TransAct Technologies Inc (TACT) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time, all participants are on a listen-only mode. Later we will conduct a question-and-answer session. At that time, if you have a question, you will need to press 1 followed by 4 on your push button phone.

As a reminder, this conference is being recorded today. A replay will be available after 8:00 P.M. eastern standard time, today through midnight eastern on March 11th. The replay dial-in number is 973-341-3080 using pass code 4454618. The replay will also be accessible through www.TransAct-tech.com.

I would now like to turn the conference over to David [Pasqual]. Please go ahead, sir.

Thank you, operator.

Good afternoon and welcome to TransAct fourth quarter and full-year results call. Joining us from the company are Bart Shuldman, Chairman and Chief Executive Officer, and Richard Cote, Chief Financial Officer. The format of the call will be a brief business review by Bart, followed by Dick providing details on the financials. We'll then have time for any questions. If you have yet not received a copy of today's results release, please call Moon Lee over at the Ruth Group at 646-536-7001, or you can get a copy off of TransAct's website.

Before we begin the formal remarks, the company's attorneys advise that this conference call contains statements about future events and expectations, which are forward-looking statements. Any statement in this call that is not a statement of historical fact may be deemed to be a forward-looking statement. Acts or results may differ materially depending on the number of risks factors.

For a full list of the risks inherent in the business of the company, please refer to the company's SEC filings included in the company's most recent annual report on Form 10-K. The company undertakes no obligation to advise or update and forward-looking statements to reflect events or circumstances after the date of this call.

At this time, I would now like to turn the call over to Bart Shuldman. Please go ahead, sir.

Thanks, David and good afternoon and thank you for joining us on today's call. I'm going to review the highlights of the quarter and then Dick will run through the detailed financials with you.

As the press stated this afternoon, 2003 was a strong year for TransAct. As we benefited from the high growth in the gaming and lottery portion of our business, our pickup in the point of sale and banking market and solid growth our recurring revenue business of selling services, spare parts and consumables for our printers.

We believe the momentum in these segments will continue to accelerate in 2004. Importantly, our dramatically improved operating results underscore the powerful leverage we have worked so hard to achieve in our business over the past few years. Our efforts have clearly paid off and positioned TransAct for continued growth.

For the fourth quarter, revenues increased 60% to 14.7 million from 9.2 million in the same period a year ago. The growth was primarily due to strengthen the gaming and lottery portion of TransAct's business, which had revenue growth of 106% in the fourth quarter versus the fourth quarter of last year. The strong growth in this segment is a result of the continued roll-out of ticket in/ticket out slot machines in the U.S. TransAct also experienced growth in the point-of-sale and banking markets, and in its spare parts, consumables and services business.

The pro forma net income in the fourth quarter of 2003 was $1 million or 14 cents per diluted share. We were pleased with our operating results, given that once again, we came in ahead of our initial guidance, which for this quarter or for the fourth quarter was for revenues of approximately 13 million to 14 million with net income of approximately 10-13 cents per share. On a GAAP basis, we posted a net loss due to special charges in the quarter, which amounted to almost 1.9 million or 19 cents per share. Dick Cote will explain these charges in his presentation in a couple of minutes.

For the full year, revenues increased 32% to 52.1 million from 39.5 million in 2002. On a pro forma basis, net income for the year was approximately 2.7 million or 38 cents per share, compared to a pro forma net loss of a negative 79,000 or an 8 cent loss for the year of 2002.

And let me make one comment about our current financial position. At the end of January of this year, we paid off the remaining loan we had with our bank. We now have cash on the balance sheet and no debt. A major milestone for us, which we are very proud of. Again, Dick will review the quarter in full-year numbers in further detail in a few minutes so I'll leave it up to him to explain this all to you.

Now let me give you some color on our specific markets. Revenues from our gaming and lottery business were up almost 50% in 2003 over 2002. Clearly, the main driver of growth for TransAct over the past year has been sales of our slot machine printers for the transition to coinless gaming in the casinos in the U.S.

As an example, in the fourth quarter, we announced a major win with Foxwood's Resort Casino, the largest single resort casino in the world. Foxwood selected our Series 850 line of thermal printers as their standard to upgrade all 6,500 slot machines as part of its transition to coinless gaming. Agreements like this in the U.S., coupled with the international roll-out that we now anticipate beginning over the next few years, continue to be to be the biggest opportunity in front of us.

As a result, our present addressable market has expanded to over 1 million slot machines. This includes 700,000 slot machines in North America and 300,000 overseas. We are seeing increased activity in Europe and Australia among other regions. We are seeing countries like Russia, Poland and China using gambling as a tourist attraction. Given our strategic relationship with all the major slot machine manufacturers and system providers, we stand to benefit from growth in this area.

For example, we just announced that Aristocrat has selected our Series 850 line of thermal printers as their standard for slot machines in the Australian gaming market. Australia is the second-largest slot machine market in the world with over 240,000 machines. This agreement further extends the momentum we have generated domestically and should significantly drive increased sales of our slot machine printers. We also continue to get inquiries on the benefits of the ticket out/ticket out system from customers in Europe, another market that could embrace this technology and further drive growth for us down the road.

