FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
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
(Exact name of registrant as specified in its charter)
DELAWARE 06-1456680
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 LASER LANE, WALLINGFORD, CT 06492
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(Address of principal executive offices)
(Zip Code)
(203) 269-1198
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [x] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING JULY 26, 2002
- ----- -------------------------
COMMON STOCK,
$.01 PAR VALUE 5,710,048
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
PART I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1 Financial Statements
Consolidated condensed balance sheets as of June
30, 2002 and December 31, 2001 3
Consolidated condensed statements of operations
for the three and six months ended June 30, 2002
and 2001 4
Consolidated condensed statements of cash flow
for the six months ended June 30, 2002 and 2001 5
Notes to consolidated condensed financial
statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 15
PART II. Other Information:
Item 4 Submission of Matters to a Vote of Security
Holders 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, December 31,
(In thousands) 2002 2001
-------- --------
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents $ 201 $ 417
Receivables, net 3,874 4,047
Inventories 9,093 10,633
Deferred tax assets 2,308 2,382
Other current assets 217 212
-------- --------
Total current assets 15,693 17,691
-------- --------
Fixed assets, net 4,476 5,190
Goodwill, net 1,469 1,469
Deferred tax assets 1,120 1,120
Other assets 296 321
-------- --------
7,361 8,100
-------- --------
$ 23,054 $ 25,791
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan $ 100 $ 100
Accounts payable 2,482 2,903
Accrued liabilities 3,696 3,320
Customer advance payment (Note 4) 944 --
Accrued restructuring expenses (Note 5) 1,595 3,002
-------- --------
Total current liabilities 8,817 9,325
-------- --------
Revolving bank loan payable 2,509 4,994
Long-term portion of term loan 300 350
Other liabilities 58 61
-------- --------
2,867 5,405
-------- --------
Mandatorily redeemable preferred stock 3,785 3,746
-------- --------
Shareholders' equity:
Common stock 57 57
Additional paid-in capital 6,405 6,303
Retained earnings 1,630 1,649
Unamortized restricted stock compensation (160) (286)
Loan receivable from officer (330) (330)
Accumulated other comprehensive loss (17) (78)
-------- --------
Total shareholders' equity 7,585 7,315
-------- --------
$ 23,054 $ 25,791
======== ========
See notes to consolidated condensed financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
(In thousands, except per share data) 2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 10,921 $ 10,796 $ 21,446 $ 20,569
Cost of sales 7,809 8,383 15,708 16,353
-------- -------- -------- --------
Gross profit 3,112 2,413 5,738 4,216
-------- -------- -------- --------
Operating expenses:
Engineering, design and product
development expenses 504 873 1,050 1,691
Selling and marketing expenses 1,094 1,309 2,125 2,455
General and administrative 1,108 1,626 2,284 3,133
expenses
Business consolidation and
restructuring expenses (Note 5) 5 422 46 1,446
-------- -------- -------- --------
2,711 4,230 5,505 8,725
-------- -------- -------- --------
Operating income (loss) 401 (1,817) 233 (4,509)
-------- -------- -------- --------
Other income (expense):
Interest, net (34) (88) (89) (182)
Other, net (Note 4) 84 (1) 105 40
-------- -------- -------- --------
50 (89) 16 (142)
-------- -------- -------- --------
Income (loss) before income taxes 451 (1,906) 249 (4,651)
Income tax provision (benefit) 162 (686) 89 (1,674)
-------- -------- -------- --------
Net income (loss) 289 (1,220) 160 (2,977)
Dividends and accretion charges
on preferred stock (89) (89) (179) (179)
-------- -------- -------- --------
Net income (loss) available to
common shareholders $ 200 $ (1,309) $ (19) $ (3,156)
======== ======== ======== ========
Net income (loss) per share:
Basic and diluted $ 0.04 $ (0.24) $ -- $ (0.57)
======== ======== ======== ========
Shares used in per share calculation:
Basic and diluted 5,626 5,556 5,615 5,547
======== ======== ======== ========
See notes to consolidated condensed financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
(In thousands) 2002 2001
------- -------
Cash flows from operating activities:
Net income (loss) $ 160 $(2,977)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,148 1,599
Deferred income taxes 74 (1,865)
Loss on disposal of equipment -- 67
Changes in operating assets and liabilities:
Receivables 173 (1,510)
Inventories 1,540 (497)
Other current assets (5) 210
Other assets (19) (208)
Accounts payable (421) 1,662
Accrued liabilities and other liabilities 373 694
Customer advance payment (Note 4) 944 --
Accrued restructuring expenses (Note 5) (1,407) 1,280
------- -------
Net cash provided by (used in) operating activities 2,560 (1,545)
------- -------
Cash flows from investing activities:
Purchases of fixed assets (269) (597)
------- -------
Net cash used in investing activities (269) (597)
------- -------
Cash flows from financing activities:
Revolving bank loan borrowings (repayments), net (2,485) 742
Term loan borrowings (repayments), net (50) 500
Proceeds from option exercises 107 195
Payment of cash dividends on preferred stock (140) (140)
------- -------
Net cash provided by (used in) financing activities (2,568) 1,297
------- -------
Effect of exchange rate changes on cash 61 (51)
------- -------
Decrease in cash and cash equivalents (216) (896)
Cash and cash equivalents at beginning of period 417 992
------- -------
Cash and cash equivalents at end of period $ 201 $ 96
======= =======
See notes to consolidated condensed financial statements.
