UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from:__________to:____________
Commission file number: 0-21121
TRANSACT TECHNOLOGIES INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1456680
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 LASER LANE, WALLINGFORD, CT 06492
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(203) 269-1198
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name,former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING OCTOBER 31, 2004
- ----- ----------------------------
COMMON STOCK,
$.01 PAR VALUE 9,983,637
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
Page No.
--------
PART I. Financial Information:
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of September 30, 2004 and
December 31, 2003 3
Condensed consolidated statements of income for the three and nine
months ended September 30, 2004 and 2003 4
Condensed consolidated statements of cash flow for the nine months
ended September 30, 2004 and 2003 5
Notes to condensed consolidated financial statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 4 Controls and Procedures 20
PART II. Other Information:
Item 5 Subsequent Event 20
Item 6 Exhibits 21
Signatures 22
Certifications 24
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, December 31,
(In thousands) 2004 2003
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents $ 6,343 $ 498
Receivables, net 9,316 9,074
Inventories 8,545 8,061
Deferred tax assets 2,438 2,340
Other current assets 375 509
------------- -------------
Total current assets 27,017 20,482
------------- -------------
Fixed assets, net 3,239 3,607
Goodwill 1,469 1,469
Deferred tax assets - 684
Other assets 98 119
------------- -------------
4,806 5,879
------------- -------------
Total assets $ 31,823 $ 26,361
============= =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current portion of term loan $ - $ 90
Accounts payable 3,680 3,288
Accrued liabilities 2,662 2,892
Accrued restructuring expenses 480 480
Accrued patent license fees 413 408
Deferred revenue, current portion 1,078 1,537
------------- -------------
Total current liabilities 8,313 8,695
------------- -------------
Long-term portion of term loan - 330
Long-term portion of accrued restructuring 1,312 1,645
Long-term portion of accrued patent license fees - 750
Other long-term liabilities 725 692
------------- -------------
2,037 3,417
------------- -------------
Total liabilities 10,350 12,112
------------- -------------
Redeemable convertible preferred stock - 3,902
------------- -------------
Shareholders' equity:
Common stock 69 60
Additional paid-in capital 16,417 8,441
Retained earnings 6,086 1,769
Unamortized restricted stock compensation (1,206) (30)
Accumulated other comprehensive income 107 107
------------- -------------
Total shareholders' equity 21,473 10,347
------------- -------------
Total liabilities and shareholders' equity $ 31,823 $ 26,361
============= =============
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands, except per share data) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 15,482 $ 15,048 $ 45,251 $ 37,438
Cost of sales 9,585 10,229 28,319 25,966
------------ ------------ ------------ ------------
Gross profit 5,897 4,819 16,932 11,472
------------ ------------ ------------ ------------
Operating expenses:
Engineering, design and product
development 643 550 1,805 1,657
Selling and marketing 1,254 1,194 3,834 3,502
General and administrative 1,528 1,098 4,423 3,316
------------ ------------ ------------ ------------
3,425 2,842 10,062 8,475
------------ ------------ ------------ ------------
Operating income 2,472 1,977 6,870 2,997
------------ ------------ ------------ ------------
Interest and other income (expense):
Interest, net 4 (61) (8) (183)
Write-off of deferred financing costs - (103) - (103)
Other, net 4 (32) 3 (58)
------------ ------------ ------------ ------------
8 (196) (5) (344)
------------ ------------ ------------ ------------
Income before income taxes 2,480 1,781 6,865 2,653
Income tax provision 855 641 2,433 924
------------ ------------ ------------ ------------
Net income $ 1,625 $ 1,140 $ 4,432 $ 1,729
============ ============ ============ ============
Net income available to common shareholders $ 1,625 $ 976 $ 4,201 $ 1,355
Net income per common share:
Basic $ 0.16 $ 0.11 $ 0.44 $ 0.16
Diluted $ 0.15 $ 0.10 $ 0.41 $ 0.15
Shares used in per share calculation
Basic 9,853 8,745 9,483 8,621
Diluted 10,556 9,482 10,278 9,086
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 2004 2003
----------- ----------
Cash flows from operating activities:
Net income $ 4,432 $ 1,729
Adjustments to reconcile net income to net cash
provided by operating activities:
Non-cash compensation expense 224 53
Write-off of deferred financing costs - 103
Depreciation and amortization 1,237 1,278
Deferred income taxes 667 879
Gain on sale of equipment - (1)
Changes in operating assets and liabilities:
Receivables (242) (3,391)
Inventories (484) (106)
Other current assets 134 (43)
Other assets 2 11
Accounts payable 392 (29)
Accrued liabilities and other liabilities 139 646
Accrued restructuring expenses (333) (611)
----------- ----------
Net cash provided by operating activities 6,168 518
----------- ----------
Cash flows from investing activities:
Purchases of fixed assets (850) (1,156)
Proceeds from sale of fixed assets - 1
Repayment of loan receivable from officer - 330
----------- ----------
Net cash used in investing activities (850) (825)
----------- ----------
Cash flows from financing activities:
Revolving bank loan borrowings, net - (632)
Term loan (repayments) borrowings, net (420) 93
Proceeds from option and warrant exercises, and from issuance
of shares under the Employee Stock Purchase Plan 1,112 601
Payment of cash dividends (91) (210)
Payment of expenses related to preferred stock conversion and
registration of common stock (74) -
----------- ----------
Net cash provided by (used in) financing activities 527 (148)
----------- ----------
Effect of exchange rate changes - 33
----------- ----------
Increase (decrease) in cash and cash equivalents 5,845 (422)
Cash and cash equivalents at beginning of period 498 902
----------- ----------
Cash and cash equivalents at end of period $ 6,343 $ 480
=========== ==========
See notes to condensed consolidated financial statements.
5
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS
TransAct Technologies Incorporated ("TransAct"), which has
headquarters in Wallingford, CT and its primary operating facility in
Ithaca, NY, operates in one industry segment, transaction-based printers
and related products. TransAct designs, develops, manufactures and markets
transaction-based printers under the Ithaca(R) and Magnetec(R) brand
names. In addition, we market related consumables, spare parts and
service. Our printers are used worldwide to provide transaction records
such as receipts, tickets, coupons, register journals and other documents.
We focus on two core markets: point-of-sale and banking ("POS") and gaming
and lottery. We sell our products to original equipment manufacturers
("OEMs"), value-added resellers, selected distributors and directly to
end-users. Our product distribution spans across the Americas, Europe, the
Middle East, Africa, the Caribbean Islands and the South Pacific.