In terms of new products for the gaming market, during 2003, we launched the gaming's first jam resistant printer bezel, specifically for our Series 800 thermal line of printers for coinless slot machines. The bezel significantly decreases the odds of a ticket getting jammed in the slot machine, reducing game time and lost revenues at the casino. This type of innovation is exactly what TransAct has become known for in the industry and is synonymous with our mission critical printing philosophy. In every instance, whether in a slot machine, a lottery terminal or a register, our printers simply cannot fail.

The second revenue driver in our gaming and lottery segment is the VLT or Racino market where we have been seeing encouraging signs as more and more states look to have slot machines at racetracks to supplement budget shortfalls. The nature of this market demands receipt printing and TransAct has been the primary supplier of printers to the game manufacturers for the past decade. There are currently 19 states reviewing the potential monetary benefits of adding slot machines at race tracks, including Kentucky, Florida, Maryland and Pennsylvania.

The first state to actually approve Racinos was New York late last year. Our understanding is that the installations have begun at certain racetracks and the results have been overwhelming in terms of increased state revenue.

The most recent approval was Oklahoma, whose house of representatives just passed the legislation authorizing the operation of certain forms of gaming at Oklahoma's racetracks and additional types of games at tribal gaming facilities within the state. Announcements like this one in Oklahoma make us believe the number of slot machines in the U.S. will only continue to grow, and we are also starting to see increased interest in the international markets as countries around the world look to VLTs solve their budget issues, also.

And finally, the third revenue driver in our gaming and lottery market is our strong relationship with the world's largest lottery company, GTECH, where we provide one-stop shopping for it's lottery system. As our strategic relationship with GTECH continues to strengthen, and state governments continue to approve lotteries to offset budget deficits, we expect this segment will continue to have a significant impact on our revenues and profitability.

Now let me turn to our POS and banking business, where we were extremely pleased with the pickup in this market and the progress we have made with our proprietary inkjet and thermal technologies. Revenues in the fourth quarter from this portion of our business were up 17% year over year, as our POSjet and BANKjet printer lines continue to be selected as the printer of choice by retail and banking customers given their numerous benefits.

For the full year, revenues from this part of our business were up 12% from 2002. The real driver of growth in this combined market has been our ability to print color on receipts, creating a low-cost promotional tool for our customers so they can communicate with their customers in real time.

In order to validate the effectiveness of the power of color, we conducted an independent research study last March and the results were overwhelming. These findings have given our sales force a competitive advantage in selling new printers.

In line with the growth we saw in this market, we announced several major wins during the year in terms of [inaudible] of size and customer quality. In January, we announced that Ace, America's Cash Express, the largest owner/operator and franchiser of retail financial service stores in the U.S., had selected our POSjet 1500 two-color inkjet printer for use in Ace Cash Express's network of nearly 1,200 stores. Ace Cash Express is using our printers to validate checks and print customer receipts.

In May, we announced one of the largest diversified entertainment companies had selected our POSjet 1000 printers for a complete upgrade of their 2,500 thermal and impact printers. At the end of July, we announced a win for 7,000 of our POSjet printers from one of the world's largest quick-serve and takeout restaurant chains for upgrade of their point-of-sale system. And in September, we announced a major order for 4,000 POSjet 1000 printers as one of the world's largest casual dining and restaurant chains selected TransAct for a complete upgrade of their food and beverage service operations.

On the banking side, we announced two very significant wins during the year. In September, we announced our largest BANKjet win to date with an order of 13,000 BANKjet 1500 printers from one of the U.S.'s top tier financial services companies for a complete upgrade of their bank teller stations. Prior to this win, we announced last June that one of the world's largest financial services holding companies selected our BANKjet 1500 printer for a full upgrade of their company's 6,000 U.S. bank teller stations.

The growth in this business is being driven by several factors that are forcing upgrades. Banks are refocusing their business on local branches, and we expect the government's Check 21 Initiative will drive increased printer volumes as we move through 2004.

During 2003, we launched two new products for the POS market and have high expectations. Our new iTherm 280 thermal printer are for customers at low-cost high-speed two-color printing thermal solution. The printer offers users the industry's first internal power supply and an 802.11B wireless option. In addition, the printer has a vertically mounted circuit board to avoid spill damage.

We also launched our new wireless technology based on the popular 802.11B standard. The wireless solution is initially available as an option to our Ithaca POSjet inkjet and new iTherm 280 receipt printers. This is extremely compelling because it removes cumbersome and restrictive location environmental constraints. We completed one installation with Dardon Restaurants and are in talks with other customers. We view this as a future opportunity because our industry is slower to adapt new technologies. Once a security standard is set, we will be in position to capture orders. Cisco and Symbol are two companies actively working to set such a set standard.

