1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 26, 1999
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 |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING JULY 30, 1999
- - ----- -------------------------
COMMON STOCK,
$.01 PAR VALUE 5,558,900
2
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
PART I. Financial Information: Page No.
Item 1 Financial Statements
Consolidated condensed balance sheets as of June 26, 1999 and December
31, 1998 3
Consolidated condensed statements of operations for the three and six
months ended June 26, 1999 and June 27, 1998 4
Consolidated condensed statements of cash flows for the six months ended
June 26, 1999 and June 27, 1998 5
Notes to consolidated condensed financial statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
PART II. Other Information:
Item 1 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 26, December 31,
(In thousands) 1999 1998
--------------- --------------
ASSETS: (UNAUDITED)
Current assets:
Cash and cash equivalents $ 486 $ 546
Receivables, net 6,048 5,153
Inventories 7,746 8,744
Other current assets 1,417 1,651
-------- --------
Total current assets 15,697 16,094
-------- --------
Plant and equipment, net 5,854 5,664
Excess of cost over fair value of net assets acquired 1,991 1,900
Other assets 144 130
-------- --------
7,989 7,694
-------- --------
$ 23,686 $ 23,788
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Bank loans payable $ -- $ 725
Accounts payable 3,772 2,188
Accrued liabilities 2,899 3,074
-------- --------
Total current liabilities 6,671 5,987
-------- --------
Long term debt 4,900 5,075
Other liabilities 520 549
-------- --------
5,420 5,624
-------- --------
Shareholders' equity:
Common stock 55 56
Additional paid-in capital 5,535 5,763
Retained earnings 7,135 7,268
Unamortized restricted stock compensation (777) (903)
Loan receivable from officer (330) --
Accumulated other comprehensive income (23) (7)
-------- --------
Total shareholders' equity 11,595 12,177
-------- --------
$ 23,686 $ 23,788
======== ========
See notes to consolidated condensed financial statements.
3
4
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 26, June 27, JUNE 26, June 27,
(In thousands, except per share data) 1999 1998 1999 1998
-------- -------- -------- --------
Net sales $ 12,524 $ 12,500 $ 21,725 $ 25,780
Cost of sales 9,286 9,065 16,059 18,599
-------- -------- -------- --------
Gross profit 3,238 3,435 5,666 7,181
-------- -------- -------- --------
Operating expenses:
Engineering, design and product
development costs 789 983 1,590 1,816
Selling and marketing expenses 997 843 1,856 1,616
General and administrative expenses 1,118 1,161 2,206 2,262
-------- -------- -------- --------
2,904 2,987 5,652 5,694
-------- -------- -------- --------
Operating income 334 448 14 1,487
-------- -------- -------- --------
Other income (expense):
Interest, net (95) (87) (185) (128)
Other, net 11 6 26 15
-------- -------- -------- --------
(84) (81) (159) (113)
-------- -------- -------- --------
Income (loss) before income taxes 250 367 (145) 1,374
Income tax provision (benefit) 104 136 (12) 509
-------- -------- -------- --------
Net income (loss) $ 146 $ 231 $ (133) $ 865
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.03 $ 0.04 $ (0.02) $ 0.14
======== ======== ======== ========
Diluted $ 0.03 $ 0.04 $ (0.02) $ 0.14
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 5,559 6,239 5,568 6,347
======== ======== ======== ========
Diluted 5,576 6,264 5,570 6,394
======== ======== ======== ========
See notes to consolidated condensed financial statements.