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. These accounting principles were applied on a basis
consistent with those of the consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December
31, 2003. In our opinion, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to state fairly TransAct's
financial position as of September 30, 2004, the results of our operations
for the three and nine months ended September 30, 2004 and 2003, and our
cash flows for the nine months ended September 30, 2004 and 2003. The
December 31, 2003 condensed consolidated balance sheet has been derived
from the audited financial statements at that date. These interim
financial statements should be read in conjunction with the audited
financial statements for the year ended December 31, 2003 included in our
Annual Report on Form 10-K.
The financial position and results of operations of our foreign
subsidiary are measured using local currency as the functional currency.
Assets and liabilities of such subsidiary have been translated at end of
period exchange rates, and related revenues and expenses have been
translated at weighted average exchange rates with the resulting
translation gain or loss recorded in accumulated other comprehensive
income. Transaction gains and losses are included in other income.
The results of operations for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results to be
expected for the full year.
On March 4, 2004, we announced that our Board of Directors approved
a three-for-two stock split of our common stock to be effected in the form
of a 50 percent stock dividend. The additional shares were payable April
2, 2004 to shareholders of record at the close of business on March 17,
2004. As a result of the stock dividend, all shareholders of record
received one additional share of common stock for every two shares of
common stock held on the record date, and cash instead of any fractional
shares. All share and per share amounts within the accompanying condensed
consolidated financial statements and footnotes reflect the stock split on
a retroactive basis.
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACCOUNTING FOR STOCK-BASED COMPENSATION
We have elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for stock options. Since the exercise price
of employee stock options granted by the Company equals the market price
of the underlying stock on the date of grant, no compensation expense is
recorded. We have adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), as amended by Statement of Financial Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FAS 123" ("FAS 148").
During the three and nine months ending September 30, 2004, we
granted 3,000 and 81,000 shares of restricted stock, respectively, to key
employees under the 1996 Stock Plan. Deferred compensation of $61,000 and
$1,400,000 was recorded with respect to these grants in the three and nine
months ended September 30, 2004, respectively, and will be recognized into
expense over the vesting period (between one and five years).
The following table illustrates the effect on net income,
compensation expense and net income per share as if the Black-Scholes fair
value method pursuant to FAS 123 had been applied to our stock plans. For
the 2003 periods presented, stock-based compensation expense determined
under the fair value method has been adjusted to properly reflect related
tax effects.
Three months ended Nine months ended
September 30, September 30,
(In thousands, except per share data) 2004 2003 2004 2003
----------- ---------- ----------- -----------
Net income available to common
shareholders:
Net income available to common
shareholders, as reported $ 1,625 $ 976 $ 4,201 $ 1,355
Add: Stock-based compensation expense
included in reported net income,
net of tax 53 9 143 34
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (148) (192) (233) (450)
----------- ---------- ----------- -----------
Pro forma net income available to common
Shareholders $ 1,530 $ 793 $ 4,111 $ 939
=========== ========== =========== ===========
Net income per common share:
Basic:
As reported $ 0.16 $ 0.11 $ 0.44 $ 0.16
Pro forma $ 0.16 $ 0.09 $ 0.43 $ 0.11
Diluted:
As reported $ 0.15 $ 0.10 $ 0.41 $ 0.15
Pro forma $ 0.14 $ 0.08 $ 0.40 $ 0.10
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACCOUNTING FOR STOCK-BASED COMPENSATION (CONT)
During the three and nine months ended September 30, 2004, we
received cash proceeds of approximately $286,000 and $1,085,000,
respectively, from the issuance of approximately 70,000 and 227,000 shares
of common stock resulting from stock option and warrant exercises. We also
recorded a related tax benefit that was credited to Additional Paid-In
Capital of approximately $459,000 and $1,635,000 in the three and nine
months ended September 30, 2004, respectively, resulting from subsequent
employee stock sales.
3. INVENTORIES
The components of inventories are:
September 30, December 31,
(In thousands) 2004 2003
------------- -------------
Raw materials and component parts $ 8,311 $ 7,947
Finished goods 234 114
------------- -------------
$ 8,545 $ 8,061
============= =============
4. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the accrued
product warranty liability during the three and nine months ended
September 30, 2004 and 2003.
Three months ended Nine months ended
September 30, September 30,
(In thousands) 2004 2003 2004 2003
----------- -------- -------- --------
Balance, beginning of period $ 516 $ 601 $ 495 $ 644
Additions related to warranties issued 100 125 405 320
Warranty costs incurred (78) (166) (362) (404)
----------- -------- -------- --------
Balance, end of period $ 538 $ 560 $ 538 $ 560
=========== ======== ======== ========
Approximately $134,000 and $169,000 of the accrued product warranty
liability are classified as other long-term liabilities at September 30,
2004 and December 31, 2003, respectively. The current portion of the
accrued product warranty liability is included in accrued liabilities in
the accompanying balance sheet.
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING
In February 2001, we undertook a plan to consolidate all
manufacturing and engineering into our existing Ithaca, NY facility and
close our Wallingford, CT manufacturing facility (the "Consolidation"). As
of December 31, 2001, substantially all Wallingford product lines were
successfully transferred to Ithaca, NY. We continue to apply the consensus
set forth in EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)" in recognizing the accrued
restructuring expenses relating to the consolidation. The remaining
accrued restructuring balance relates to lease and other occupancy costs
related to unused space at our Wallingford facility through the end of the
lease term.
The following table summarizes the activity recorded in accrued
restructuring expenses during the three and nine months ended September
30, 2004 and 2003.
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2004 2003 2004 2003
--------- ----------- ---------- ----------
Accrual balance, beginning of period $ 1,904 $ 1,226 $ 2,125 $ 1,718
Cash payments (112) (119) (333) (611)
--------- ----------- ---------- ----------
Accrual balance, end of period $ 1,792 $ 1,107 $ 1,792 $ 1,107
========= =========== ========== ==========
6. EARNINGS PER SHARE
Beginning in the second quarter of 2004, the Company applied the
consensus set forth in EITF 03-06 "Participating Securities and the
Two-Class Method under FASB Statement No. 128, Earnings Per Share", which
requires the two-class method of computing earnings per share when
participating securities, such as our redeemable preferred stock, are
outstanding. The two-class method is an earnings allocation formula that
determines earnings per share for common stock and participating
securities based upon an allocation of earnings as if all of the earnings
for the period had been distributed in accordance with participation
rights on undistributed earnings. EITF 03-6 became effective for reporting
periods beginning after March 31, 2004. This guidance impacted the
calculation of earnings per share for the nine months ended September 30,
2004 and also requires retroactive restatement of earnings per share
presented for the three and nine months ended September 30, 2003. Because
the preferred stock converted in April 2004, there was no impact on
earnings per share for the three months ended September 30, 2004.