Finally, let me speak about our after-market business, which has become a major business at TransAct. Revenues in our spare parts service and consumables business was up 22% over the year ago period, primarily driven by our inkjet cartridge sales. Importantly, the increased printer sales we achieved in 2003 will deliver future recurring revenues through spare parts services and, of course, consumables.

Just to remind you, for each inkjet printer we sell, our customers will use at least 4-8 inkjet cartridges per year. This provides TransAct with recurring a revenue for each printer that exceeds 200% of the original printer price over five years. Clearly, this is an extremely lucrative business for us. As I have always said, we are 100% focused on this part of our business, as we see it contributing significantly to our revenue base every year going forward.

Now let me speak about the outlook. In terms of our outlook, we entered 2004 very confident in our business. As noted in the release, our projections for 2004 are based on the steady growth of the casino market worldwide, the continued improvement in the POS and banking business, and our growth in our after market business.

The key here is that we have exposure and competitive strength and several large and growing markets, which gives us a higher level of comfortability in our outlook. Overall, we expect revenues for 2004 will be in the range of 62-64 million with net income in the range of 68-74 cents per share.

For the first quarter of 2004, we anticipate revenues of over $15 million when net income of approximately 16 cents per share. And we are also excited about the 3-for-2 stock split we announced after the market closed today. The board's declaration of our first stock split as a public company recognizes everything I have said to date on our calls. TransAct has achieved impressive growth and has strong prospects for continued success. Importantly, the stock split will make our common shares more accessible to both institutional and individual investors. We believe this will ultimately serve to increase shareholder value through improved liquidity in the trading of our shares and broadening of our investor base.

At this time, I'll turn the call over to Dick Cote for our financial summary. Dick?

Thank you, Bart.

Before I begin, let me give you some background on the presentation of our fourth quarter and full-year results contained in the press release we issued this afternoon. As disclosed in the release, during the fourth quarter, we had two charges that were outside of our normal recurring operating expenses. One related to a restructuring charge connected with our Wallingford, Connecticut manufacturing facility, which we closed back in 2001. The other charge was an adjustment to the expense related to the past use of certain third party patented technology.

Generally accepted accounting principles or GAAP require that these items be included in the reported results without special treatment. We have provided financial information in the press release on a pro forma basis, which excludes those special items because we believe those non-GAAP amounts are helpful to investors and others to more accurately assess the ongoing nature of TransAct's core business. And as required by Regulation G issued by the SEC during 2003 and response to Sarbanes Oxley, we have included a reconciliation of the GAAP amounts to the pro forma amounts in the tables attached to the press release.

In my discussion of operating results, I will be referring to the pro forma amounts. Please refer to our press release and the attached tables for the GAAP amounts and the reconciliation to the pro formas.

So starting with the fourth quarter, as Bart indicated, total revenues increased 60% to 14.7 million, compared to 9.2 million in the fourth quarter a year ago. Revenues in the gaming and lottery markets were up over 106% from the fourth quarter of last year primarily due to the accelerated roll-out of coinless gaming machines in the U.S. POS revenues grew 17% over the fourth quarter of 2002, largely the result of increased sales of our inkjet printers.

As we stated in our press release, we recorded two charges in the fourth quarter of 2003 totaling nearly $1.9 million. First, we increased our restructuring accrual by 1,128,000 to provide for the remaining lease cost associated with our manufacturing facility in Wallingford, Connecticut, which was substantially closed in 2001. After extensive efforts, we have concluded that because of the continuing regional decline in the commercial real estate market in 2003, it was unlikely that we would be able to sublease the facility, which has a lease term that expires in March of 2008. So we have now provided for all the remaining lease costs related to this closed manufacturing plant.

Second, faced on the now likely outcome of current negotiations, we recorded an additional charge to cost-of-sales of 740,000 in the fourth quarter in connection with the estimated expense for the use of certain third party patented technology prior to December 31, 2002. We initially recorded a charge of 160,000 in 2002 related to this matter, bringing the total accrual for this patent -- for this patent issue to 900,000. Although settlement negotiations are continuing, we believe the total amount accrued reflects the best estimate of the expense for the past usage of patented technology. Ongoing costs related to the use of this technology have been reflected in our 2003 results and, of course, in our financial guidance.

Moving on, gross profit in the fourth quarter on a pro forma basis increased to 4.8 million, up 2.5 million over a year ago. Our gross margin on that basis improved to 32.8% from 25.5% a year ago. That higher margin is attributable to the higher revenues, favorable product mix and ongoing cost controls.

For the quarter ended December 31, 2003, operating expenses, excluding the restructuring charge, were 3.3 million, compared to 2.4 million a year ago. Our selling expenses were up in the current quarter, largely due to higher commissions on a significant increase in sales and expenses associated with the opening and staffing of our new gaming office in Las Vegas, Nevada. In addition, our general and administrative expenses were up, largely due to increased legal fees and other professional fees.