4
5
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
-----------------------
JUNE 26, June 27,
(In thousands) 1999 1998
------- -------
Cash flows from operating activities:
Net income (loss) $ (133) $ 865
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,137 1,047
Loss on disposal of equipment -- 9
Changes in operating assets and liabilities:
Receivables (814) (130)
Inventories 1,036 (1,841)
Other current assets 234 (94)
Other assets (46) (63)
Accounts payable 1,574 1,384
Accrued liabilities and other liabilities (207) (223)
------- -------
Net cash provided by operating activities 2,781 954
------- -------
Cash flows from investing activities:
Purchases of plant and equipment (1,056) (1,760)
Proceeds from sale of equipment -- 2
Loans to officers (345) --
Acquisition of Tridex Ribbon business (295) --
------- -------
Net cash used in investing activities (1,696) (1,758)
------- -------
Cash flows from financing activities:
Bank line of credit borrowings 4,900 8,200
Bank line of credit repayments (5,800) (2,700)
Purchases of treasury stock (229) (4,771)
Proceeds from option exercises -- 2
------- -------
Net cash (used in) provided by financing activities (1,129) 731
------- -------
Effect of exchange rate changes on cash (16) 3
------- -------
Decrease in cash and cash equivalents (60) (70)
Cash and cash equivalents at beginning of period 546 391
------- -------
Cash and cash equivalents at end of period $ 486 $ 321
======= =======
See notes to consolidated condensed financial statements.
5
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of TransAct Technologies Incorporated (the "Company"),
the accompanying unaudited consolidated condensed financial statements
contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly its financial position as of
June 26, 1999, and the results of its operations and cash flows for the
three and six months ended June 26, 1999 and June 27, 1998. The
December 31, 1998 consolidated condensed balance sheet has been derived
from the Company's 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, 1998
included in the Company's Annual Report on Form 10-K.
The financial position and results of operations of the
Company's foreign subsidiaries are measured using local currency as the
functional currency. Assets and liabilities of such subsidiaries have
been translated at end of period exchange rates, and related revenues
and expenses have been translated at weighted average exchange rates.
Transaction gains and losses are included in other income.
The results of operations for the three and six months ended
June 26, 1999 and June 27, 1998 are not necessarily indicative of the
results to be expected for the full year.
2. Earnings per share
Basic earnings per common share for the three and six months
ended June 26, 1999 and June 27, 1998 were based on the weighted
average number of shares outstanding during the period. Diluted
earnings per share for the same periods were based on the weighted
average number of shares after consideration of any dilutive effect of
stock options and warrants.
3. Inventories:
The components of inventory are:
June 26, December 31,
(In thousands) 1999 1998
------ ------
Raw materials and component parts $6,576 $7,754
Work-in-process 771 495
Finished goods 399 495
------ ------
$7,746 $8,744
====== ======
4. Commitments and contingencies
The Company has a long-term purchase agreement with Okidata,
Division of Oki America, Inc., for certain printer components. Under
the terms of the agreement, the Company receives favorable pricing for
volume purchases over the life of the contract. In the event
anticipated purchase levels are not achieved, the Company would be
subject to retroactive price increases on previous purchases.
Management currently anticipates achieving purchase levels sufficient
to maintain the favorable prices.
5. Significant transactions
On May 28, 1999, the Company acquired the business and
substantially all the assets of the Tridex Ribbon Business for total
cash consideration of approximately $295,000. The acquisition has been
accounted for by the purchase method of accounting. The purchased
assets and liabilities have been recorded in the Company's financial
statements at their estimated fair values at the acquisition date. The
results of operations of the acquired company have been included with
those of the Company since the date of acquisition. The acquisition
cost exceeded the fair value of the net assets acquired by $180,000.
Such excess cost is being amortized over a five-year period on a
straight-line basis.
6
7
5. Significant transactions (continued)
On May 7, 1999, the Company entered into a new two-year $10,000,000
revolving credit facility (the "New Credit Facility") with Fleet National
Bank ("Fleet"), expiring on May 31, 2001. The New Credit Facility
replaced both the existing $5,000,000 revolving working capital facility
and $10,000,000 revolving credit facility (the "Credit Facility"), also
with Fleet. The New Credit Facility provides the Company with a
$10,000,000 credit facility that may be used to fund working capital.
Borrowings under the New Credit facility bear interest on outstanding
borrowings at Fleet's prime rate and bear a commitment fee ranging from
0.25% to 0.625% on any unused portion of the New Credit Facility. The New
Credit Facility also permits the Company to designate a LIBOR rate on
outstanding borrowings with a margin ranging from 1.50 to 2.25 percentage
points over the market rate, depending on the Company meeting certain
ratios. Concurrent with the New Credit Facility, the Company entered into
a swap agreement with Fleet under which the Company fixed its interest
rate at 7.88% for two years on $3,000,000 of outstanding borrowings under
the New Credit Facility. The New Credit Facility is secured by a lien on
substantially all the assets of the Company, imposes certain financial
covenants and restricts the payment of cash dividends and the creation of
liens.