Previously reported earnings per share amounts for 2003 have been
restated as follows:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------------------------- -----------------------------------
As previously Restated As previously Restated
reported, split for EITF reported, split for EITF
adjusted 03-6 adjusted 03-6
(In thousands) -------------- ----------- --------------- -----------
Net income available to
common shareholders $ 1,050 $ 976 $ 1,460 $ 1,355
Net income per common Share:
Basic $ 0.12 $ 0.11 $ 0.17 $ 0.16
Diluted $ 0.11 $ 0.10 $ 0.16 $ 0.15
9
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. EARNINGS PER SHARE (CONT)
For the nine months ended September 30, 2004 and for the three and
nine months ended September 30, 2003, diluted earnings per share
calculations assumed no conversion of the convertible mandatorily
redeemable preferred stock (which was converted into 666,665 shares of
common stock, partly on April 20 and the remainder on April 26, 2004), as
the effect would have been anti-dilutive.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- ------------ ------------ ----------
Net income $ 1,625 $ 1,140 $ 4,432 $ 1,729
Dividends and accretion charges on
preferred stock - (90) (111) (269)
Earnings allocation to preferred shareholders - (74) (120) (105)
------------- ------------ ------------ ----------
Net income available to common shareholders $ 1,625 $ 976 $ 4,201 $ 1,355
============= ============ ============ ==========
SHARES:
Basic: Weighted average common shares outstanding 9,853 8,745 9,483 8,621
Add: Dilutive effect of outstanding options,
warrants and restricted stock as determined by the
treasury stock method 703 737 795 465
------------- ------------ ------------ ----------
Diluted: Weighted average common and common
equivalent shares outstanding 10,556 9,482 10,278 9,086
============= ============ ============ ==========
NET INCOME PER COMMON SHARE:
Basic $ 0.16 $ 0.11 $ 0.44 $ 0.16
Diluted $ 0.15 $ 0.10 $ 0.41 $ 0.15
Unvested restricted stock is excluded from the calculation of
weighted average common shares for basic EPS. For diluted EPS, weighted
average common shares include the impact of restricted stock under the
treasury method.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements included in this report, including without limitation
statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements generally can be identified by the use of
forward-looking terminology, such as "may", "will", "expect", "intend",
"estimate", "anticipate", "believe", "project" or "continue" or the negative
thereof or other similar words. All forward-looking statements involve risks and
uncertainties, including, but not limited to, customer acceptance and market
share gains, both domestically and internationally, in the face of substantial
competition from competitors that have broader lines of products and greater
financial resources; introduction of new products into the marketplace by
competitors; successful product development; dependence on significant
customers; dependence on significant vendors; the ability to recruit and retain
quality employees as we grow; dependence on third parties for sales outside the
United States including Australia, New Zealand, Europe and Latin America;
economic and political conditions in the United States, Australia, New Zealand,
Europe and Latin America; marketplace acceptance of new products; availability
of third-party components at reasonable prices; and the absence of price wars or
other significant pricing pressures affecting our products in the United States
and abroad. Actual results may differ materially from those discussed in, or
implied by, the forward-looking statements. The forward-looking statements speak
only as of the date of this report and we assume no duty to update them to
reflect new, changing or unanticipated events or circumstances.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America. The presentation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets
and liabilities. Our estimates include those related to revenue recognition,
inventory obsolescence, the valuation of deferred tax assets and liabilities,
depreciable lives of equipment, warranty obligations, contingent liabilities and
restructuring accruals. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. For a complete description of our accounting policies, see Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Critical Accounting Policies and Estimates," included in our Form
10-K for the year ended December 31, 2003.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
NET SALES. Net sales by market for the current and prior year's quarter were as
follows:
Three months ended Three months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
------------------------------ ------------------------------ ---------------------
Point of sale and banking $ 5,808 37.5% $ 6,053 40.2% $ (245) (4.0%)
Gaming and lottery 9,674 62.5% 8,995 59.8% 679 7.5%
------------ ------ ------------- ----- ------
$ 15,482 100.0% $ 15,048 100.0% $ 434 2.9%
============ ====== ============= ===== ======
International * $ 1,658 10.7% $ 1,116 7.4% $ 542 48.6%
============ ====== ============= ===== ======
*International sales do not include sales of printers made to domestic
distributors or other customers who in turn ship those printers to international
destinations.
11
Net sales by product type for the current and prior year's quarter were as
follows:
Three months ended Three months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
------------------------------ ------------------------------ ------------------------
Printers - POS and banking $ 3,968 25.6% $ 4,326 28.7% $ (358) (8.3%)
Printers - Gaming and lottery 8,971 58.0% 8,531 56.7% 440 5.2%
------------ ----- ------------- ----- -------------
Subtotal - printers 12,939 83.6% 12,857 85.4% 82 0.6%
Services and consumables 2,543 16.4% 2,191 14.6% 352 16.1%
------------ ----- ------------- ----- -------------
Total net sales $ 15,482 100.0% $ 15,048 100.0% $ 434 2.9%
============ ===== ============= ===== =============
Net sales for the third quarter of 2004 increased $434,000, or 3%, from the same
period last year due to higher printer shipments (an increase of approximately
$440,000, or 5%) into our gaming and lottery market, in part offset by lower
printer shipments (a decrease of approximately $358,000, or 8%) into our point
of sale ("POS") and banking market. Sales of our services and consumables
products, which include the repair of printers and the sale of spare parts and
consumables (paper, ribbons and inkjet cartridges), also increased by $352,000,
or 16%, as our installed base of printers grows and we continue to aggressively
pursue these sales. Overall, international sales increased by $542,000, or 49%,
due to higher international shipments of our gaming printers, primarily to
Australia and Europe.
POINT OF SALE AND BANKING:
Sales of our POS and banking products worldwide decreased approximately
$245,000, or 4%.
Three months ended Three months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
----------------------------- ------------------------------ ----------------------
Domestic $ 4,876 84.0% $ 5,003 82.7% $ (127) (2.5%)
International 932 16.0% 1,050 17.3% (118) (11.2%)
------------ ----- ------------- ----- ------
$ 5,808 100.0% $ 6,053 100.0% $ (245) (4.0%)
============ ===== ============= ===== ======
Domestic POS and banking revenue decreased to $4,876,000, representing a
$127,000, or 3%, decrease from the third quarter of 2003, due largely to lower
sales of our Bankjet(R) line of inkjet printers, partly offset by increasing
sales of our recently launched iTherm(TM)280 thermal printer. In addition, we
reported higher service, spare parts and consumables revenue in the third
quarter of 2004 compared to the third quarter of 2003. Sales of our Bankjet(R)
line of inkjet printers decreased by approximately 50% in the third quarter of
2004 compared to the third quarter of 2003. The decrease is largely attributable
to the expected completion of almost all shipments of Bankjet(R) printers to two
major financial services companies to upgrade bank teller stations.