Operating income then, on a pro forma basis, reached 1.6 million in Q4, compared to about breakeven results a year ago. As a percent of sales, pro forma operating income in Q4 of 2003 was nearly 11%.

Interest expense in the fourth quarter of this year was 27,000, compared to 44,000 a year ago on lower borrowings and a lower interest rate. Our provision for tax in the quarter on a pro forma basis was about 31.3%, lower than in the first three quarters, as we benefited from R&D credits and the utilization of certain state net operating loss carry forwards not previously recognized.

Pro forma net income then, in the fourth quarter of 2003 was 1 million or 14 cents per diluted share, compared to a net loss of 41,000 or 2 cents per share in the fourth quarter of the previous year. On a GAAP basis, we had a net loss in the fourth quarter of 2003 of 201,000 or 5 cents per share, compared to a GAAP net loss of 143,000 or 4 cents per share in the fourth quarter of 2002. The charges I discussed reduced our diluted net earnings per share in the quarter by 19 cents.

Moving to the year, revenues for the full year ended December 31, 2003 increased 32% to 52.1 million, from 39.5 million in 2002. Gaming and lottery revenues were up nearly 50% in 2003, compared to '02, primarily due to the accelerated roll-out of coinless gaming machines in the U.S. Also contributing to our growth was a pickup in revenue in the POS and banking market, which grew over 12% in 2003, largely the result of increased sales of our inkjet and after-market product sales.

Gross margin on a pro forma basis for the year, which excludes the patent-related charge increased significantly to 31.2% in '03, compared to 26.3% in 2002. Again, the higher margin was attributable to the higher revenue volume and more favorable product mix. And looking forward, we expect our gross margin to continue to improve, as we gained leverage from expected higher volume sales.

For the full year 2003, operating expenses, excluding the restructuring charges, were 11.7 million, compared to 10.2 million a year ago. Again, our selling expenses were up largely due to higher commissions on significantly increased sales and expenses associated with the opening and staffing of our new office in -- our gaming office in Las Vegas. And for the year, in addition, our general and administrative expenses were up, largely due to legal fees and other professional expenses.

Operating income on a pro forma basis reached 4.6 million in 2003, compared to just over breakeven in 2002. And as a percent of sales, pro forma operating income rose to almost 9% in 2003. During 2003, we recorded a tax provision for the year at an effective rate of 33.6% on a pro forma basis, as we benefited from those R&D credits and the utilization of certain state net operating loss carry-forwards not previously recognized. We expect our affected tax rate to be approximately 36% in 2004.

So our pro forma net income for the year ended December 31, 2003 was 2,738,000 or 38 cents per diluted share, compared to pro forma net income for the year ended December 31, 2002 of 24,000 or a 6 cent loss per share.

On a GAAP basis, full-year net income was 1.5 million or 19 cents per diluted share, compared with a GAAP net loss for the full year 2002 of 692,000 or a 19 cent loss per share. All those per share amounts in the full year 2003 and 2002 are after giving affect to the preferred stock dividends and accretion charges.

The operating results for 2003 demonstrate the powerful leverage we now have in our business. You can see the impact of increasing revenues on our operating results and we expect that to continue into 2004.

We are experiencing significant productivity improvements in our operations as well. For example, a key productivity measure is sales per employee, which grew 11% in 2003. We expect further productivity gains in 2004.

Turning to our cash flow, during 2003, we generated 1.8 million of cash from operations. This is largely the result of our net income for the year, plus depreciation and amortization, offset by a net use of working capital mainly to finance higher receivables from increased sales.

Also during the year, we took in nearly 1.4 million through the exercise of employee stock options. As a result, we were able to exit 2003 almost debt-free. At year-end, we had paid off our borrowings on our revolving credit line and had only 420,000 remaining on our term loan. We paid off the term loan in January so as Bart said, we are now debt-free and have cash in the bank.

During the year we had capital spending of about 1.3 million mostly for new product tooling. And we paid out 280,000 of dividends on our preferred stock.

Now let's take a look at our financial position. We ended the year with our balance sheet in very good shape. Our total assets were 26.4 million, compared to 22 million a year ago. Our inventories were at 8.1 million, compared to 8.4 million at the beginning of the year. This decline in inventories is notable in view of the 32% increase in sales during the year. We're truly seeing the benefits of our lean manufacturing initiatives we began a year ago.

Receivables were at 9.1 million, compared to 4.0 million at the end of '02. This increase is the direct result of the increased level of sales. I should point out, though, that our credit and collection experience has been excellent. Our receivables are from financially sound customers who pay on time.

Well, that concludes my remarks. Now it's back to you.

Thanks, Dick.

At this point, we'll open up the conference call to questions. Operator, can we open it up to questions, please.

Thank you. The floor is now open for questions.

Once again, if you have a question at this time, please press 1 followed by 4 on your touchtone phone. Again, that's 1 followed by 4 if you have a question at this time. Please hold while we poll for questions.

Once again, that's 1 followed by 4 to pose a question at this time.

