 70,80012,62 shares of its common stock
for $229,000 in 1999, 1,003,000 shares for $7,170,000 in 1998, and 200,000
shares for $2,251,000 in 1997. Since the Company began the stock repurchase
program in December 1997 through December 31, 1999, it has repurchased
1,273,800 shares for $9,650,000 (an average cost of $7.58 per share). The
Company did not repurchase any shares during 2000, and management does not
expect to repurchase any additional shares in the foreseeable future.
16.stock.
19. INTERNATIONAL OPERATIONS
The Company hasWe have foreign operations primarily from TransAct Technologies Ltd.,
a wholly-owned subsidiary, which had sales to its customers of $11,164,000, $700,000$1,068,000,
$738,000 and $4,990,000$1,791,000 in 2003, 2002 and 2001, respectively. We had sales
from the year ended December 31, 2000,
1999 and 1998, respectively. The Company had export salesUnited States to its foreignour customers fromoutside of the United States of
approximately $5,156,000, $7,807,000$3,663,000, $3,968,000 and $3,396,00$6,131,000 in the year ended December 31, 2000, 19992003, 2002 and 1998,2001,
respectively.
3220. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Our quarterly results of operations for 2003 and 2002 (unaudited) are
as follows:
Quarter Ended
------------------------------------------------------------
(In thousands, except per share amounts) March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
2003:
Net sales $ 9,012 $ 13,378 $ 15,048 $ 14,660
Gross profit 2,441 4,212 4,819 4,071
Net income (loss) (198) 787 1,140 (201)
Net income (loss) available to common shareholders (288) 698 1,050 (290)
Net income (loss) per share:
Basic (0.05) 0.12 0.18 (0.05)
Diluted (0.05) 0.12 0.17 (0.05)
March 31 June 30 September 30 December 31
--------- --------- ------------ -----------
2002:
Net sales $ 10,525 $ 10,921 $ 8,852 $ 9,163
Gross profit 2,626 3,112 2,302 2,176
Net income (loss) (129) 289 (709) (143)
Net income (loss) available to common shareholders (219) 200 (799) (232)
Net income (loss) per share:
Basic and diluted (0.04) 0.04 (0.14) (0.04)
43
33
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17.21. SUBSEQUENT EVENTS (unaudited)EVENT
On February 15, 2001,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 Company announced plansform of
a 50 percent stock dividend. The additional shares will be payable April 2,
2004 to establish a global
engineering and manufacturing center at its Ithaca, NY facility. As partshareholders of this strategic decision, the Company will consolidate all manufacturing and
engineering into its existing Ithaca, NY facility and close its
Wallingford, CT facility by the end of 2001. Production is planned to
continuerecord at the Wallingford facility until the endclose of 2001, with individual
product lines scheduled to move over the course of 2001. The closingbusiness on March 17, 2004.
As a result of the Wallingford facility is expected to result in the terminationstock dividend, shareholders of employment
of approximately 70 employees. The Company estimates that the non-recurring
costs associated with the consolidation, including severance pay, employee
benefits, moving expenses, non-cancelable lease payments, and other costs,record will be approximately $3.0entitled
to $3.5 millionreceive one additional share of common stock for every two shares of
common stock held on the record date, and will be recognized during
2001.
On February 27, 2001,cash instead of any fractional
shares. No amounts within the Company amendedfinancial statements and footnotes reflect
the Webster Credit Facility
to (1) provide the Company with the ability to borrow up to $1,500,000 in
excess of the amount permitted under the Webster Credit Facility's
borrowing base formula ("Permitted Over-Formula Borrowing") and (2) revise
certain financial covenants.stock split. The Permitted Over-Formula Borrowing is
effective from March 1, 2001 through August 31, 2001.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company's quarterly results of operationsfollowing table indicates our net income (loss) per
share had these amounts been adjusted for the years ended
December 31, 2000, 1999 and 1998 (unaudited) are as follows:stock split.