International POS and banking product shipments decreased by approximately
$118,000, or 11%, to $932,000, due primarily to lower sales through our network
of international distributors.
Historically, sales of printers in the POS and banking market have increased in
the third quarter and decreased in the fourth quarter, as retailers typically
reduce purchases of new POS equipment in the fourth quarter due to the
increased volume of consumer transactions in that holiday period. Despite this,
we expect sales into the POS and banking market for the fourth quarter of 2004
to be consistent with those reported for the third quarter of 2004 and the
fourth quarter of 2003. We also expect sales of our banking printers to be
consistent with those reported in the third quarter of 2004, but lower than
those reported in the fourth quarter 2003, as we substantially completed
shipments of our Bankjet(R) line of inkjet printers to two major financial
services companies to upgrade bank teller stations in the second quarter of
2004. We are currently pursuing new opportunities with new customers for
further upgrade projects using our Bankjet(R) line of inkjet printers for
shipment in 2005. However, sales of our banking printers are project-oriented
and will vary from quarter to quarter based on the number and size of projects,
and the timing of installation of our printers.
GAMING AND LOTTERY:
Sales of our gaming and lottery products increased by $679,000, or 8%, from the
third quarter a year ago, primarily due to an increase in sales of our slot
machine and other gaming printers in North America, Australia and Europe largely
offset by lower sales of lottery products to GTECH.
12
Three months ended Three months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
---------------------------- ------------------------------ -----------------
Domestic $ 8,948 92.5% $ 8,929 99.3% $ 19 0.2%
International 726 7.5% 66 0.7% 660 1000.0%
------------ ------ ------------- ----- -----
$ 9,674 100.0% $ 8,995 100.0% $ 679 7.5%
============ ====== ============= ===== =====
Three months ended Three months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
---------------------------- ------------------------------ ------------------
Gaming $ 6,306 65.2% $ 4,312 47.9% $ 1,994 46.2%
Lottery 3,368 34.8% 4,683 52.1% (1,315) (28.1%)
------------ ------ ------------- ----- -------
$ 9,674 100.0% $ 8,995 100.0% $ 679 7.5%
============ ====== ============= ===== =======
Sales of our gaming products, which include video lottery terminal ("VLT")
printers and slot machine printers used in casinos and racetracks ("racinos"),
and related spare parts and repairs, increased by approximately $1,994,000, or
46%, to $6,306,000. This increase resulted primarily from significantly
increased installations of our casino printers, primarily for use in slot
machines at casinos throughout North America that print receipts instead of
issuing coins ("ticket-in, ticket-out" or "TITO"), as well as increasing sales
of gaming printers in Australia and Europe. Based on existing orders and sales
opportunities for TITO printers, we expect sales of our casino printers to
continue to increase during the fourth quarter of 2004 compared to the
comparable period in 2003, as casinos continue to convert to TITO slot machines.
Also, due to state government budget shortfalls, many states have approved or
are considering VLT initiatives as a means of raising revenue. As a result, we
also expect sales of our VLT printers to increase during the fourth quarter of
2004 compared to the comparable period in 2003.
Total sales to GTECH Corporation ("GTECH") (a worldwide lottery terminal
provider and major customer), which include impact and thermal on-line lottery
printers, and spare parts revenue, decreased by $1,315,000 to approximately
$3,368,000, or 22% of net sales, in the third quarter of 2004, compared to
$4,683,000, or 31% of net sales, in the third quarter of 2003. This is primarily
due to a shift in timing of orders for thermal lottery printers from GTECH from
the second and third quarters of 2004 to the fourth quarter of 2004 and the
first quarter of 2005.
In July 2002, we entered into a 5-year agreement with GTECH to provide a newly
designed thermal on-line lottery printer. As of September 30, 2004, we have
received orders from GTECH for approximately $1.5 million of these thermal
printers that we expect to ship during the fourth quarter of 2004. We expect to
ship more thermal lottery printers during the fourth quarter than in the third
quarter, due to the shift in GTECH's forecast. We still anticipate receiving
additional orders from GTECH for thermal on-line lottery printers for delivery
in 2004.
We also received orders from GTECH for approximately $2.0 million of our legacy
impact on-line lottery printer for shipment during the second and third quarters
of 2004, all of which have been shipped as of September 30, 2004. We do not
expect any further shipments of impact on-line lottery printers beyond 2004, as
GTECH has substantially replaced our legacy impact on-line lottery printer with
our newly designed thermal on-line lottery printer.
See the table below for an analysis of revenues from GTECH:
Three months ended
September 30,
(In thousands, except %) 2004 2003
------ ------
Impact on-line lottery printers and spare parts $1,614 $ 308
Thermal on-line lottery printers 1,754 4,375
------ ------
$3,368 $4,683
====== ======
% of consolidated net sales 22% 31%
International sales into the gaming and lottery market increased $660,000, to
$726,000 in the third quarter of 2004. Although we expected international sales
into the gaming and lottery market to remain relatively flat in the third
quarter of 2004 compared to the second quarter of 2004, we experienced an
increase in sales of VLT and casino printers into Australia and Europe sooner
than we had anticipated. We expect moderate growth in these sales during the
fourth quarter of 2004 compared to the third quarter of 2004, with more
significant growth in 2005 as we expect sales of our gaming printers (primarily
thermal casino printers) to accelerate in Australia and Europe.
GROSS PROFIT. Gross profit increased $1,078,000, or 22%, and gross margin
increased to 38.1% from 32.0%, due primarily to a more favorable sales mix of
higher margin products and continued reductions in component costs in
13
the third quarter of 2004 compared to the third quarter of 2003. We expect gross
margin for the fourth quarter of 2004 to be consistent with the gross margin
reported for the first nine months of 2004.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses primarily include salary and payroll related expenses for our
engineering staff, depreciation and design expenses (including prototype printer
expense, outside design and testing services, and supplies). Such expenses
increased by $93,000, or 17%, as we incurred increased design and testing
expenses related to the development and launch of our new Epic950(R) gaming
printer. Such expenses increased as a percentage of net sales to 4.2% from 3.7%,
due primarily to these increased costs in proportion to consistent sales in the
third quarter of 2004 compared to the third quarter of 2003. We expect
engineering and product design development expenses for the fourth quarter of
2004 to be consistent with those reported in the third quarter of 2004.