5
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of TransAct Technologies Incorporated (the
"Company"), the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly its financial position as of June
30, 2002, and the results of its operations and cash flows for the three
and six months ended June 30, 2002 and 2001. The December 31, 2001
consolidated condensed balance sheet has been derived from the audited
financial statements at that date. These interim financial statements
should be read in conjunction with the audited financial statements for
the year ended December 31, 2001 included in the Company's Annual Report
on Form 10-K.
The financial position and results of operations of the Company's
foreign subsidiaries are measured using local currency as the functional
currency. Assets 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 and
losses are included in other income.
The results of operations for the three and six months ended June
30, 2002 are not necessarily indicative of the results to be expected for
the full year.
The Company has adopted the provisions of Statement of Financial
Accounting Standard 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, the Company had
been amortizing goodwill related to the acquisition of (1) Ithaca
Peripherals, Inc. ("Ithaca") in 1991 and (2) the ribbon business formerly
conducted by Tridex ("Tridex Ribbon Business"). The original amount
applicable to the Ithaca acquisition totaled $3,536,000 and was being
amortized on the straight-line method over 20 years. The original amount
applicable to the Tridex Ribbon Business acquisition totaled $180,000 and
was being amortized on the straight-line method over five years. The
Company recorded amortization of goodwill of approximately $33,000 and
$67,000, net of taxes, during the three and six months ended June 30,
2001, respectively.
FAS 142 requires that goodwill be tested annually for impairment.
The Company has performed an impairment test as of January 1, 2002 and
determined that no transition adjustment related to impairment is
necessary.
2. Earnings per share
Basic earnings per common share for the three and six months ended
June 30, 2002 and 2001 were based on the weighted average number of shares
outstanding during the period. Diluted earnings per share for the same
periods were based on the weighted average number of shares after
consideration of any dilutive effect of stock options and warrants. For
the three and six months ended June 30, 2002 and 2001, the effects of
potential dilutive securities have been excluded, as they would have been
anti-dilutive.
3. Inventories:
The components of inventory are:
June 30, December 31,
(In thousands) 2002 2001
------- -------
Raw materials and component parts $ 8,988 $10,299
Work-in-process 5 25
Finished goods 100 309
------- -------
$ 9,093 $10,633
======= =======
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
4. Significant transactions
In June 2002, the Company received 2,146 shares of common stock from
its health insurance company, Anthem, Inc., upon its demutualization. The
value of these shares was approximately $145,000 at June 30, 2002, and is
included in Other Income. The Company sold these shares in the third
quarter of 2002.
On February 22, 2002, at the request of a major customer, the
Company received a cash payment of approximately $5,824,000 in advance of
printer shipments to be made from March through August 2002. As a result
of this payment, the Company repaid all its outstanding revolving
borrowings under the LaSalle Credit Facility in February 2002. The advance
payment has been classified as a current liability, and is being reduced
by the sales value of shipments as they are made. As of June 30, 2002
approximately $900,000 of the original $5.8 million advance remains
outstanding, and outstanding borrowings have increased to $2,509,000.
5. Business consolidation and restructuring
In February 2001, the Company announced plans to establish a global
engineering and manufacturing center at its Ithaca, NY facility. As part
of this strategic decision, the Company undertook a plan to consolidate
all manufacturing and engineering into its existing Ithaca, NY facility
and close its Wallingford, CT facility (the "Consolidation"). As of
December 31, 2001, substantially all Wallingford product lines were
successfully transferred to Ithaca, NY. The Company currently maintains
one small component production line in Wallingford. The closing of the
Wallingford facility resulted in the termination of employment of
approximately 70 production, administrative and management employees. The
Company has 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. The Company estimates that
the non-recurring costs associated with the Consolidation, including
severance pay, stay bonuses, employee benefits, moving expenses,
non-cancelable lease payments, accelerated depreciation and other costs,
will be approximately $4.2 million, of which approximately $4.1 million
was recognized during 2001.