Our first question comes from Chad Cooper from Roth Capital.

Good afternoon, Bart. Good afternoon, Dick.

Hi.

Hey, Chad.

Congratulations on an excellent quarter.

I wonder if you guys could give some color on the slot machine market from your view. I guess, what percent of the U.S. market, from your view again, has been converted to ticket in/ticket out?

From what we could see right now, at the end of '03, we had about 25% done. And we've got about another 75% to go. And that's based on the latest count of about 700,000 slot machines, which, as you know, Chad, continues to grow.

Right. And is there any change in the speed at which operators are rolling this out, or any change relative to a quarter or so ago?

Well, you know, at the beginning of last year, we talked about a 3-5-year implementation. I got to say it's going to be a lot quicker than 3-5 years from a year ago. We are seeing certain customers of ours do it as much as they can right away.

With the Foxwood's release, for instance, they'll going to try and do everything as quickly as they can. We've seen that with some of the other casinos. The benefit of ticket in/ticket out, or the coinless slot machine, has really paid off to the casinos. So, you know, you got to figure in the next two years, two and a half years, it's all done.

And what percent of the 19,000 BANK printers you guys got orders for were actually shipped in the fourth quarter?

I think about 25%. Most of them will ship this year.

So a very small percentage were actually shipped in '04.

Yeah. The roll-out schedule that we got from both banks, I think was 20-25% was '03 and 75-80% was '04, so we'll see the bulk of that this year. And then we're shipping right now. So we're right in the middle of the roll-out schedules right now.

Great. Thank you.

Once again, that's 1 followed by 4 to pose a question at this time.

Our next question comes from Andrew [Winer] from Burnham Asset Management.

Hi, good afternoon.

Bart, I wanted to elaborate on the prior question. Excluding GTECH, which does have a fair international business, what percent of your gaming revenues, that related to slot machines or VLTs came from international markets?

You know, Andrew, probably 95-97% of our gaming revenue is domestic. And actually, that's what's got us really enthused. The Aristocrat deal, clearly, was a major win for us.

First, from a standpoint that Aristocrat in Australia is 65-70% of the market. But more importantly -- I mean, so we won the big manufacturer in Australia. On top of that is just the fact that they're talking about ticket in/ticket out in Australia, which, of course, was not something that we've talked about in the past. Then when we were at the international casino show in January, we met a lot of different casino operators, and actually VLT operators, and they were countries, the people that work for the government of certain countries that were all talking about ticket in/ticket out at either the casinos that they were running or VLTs or new VLTs that they were going to put in. So we're actually really encouraged with that.

Because if you kind of look at our business in the next couple of years, you've got the remaining roll-out of the U.S. market, and that we're in full steam ahead, and our production lines are running right now. But when you start looking out another year or two and start thinking about Australia coming online, you start talking about Europe, eastern, central, western Europe, you start looking at this business at one, now you've got close to a million, if not more, machines, and that's based on the population today.

So if the U.K. puts in slot machines and casinos, that would only add to it. And then if you figure that the roll-out starts, let's say, next year or the year after, that just continues our growth for a couple more years past the typical roll-out that we were looking, which at first, we thought was 3-5 years, and now it's more like in the 2-3, 2-4-year period. So now, it continues that down the path.

Then you just got to figure that by the time that ends, the U.S. market's going to start seeing its turnover because every five years the slot machines get turned over. Then you got all those printers coming out of warranty and into service.

So we look at this business as a real growth driver for the next 3, 5, 6, 7 years, which is kind of new to the story because at the beginning, we really just looked at it from a U.S. market only.

Okay. So specifically, for the Aristocrat announcement, I mean, was the [inaudible] of them formally selecting you as their preferred provider, the result of them getting some initial meaningful orders in the Australian market that they felt that they needed to sort of publicly state where their direction is and where the suppliers are?

Well, what caught us by surprise was the fact that they had called, and it was kind of a bake off between us and our competitor, and asked for some printers to test. And then we thought this would go on for quite some time. We were a bit surprised at how quickly they got back to us and then selected us.

From a standpoint on what the roll-out schedule looks like and what the environment looks like, I'm leaving Saturday for Sydney. I've got meetings on Monday and Monday night with Aristocrat, and then sit down and make plans to sit down and understand more of the roll-out schedule, what, if any, [inaudible] are out there, why did this happen so quick, and to get a feel for what the next couple of years looks like.

So I hope to be able to talk about that at the next conference call.

Well, maybe I'll put it another way, Bart. Your guidance for '04, is it based on a similar 95% North America, 5% international '04-type experience, and if international were to accelerate deployments, that would actually be a source of potential upside?

Yes. Yeah. Yeah. The model that we built was based on the existing business that we know today. And in my talk, I talk a lot about the international markets because we are seeing a lot of activity. We are seeing a lot of interest. We have a lot of quotes out there.

And you've been -- you've known this company for a while, it just depends on when it hits and when countries decide to put in a new VLT system or when I find out from Aristocrat what the roll-out schedule is going to look like in Australia. So we built the business plan based on the existing business that we know today.