SELLING AND MARKETING. Selling and marketing expenses primarily include salaries
and payroll related expenses for our sales and marketing staff, sales
commissions, travel expenses, expenses associated with the lease of sales
offices, advertising, trade show expenses and other promotional marketing
expenses. Selling and marketing expenses increased by $60,000, or 5%, due
primarily to higher print advertising and other promotional marketing expenses
related to the launch of the Epic950(R) (approximately $60,000) and higher
compensation related expenses, including additional sales staff and expenses
associated with the opening of a new sales office in Las Vegas to support our
growing gaming printer sales (approximately $30,000) and recruitment and
compensation-related expenses related to adding sales and marketing staff
(approximately $40,000), offset by lower expenses at our UK facility due to a
staff reduction (approximately $40,000). Selling and marketing expenses
increased slightly as a percentage of net sales to 8.1% from 7.9%, due primarily
to the higher costs identified above in the third quarter of 2004 compared to
the third quarter of 2003. We expect selling and marketing expenses to be
somewhat higher in the fourth quarter of 2004 compared to the third quarter of
2004, as we plan to increase our sales staff to broaden our efforts and continue
to grow our sales in each of our markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
include salaries and payroll related expenses for our executive, accounting,
human resource and information technology staff, expenses for our corporate
headquarters, professional and legal expenses; and telecommunication expenses.
General and administrative expenses increased by $430,000, or 39%, due largely
to higher professional expenses, including those related to compliance with the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), and additional finance staff
related to both Sarbanes - Oxley and our CFO transition plan. In addition,
during the third quarter, we incurred approximately $95,000 of one-time listing
fees related to our move back onto the NASDAQ National Market from the NASDAQ
SmallCap Market. General and administrative expenses increased as a percentage
of net sales to 9.9% from 7.3% due primarily to the factors listed above. We
expect general and administrative expenses to continue to increase in the fourth
quarter of 2004, largely due to professional fees related to compliance with
Sarbanes-Oxley. We expect to incur approximately $600,000 to $700,000 of
external expenses directly related to compliance with Sarbanes-Oxley for the
full year of 2004.
OPERATING INCOME. During the third quarter of 2004 we reported operating income
of $2,472,000, or 16.0% of net sales, compared to $1,977,000, or 13.1% of net
sales in the third quarter of 2003. The substantial increase in our operating
income and operating margin was due largely to higher gross profit on higher
sales, partially offset by higher operating expenses in the third quarter of
2004 compared to that of 2003. We also significantly improved our operating
margin by 25% to 16% of net sales. This improvement demonstrates the substantial
operating leverage we have in our business that we expect to continue during the
fourth quarter of 2004.
INTEREST. We recorded net interest income of $4,000 compared to net interest
expense of $61,000 in the third quarter of 2003, as we repaid all outstanding
revolving borrowings at December 31, 2003 and the remaining outstanding balance
on our term loan in January 2004. We do not expect to draw on our revolving
borrowings as we continue to generate cash from operations through the remainder
of 2004. During the fourth quarter of 2004 and into 2005, we expect to report
increasing net interest income compared to the net interest expense that was
experienced in 2003 and the early part of 2004. See "Liquidity and Capital
Resources" below for more information.
INCOME TAXES. We recorded an income tax provision of $855,000 and $641,000 in
the third quarter of 2004 and 2003, respectively, at an effective rate of 34.5%
and 36.0%, respectively. The lower effective tax rate in the 2004 period
reflects the reversal of tax reserves for certain tax credits.
NET INCOME. We reported net income during the third quarter of 2004 of
$1,625,000, or $0.15 per diluted share compared to net income of $1,140,000, or
$0.10 per diluted share for the third quarter of 2003. Earnings per share has
been retroactively restated for adoption of EITF 03-06 "Participating Securities
and the Two-Class Method
14
under FASB Statement No. 128, Earnings Per Share", which requires the two-class
method of computing earnings per share. The two-class method is an earnings
allocation formula that determines earnings per share for common stock and
participating securities based upon an allocation of earnings as if all of the
earnings for the period had been distributed in accordance with participation
rights on undistributed earnings. There was no preferred stock dividend payments
or allocation of earnings to preferred shareholders beyond the second quarter of
2004, as the preferred stock was converted to common stock in April 2004. All
share and per share amounts reflect the April 2004 stock split on a retroactive
basis.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
NET SALES. Net sales by market for the current and prior year's nine month
period are as follows:
Nine months ended Nine months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
---------------------------- ------------------------------ ------------------------
Point of sale and banking $ 18,968 41.9% $ 15,192 40.6% $ 3,776 24.9%
Gaming and lottery 26,283 58.1% 22,246 59.4% 4,037 18.1%
------------ ----- ------------- ----- -------
$ 45,251 100.0% $ 37,438 100.0% $ 7,813 20.9%
============ ===== ============= ===== =======
International * $ 4,249 9.4% $ 3,500 9.3% $ 749 21.4%
============ ===== ============= ===== =======
* International sales do not include sales of printers made to domestic
distributors or other domestic customers who in turn ship those printers to
international destinations.
Net sales by product type for the current and prior year's nine month period
were as follows:
Nine months ended Nine months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
----------------------------- ------------------------------- ------------------------
Printers - POS and banking $ 13,597 30.0% $ 10,246 27.4% $ 3,351 32.7%
Printers - Gaming and lottery 24,286 53.7% 20,769 55.4% 3,517 16.9%
------------ ----- ------------- ----- -------------
Subtotal - printers 37,883 83.7% 31,015 82.8% 6,868 22.1%
Services and consumables 7,368 16.3% 6,423 17.2% 945 14.7%
------------ ----- ------------- ----- -------------
Total net sales $ 45,251 100.0% $ 37,438 100.0% $ 7,813 20.9%
============ ===== ============= ===== =============
Net sales for the first nine months of 2004 increased $7,813,000, or 21%, from
the prior year's first nine months due to significantly higher printer shipments
(approximately $6,868,000, or 22%) into both our gaming and lottery market and
POS and banking market. Sales of our services and consumables products, which
include the repair of printers and the sale of spare parts and consumables
(paper, ribbons and inkjet cartridges), also increased by $945,000, or 15%, as
our installed base of printers grows and we continue to aggressively pursue
these sales. Overall, international sales increased by $749,000, or 21%, due to
higher international shipments of our gaming printers, primarily to Australia
and Europe.
POINT OF SALE AND BANKING:
Sales of our POS and banking products worldwide increased approximately
$3,776,000, or 25%.