The following table summarizes the activity recorded in the
restructuring accrual during the three and six months ended June 30, 2002
and 2001.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
(In thousands) 2002 2001 2002 2001
------- ------- ------- -------
Accrual balance, beg of period $ 2,358 $ 1,007 $ 3,002 $ 105
------- ------- ------- -------
Business consolidation and restructuring expenses:
Employee severance and termination expenses (1) -- 379 40 574
Facility closure and consolidation expenses (2) 5 43 6 872
------- ------- ------- -------
5 422 46 1,446
------- ------- ------- -------
Cash payments (768) (44) (1,453) (166)
------- ------- ------- -------
Accrual balance, end of period $ 1,595 $ 1,385 $ 1,595 $ 1,385
======= ======= ======= =======
(1) Employee severance and termination related expenses are the estimated
termination salaries, benefits, outplacement, counseling services and
other related costs expected to be paid to involuntarily terminated
employees.
(2) Facility closure and consolidation expenses are the estimated costs to
close the Wallingford, CT facility including lease termination costs and
other related costs, in accordance with the restructuring plan. The
Wallingford facility closure was substantially completed by December 31,
2001.
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
5. Business consolidation and restructuring (continued)
The following table summarizes the components of all charges related
to the Consolidation.
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
(In thousands) 2002 2001 2002 2001
------ ------ ------ ------
Business consolidation and restructuring expenses $ 5 $ 422 $ 46 $1,446
Accelerated depreciation and asset disposal losses (1) -- 163 -- 261
------ ------ ------ ------
Total business consolidation, restructuring and related charges $ 5 $ 585 $ 46 $1,707
====== ====== ====== ======
(1) Represents accelerated depreciation on certain leasehold improvements and
other fixed assets, due to the closing of the Wallingford facility. These
charges are included in general and administrative expenses.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 by competitors; successful product development; dependence on
significant customers including GTECH Corporation; dependence on third parties
for sales in Europe and Latin America; economic conditions in the United States,
Europe and Latin America; marketplace acceptance of our new products; risks
associated with foreign operations; our ability to successfully sublease our
facility in Wallingford, CT subsequent to its closing; availability of
third-party components at reasonable prices; and the absence of price wars or
other significant pricing pressures affecting our products in the United States
or abroad. Actual results may differ materially from those discussed in, or
implied by, the forward-looking statements. The forward-looking statements speak
only as of the date of this report and we assume no duty to update them to
reflect new, changing or unanticipated events or circumstances.
PLANT CONSOLIDATION
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 facility
(the "Consolidation"). Our technology shift to inkjet and thermal printing from
dot matrix impact printing has dramatically reduced the labor content in our
printers, and therefore, lowers the required production capacity. As of December
31, 2001, we successfully transferred substantially all our Wallingford product
lines to Ithaca, NY, with the exception of one small production line that
remains in Connecticut. The closing of the Wallingford facility resulted in the
termination of employment of approximately 70 production, administrative and
management employees. We estimate that the non-recurring costs associated with
the Consolidation, including severance pay, stay bonuses, employee benefits,
moving expenses, non-cancelable lease payments, and other costs, will be
approximately $4.2 million, of which approximately $4.1 million was recognized
during 2001. See the "Liquidity and Capital Resources" section for a discussion
of the expected impact of the Consolidation on our future results of operations
and cash flows.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
NET SALES. Net sales by market for the current and prior year's quarter were as
follows:
Three months ended Three months ended
(In thousands, except %) June 30, 2002 June 30, 2001
--------------------- ---------------------
Point of sale $ 4,612 42.2% $ 4,935 45.7%
Gaming and lottery 5,859 53.7 4,813 44.6
Other 450 4.1 1,048 9.7
------- ----- ------- -----
$10,921 100.0% $10,796 100.0%
======= ===== ======= =====
International $ 1,073 9.8% $ 1,894 17.5%
======= === ======= ====
Net sales for the second quarter of 2002 increased $125,000, or 1%, from the
prior year's second quarter due to significantly higher shipments into the
gaming and lottery market, largely offset by decreased sales into the point of
sale ("POS") and other markets. Overall, international sales decreased by
$821,000, or 43%, largely due to a reduction in POS revenue through distribution
primarily in Europe and Latin America (approximately $400,000) and kiosk printer
shipments for use in a Canadian government application (approximately $400,000).
Point of sale: Sales of our POS printers overall decreased by approximately
$323,000, or 7% from the same period last year. Despite softness in demand for
POS printers, domestic POS printer sales rose to $3,642,000, representing a
$131,000, or 4% increase over the second quarter of 2002. These sales were
bolstered by increasing sales of our POSjet line of inkjet printers.
9
International POS printer shipments declined by approximately $454,000, or 32%,
to $970,000 due to a number of factors. First, shipments of our thermal fiscal
printer in Europe declined by approximately $500,000 to $229,000 in the second
quarter of 2002. Although we continue to pursue sales of our fiscal printer,
such sales are principally project-oriented, and we cannot predict if and when
future sales may occur. Secondly, sales in Latin America through Okidata, a
distribution partner in the region, decreased by approximately $300,000 to
approximately $100,000. Both of these decreases were partially offset by an
increase of (1) approximately $100,000 of printer, spare parts and service
revenue, primarily through distribution in Europe and (2) approximately $200,000
in service and spare parts revenue for the British Post Office Project. Although
we expect continued weakness in our international POS sales for the remainder of
the year, we are actively seeking additional distribution partners in both Latin
America and Europe in order to increase our breadth of coverage and future sales
in these regions.