6. Subsequent events
On June 25, 1999, the Company and its wholly-owned subsidiary,
Magnetec Corporation ("Magnetec"), commenced a lawsuit in the United
States District Court for the District of Rhode Island against GTECH
Corporation ("GTECH") for misappropriation of trade secrets, breach of
contract and related claims, seeking injunctive relief and compensatory
and punitive damages. Magnetec has manufactured and sold printers to
GTECH for use in the GTECH Isys(R) on-line terminal system under various
OEM agreements since 1994. The lawsuit asserted that GTECH attempted to
use proprietary Magnetec information in violation of Magnetec's rights
under the OEM agreements and applicable law. The lawsuit was subsequently
refiled in the Rhode Island Superior Court. On June 30, 1999, the Rhode
Island Superior Court issued a temporary restraining order against GTECH,
which among other things, prohibited GTECH from working with or giving
information to third parties about the design or manufacture of a printer
to replace the printer designed and produced by Magnetec for the GTECH
Isys(R) on-line lottery system. On July 15, 1999, GTECH and the Company
signed a new five-year agreement under which Magnetec will be the
exclusive manufacturer and supplier to GTECH of an impact printer for use
in GTECH's Isys(R) online lottery terminal. As part of the agreement,
GTECH agreed to pay the Company $1 million for past design efforts,
development costs and manufacturing interruption costs and agreed to
place a non-cancelable order for delivery of a minimum of approximately
$8 million of printers in the year 2000. In connection with the execution
of this agreement, the parties agreed to have all claims under the
lawsuits dismissed and subsequently filed dismissal stipulations to
terminate the federal and state lawsuits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements included in this report, including without limitation
statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
forward-looking statements involve risks and uncertainties, including, but not
limited to, customer acceptance and market share gains, both domestically and
internationally, in the face of substantial competition from competitors that
have broader lines of products and greater financial resources; successful
product development; dependence on significant customers; dependence on third
parties for sales in Europe and Latin America; economic conditions in the United
States, Europe and Latin America; marketplace acceptance of new products; risks
associated with foreign operations; availability of third-party components at
reasonable prices; and the absence of price wars or other significant pricing
pressures affecting the Company's products in the United States or abroad.
Actual results may differ materially from those discussed in, or implied by, the
forward-looking statements.
7
8
IMPACT OF THE YEAR 2000 ISSUE.
General.
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Program.
The Company has begun a program to resolve its Year 2000 issue. This program
consists of four phases; assessment, remediation, testing and contingency
planning. The Company completed the assessment phase in December 1998 and is
currently in the remediation and testing phases. During the assessment phase,
the Company assessed its products, key financial and operating systems and other
systems for Year 2000 compliance. The assessment included identifying all
critical information management systems and other critical systems on which the
Company relies, testing Year 2000 compliance of such systems, and recommending
steps for replacing/making corrective fixes to non-compliant systems.
Additionally, as part of the assessment phase, the Company obtained compliance
verification from third party vendors supplying critical parts or services to
the Company in order to determine their plans to address their own Year 2000
issues.
Upon completion of the detailed assessment, the Company concluded that
substantially all its critical financial operating systems and other systems are
Year 2000 compliant. However, certain software and hardware components were
identified as noncompliant. As of June 26, 1999, substantially all critical
noncompliant software and hardware have been replaced . Also, the Company
believes that its products will be unaffected by the Year 2000 Issue, as none of
its products contain embedded date information.
The testing phase of the program has been ongoing, and will continue to be
conducted as noncompliant software and hardware are replaced. The Company
estimates that the testing phase is virtually 100% completed as of June 26,
1999.
The Company has begun to develop a contingency plan to address third party
factors which are out of its control, and expects completion of this plan by
September 1999.
Costs.