Nine months ended Nine months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
---------------------------- ------------------------------ --------------------------
Domestic $ 16,116 85.0% $ 12,153 80.0% $ 3,963 32.6%
International 2,852 15.0% 3,039 20.0% (187) (6.2%)
------------ ----- ------------- ----- ------- -----
$ 18,968 100.0% $ 15,192 100.0% $ 3,776 24.9%
============ ===== ============= ===== ======= =====
Domestic POS and banking printer sales increased to $16,116,000, representing a
$3,963,000, or 33%, increase from the first nine months of 2003, due primarily
to significantly higher sales of our Bankjet(R) line of inkjet PRINTERS. Sales
of our
15
Bankjet(R) line of inkjet printers increased by approximately 244% in the first
nine months of 2004 compared to the first nine months of 2003. The increase is
largely attributable to shipments of our Bankjet(R) line of inkjet printers to
two major financial services companies to upgrade bank teller stations. We
substantially completed shipments to these two companies in the third quarter.
In addition, we reported higher service, spare parts and consumables revenue in
the first nine months of 2004 compared to the first nine months of 2003.
International POS and banking product shipments decreased by approximately
$187,000, or 6%, to $2,852,000, due primarily to lower sales of our printers
through our network of international distributors (primarily in Europe and Latin
America), somewhat offset by higher service, spare parts and consumables
revenue.
Historically, sales of printers in the POS and banking market have increased in
the third quarter and decreased in the fourth quarter, as retailers typically
reduce purchases of new POS equipment in the fourth quarter due to the
increased volume of consumer transactions in that holiday period. Despite this,
we expect sales into the POS and banking market for the fourth quarter of 2004
to be consistent with those reported for the third quarter of 2004 and the
fourth quarter of 2003. We also expect sales of our banking printers to be
consistent with those reported in the third quarter of 2004, but lower than
those reported in the fourth quarter 2003, as we substantially completed
shipments of our Bankjet(R) line of inkjet printers to two major financial
services companies to upgrade bank teller stations in the second quarter of
2004. We are currently pursuing new opportunities with new customers for
further upgrade projects using our Bankjet(R) line of inkjet printers for
shipment in 2005. However, sales of our banking printers are project-oriented
and will vary from quarter to quarter based on the number and size of projects,
and the timing of installation of our printers.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers increased by $4,037,000, or 18%, from
the first nine months of 2003, primarily due to significantly higher shipments
of our slot machine printers, somewhat offset by lower printer shipments of
on-line lottery printers to GTECH.
Nine months ended Nine months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
-------------------------- ------------------------------ -------------------
Domestic $ 24,886 94.7% $ 21,785 97.9% $ 3,101 14.2%
International 1,397 5.3% 461 2.1% 936 203.0%
------------ ----- ------------- ----- ------- -----
$ 26,283 100.0% $ 22,246 100.0% $ 4,037 18.1%
============ ===== ============= ===== ======= =====
Nine months ended Nine months ended Change
(In thousands) September 30, 2004 September 30, 2003 $ %
--------------------------- ------------------------------ -------------------
Gaming $ 19,476 74.1% $ 13,468 60.5% $ 6,008 44.6%
Lottery 6,807 25.9% 8,778 39.5% (1,971) (22.5%)
------------ ----- ------------- ----- ------- -----
$ 26,283 100.0% $ 22,246 100.0% $ 4,037 18.1%
============ ===== ============= ===== ======= =====
Sales of our gaming products, which include VLT and slot machine printers, and
related spare parts and repairs, increased by approximately $6,008,000, or 45%.
This increase resulted primarily from significantly increased installations of
our casino printers, primarily for use in slot machines at casinos throughout
North America that print receipts instead of issuing coins ("ticket-in,
ticket-out" or "TITO"), as well as increasing sales of gaming printers in
Australia and Europe. Based on existing orders and sales opportunities for TITO
printers, we expect sales of our casino printers to continue to increase during
the fourth quarter of 2004 compared to 2003, as casinos continue to convert to
TITO slot machines. Also, due to state government budget shortfalls, many states
have approved or are considering VLT initiatives as a means of raising revenue.
As a result, we also expect sales of our VLT printers to increase during the
fourth quarter of 2004 compared to the fourth quarter of 2003.
Total sales to GTECH, which include impact and thermal on-line lottery printers,
and spare parts revenue, decreased by $1,971,000 to approximately $6,807,000, or
15% of net sales, in the first nine months of 2004, compared to $8,778,000, or
23% of net sales, in the first nine months of 2003, primarily due to a shift in
timing of orders for thermal lottery printers from GTECH from the second and
third quarters of 2004 to the fourth quarter of 2004 and the first quarter of
2005.
In July 2002, we entered into a 5-year agreement with GTECH to provide a newly
designed thermal on-line lottery printer. As of September 30, 2004, we have
received orders from GTECH for approximately $1.5 million of these thermal
printers that we expect to ship during the fourth quarter of 2004. We expect to
ship more thermal lottery printers during the fourth quarter than in the third
quarter, due to the shift in GTECH's forecast. We still anticipate receiving
additional orders from GTECH for thermal on-line lottery printers for delivery
in 2004.
16
We also received orders from GTECH for approximately $2.0 million of our legacy
impact on-line lottery printer for shipment during the second and third quarters
of 2004, all of which have been shipped as of September 30, 2004. We do not
expect any further shipments of impact on-line lottery printers beyond 2004, as
GTECH has substantially replaced our legacy impact on-line lottery printer with
our newly designed thermal on-line lottery printer.
See the table below for an analysis of revenues from GTECH.
Nine months ended
(In thousands, except %) September 30,
2004 2003
---- ----
Impact on-line lottery printers and spare parts $3,173 $1,405
Thermal on-line lottery printers 3,634 7,373
------ ------
$6,807 $8,778
====== ======
% of consolidated net sales 15% 23%
International sales into the gaming and lottery market increased $936,000, or
203%, to $1,397,000 in the first nine months of 2004, as we experienced higher
sales of VLT and casino printers into Australia and Europe through our
international distributors. We expect moderate growth in these sales during the
fourth quarter of 2004 compared to the third quarter of 2004, with more
significant growth in 2005 as we expect sales of our gaming printers (primarily
thermal casino printers) to accelerate in Australia and Europe.
GROSS PROFIT. Gross profit increased $5,460,000, or 48%, and gross margin
increased to 37.4% from 30.6%, due primarily to higher volume of sales, a more
favorable sales mix, and continued reductions in component costs in the first
nine months of 2004 compared to the first nine months of 2003. We expect gross
margin for the fourth quarter of 2004 to be consistent with the gross margin
reported for the first nine months of 2004.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $148,000, or 9%, due primarily to higher compensation and
related expenses, and increased design and testing expenses related to the
development and launch of our new Epic950(R) gaming printer. Such expenses
decreased as a percentage of net sales to 4.0% from 4.4%, due primarily to a
higher volume of sales in the first nine months of 2004 compared to the first
nine months of 2003. We expect engineering and product design development
expenses for the fourth quarter of 2004 to be consistent with those reported in
the third quarter of 2004.