Due to on-going economic weakness and continued lower capital spending by users
of our POS products, we expect continued worldwide softness in demand for our
POS products for the remainder of 2002. As a result, we expect sales into the
POS market for each of the last two quarters of 2002 to be consistent with those
reported for the second quarter of 2002.
Gaming and lottery: Sales of our gaming and lottery printers increased by
$1,046,000, or 22%, from the second quarter a year ago, primarily on strong
sales of our video lottery terminal ("VLT") and slot machine printers, and to a
lesser extent, higher shipments of our on-line lottery printer.
Shipments to GTECH Corporation ("GTECH") (a worldwide lottery terminal provider
and major customer), which include on-line and in-lane lottery printers and
spare parts revenue, increased $150,000 to approximately $3,550,000 in the
second quarter of 2002. On-line lottery printers and spare parts sales totaled
approximately $3,450,000 in the second quarter of 2002, compared to $3,300,000
in the second quarter of 2001. We have orders from GTECH for on-line lottery
printers, of which approximately $2,500,000 will be delivered during the
remainder of 2002 and $500,000 in 2003. Shipments of in-lane lottery printers
totaled approximately $100,000 in both the second quarter of 2002 and 2001.
Since sales of in-lane lottery printers are project-oriented, we cannot predict
if and when future sales may occur. In July 2002, we entered into a 5-year
agreement with GTECH to provide a newly-designed thermal on-line lottery
printer. We expect to begin shipping our new thermal on-line lottery printer in
early 2003, and to continue to ship our existing impact on-line printer
(although at significantly lower volumes than in 2002).
Sales of our VLT printers increased by $300,000 to approximately $800,000, due
largely to installations in several states. Since VLT printer sales are largely
project-oriented, we cannot predict if and when future sales may occur. However
based on existing orders and sales opportunities, we expect higher sales of VLT
printers in 2002 compared to 2001. Sales for the full year 2001 were
approximately $1,700,000.
In addition, sales of our slot machine printers, spare parts and repairs
increased by approximately $600,000 to $1,500,000. Such printers are primarily
for use in slot machines at casinos in California and Nevada that print receipts
instead of dropping coins ("ticket-in, ticket-out"). We expect sales of our slot
machine printers to continue to increase during the second half of 2002 as more
regulatory approvals are expected to be obtained and more casinos are expected
to convert to ticket-in, ticket-out slot machines.
Other: Sales of our printers into other markets decreased by $598,000 or 57%, to
$450,000 from the prior year's comparable quarter. The second quarter of 2001
included shipments of approximately $400,000 of our thermal kiosk printers for
use in a Canadian government application. No shipments of these printers were
made in the second quarter of 2002. However, we expect to ship printers for this
application during the second half of 2002, although the amount is not known at
this time. In addition, sales of our other kiosk printers and related spare
parts declined by approximately $200,000. Since printer sales into this market
are principally project-oriented, we cannot predict if and when future sales may
occur.
GROSS PROFIT. Gross profit increased $699,000, or 29%, due primarily to an
improved sales mix and cost reductions resulting from the Consolidation. The
gross margin also increased to 28.5% from 22.4%. We expect gross margin for the
full-year 2002 to be between 26% and 27%, which is substantially higher that the
full-year 2001 gross margin of 22.2%.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses decreased $369,000, or 42%, and decreased as a percentage of net sales
to 4.6% from 8.1%. This decrease is primarily due to a reduction in engineering
staff at our Wallingford, CT facility due to the Consolidation.
10
SELLING AND MARKETING. Selling and marketing expenses decreased $215,000, or
16%, and decreased as a percentage of net sales to 10.0% from 12.1%. Such
expenses decreased mostly due to lower planned promotional and advertising
expenses and staff reductions resulting from the Consolidation.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$518,000, or 32%, and decreased as a percentage of net sales to 10.2% from
15.1%. The decrease primarily resulted from (1) staff reductions resulting from
the Consolidation and (2) the inclusion in the second quarter of 2001 of
$163,000 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. During the second quarter of 2002, we
incurred $5,000 of expenses related to the Consolidation, compared to
approximately $422,000 in the second quarter a year ago. In the second quarter
of 2002 these expenses included moving expenses; in the second quarter of 2001
these expenses included a portion of employee severance and termination expenses
incurred during the quarter, and facility closure and consolidation expenses
(including moving expenses, estimated non-cancelable lease payments and other
costs). See Note 5 to the Consolidated Condensed Financial Statements.