Okay. Good. I also wanted to follow up quickly, and then I'll let someone else get on, on the BANKjet side. Can you run the opportunity, specifically in the BANKjet area, [inaudible] and Check 21, will be the driver of increased printer sales?

Well, let me answer the second question first, because that will give us some color as to what's going on in the market. There are two fundamental dynamics happening to the banking industry. In fact, at the banking show, the VAI show in November, the word on the street was 2003 was a year of branch banking. A lot of times, I kind of look at my own life and see how it fits into our business.

When you look at banks, they basically send their customer out to the ATM. And if you wanted to go into a bank and do any business with a bank, there was nobody there to work with you. The banks realized that they're not getting a lot of retail business. I'm a prime example. I've got a checking account at my bank, my credit card, my mortgage, my brokerage account. I do nothing with my bank.

So the banks are now focused on the retail business. So we've been talking about this for about, what, 3, 4, 5 months from now, and since we started talking about it, of course, we've seen some major acquisitions, Chase and JP Morgan Chase and Bank One getting together. JP Morgan Chase talking about the need for the retail side of the business. Bank America buying Fleet for the same reason. So you've got that major dynamic of going back -- the banks going back to retail banking.

On top of that, you've got Check 21. And Check 21 is a fundamental change to the way that banks will do their business and how they handle checks. Tomorrow, once they implement Check 21 technology, that they'll scan both sides of the check in, and then those checks will move electronically between the checks, because of 9-11, the transactions couldn't get completed because they were all stuck in the bellies of the plane.

So you've got the banks, one, looking at getting back into retail banking. Two, they're being forced to change the technology because the technology they have at the teller today cannot do Check 21. There is no two-sided scanner at the banks today.

So the two orders that we saw last year were all based on both initiatives. One, they had to put the new technology in so they went out and looked at the technology. And two, they chose our technology because we were able to print color and graphics and promotion ideas and couponing on the bottom of the check with our color printer. On top of that, it's half the price of the existing printer that's out there today. So we were able to win both large orders.

We are following the industry very closely. We are talking to every opportunity that's in front of us. It's going to happen bank by bank, it's not going to be something that just, you know, because the bank has to, one, get ready with the technology, change the technology and then implement the technology all at once. I mean, the roll-out schedules that we're going through with the two banks right now, it's 19,000 terminals that's happening over about a year period. That's pretty quick.

In the POS market, that would take two to three years. So it's going to be a bank-by-bank situation. It's a wonderful opportunity for us. There is, you know, the competition is very limited. There's older printers out there that are twice as expensive as ours. They can't do color. You can't really use a thermal printer in that application because you've got to validate the check. In order to do check 21, you've got to print on the back of the check first. Because then it gets scanned in, and that's the only way, based on the regulations that they've set for Check 22 that it can happen. And you can't do that with a thermal printer, so you got to use some type of impact or inkjet printer, which is our inkjet technology. So we're very encouraged by it.

It's going to be a project-by-project basis, but we're out in front of it. And just think about all the teller stations that are out there that could eventually get our type of technology.

Bart, have you received any orders besides the two large ones you announced for this, for the BANKjet product?

Yeah. We've gotten some small orders from small banks for our printer. Nothing to the size, you know, if you think about the U.S., you're probably down to six or eight large institutions. So there's a lot of small institutions out there now. We've gotten a couple of those already, and that just flows through the system. But the bigger banks are, of course, bigger initiatives, a lot of testing, a lot of integration and things like that, so that takes longer to close.

Okay. Thank you.

Once again, that's 1 followed by 4 to pose a question at this time.

Our next question is from Brad [Ore] from Founders Asset Management. Please go ahead, sir.

Brad? You can hear us?

Hello, can you hear me?

Okay. Now we can hear you.

Great quarter, guys.

Thank you, Brad.

When is Check 21 implementation required by?

I think it's the end of 2005.

And that is a mandatory as opposed to government suggested?

Our understanding it's mandatory. It's been approved by the -- when I say mandatory, in order for the banks to be able to make this -- make Check 21 happen, they all have to have the technology. If one bank has the technology and the other bank doesn't, it doesn't work because you've got to be able to send the check electronically back and forth between the banks. So it's not an if, it's a when they implement it.

Uh-huh. What size printer order do you think warrants or -- do you think warrants a press release? I've seen as small as 2,500, I think, over the past couple of years. So I'm curious what that threshold is?

You know, with some of the smaller banks, we probably won't put out a press release. I mean, I think our guidance shows just about 100% growth of EPS.

I think when we get another major financial institution, of course, we'll put out a press release. I mean, because it's going to be in the 6-15 or 20,000 range.

Are there any -- are there any --

And by the way, just so you know, it's all subject to the bank allowing us to put the press release out also.

Sure.

So, I mean, we get into situations where some customers don't want us to put out press releases, but hopefully, if we get a -- when the next large order comes, we won't have that to worry about.