QuarterYear Ended
-------------
(In thousands, except per share amounts) March 27 June 26 September 23 December 31,
-------- ------- ------------ -----------2003 2002 2001
---- ---- ----
(unaudited)
2000:
Net sales $ 11,238 $ 13,740 $ 14,604 $ 14,138
Gross profit 3,013 3,665 3,867 3,597
Net income (loss) (300) (186) 290 (148)
Net income (loss) available to common
Shareholders (300) (326) 200 (238)
Net income (loss) per share:
Basic and diluted (0.05) (0.06) 0.04 (0.04)Basic:
Historical $ 0.20 $ (0.19) $(0.95)
Pro forma, after adjusting for stock split 0.13 (0.12) (0.63)
Diluted:
Historical 0.19 (0.19) (0.95)
Pro forma, after adjusting for stock split 0.13 (0.12) (0.63)
March 27 June 26 September 25 December 31
-------- ------- ------------ -----------
1999:
Net sales $ 9,201 $ 12,524 $ 13,020 $ 10,144
Gross profit 2,428 3,238 3,335 2,753
Net income (loss) (279) 146 837 (380)
Net income (loss) per share:
Basic and diluted (0.05) 0.03 0.15 (0.07)
March 28 June 27 September 26 December 31
-------- ------- ------------ -----------
1998:
Net sales $ 13,280 $ 12,500 $ 13,600 $ 12,859
Gross profit 3,746 3,435 3,778 2,867
Net income (loss) 634 231 533 (192)
Net income (loss) per share:
Basic and diluted 0.10 0.04 0.09 (0.03)
3344
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9a. CONTROLS AND PROCEDURES
TransAct's management is responsible for designing and implementing
disclosure controls and procedures to provide reasonable (not absolute)
assurances that desired control objectives are achieved including:
- Filing with the SEC all required disclosures within the time
limits specified by the SEC
- Providing all material information to our management,
including the CEO and CFO, to enable them to make timely
decisions about required disclosures.
When designing and evaluating controls and procedures, we make
assumptions about the likelihood of future events. At the same time, we make
judgments about the cost-benefit relationship of possible controls and
procedures. We cannot assure that this design will succeed in achieving its
stated goals under all potential future conditions. Similarly, we cannot assure
that our evaluation of controls will detect all control issues or instances of
fraud, if any.
We completed our review of disclosure controls and procedures under the
supervision of the Disclosure Committee, and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer.
Based on this review, the Chief Executive Officer and Chief Financial Officer
concluded that as of December 31, 2003 our disclosure controls and procedures
were effective to provide reasonable assurance that reports are filed or
submitted within the time limits specified by the SEC, and that information is
accumulated and communicated to management to allow timely decisions regarding
required disclosure. There was no change in our internal control over financial
reporting that occurred during 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Reference is made to the Certifications of the Chief Executive Officer
and Chief Financial Officer about these and other matters following the
signature page of this report
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information contained in "Election of Directors", "Code of Ethics" and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement (the "Proxy Statement") for its Annual Meeting of Shareholders which
is scheduled to be held on May 23, 200126, 2004 is hereby incorporated herein by
reference. Also, see information under "Executive Officers of Registrant" in
Item 1.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in "Executive Compensation" other than the
"Compensation Committee Report on Executive Compensation" of the Proxy Statement
is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information contained in "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement is hereby incorporated herein by
reference.
Information regarding our equity compensation plans as of December 31,
2003 is as follows:
Number of securities Weighted average
to be issued upon exercise price of
exercise of outstanding Number of securities
outstanding options, options, warrants remaining available
Plan category warrants and rights and rights for future issuance
- ------------------------------------- --------------------- ----------------- --------------------
Equity compensation plans approved
by security holders:
1996 Stock Plan 517,733 $6.19 195,150
1996 Non-Employee Director Plan 155,000 8.57 77,500
2000 Employee Stock Purchase Plan - - 31,794
------- ----- -------
Total 672,733 $6.74 304,444
======= ===== =======
Equity compensation plans not approved
by security holders:
2001 Employee Stock Plan 87,636 5.90 29,410
======= ===== =======
The TransAct Technologies Incorporated 2001 Employee Stock Plan (the
"2001 Employee Plan") was adopted by our Board of Directors, without approval of
our security holders, effective February 26, 2001. Under the 2001 Employee Plan,
we may issue non-qualified stock options, shares of restricted stock, restricted
units to acquire shares of common stock, stock appreciation rights and limited
stock appreciation rights to key employees of TransAct or any of our
subsidiaries and to non-employees who provide services to TransAct or any of our
subsidiaries. The 2001 Employee Plan is administered by our Compensation
Committee, which has the authority to determine the vesting period and other
similar restrictions and terms of awards, provided that the exercise price of
options granted under the plan may not be less than the fair market value of the
underlying shares on the date of grant. Awards may be issued under the 2001
Employee Plan with respect to up to 150,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in "Certain Relationships and Related
Transactions" of the Proxy Statement is hereby incorporated herein by reference.
34ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in "Independent Auditors' Fees" of the Proxy
Statement is herby incorporated herein by reference.
46
35
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING FINANCIAL STATEMENTS AND EXHIBITS ARE FILED AS
PART OF THIS REPORT:
(i) Financial statements
See Item 8.
(ii) Financial statement schedules
All schedules are omitted since the required information is
either (a) not present or not present in amounts sufficient
to require submission of the schedule or (b) included in
the financial statements or notes thereto.
35
36
(iii) List of exhibits
3.1(a) Certificate of Incorporation of the Company, filed with the Secretary of State of (2)
Delaware on June 17, 1996.
3.1(b) Certificate of Amendment of Certificate of Incorporation of the Company, filed with (4)
the Secretary of State of Delaware on May 30,June 4, 1997.
3.1(c) Certificate of Designation, Series A Preferred Stock, filed with the Secretary of (5)
State of Delaware on December 2, 1997.
3.1(d) Certificate of Designation, Series B Preferred Stock, filed with the Secretary of (8)
State of Delaware on April 6, 2000.
3.2 Amended and Restated By-laws of the Company. (6)
4.1 Specimen Common Stock Certificate. (2)
4.2 Amended and Restated Rights Agreement between TransAct and American Stock Transfer & (5)
Trust Company dated February 16, 1998.
10.1 Tax Sharing Agreement dated as of July 31, 1996 between Tridex and TransAct. (3)
10.2 Purchase Agreement dated as of October 17, 1996 between ICL Pathway Limited, Ithaca (3)
Peripherals Limited and TransAct. (Pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Company has requested
confidential treatment of portions of this exhibit deleted from the filed copy.)
10.3(x)10.2(x) 1996 Stock Plan, effective July 30, 1996. (3)
10.4(x)10.3(x) Non-Employee Directors' Stock Plan, effective August 22, 1996. (3)
10.5 Sales and Marketing Agreement by and between the Company and Oki Europe Limited, (2)
dated May 9, 1996. (Pursuant to Rule 477 under the Securities Act of 1993, as
amended (the "Securities Act"), the Company has requested confidential treatment
of portions of this exhibit deleted from the filed copy.)10.4(x) 2000 Employee Stock Purchase Plan (9)
10.5(x) 2001 Employee Stock Plan (11)
10.6 OEM Purchase Agreement by and between OKIDATA and Tridex, dated January 21, 1991. (2)
(Pursuant to Rule 477 under the Securities Act, the Company has requested
confidential treatment of portions of this exhibit deleted from the filed copy.)
10.7 Strategic Agreement by and between OKIDATA and Tridex, dated May 9, 1996. (Pursuant (2)
to Rule 477 under the Securities Act, the Company has requested confidential
treatment of portions of this exhibit deleted from the filed copy.)
10.8 Lease Agreement by and between Bomax Properties and Ithaca, dated as of March 23, (2)
1992.
10.9(x) Employment Agreement, dated July 31, 1996, by and between the Company and Bart C. (2)
Shuldman.
10.10(x) Employment Agreement, dated July 31, 1996, by and between the Company and Richard L. (2)
Cote.
10.11(x) Severance Agreement by and between TransAct and Lucy H. Staley, dated September 4, (3)
1996.
10.12(x) Severance Agreement by and between TransAct and Michael S. Kumpf, dated September 4, (3)
1996.
10.1310.7 Second Amendment to Lease Agreement by and between Bomax Properties and Ithaca, (4)
dated December 2, 1996.
10.1410.8 Agreement regarding the Continuation and Renewal of Lease by and between Bomax (14)
Properties, LLC and TransAct, dated July 18, 2001.