OPERATING INCOME (LOSS). During the second quarter of 2002 we reported operating
income of $401,000, or 3.7% of net sales, compared to an operating loss of
$1,817,000 in the second quarter of 2001. Our return to operating profitability
was due to (1) significantly lower Consolidation expenses, (2) higher gross
margin and (3) significantly reduced operating expenses as a direct result of
the Consolidation.
INTEREST. Net interest expense decreased to $34,000 from $88,000 in the second
quarter of 2001 due largely to a significant reduction in our outstanding
borrowings under our revolving bank facility resulting from receipt of an
advance payment from a customer, and to a lesser extent, lower interest rates.
The cash proceeds for the repayment resulted from the receipt of an advance
payment of approximately $5.8 million from a major customer in advance of
printer shipments to be made from March through August 2002. See Note 4 to the
Consolidated Condensed Financial Statements. We expect revolving borrowings to
return to approximately $4 million by the end of the third quarter 2002, and to
remain at approximately that level during the fourth quarter of 2002. As a
result, interest expense is expected to increase sequentially in each of the
remaining quarters of 2002. See "Liquidity and Capital Resources" below.
OTHER INCOME. Other income for the second quarter of 2002 includes a one-time
gain of $145,000 resulting from the receipt of 2,146 shares of common stock from
our health insurance company, Anthem, Inc., upon its demutualization. We sold
these shares during the third quarter of 2002. This gain was partially offset by
approximately $60,000 of transaction exchange loss recorded by our UK subsidiary
in the quarter, due to the strengthening of the British pound against the
dollar.
INCOME TAXES. We recorded an income tax provision of $162,000 in the second
quarter of 2002, and an income tax benefit of $686,000 in the second quarter of
2001, at an effective rate of approximately 36.0% in both quarters.
NET INCOME (LOSS). We reported net income during the second quarter of 2002 of
$289,000, or $0.04 per share (basic and diluted) after giving effect to $89,000
of dividends and accretion charges on preferred stock. This compares to a net
loss of $1,220,000, or $0.24 per share (basic and diluted) for the second
quarter of 2001, after giving effect to $89,000 of dividends and accretion
charges on preferred stock. In future quarters, dividends and accretion charges
on preferred stock will be approximately $90,000, assuming no conversion or
redemption of the preferred stock.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
NET SALES. Net sales by market for the current and prior year's six month period
were as follows:
Six months ended Six months ended
(In thousands, except %) June 30, 2002 June 30, 2001
--------------------- ---------------------
Point of sale $ 8,234 38.4% $10,940 53.2%
Gaming and lottery 12,312 57.4 6,741 32.8
Other 900 4.2 2,888 14.0
------- ----- ------- -----
$21,446 100.0% $20,569 100.0%
======= ===== ======= =====
International $ 2,084 9.7% $ 5,438 26.4%
======= === ======= ====
11
Net sales for the first half of 2002 increased $877,000, or 4%, due to
significantly higher shipments into the Company's gaming and lottery market,
including significantly higher shipments of on-line lottery printers to GTECH,
largely offset by lower sales into the POS and other markets. Overall,
international sales decreased by $3,354,000, or 62%, largely due to a reduction
in (1) revenue related to the British Post Office project (approximately
$600,000), (2) kiosk printer shipments for use in a Canadian government
application (approximately $1,400,000), (3) shipments of our thermal fiscal
printer in Europe (approximately $850,000) and (4) POS revenue through
distribution in Europe and Latin America (approximately $500,000)
Point of sale: Sales of our POS printers decreased approximately $2,706,000, or
25%, in the first half of 2002 compared to the first half of 2001.
International POS printer shipments decreased approximately $1,997,000, or 51%,
to $1,931,000 for several reasons. First, sales to ICL Pathway for the British
Post Office project, which include printer shipments, spare parts and service
revenue, declined by approximately $600,000 to $700,000 for the first half of
2002. We completed shipping printers for the British Post Office project during
the first quarter of 2001, and expect no future sales, other than spare parts
and service of approximately $250,000 per quarter, for the remainder of 2002.
Secondly, shipments of the Company's thermal fiscal printer in Europe declined
by approximately $850,000 to $300,000 in the first half of 2002. Although we
continue to pursue sales of our fiscal printer, such sales are principally
project-oriented, and we cannot predict if and when future sales may occur.
Lastly, the Company experienced a decrease of approximately $500,000 in sales
through distribution, primarily in Europe and Latin America. Although we expect
continued weakness in our international POS sales for the remainder of the year,
we are actively seeking additional distribution partners in both Latin America
and Europe in order to increase our breadth of coverage and future sales in
these regions.
Domestic POS printer sales totaling $6,303,000 were lower by $709,000, or 10%,
as we experienced softness in demand from our domestic distributors,
particularly in the first quarter of 2002. However, sales in the first half of
2002 included increasing sales of our POSjet line of inkjet printers.