Can you give us any color on RFP activity that you have going on currently? On, obviously, the bigger sized orders? Biggest interest?

All I can say is we've got -- we've got a lot of irons in the fire and we'll let you know when the next one closes.

How did the gaming operators view the life cycle of the printers they're ordering today? Four or five years?

I think it's going to go two ways, Brad. I think one way is going to go, when they replace a machine, they're going to put a new printer in. It's such a small piece -- it's a small part of the purchase price of the slot machine, that when an old machine goes, the printer's going to go and a new one goes in.

The one thing that we're very curious about is the environment that the printer is working in. The casino is quite a hostile environment, a lot of heat in the slot machine, there's a lot of dirt, there's a lot of dust, there's a lot of smoke, there's a lot of drinks. So it's going to be interesting to see what happens over time as these printers are out there, as to once they come off warranty what the life cycle the printer's going to be. Because whether it lasts the full five years -- I mean, I'm sure we're going to see the printers at some point need some type of repair, but whether there's an intermediate period where they just start replacing printers just because they're getting abused out there, it's too early to tell.

I guess, at the very least, you've got a five to seven-year replacement cycle just on that general slot machine replacement cycle.

Yeah. And that replacement cycle continues to come down. It used to be seven or eight years, and now -- and I'm just quoting what the other manufacturers like to say, they like to say it's a five-year period. It's because the games have gotten so much better that one casino can't have -- they can't allow one casino to have a better game than somebody else. So there's constant movement of games now. So it is averaging about, what we've been told, five years.

I had a question about -- you know, not sure you'll be able to answer this, but what kind of features and functionality are you working on to try to pull forward that replacement cycle? But I guess you're more of a -- the best product available and you wait for the order to come in.

What I could say is this, we're always leading the market in technology, and this company continues to bring out two to three printers every year that continue to lead the industry. And we look at the casino industry as a major opportunity for us. So stay tuned and you'll see what we do.

Lastly, Bart, any color on the regulatory front in Australia? Or is that one of the items on the agenda for next week?

Clearly on the agenda. Clearly on the agenda.

Okay. Thanks, guys.

I mean, it happens so quick. I was planning on making a trip out there in a couple of months and it came so -- quicker than I thought. So I've had to redo my schedule to get out there.

Okay. Thanks, guys. Appreciate it.

Thanks, Brad.

Once again, that's 1 followed by 4 to pose a question at this time.

We have a follow-up question coming from Andrew Winer. Please go ahead.

Hi. Dick, this is probably for you. You mentioned that the legal expense was higher than -- you referred to it a couple of times as being sort of higher than normal. I was wondering if that was specifically related to the settlement discussions going on for the item for which you accrued an additional charge, or is that also related to some of your efforts to pursue your intellectual property rights on two-color -- four to two-color conversion and some of the other intellectual property items you guys have that you think may have value over time.

Both for the quarter and the year, it's mainly our new patent filings. We have filed about eight patents last year. And when we file them both in the United States and foreign patents, it just adds the expense. Some of the cost, of course, was associated with the patent settlement issue.

Yeah. Andrew, we've done a -- for a small company, I think we've just done a wonderful job at looking at all the technology that we're developing and making sure that we filed a patent everywhere and anywhere we can. We have literally filed at least eight new patents this past year, and the cost of doing that and the cost -- and then we look at where it's important. For instance, if we file a gaming patent, we should file it also in Australia because that's a big market for us.

So our lawyers are keeping us in the right direction regards to the right countries, the right PCPs we need to file. By the way, this all is helping us in things like getting the use of somebody's technology or, two, licensing our technology. So it's all been very positive for us?

Bart, can you speak to the latter, you know, you said helping you in licensing your technology. Does that mean one, we currently have licenses? Or two, we're active discussions? And maybe you can sort of update us a little bit in that regard?

We're in active discussions now, Andrew. And I'm very pleased where we are with this. From where we came many years ago, just eight years ago, whatever, to where we are today, we have some real technology, and we are in active discussions right now.

Okay. And then, I guess, my last question would be on the sort of traditional point-of-sale side, you know, we still, while we had nice growth this year, still command the sort of very small share of market, and I think you'd talked about needing a recovery in the market for some large-scale implementations to get off the drawing board, per se.

Can you sort of give us a flavor for what you're seeing in the market entering 2004, particularly in light of what seems to be improving results across the hospitality industry?

Yeah. We're clearly seeing much more action in the market. Our results show it. Just to put some color on it, our domestic POS business, POS banking business in the fourth quarter was up 20%, and 17% for the year, and I think, as we all know, the first two quarters of 2003 were not very good quarters, and the third quarter we saw the pickup. And for us to see a pickup in the fourth quarter, which is typically our slowest quarter for the POS banking industry, and see the growth that we did see, which is 20%, was a nice indication that the market is picking up. It's also an indication that our technology is being well accepted.