The Company plans completion of all phases, including contingency planning, of
the Year 2000 program by September 1999. All costs associated with the Company's
Year 2000 program are being expensed as incurred. The Company's total cost
associated with the Year 2000 program has not been, and based on results of its
detailed assessment, is not expected to be, material to the Company's business,
financial position, results of operations or cash flows. The estimated total
cost of the Year 2000 Program is approximately $25,000, which primarily includes
the cost of replacing/upgrading noncompliant software identified during the
assessment phase with compliant software. The Company incurred costs of
approximately $15,000 through June 26, 1999.
Risks.
The Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, the
Company may not timely identify and remediate all significant Year 2000 problems
and remedial efforts may involve significant time and expense. If such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the results of operations,
financial position or cash flows of the Company.
The Company is currently identifying and analyzing the most reasonably likely
worst case scenarios for third party relationships affected by the Year 2000
Issue. These scenarios could include the inability of certain suppliers to
supply critical parts on a timely basis or the inability of customers to place
orders. Either of these scenarios, which is outside of the Company's control,
could result in a delay or an inability to ship product in the year 2000,
depending on the nature and severity of the problems. Furthermore, there can be
no assurance that any Year 2000 compliance problems of the Company or its
customers or suppliers will not have a material adverse effect on the results of
operations, financial position or cash flows of the Company.
8
9
The estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events. Risks to completing the
remaining portions of the program include the availability of outside resources,
the Company's ability to discover and correct potential Year 2000 problems which
could have an impact on the Company's operations and the ability of suppliers or
customers to bring their systems into Year 2000 compliance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 26, 1999 COMPARED TO THREE MONTHS ENDED JUNE 27, 1998
NET SALES. Net sales into the Company's vertical markets for the current and
prior year's quarter were as follows:
Three months ended Three months ended
(In thousands, except %) June 26, 1999 June 27, 1998
--------------------- ---------------------
Point of sale $ 6,305 50.3% $ 7,349 58.8%
Gaming and lottery 3,937 31.5 4,598 36.8
Other 2,282 18.2 553 4.4
--------------------- ---------------------
$12,524 100.0% $12,500 100.0%
===================== =====================
Net sales for the second quarter of 1999 increased $24,000, or less than 1%, to
$12,524,000 from $12,500,000 in the prior year's second quarter. Increased
shipments into the Company's other markets were almost entirely offset by
decreased sales into the point of sale ("POS") and gaming and lottery markets.
Point of sale: Sales of the Company's POS printers decreased approximately
$1,044,000, or 14%, from the second quarter of 1998. International POS printer
shipments decreased approximately $1,048,000 due largely to the absence of
printer shipments for the British Post Office project. Shipments for this
project totaled approximately $1,600,000 in the second quarter of 1998. The
Company does not anticipate making any printer shipments related to this project
during 1999, however, printer shipments are expected to resume in the first
quarter of 2000. The absence of printer shipments for the British Post Office
project was partially offset by increased shipments to Europe and Latin America
through the Company's distribution partner, Okidata. Domestic POS printer sales
were consistent with those of the prior year's second quarter.
Gaming and lottery: Sales of the Company's gaming and lottery printers decreased
approximately $661,000, or 14%, from the second quarter a year ago. The overall
decrease primarily reflects a decrease of approximately $3,800,000 in shipments
of the Company's on-line lottery printers and spare parts to one customer. The
Company does not anticipate making any further on-line lottery printer
shipments, other than spares, to this customer until 2000. The decrease in sales
of printers for use in on-line lottery terminals was largely offset by (1) sales
of in-lane and other lottery printers to this same customer of approximately
$800,000 and (2) an increase of approximately $2,400,000 in shipments of
printers for use in video lottery terminals, primarily for use in South
Carolina's video poker industry. During the second quarter of 1998, shipments of
these printers were significantly lower due to uncertainty in South Carolina's
video poker industry concerning the industry's continued future in the state.
Other: Sales of the Company's printers into other markets increased $1,729,000,
or 313%, to $2,282,000 from $553,000. Sales for the second quarter of 1999
included resumed shipments of approximately $500,000 of the Company's thermal
kiosk printers for use in a Canadian government application. No shipments of
these printers were made in the second quarter of 1998. Additionally, sales in
the Company's other markets increased due to shipments of printers to a new
customer for use in a bank teller application and, to a lesser extent, increased
shipments of printers used in automated teller machines.