Due to on-going economic weakness and continued lower capital spending by users
of our POS products, we expect continued worldwide softness in demand for our
POS products for the remainder of 2002. As a result, we expect sales into the
POS market for each of the last two quarters of 2002 to be consistent with those
reported for the second quarter of 2002.
Gaming and lottery: Sales into the gaming and lottery market increased by
$5,571,000, or 83%, from the first half a year ago, primarily due to
significantly higher shipments of our on-line and in-lane lottery printers to
GTECH, as well as strong sales of our video lottery terminal ("VLT") and slot
machine printers.
Shipments to GTECH, which include on-line and in-lane lottery printers and spare
parts revenue, increased $4,500,000 to approximately $7,900,000 in the first
half of 2002. On-line lottery printers and spare parts sales totaled
approximately $7,250,000 in the first half of 2002, compared to $3,300,000 in
the first half of 2001. We have orders from GTECH for on-line lottery printers,
of which approximately $2,500,000 will be delivered during the remainder of 2002
and $500,000 in 2003. Shipments of in-lane lottery printers totaled
approximately $650,000 in first half of 2002 compared to $100,000 in the first
half of 2001. Since sales of in-lane lottery printers are project-oriented, we
cannot predict if and when future sales may occur. In July 2002, we entered into
a 5-year agreement with GTECH to provide a newly-designed thermal on-line
lottery printer. We expect to begin shipping our new thermal on-line lottery
printer in early 2003, and to continue to ship our existing impact on-line
printer (although at significantly lower volumes than in 2002).
Sales of our VLT printers increased by $1,100,000 to approximately $2,300,000,
due largely to installations in West Virginia and other states. Since VLT
printer sales are largely project-oriented, we cannot predict if and when future
sales may occur. However based on existing orders and sales opportunities, we
expect higher sales of VLT printers in 2002 compared to 2001. Sales for the full
year 2001 were approximately $1,700,000.
In addition, sales of our slot machine printers, spare parts and repairs
remained flat at approximately $2,100,000. Such printers are primarily for use
in slot machines at casinos in California and Nevada that print receipts instead
of dropping coins ("ticket-in, ticket-out"). The Company expects sales of its
slot machine printers to increase during the second half of 2002 as more
regulatory approvals are expected to be obtained and more casinos are expected
to convert to ticket-in, ticket-out slot machines.
12
Other: Sales of our printers into other markets decreased by $1,988,000 or 69%,
to $2,888,000 from the first six months of 2001. The first half of 2001 included
shipments of approximately $1,400,000 of our thermal kiosk printers for use in a
Canadian government application. No shipments of these printers were made in the
first half of 2002. However, we expect to ship printers for this application
during the second half of 2002, although the amount is not known at this time.
In addition, sales of our other kiosk printers and related spare parts declined
by approximately $1,500,000. Since printer sales into this market are
principally project-oriented, we cannot predict if and when future sales may
occur.
GROSS PROFIT. Gross profit increased by $1,522,000, or 36%, to $5,738,000, and
the gross margin also increased to 26.8% from 20.5%. Both gross profit and gross
margin for the first half of 2002 benefited from an improved sales mix and cost
reductions resulting from the Consolidation. We expect gross margin for the
full-year 2002 to be between 26% and 27%, which is substantially higher that the
full-year 2001 gross margin of 22.2%.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses decreased $641,000, or 38%, and also decreased as a percentage of net
sales to 4.9% from 8.2%. This decrease is primarily due to a reduction in
engineering staff at our Wallingford, CT facility due to the Consolidation.
SELLING AND MARKETING. Selling and marketing expenses decreased $330,000, or
13%, and decreased as a percentage of net sales to 9.9% from 11.9%. Such
expenses decreased mostly due to lower planned promotional and advertising
expenses and staff reductions resulting from the Consolidation.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$849,000, or 27%, and decreased as a percentage of net sales to 10.7% from
15.2%. The decrease primarily resulted from (1) staff reductions resulting from
the Consolidation and (2) the inclusion in the first half of 2001 of $197,000 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. During the first half of 2002, we
incurred approximately $46,000 of expenses related to the Consolidation. These
expenses primarily included severance costs and moving expenses. During the
first half of 2001, we incurred approximately $1,446,000 of expenses, which
included a portion of employee severance and termination expenses incurred
during the period, and facility closure and consolidation expenses (including
moving expenses, estimated non-cancelable lease payments and other costs). See
Note 5 to the Consolidated Condensed Financial Statements.
OPERATING INCOME (LOSS). During the first half of 2002 we reported operating
income of $233,000, or 1.1% of net sales, compared to an operating loss of
$4,509,000 in the first half of 2001. Our return to operating profitability was
due to (1) significantly lower Consolidation expenses, (2) higher gross margin
and (3) significantly reduced operating expenses as a direct result of the
Consolidation.