SELLING AND MARKETING. Selling and marketing expenses increased by $332,000, or
9%, due primarily to higher (1) sales commissions resulting from higher sales in
the first nine months of 2004 compared to the first nine months of 2003
(approximately $12,000), (2) compensation related expenses, including additional
sales staff and expenses associated with the opening of a new sales office in
Las Vegas to support our growing gaming printer sales (approximately $240,000)
and (3) recruitment and compensation-related expenses related to adding sales
and marketing staff (approximately $190,000). Such increases were partially
offset by lower print advertising and other promotional marketing expenses
(approximately $50,000) and lower expenses at our UK facility due to a staff
reduction (approximately $120,000). Selling and marketing expenses decreased as
a percentage of net sales to 8.5% from 9.4%, due primarily to higher volume of
sales in the first nine months of 2004 compared to the first nine months of
2003. We expect selling and marketing expenses to be somewhat higher in the
fourth quarter of 2004 compared to the third quarter of 2004, as we plan to
increase our sales staff to broaden our efforts and continue to
grow our sales in each of our markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$1,107,000, or 33%, due largely to higher professional expenses, including those
related to compliance with the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"),
and additional finance staff related to both Sarbanes-Oxley and our CFO
transition plan. In addition, during the second quarter, we expensed
approximately $110,000 of costs we incurred in conducting due diligence related
to our proposed acquisition of TPG, Inc., as the proposed transaction was
terminated, and during the third quarter, we incurred approximately $95,000 of
one-time listing fees related to our move back onto the NASDAQ National Market
from the NASDAQ SmallCap Market. General and administrative expenses increased
as a percentage of net sales to 9.8% from 8.9% due primarily to the factors
listed above, partially offset by a higher volume of sales in the first nine
months of 2004 compared to the first nine months of 2003. We expect general and
17
administrative expenses to continue to increase in the fourth quarter of 2004,
largely due to professional fees related to compliance with Sarbanes-Oxley. We
expect to incur approximately $600,000 to $700,000 of external expenses directly
related to compliance with Sarbanes-Oxley for the full year of 2004.
OPERATING INCOME. During the first nine months of 2004 we reported operating
income of $6,870,000, or 15.2% of net sales, compared to $2,997,000, or 8.0% of
net sales, in the first nine months of 2003. The significant increase in our
operating income and operating margin was due largely to higher gross profit on
higher sales, partially offset by higher operating expenses in the first nine
months of 2004 compared to the same period of 2003. Although sales increased by
21% in the first nine months of 2004 compared to the first nine months of 2003,
operating expenses only increased 19%, which provided additional operating
leverage that we expect to continue during the fourth quarter of 2004.
INTEREST. Net interest expense decreased to $8,000 from $183,000 in the first
nine months of 2003 as we repaid all outstanding revolving borrowings at
December 31, 2003 and the remaining outstanding balance on our term loan in
January 2004. We do not expect to draw on our revolving borrowings as we
continue to generate cash from operations through the remainder of 2004. During
the fourth quarter of 2004 and into 2005, we expect to report increasing net
interest income as we expect the interest earned on our cash balances to exceed
our interest expense of approximately $10,000 per quarter related to interest on
unused borrowings under our revolving credit line. See "Liquidity and Capital
Resources" below for more information.
INCOME TAXES. We recorded an income tax provision of $2,433,000 and $924,000 in
the first nine months of 2004 and 2003, respectively, at an effective rate of
35.4% and 34.8%, respectively.
NET INCOME. We reported net income during the first nine months of 2004 of
$4,432,000, or $0.41 per diluted share compared to net income of $1,729,000, or
$0.15 per diluted share, for the first nine months of 2003. Earnings per share
has been retroactively restated for adoption of EITF 03-06 "Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per
Share", which requires the two-class method of computing earnings per share. The
two-class method is an earnings allocation formula that determines earnings per
share for common stock and participating securities based upon an allocation of
earnings as if all of the earnings for the period had been distributed in
accordance with participation rights on undistributed earnings. Dividends paid
in the first six months of 2004 were approximately $86,000 and there will be no
dividends or allocation of earnings to preferred shareholders beyond the first
six months of 2004, as the preferred stock was converted to common stock in
April 2004. All share and per share amounts reflect the April 2004 stock split
on a retroactive basis.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first nine months of 2004, we significantly improved our
operating results, including cash flows, compared to 2003. We repaid our
remaining outstanding debt in January 2004 and ended the quarter with
approximately $6.3 million in cash and cash equivalents. Looking forward, we
expect to generate approximately $7 to $8 million in cash from operations during
2004 and anticipate having between $7 and $8 million of cash on our balance
sheet at the end of 2004. We also expect to earn interest income on our
available cash balance throughout 2004.
Operating activities: The following significant factors affected our cash
provided by operations of $6,168,000 in the first nine months of 2004:
- We reported net income of $4,432,000
- We recorded depreciation, amortization and non-cash compensation
expense of $1,461,000
- Accounts receivable increased by $242,000 due to timing of sales
during the quarter
- Inventories increased by $484,000, as we prepared for our expected
higher sales volume in the fourth quarter of 2004 and the launch of
our new EPIC 950(TM) Thermal Slot Machine Printer
- Other current assets decreased by $134,000 due primarily to receipts
of federal and state tax refunds in the first quarter of 2004
- Deferred taxes decreased by $667,000 as we realize the tax assets
related to certain accruals and reserves
- Accrued liabilities and other liabilities increased by $139,000
18
- Accrued restructuring expenses decreased by $333,000 due to payments
made for lease obligation costs
During the second quarter of 2004, we signed a cross licensing agreement with
Seiko Epson. Under the agreement, Seiko Epson received a license to three of our
patents, and we received a license to eighteen of Seiko Epson's patents relating
to printing applications for the point of sale and banking markets. In addition,
we agreed to pay $900,000 as a royalty for the usage of certain Seiko Epson
technology prior to January 1, 2003. We had accrued for the $900,000 royalty for
past usage as of December 31, 2003. In accordance with the terms of the
agreement, we paid $525,000 of the royalty in the second quarter of 2004, and
will pay the remaining $375,000 in the first quarter of 2005. Under the
agreement, we continue to pay royalties on a quarterly basis related to the
current sales of licensed printers, which is reflected in cost of sales.