GROSS PROFIT. Gross profit decreased $197,000, or 6%, to $3,238,000 from
$3,435,000 in the prior year's quarter. The gross margin also declined to 25.9%
from 27.5%. Both gross profit and gross margin declined largely due to the
impact of fixed overhead costs on significantly lower sales volume at the
Company's Wallingford, Connecticut facility. The Company expects its gross
margin for the remainder of 1999 to be relatively consistent with that of the
most recent quarter.
9
10
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses decreased $194,000, or 20%, to $789,000 from $983,000 in the second
quarter of 1998. This decrease is primarily due to a reduction in engineering
staff resulting from the downsizing and reorganization of the Company's
manufacturing facility in Wallingford, Connecticut in December 1998. This
reduction was somewhat offset by increased product development and design
expenses, primarily for new products in the POS market, including expenses
related to the development of printers utilizing inkjet printing technology.
Engineering and product development expense decreased as a percentage of net
sales to 6.3% from 7.9%.
SELLING AND MARKETING. Selling and marketing expenses increased $154,000, or
18%, to $997,000 from $843,000 in the quarter ended June 27, 1998, and increased
as a percentage of net sales to 8.0% from 6.7%. Such expenses increased due to
additional marketing staff related to the establishment of a corporate marketing
department in the second half of 1998 and increased sales commission resulting
from an increase in sales eligible for commissions in the second quarter of 1999
compared to 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
$43,000, or 4%, to $1,118,000 from $1,161,000 in the comparable prior year's
quarter, due primarily to the downsizing and reorganization of the Company's
manufacturing facility in Wallingford, Connecticut in December 1998. General and
administrative expenses decreased as a percentage of net sales to 8.9% from
9.3%.
OPERATING INCOME. Operating income decreased $114,000, or 25%, to $334,000 from
$448,000 in the second quarter of 1998. Operating income as a percentage of net
sales declined to 2.7% from 3.6%, primarily due to lower gross margin on
significantly lower sales volume in the Company's manufacturing facility in
Wallingford, CT in the second quarter of 1999 compared to 1998.
INTEREST. The Company incurred net interest expense of $95,000, compared to
$87,000 in the second quarter of 1998, due to slightly higher interest rates on
outstanding borrowings on the Company's line of credit during the second quarter
of 1999. See "Liquidity and Capital Resources" below.
INCOME TAXES. The provision for income taxes for the current quarter reflects an
effective tax rate of 41.6% compared to 37.1% in the prior year's period. The
increase in the Company's effective tax rate is due to the impact of
nondeductible goodwill compared to relatively low income before taxes in the
current quarter.
NET INCOME. Net income for the second quarter of 1999 was $146,000, or $0.03 per
share (basic and diluted) compared to $231,000, or $0.04 per share (basic and
diluted) for the second quarter of 1998.
SIX MONTHS ENDED JUNE 26, 1999 COMPARED TO SIX MONTHS ENDED JUNE 27, 1998
NET SALES. Net sales into the Company's vertical markets for the current and
prior six-month periods were as follows:
Six months ended Six months ended
(In thousands, except %) June 26, 1999 June 27, 1998
----------------------- -----------------------
Point of sale 11,137 51.3 % $15,162 58.8 %
Gaming and lottery 6,131 28.2 8,786 34.1
Other 4,457 20.5 1,832 7.1
----------------------- -----------------------
21,725 100.0 % $25,780 100.0 %
======================= =======================
Net sales for the first half of 1999 decreased $4,055,000, or 16%, to
$21,725,000 from $25,780,000 in the prior year's period, due to decreased
shipments into the POS and gaming and lottery markets, offset by an increase in
the Company's other markets.