INTEREST. Net interest expense decreased to $89,000 from $182,000 in the first
half of 2001 due largely to a significant reduction in our outstanding
borrowings under our revolving bank facility resulting from receipt of an
advance payment from a customer, and to a lesser extent, lower interest rates.
The cash proceeds for the repayment resulted from the receipt of an advance
payment of approximately $5.8 million from a major customer in advance of
printer shipments to be made from March through August 2002. See Note 4 to the
Consolidated Condensed Financial Statements. We expect revolving borrowings to
return to approximately $4 million by the end of the third quarter 2002, and to
remain at approximately that level during the fourth quarter of 2002. As a
result, interest expense is expected to increase sequentially in each of the
remaining quarters of 2002. See "Liquidity and Capital Resources" below.
OTHER INCOME. Other income for the first half of 2002 includes a one-time gain
of $145,000 resulting from the receipt of 2,146 shares of common stock from our
health insurance company, Anthem, Inc., upon its demutualization. We sold these
shares during the third quarter of 2002. This gain was partially offset by
approximately $40,000 of transaction exchange loss recorded by our UK subsidiary
in the half, due to the strengthening of the British pound against the dollar in
the second quarter of 2002.
INCOME TAXES. We recorded an income tax provision of $89,000 in the first half
of 2002, and an income tax benefit of $1,674,000 in the first half of 2001, at
an effective rate of approximately 36.0% in both periods.
13
NET INCOME (LOSS). We reported net income during the first half of 2002 of
$160,000, or $0.00 per share (basic and diluted) after giving effect to $179,000
of dividends and accretion charges on preferred stock,. This compares to a net
loss of $2,977,000, or $0.57 per share (basic and diluted) after giving effect
to $179,000 of dividends and accretion charges on preferred stock in the first
half of 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.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
We generated cash from operations of $2,560,000 in the first half of 2002,
compared to using cash in operations of $1,545,000 in the first half of 2001.
The significant increase in cash generated from operations in the first half of
2002 was largely the result of a return to profitability in the first half of
2002. During the first half of 2002, we earned net income of $160,000 compared
to a net loss of $2,977,000 in the first half of 2001.
During the first half of 2002, depreciation and amortization totaled
$1,148,000. We received a $5,824,000 advance payment from a major customer in
February 2002, of which $944,000 was outstanding at June 30, 2002. (See Note 4
to the Consolidated Condensed Financial Statements.) Receivables were lower by
$173,000 despite higher sales, primarily as a result of the advance payment
noted above. Without the advance payment, receivables would have increased by
approximately $1,100,000. Inventories were reduced in the first half of 2002 by
approximately $1,540,000 due to higher shipments and tighter inventory
management. Offsetting the activities providing cash in the quarter was a net
reduction in the restructuring accrual of $1,407,000, representing primarily
payouts for severance pay and related benefits of $1,453,000 and an additional
accrual of $46,000.
We used $2,568,000 in financing activities, largely due to repayments on
our revolving credit facility resulting from the advance payment from a major
customer.
WORKING CAPITAL
Our working capital decreased to $6,876,000 at June 30, 2002 from
$8,366,000 at December 31, 2001. The current ratio also decreased to 1.78 to 1
at June 30, 2002 from 1.90 to 1 at December 31, 2001. The decrease in both
working capital and the current ratio were largely due to (1) lower inventories
($1,540,000) and (2) the receipt of a $5,824,000 advance payment from a major
customer in February 2002, the balance of which ($944,000) is carried as a
current liability in the condensed consolidated balance sheet, but will be
eliminated by the end of the third quarter.
CREDIT FACILITY AND BORROWINGS
On May 25, 2001, we entered into a three-year, $13.5 million credit
facility (the "LaSalle Credit Facility") with LaSalle Business Credit, Inc.
("LaSalle") expiring on May 25, 2004 to replace a prior credit facility with
Webster Bank. The LaSalle Credit Facility provides 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 bear a floating rate of interest
based on LaSalle's prime rate. 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.
On October 30, 2001, we amended the LaSalle Credit Facility. Under the
terms of the amendment ("LaSalle Amendment No.1"), LaSalle, in consideration of
certain waivers and other matters, (1) increased the floating rate of interest
on borrowings under the revolving credit line to LaSalle's prime rate plus 1.0%,
or the current LIBOR rate plus 3.5%, and (2) increased the floating rate of
interest on borrowings under the term loan and equipment loan to LaSalle's prime
rate plus 1.5%, or the current LIBOR rate plus 4.0%. Upon execution of LaSalle
Amendment No. 1, we paid a fee of $20,000 to LaSalle.
On December 21, 2001, we amended the LaSalle Credit Facility to reset
certain financial covenants for 2002 and beyond ("LaSalle Amendment No. 2). Upon
execution of LaSalle Amendment No. 2, we paid a fee of $5,000 to LaSalle.