10.9 Lease Agreement by and between Pyramid Construction Company and Magnetec, dated July (4)
July
30, 1997.
10.15 Amendment to OEM Purchase10.10(x) Employment Agreement, dated July 31, 1996, by and between the Company and Bart C. (2)
Shuldman.
10.11(x) Employment Agreement, dated July 31, 1996, by and between the Company and Richard L. (2)
Cote.
10.12(x) Severance Agreement by and between OkidataTransAct and Tridex,Michael S. Kumpf, dated May 31, (4)September 4, (3)
1996.
(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.)
10.16(x)10.13(x) Severance Agreement by and between TransAct and Steven A. DeMartino, dated January (6)
21, 1998.
10.1710.14(x) Severance Agreement by and between TransAct and James B. Stetson, dated January 24, (10)
2001.
47
10.15 Loan Agreement by and between the Company and Bart C. Shuldman, dated February 23, (6)
1999.
36
37
10.18 Asset TransferJuly 1, 2001 (14)
10.16 Loan Agreement by and between the Company and Bart C. Shuldman, dated as of May 28, 1999 between Magnetec Corporation and (7)
Tridex Corporation.
10.19January, 2002 (15)
10.17 OEM Purchase Agreement by and between GTECH Corporation, TransAct Technologies and (8)(7)
Magnetec Corporation commencing July 14, 1999. (Pursuant to Rule 24-b-2 under the
Exchange Act, the Company has requested confidential treatment of portions of this
exhibit deleted from the filed copy.)
10.20 Amendment10.18 OEM Purchase Agreement by and between GTECH Corporation and TransAct Technologies (16)
Incorporated commencing July 2, 2002. (Pursuant to Rule 24-b-2 under the Exchange
Act, the Company has requested confidential treatment of portions of this exhibit
deleted from the filed copy.)
10.19 OEM Purchase Agreement by and between Okidata Americas, Inc. and Tridex,TransAct, dated August (9)
28, 1999.(14)
June 8, 2001. (Pursuant to Rule 24b-2 under the Exchange Act, the Company has
requested confidential treatment of portions of this exhibit deleted from the filed
copy.)
10.2110.20 Preferred Stock Purchase Agreement and Certificate of Designation dated as of March (10)(8)
20, 2000 between TransAct Technologies Incorporated and Advance Capital Partners,
L.P. and affiliate
10.22 Revolving Credit10.21 Loan and Security Agreement dated as of SeptemberMay 25, 2001 among TransAct, LaSalle (12)
Business Credit, Inc. ("LaSalle") and the institutions from time to time a party
thereto.
10.22 Waiver and Amendment No. 1 to Loan and Security Agreement dated as of October 30, (13)
2001 among TransAct, LaSalle and the institutions from time to time a party thereto.
10.23 Amendment No. 2 to Loan and Security Agreement dated as of December 21, 2000 by2001 among (14)
TransAct, LaSalle and the institutions from time to time a party thereto.
10.24 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of November 12, (17)
2002 among TransAct, LaSalle and the institutions from time to time a party thereto.
10.25 Waiver and Amendment No. 4 to Loan and Security Agreement dated as of March 24, 2003 (18)
among TransAct, LaSalle and the institutions from time to time a party thereto.
10.26 OEM Purchase Agreement between Oki Data Americas, Inc. ("Oki Data") and TransAct (19)
Technologies Incorporated dated as of June 8, 2003. (Pursuant to Rule 24b-2 under
the Securities Exchange Act of 1934, as amended, the Company has requested
confidential treatment of portions of this exhibit deleted from the filed copy.)
10.27 Revolving Credit, Equipment Loan and Security Agreement between TransAct (11)(19)
Technologies Incorporated and Webster Bank.
10.23(x) Severance Agreement by and between TransAct and Catherine J. Dawson,Banknorth N.A. dated April 21,August 6, 2003.
21.1 Subsidiaries of the Company. (1)
1999.
10.24(x) Severance Agreement by and between TransAct and Mark Goebel, dated July 31, 1996.23.1 Consent of PricewaterhouseCoopers LLP. (1)
10.25(x) Severance Agreement by and between TransAct and James B. Stetson, dated January 24, (1)
2001.