10
11
Point of sale: Sales of the Company's POS printers decreased approximately
$4,025,000, or 27% from the first six months of 1998. International POS printer
shipments decreased approximately $2,638,000 due largely to the absence of
printer shipments for the British Post Office project. Shipments for this
project totaled approximately $3,200,000 in the first half of 1998. The Company
does not anticipate making any printer shipments related to this project during
1999, however, printer shipments are expected to resume in the first quarter of
2000. The absence of printer shipments for the British Post Office project was
partially offset by increased shipments to Europe and Latin America through the
Company's distribution partner, Okidata. Domestic POS printer sales also
declined by approximately $1,387,000 due primarily to specific sales in the
first half of 1998 related to several large POS printer installations that did
not repeat in the first half of 1999.
Gaming and lottery: Sales of the Company's gaming and lottery printers decreased
approximately $2,655,000, or 30%, from the first half a year ago. The overall
decrease primarily reflects a decrease of approximately $7,500,000 in shipments
of the Company's on-line lottery printers and spare parts to one customer. The
Company does not anticipate making any further on-line lottery printer
shipments, other than spares, to this customer until 2000. The decrease in sales
of printers for use in on-line lottery terminals was largely offset by (1) sales
of in-lane lottery printers to this same customer of approximately $800,000 and
(2) an increase of approximately $4,200,000 in shipments of printers for use in
video lottery terminals, primarily for use in South Carolina's video poker
industry. During the first six months of 1998, shipments of these printers were
significantly lower due to uncertainty in South Carolina's video poker industry
concerning the industry's continued future in the state.
Other: Sales of the Company's printers into other markets increased $2,625,000,
or 143%, to $4,457,000 from $1,832,000 in the first half of 1998 due primarily
to resumed shipments of approximately $1,100,000 of the Company's thermal kiosk
printers for use in a Canadian government application. No shipments of these
printers were made in the first half of 1998. Additionally, sales into the
Company's other markets increased due to shipments of printers to a new customer
for use in a bank teller application and, to a lesser extent, increased
shipments of printers used in automated teller machines.
GROSS PROFIT. Gross profit decreased $1,515,000, or 21%, to $5,666,000 from
$7,181,000 in first half of 1998 due primarily to lower volume of sales. The
gross margin declined to 26.1% from 27.9% largely due to the impact of fixed
overhead costs on lower sales volume at the Company's Wallingford, Connecticut
facility. The Company expects its gross margin for the remainder of 1999 to be
relatively consistent with that of the most recent quarter.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses decreased $226,000, or 12%, to $1,590,000 from $1,816,000 in the six
months ended June 27, 1998. This decrease is primarily due to a reduction in
engineering staff resulting from the downsizing and reorganization of the
Company's manufacturing facility in Wallingford, Connecticut. This reduction was
somewhat offset by increased product development and design expenses, primarily
for new products in the POS market, including expenses related to the
development of printers utilizing inkjet printing technology. Engineering and
product development expense increased as a percentage of net sales to 7.3% from
7.1%, due to lower sales volume in the first half of 1999 compared to 1998.
SELLING AND MARKETING. Selling and marketing expenses increased $240,000, or
15%, to $1,856,000 from $1,616,000 in the first half of 1998, and increased as a
percentage of net sales to 8.5% from 6.2%. Such expenses increased due to
increased sales commission resulting from an increase in sales eligible for
commissions in the second half of 1999 compared to 1998, and additional
marketing staff related to the establishment of a corporate marketing department
in the second half of 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$56,000, or 2%, to $2,206,000 from $2,262,000 in the comparable prior year's
period primarily due to a reduction in staff resulting from the downsizing and
reorganization of the Company's manufacturing facility in Wallingford,
Connecticut. General and administrative expenses increased as a percentage of
net sales to 10.2% from 8.8%, primarily due to a lower volume of sales in the
first half of 1999 compared to 1998.
OPERATING INCOME. Operating income decreased $1,473,000, or 99%, to $14,000 from
$1,487,000 in the first six months of 1998. Operating income as a percentage of
net sales declined to 0.1% from 5.8%, due primarily to lower gross margin on
significantly lower sales volume in the first half of 1999, and to a lesser
extent, increased selling and marketing expenses.