As of June 30, 2002, we had $2,509,000 of outstanding borrowings on the
revolving credit line compared to $4,994,000 outstanding at December 31, 2001.
We expect our outstanding borrowings on the revolving credit line to increase to
approximately $4 million by the end of the third quarter 2002, and to remain at
approximately that level during the fourth quarter 2002. At June 30, 2002 we had
$400,000 outstanding under the term loan, compared to $450,000 at December 31,
2001. Annual principal payments on the term loan are $100,000. There were no
borrowings under the equipment loan.
14
PREFERRED STOCK
In connection with its 7% Series B Cumulative Convertible Redeemable
Preferred Stock (the "Preferred Stock"), we paid $70,000 of cash dividends to
Advance Capital Advisors, L.P. in each of the first two quarters of 2002 and
2001, and expect to pay $70,000 per quarter for the remainder of 2002. 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.
CAPITAL EXPENDITURES
Our capital expenditures were approximately $269,000 and $597,000 in the
first half of 2002 and 2001, respectively. These expenditures for 2002 primarily
included new product tooling and computer equipment. We expect capital
expenditures for the year 2002 to be approximately $800,000, a majority for new
product tooling.
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 expect to incur an additional $50,000 to
$100,000 of non-recurring costs associated with the Consolidation during 2002,
of which $46,000 was recorded in the first half of 2002. These costs in 2002
primarily include (1) expenses incurred to physically move the remaining assets
of the Wallingford, CT facility to Ithaca, NY and (2) severance costs for
employees who terminate in 2002. We believe that the Consolidation will
significantly lower our cost structure in 2002, with estimated annual cost
savings of approximately $4.0 million compared to 2001. The first half 2002
operating results reflect a portion of these cost savings.
Of the total of $4,200,000 of expenses, approximately $3,400,000 requires
cash outlays. During 2001, we paid approximately $400,000 of these costs, with
substantially all the remaining costs expected to be paid during 2002. The
Company paid approximately $1,453,000 of these expenses during the six months
ended June 30, 2002.
RESOURCE SUFFICIENCY
We believe that cash flows generated from operations and borrowings
available under the LaSalle Credit Facility, as amended, will provide sufficient
resources to meet our working capital needs, including costs associated with the
Consolidation, finance our capital expenditures and meet our liquidity
requirements through December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates
primarily to borrowings under our Credit Facility with LaSalle Business Credit.
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 Facility would not have a material effect on our results of
operations or cash flow.
FOREIGN CURRENCY EXCHANGE RISK
A substantial portion of our sales are denominated in U.S. dollars and, as
a result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made. This exposure may change over time as business
practices evolve and could have a material adverse impact on our financial
results in the future. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material impact on our future results
of operations or cash flow.
15
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 17, 2002.
Matters voted upon at the meeting and the number of votes cast for,
against, withheld or abstentions, are as follows:
(1) To consider and act upon a proposal to elect two Directors to
serve until the Annual Meeting of Stockholders in the year
2005 or until their successors have been duly elected and
qualified. Nominees were Thomas R. Schwarz and Bart C.
Shuldman. Votes cast were as follows:
For Withheld
--------- --------
Thomas R. Schwarz 5,232,748 12,005
Bart C. Shuldman 5,232,748 12,005
(2) To ratify the selection of PricewaterhouseCoopers LLP as the
Company's independent accountants for 2002. Votes cast were as
follows: 5,228,734 common shares for; 9,200 common shares
against; 6,819 common shares abstained; 4,000 preferred shares
(representing 444,444 votes) for.
The following directors continue to serve until the Annual Meeting
of Stockholders in the year 2003 or until their successors have been
duly elected and qualified: Charles A. Dill and Jeffrey T. Leeds.
The following directors continue to serve until the Annual Meeting
of Stockholders in the year 2004 or until their successors have been
duly elected and qualified: Graham Y. Tanaka and Richard L. Cote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits filed herein
Exhibit 10.27 OEM Purchase Agreement by and between GTECH
Corporation and TransAct Technologies
Incorporated commencing July 2, 2002.
(Pursuant to Rule 24-b-2 under the Exchange
Act, the Company has requested confidential
treatment of portions of this exhibit deleted
from the filed copy.)
Exhibit 11.1 Computation of earnings per share
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
----------------------------------
(Registrant)
August 13, 2002 /s/ Richard L. Cote
-------------------
Richard L. Cote
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
/s/ Steven A. DeMartino
-----------------------
Steven A. DeMartino
Senior Vice President, Finance and
Information Technology
(Principal Accounting Officer)
17
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
- -------
10.27 OEM Purchase Agreement by and between GTECH Corporation and TransAct
Technologies Incorporated commencing July 2, 2002. (Pursuant to Rule
24-b-2 under the Exchange Act, the Company has requested
confidential treatment of portions of this exhibit deleted from the
filed copy.)
11.1 Computation of earnings per share.
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002
18