As of September 30, 2004 and December 31, 2003, our restructuring accrual
amounted to $1,792,000 and $2,125,000, respectively. We expect to pay
approximately $480,000 of these expenses per year from 2004 through 2007, and
the remaining $74,000 in 2008. These payments from 2004 through 2008 relate
primarily to lease obligation costs for unused space in our Wallingford, CT
facility.
Investing activities: Our capital expenditures were approximately $850,000 and
$1,156,000 in the first nine months of 2004 and 2003, respectively. Expenditures
in 2004 primarily included new product tooling and computer hardware and
software. We expect capital expenditures for the full year 2004 to be
approximately $1,200,000, primarily for tooling for new products and enhanced
versions of our existing products.
Financing activities: We generated approximately $527,000 from financing
activities during the first nine months of 2004, largely due to proceeds from
stock option exercises (approximately $1,112,000), largely offset by the
repayment of our term loan (approximately $420,000) and payments of cash
dividends on our preferred stock (approximately $91,000).
WORKING CAPITAL
Our working capital increased to $18,704,000 at September 30, 2004 from
$11,787,000 at December 31, 2003. The current ratio also increased to 3.25 to 1
at September 30, 2004 from 2.36 to 1 at December 31, 2003. The increase in both
working capital and the current ratio was due largely to higher cash and cash
equivalents ($5,845,000), higher inventories ($484,000), and higher receivables
($242,000) compared to December 31, 2003.
DEFERRED TAXES
As of September 30, 2004, we had a net deferred tax asset of approximately
$2,357,000. In order to utilize this deferred tax asset, we will need to
generate approximately $6.5 million of taxable income in future years. Based on
future projections of taxable income, we have determined that it is more likely
than not that the existing net deferred tax asset will be realized.
CREDIT FACILITY AND BORROWINGS
On August 6, 2003, we entered into a $12.5 million credit facility (the
"Banknorth Credit Facility") with Banknorth N.A. The Banknorth Credit Facility
provides for an $11.5 million revolving credit line expiring on July 31, 2006,
and a $1 million equipment loan facility which may be drawn down through July
31, 2004. Borrowings under the revolving credit line bear a floating rate of
interest at the prime rate. Borrowings under the equipment loan bear a floating
rate of interest at the prime rate plus 0.25%, which is included in interest
expense. The Banknorth Credit Facility imposes certain quarterly financial
covenants on the Company and restricts the payment of dividends on its common
stock and the creation of other liens.
On November 12, 2004, we amended our $12.5 million Banknorth Credit Facility.
Under the terms of the agreement, we renewed our $1.0 million equipment loan,
which had expired on July 31, 2004. The amendment also revised certain other
terms of the revolving credit facility.
The borrowing base of the revolving credit line under Banknorth Credit Facility
is based on the lesser of (a) $11.5 million or (b) 85% of eligible accounts
receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of eligible raw
material inventory plus 50% of eligible finished goods inventory, less (ii) a
$40,000 credit reserve. Concurrent with the signing of the Banknorth Credit
Facility, we borrowed $450,000 under the equipment loan facility.
As of September 30, 2004, we had no balances outstanding on the revolving credit
line and term loan, respectively. Undrawn commitments under the Banknorth Credit
Facility were approximately $11,500,000 at September 30, 2004.
19
However, our maximum additional available borrowings under the facility were
limited to approximately $10,200,000 at September 30, 2004 based on the
borrowing base of our collateral. We were in compliance with all financial
covenants of the Banknorth Credit Facility at September 30, 2004.
PREFERRED STOCK
In connection with our 7% Series B Cumulative Convertible Redeemable Preferred
Stock (the "Preferred Stock"), we paid $70,000 of cash dividends per quarter. We
also recorded non-cash accretion of approximately $20,000 per quarter related to
preferred stock warrants and issuance costs. The preferred stock was convertible
at any time by the holders at a conversion price of $6.00 per common share. In
April 2004, all holders of our Series B Preferred Stock converted all their
preferred shares into common stock. Under the conversion, a total 666,665 new
shares of common stock were issued. As a result, we paid approximately $17,000
of cash dividends in the second quarter of 2004. No future dividend payments are
required beyond the second quarter of 2004. The conversion will result in a cash
savings of approximately $280,000 annually, as we will no longer pay dividends
previously required under the terms of the preferred stock.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $11,126,000 to $21,473,000 at September 30,
2004 from $10,347,000 at December 31, 2003. The increase was primarily due to
the following for the nine months ended September 30, 2004: (1) the conversion
by our preferred shareholders of all shares of their preferred stock into common
stock , net of costs of conversion ($3,902,000), (2) net income of $4,432,000,
less cash dividends on our preferred stock of $86,000, (3) proceeds of
approximately $1,085,000 from the issuance of approximately 227,000 shares of
common stock from stock option and warrant exercises, (4) an increase in
additional paid in capital of approximately $1,635,000 resulting from the tax
benefits resulting form the sale of employee stock from stock option exercises,
and (5) compensation expense related to restricted stock grants of $224,000.
CONTRACTUAL OBLIGATIONS
We have experienced no material changes in our contractual obligations outside
the ordinary course of business during the three or nine months ended September
30, 2004.
RESOURCE SUFFICIENCY
We believe that our cash on hand and cash flows generated from operations and
borrowings available under the Banknorth Credit Facility will provide sufficient
resources to meet our working capital needs, including costs associated with the
Consolidation, to finance our capital expenditures and meet our liquidity
requirements through at least December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures was conducted under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer. Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were adequate
and designed to ensure that information required to be disclosed by the Company
in this report is recorded, processed, summarized and reported in a timely
manner, including that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
There were no significant changes in internal controls or in other factors that
could be reasonably likely to materially affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses in internal controls, during the period covered by this report.
ITEM 5. SUBSEQUENT EVENTS
On November 12, 2004, we amended our $12.5 million Banknorth Credit Facility.
Under the terms of the agreement, we renewed our $1.0 million equipment loan,
which had expired on July 31, 2004. The amendment also revised certain other
terms of the revolving credit facility.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
a. Exhibits filed herein
Exhibit 10.29 First Amendment to Revolving Credit, Equipment Loan and Security
Agreement dated as of November 12, 2004 between TransAct
Technologies Incorporated and Banknorth N.A.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-OxleyAct of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
21
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)
November 15, 2004 /s/ Steven A. DeMartino
--------------------------------------------
Steven A. DeMartino
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
22
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
- -------
10.29 First Amendment to Revolving Credit, Equipment Loan and Security
Agreement dated as of November 12, 2004 between TransAct
Technologies Incorporated and Banknorth N.A.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
23