11
12
INTEREST. Net interest expense increased to $185,000 from $128,000 in the first
six months of 1998 due primarily to increased outstanding borrowings on the
Company's line of credit, and to a lesser extent, a slightly higher average
borrowing rate in the first half of 1999 compared to the same period in 1998.
See "Liquidity and Capital Resources" below.
INCOME TAXES. As a result of the Company's loss before income taxes, the Company
recorded an income tax benefit of $12,000 for the six months ended June 26,
1999. The relatively low tax benefit is due to the impact of nondeductible
goodwill in the current six-month period. The effective tax rate for the
comparable prior year's period was 37.0%.
NET INCOME (LOSS). The Company incurred a net loss during the first half of 1999
of $133,000, or $0.02 per share (basic and diluted) compared to net income of
$865,000, or $0.14 per share (basic and diluted) for the first half of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $2,781,000 during the six months
ended June 26, 1999, compared to $954,000 during the six months ended June 27,
1998. The Company's working capital declined to $9,026,000 at June 26, 1999 from
$10,107,000 at December 31, 1998. The current ratio also slightly decreased to
2.35 June 26, 1999 from 2.69 at December 31, 1998.
During 1997 and 1998, the Board of Directors authorized the repurchase of up to
1.5 million shares of the Company's common stock (the "Stock Buyback Program").
As of December 31, 1998, the Company had acquired 1,203,000 shares of its common
stock for $9,421,000. During the first half of 1999, the Company repurchased an
additional 70,800 shares of its common stock for $229,000. Since the Company
began the stock repurchase program in December 1997, it has repurchased
1,273,800 shares for $9,650,000 (an average cost of $7.58 per share) under the
Stock Buyback Program. Further repurchases of the Company's common stock will
depend upon future cash flow of the Company and stock market conditions.
The Company had in place a $15,000,000 revolving credit facility (the "Credit
Facility") with Fleet National Bank ("Fleet"). The Credit Facility provided the
Company with a $5,000,000 revolving working capital facility, and a $10,000,000
revolving credit facility to be used for activities such as acquisitions and
repurchases of the Company's common stock. Borrowings under the $10,000,000
revolving credit facility could have been, at the Company's election, converted
to a four-year term loan commencing on June 30, 1999, the expiration date of the
Credit Facility. Any term loan borrowings would have matured on June 30, 2003.
Borrowings under the Credit Facility bore interest at Fleet's prime rate and
bore a commitment fee ranging from 0.25% to 0.50% on any unused portion of the
Credit Facility.
On May 7, 1999, the Company replaced the Credit Facility with a new two-year
$10,000,000 revolving credit facility (the "New Credit Facility") with Fleet,
expiring May 31, 2001. The New Credit Facility provides the Company with a
$10,000,000 credit facility that may be used to fund working capital. Borrowings
under the New Credit Facility bear interest at Fleet's prime rate (8.0% at June
26, 1999) and bear a commitment fee ranging from 0.25% to 0.625% on any unused
portion of the New Credit Facility (0.625% at June 26, 1999). The New Credit
Facility also permits the Company to designate a LIBOR rate on outstanding
borrowings with a margin ranging from 1.50 to 2.25 percentage points over the
market rate, depending on the Company meeting certain ratios. Concurrent with
the New Credit Facility, the Company entered into a swap agreement with Fleet
which permits the Company to fix its interest rate on a portion, or all, of its
outstanding borrowings under the New Credit Facility. The New Credit Facility is
secured by a lien on substantially all the assets of the Company, imposes
certain financial covenants and restricts the payment of cash dividends and the
creation of liens.
At December 31, 1998, the Company had outstanding borrowings of $5,800,000 under
the Credit Facility. In accordance with the Company's intent to convert the
outstanding borrowings to a four-year term loan at the expiration of the Credit
Facility, $5,075,000 ($5,800,000, less the current maturity of $725,000) had
been classified as long-term debt at December 31, 1998.
12
13
During the first half of 1999, the Company had net repayments of $900,000,
reducing outstanding borrowings to $4,900,000 at June 26, 1999 from $5,800,000
at December 31, 1998. In accordance with the New Credit Facility, these
borrowings have been classified as long-term debt at June 26, 1999.