10.26 Amendment31.1 Certification of Chief Executive Officer pursuant to Revolving Credit Agreement dated February 27, 2001 by and between (1)
TransAct Technologies Incorporated and Webster Bank.
11.1 Computation of earnings per share. (1)
21.1 SubsidiariesSection 302 of the Company. (1)
23.1 ConsentSarbanes-Oxley Act of PricewaterhouseCoopers LLP.2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the (1)
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as (1)
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as (1)
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
48
(1)
(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.
(6) These exhibits, which were previously filed with the
Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are incorporated by
reference.
(7) These exhibits, which were previously filed with the
Company's Quarterly Report on Form 10-Q for the
period ended June 26, 1999, are incorporated by
reference.
(8) This exhibit, which was previously filed with the
Company's Quarterly Report on Form 10-Q for the
period ended September 25, 1999, is incorporated by
reference.
(9) These exhibits, which were previously filed with the
Company's Annual Report on Form 10-K for the year
ended December 31, 1999, are incorporated by
reference.
(10) These exhibits, which were previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended March 25, 2000, are incorporated by
reference.
(11) This exhibit, which was previously filed with the
Company's Current Report on Form 8-K filed October
11,
2000, is incorporated by reference.
37
38
(9) This exhibit, which was previously filed with the Company's
Registration Statement on Form S-8 (No. 333-49540), is
incorporated by reference.
(10) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31,
2000, are incorporated by reference.
(11) This exhibit, which was previously filed with the Company's
Registration Statement on Form S-8 (No. 333-59570), is
incorporated by reference.
(12) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2001, is incorporated by reference.
(13) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2001, is incorporated by reference.
(14) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31,
2001, are incorporated by reference.
(15) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended March 31,
2002, is incorporated by reference.
(16) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2002, is incorporated by reference.
(17) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2002, is incorporated by reference.
(18) These exhibits, which were previously filed with the Company's
Annual Report on Form 10-K for the year ended December 31,
2002, are incorporated by reference.
(19) This exhibit, which was previously filed with the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
2003, is incorporated by reference.
(x) Management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
(B) REPORTS ON FORM 8-K.
A report on Form 8-K was filedfurnished on October 11, 2000November 3, 2003 to report under
Items 7 and 9 a press release announcing the Company's financial results for the
quarter ended September 30, 2003 pursuant to Item 5 a new revolving credit agreement with Webster Bank.12 of Form 8-K.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
By: /s/ Bart C. Shuldman
------------------------------------------------------------------------
Bart C. Shuldman
Chairman of the Board, President
and Chief Executive Officer
Date: March 28, 200130, 2004
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Bart C. Shuldman Chairman of the Board, President and March 28, 200130, 2004
- ------------------------------------ Chief Executive Officer
Bart C. Shuldman (Principal Executive Officer)
/s/ Richard L. Cote Executive Vice President, Chief Financial March 28, 200130, 2004
- ------------------------------------ Officer, Treasurer, Secretary and Director
Richard L. Cote (Principal Financial Officer)
/s/ Steven A. DeMartino Senior Vice President, and Corporate ControllerFinance March 28, 200130, 2004
- ------------------------------------ and Information Technology
Steven A. DeMartino (Principal Accounting Officer)
Steven A. DeMartino
/s/ Charles A. Dill Director March 28, 200130, 2004
- ------------------------------------
Charles A. Dill
/s/ Jeffrey T. Leeds Director March 28, 2001
- ------------------------------------
Jeffrey T. Leeds
/s/ Thomas R. Schwarz Director March 28, 200130, 2004
- ------------------------------------
Thomas R. Schwarz
/s/ Graham Y. Tanaka Director March 28, 200130, 2004
- ------------------------------------
Graham Y. Tanaka
3850
39
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
10.23(x) Severance Agreement by and between TransAct and
Catherine J. Dawson, dated April 21, 1999.
10.24(x) Severance Agreement by and between TransAct and Mark
Goebel, dated July 23, 1996.
10.25(x) Severance Agreement by and between TransAct and James
B. Stetson, dated January 24, 2001
10.26 Amendment to Revolving Credit Agreement dated
February 27, 2001 by and between TransAct
Technologies Incorporated and Webster Bank.
11.1 Computation of earnings per share.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
39Exhibit
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
51