So we feel, in our plan and the numbers that we're giving you, we're still conservative, but we are projecting growth for '04. We're still a bit conservative. I think that the current economic situation with the war going on in Iraq, with the job situation, when we take a macro look at our business and we see everything out there and knowing that that affects our POS banking business, we just took a conservative look at it, even though we are starting to see the growth and we are starting to see the market come back. So we are being a bit conservative on that in -- when we put our plan together and put the guidance together for this.

Thank you.

The next question is coming from Jonathan [Tanako] from Wachovia Securities. Sir, please state your question.

Hi, Bart and Dick. Congratulations on the growth in your company.

I was wondering how big the market is for the bank teller printers.

We're trying to get our arms around that, Jonathan. You got to believe it's a couple hundred thousand printers. It's not an industry where a -- you can go to somebody and say, you know, give me your statistics on how many teller stations are out there. But if you just look at the population of banks and teller stations out there, I mean, the interesting this thing is, in one of the banking deals we got, they're actually opening up more branches even during the contract, so we probably will see a couple of extra printers as part of that contract. So you got to believe it's a couple hundred thousand printers or more.

I see. Would your printer possibly be used in new vision gaming products, as well as multimedia games Bingo products?

They are right now. In certain cases they are, yes.

In the case where GTECH, you provide exclusively for their lottery business, now they have a ten-year agreement with New Vision Gaming. Will you then get their business or something to be negotiated?

Well, I think that's scratch-off business; isn't that? Depending on what GTECH does, where they use the printer, there's a good chance that that printer will be ours. We have a wonderful relationship with GTECH. We're encouraged with their [inaudible] acquisition, which is GTECH entering the VLT and the Class 2 market and Class 3 market. That's a wonderful opportunity for us. So wherever GTECH goes, we follow.

Okay. Great. Thank you, Bart.

Sure.

Once again, that's 1 followed by 4 to pose your question at this time. Our next question comes Todd [Ilers].

Todd?

Mr. [Ilers], if you have a question, please press 1 followed by 4. Go ahead, sir.

Okay. I had a question. You talked about the European markets earlier. I was wondering if you care to talk about, specifically, the U.K. market in terms of potential size upon deregulation, and what percentage of those do you expect to be ticket in/ticket out?

The only thing we can say, Todd, is the same thing that we're hearing from the major manufacturers. The queen has endorsed casinos. Clearly, we're seeing the operators starting to either do joint ventures or actually buy companies over there. And they're all getting ready for it.

I personally think it's a 2005, 2006 story. I clearly don't think it's going to happen this year. And the benefit -- we've always said that the benefit of ticket in/ticket out is not the receipt, but it's the promotion. It's being able to have the casino talk to the customer realtime, to target that customer. And we think we've just scratched the surface using printers in a slot machine.

So when we look at the U.K. market, we're very optimistic that no matter what they do, that they're going to look in printing as a way to talk to they're customers realtime with the slot machine. We're also very -- we're, of course, looking at it from the standpoint of just the receipt market. One of the issues that the U.K. has, which is different from what we have, is multiple-sized coins and dollar bills. So they have a bigger issue in how they handle coins and currency. So clearly, a ticket printer would be a major benefit to them.

But when we look at the market, we look at the opportunity to do things with the printer outside of just receipt printing. So we'll wait to see what the true opportunity is.

What we were very encouraged with when we were at the ICE show in London was the excitement. We did a -- we made a brochure and we called it TITO and had our colors on it and our logo on it. And it basically gave a story about ticket in/ticket out. How does it work, the benefits, and we had it in our booth in London at the ICE show. We printed 1,900 brochures. We were amazed that slot machine manufacturers were coming over to us asking us for hundreds of them to give out to the operators in Europe because they were all asking about it.

They had seen the brochure for better words, that talked about it, and they wanted to use it in their presentations to their customers. So we were very, very encouraged. Not only the fact that it was our brochure and our name on it, but that there were so many customers talking about it.

We've seen quotes and we've talked to people, we've got a great partner over there who's doing a lot of work for us. So we're encouraged about the opportunity there, and that just adds to the installed base or the amount of printers that can go into slot machines.

Okay. Thank you. I also had one quick question, I'm not sure if I missed it or not, but did you guys provide a cash balance for the end of the year?

We had about half a million in cash and we had a term loan of half a million.

Yeah. And then at the end of January, the term loan was paid off and now we got cash in the bank. And it should -- we'll be generating cash all year.

All right. Sounds good. Thanks, guys. Good quarter.

Thank you.

Once again, the floor is open for questions. Please press 1 followed by 4 on your touchtone phone at this time.

Sir, there appears to be no further questions. I'd like turn the floor back over to Bart Shuldman.

Okay. Thank you very much. I know it's late and we really appreciate everybody joining us on the call. 2003 was a good solid year for us, and we look forward to another successful 2004. We look forward to you joining us on our next conference call at the end of our Q1, and I also look forward to seeing you at our annual shareholder's meeting.

Thank you and have a good night.

That does conclude today's call. Thank you.