The Company's capital expenditures were approximately $1,056,000 and $1,760,000
for the six months ended June 26, 1999 and June 27, 1998, respectively. These
expenditures primarily included new product tooling, computer equipment, and
factory machinery and equipment. The Company's total capital expenditures for
fiscal 1999 are expected to be approximately $2,800,000, a majority for new
product tooling.
The Company believes that cash flows generated from operations and borrowings
available under the New Credit Facility, as necessary, will provide sufficient
resources to meet the Company's working capital needs, finance its capital
expenditures, and meet its liquidity requirements through December 31, 1999.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On June 25, 1999, the Company and its wholly-owned subsidiary,
Magnetec Corporation ("Magnetec"), commenced a lawsuit in the
United States District Court for the District of Rhode Island
against GTECH Corporation ("GTECH") for misappropriation of
trade secrets, breach of contract and related claims, seeking
injunctive relief and compensatory and punitive damages.
Magnetec has manufactured and sold printers to GTECH for use
in the GTECH Isys(R) on-line terminal system under various OEM
agreements since 1994. The lawsuit asserted that GTECH
attempted to use proprietary Magnetec information in violation
of Magnetec's rights under the OEM agreements and applicable
law. The lawsuit was subsequently refiled in the Rhode Island
Superior Court. On June 30, 1999, the Rhode Island Superior
Court issued a temporary restraining order against GTECH,
which among other things, prohibited GTECH from working with
or giving information to third parties about the design or
manufacture of a printer to replace the printer designed and
produced by Magnetec for the GTECH Isys(R) on-line lottery
system. On July 15, 1999, GTECH and the Company signed a new
five-year agreement under which Magnetec will be the exclusive
manufacturer and supplier to GTECH of an impact printer for
use in GTECH's Isys(R) online lottery terminal. As part of the
agreement, GTECH agreed to pay the Company $1 million for past
design efforts, development costs and manufacturing
interruption costs and agreed to place a non-cancelable order
for delivery of a minimum of approximately $8 million of
printers in the year 2000. In connection with the execution of
this agreement, the parties agreed to have all claims under
the lawsuits dismissed and subsequently filed dismissal
stipulations to terminate the federal and state lawsuits.
13
14
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 6,
1999. Matters voted upon at the meeting and the number of
votes cast for, against or withheld, are as follows:
(1) To consider and act upon a proposal to elect two Directors
to serve until the Annual Meeting of Shareholders in the
year 2002 or until their successors have been duly elected
and qualified. Nominees were Thomas R. Schwarz and Bart C.
Shuldman. Votes cast were as follows:
For Withheld
--- --------
Thomas R. Schwarz 4,820,459 110,937
Bart C. Shuldman 4,544,862 386,534
(2) To ratify the selection of PricewaterhouseCoopers LLP as
the Company's independent accountants for 1999. Votes cast
were as follows: 4,857,533 for; 74,026 against; 6,368
abstained.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits filed herein
Exhibit 10.35 Amendment No. 1 to Credit Agreement
dated as of May 7, 1999 by and
among TransAct Technologies
Incorporated, Magnetec Corporation
and Fleet National Bank
Exhibit 10.36 Asset Transfer Agreement dated as
of May 28, 1999 between Magnetec
Corporation and Tridex Corporation
Exhibit 11.1 Computation of earnings per share
Exhibit 27.1 Financial Data Schedule
b. Reports on Form 8-K
The Company did not file any reports on Form 8-K during
the quarter covered by this report.
14
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
(Registrant)
August 9, 1999 /s/ Richard L. Cote
-------------------------------------
Richard L. Cote
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
/s/ Steven A. DeMartino
-------------------------------------
Steven A. DeMartino
Corporate Controller
(Principal Accounting Officer)
15
16
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
10.35 Amendment No. 1 to Credit Agreement dated as of May 7, 1999
by and among TransAct Technologies Incorporated, Magnetec
Corporation and Fleet National Bank
10.36 Asset Transfer Agreement dated as of May 28, 1999 between
Magnetec Corporation and Tridex Corporation
11.1 Computation of earnings per share
27.1 Financial Data Schedule