UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from: to:
Commission file number: 0-21121
TRANSACT TECHNOLOGIES INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 06-1456680
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 LASER LANE, WALLINGFORD, CT 06492
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(203) 269-1198
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING APRIL 29, 2005
- ----- --------------------------
COMMON STOCK, $.01 PAR VALUE 10,194,808
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
PART I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of March 31, 2005 and December
31, 2004 3
Condensed consolidated statements of income for the three months ended
March 31, 2005 and 2004 4
Condensed consolidated statements of cash flow for the three months
ended March 31, 2005 and 2004 5
Notes to condensed consolidated financial statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 4 Controls and Procedures 18
PART II. Other Information:
Item 6 Exhibits 19
Signatures 20
Certifications 22
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, December 31,
(In thousands) 2005 2004
- -------------------------------------------- -------- --------
ASSETS:
Current assets:
Cash and cash equivalents $ 7,596 $ 8,628
Receivables, net 9,145 8,910
Inventories 8,038 8,074
Refundable income taxes 510 510
Deferred tax assets 2,565 2,370
Other current assets 554 586
-------- --------
Total current assets 28,408 29,078
-------- --------
Fixed assets, net 3,666 3,177
Goodwill 1,469 1,469
Deferred tax assets 274 274
Other assets 91 101
-------- --------
5,500 5,021
-------- --------
Total assets $ 33,908 $ 34,099
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,999 $ 3,804
Accrued liabilities 3,559 3,812
Accrued restructuring 420 420
Deferred revenue 931 717
-------- --------
Total current liabilities 7,909 8,753
-------- --------
Accrued restructuring 925 1,034
Accrued product warranty 140 153
Deferred revenue 427 444
-------- --------
1,492 1,631
-------- --------
Total liabilities 9,401 10,384
-------- --------
Shareholders' equity:
Common stock 102 100
Additional paid-in capital 18,922 17,401
Retained earnings 7,275 7,112
Unamortized restricted stock compensation (1,958) (1,067)
Accumulated other comprehensive income 166 169
-------- --------
Total shareholders' equity 24,507 23,715
-------- --------
Total liabilities and shareholders' equity $ 33,908 $ 34,099
======== ========
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
(In thousands, except per share data) 2005 2004
-------- --------
Net sales $ 12,036 $ 15,075
Cost of sales 8,359 9,657
-------- --------
Gross profit 3,677 5,418
-------- --------
Operating expenses:
Engineering, design and product
development 731 614
Selling and marketing 1,349 1,362
General and administrative 1,364 1,332
-------- --------
3,444 3,308
-------- --------
Operating income 233 2,110
-------- --------
Interest and other income (expense):
Interest, net 20 (10)
Other, net (1) (3)
-------- --------
19 (13)
-------- --------
Income before income taxes 252 2,097
Income taxes 89 755
-------- --------
Net income $ 163 $ 1,342
======== ========
Net income available to common shareholders $ 163 $ 1,165
Net income per common share:
Basic $ 0.02 $ 0.13
Diluted $ 0.02 $ 0.12
Shares used in per share calculation
Basic 10,010 8,966
Diluted 10,452 9,800
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
(In thousands) 2005 2004
------- -------
Cash flows from operating activities:
Net income $ 163 $ 1,342
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash compensation expense 69 69
Depreciation and amortization 408 427
Changes in operating assets and liabilities:
Receivables (235) 1,286
Inventories 36 (536)
Other current assets 32 200
Accounts payable (805) (718)
Accrued liabilities and other liabilities 18 735
Accrued restructuring expenses (109) (131)
------- -------
Net cash (used in) provided by operating activities (423) 2,674
------- -------
Cash flows from investing activities:
Purchases of fixed assets (887) (194)
------- -------
Net cash used in investing activities (887) (194)
------- -------
Cash flows from financing activities:
Term loan repayments -- (420)
Proceeds from option and warrant exercises, and from issuance
of shares under the Employee Stock Purchase Plan 281 435
Payment of cash dividends -- (74)
------- -------
Net cash provided by (used in) financing activities 281 (59)
------- -------
Effect of exchange rate changes (3) 6
------- -------
(Decrease) increase in cash and cash equivalents (1,032) 2,427
Cash and cash equivalents at beginning of period 8,628 498
------- -------
Cash and cash equivalents at end of period $ 7,596 $ 2,925
======= =======
See notes to condensed consolidated financial statements.
5
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS
TransAct Technologies Incorporated ("TransAct"), which has its
headquarters in Wallingford, CT and its primary operating facility in
Ithaca, NY, operates in one industry segment, transaction-based printers
and related products. TransAct designs, develops, manufactures and markets
transaction-based printers under the Ithaca(R) brand name. Our printers
are used worldwide to provide transaction records such as receipts,
tickets, coupons, register journals and other documents. We focus on two
core markets: point-of-sale and banking ("POS") and gaming and lottery. In
addition, we market related consumables, spare parts and service. We sell
our products to original equipment manufacturers ("OEMs"), value-added
resellers, selected distributors and directly to end-users. Our product
distribution spans across the Americas, Europe, the Middle East, Africa,
the Caribbean Islands and the South Pacific.
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. These accounting principles were applied on a basis
consistent with those of the consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December
31, 2004. In our opinion, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to state fairly TransAct's
financial position as of March 31, 2005, the results of our operations for
the three months ended March 31, 2005 and 2004, and our cash flows for the
three months ended March 31, 2005 and 2004. The December 31, 2004
condensed consolidated balance sheet has been derived from the audited
financial statements at that date. These interim financial statements
should be read in conjunction with the audited financial statements for
the year ended December 31, 2004 included in our Annual Report on Form
10-K.
The financial position and results of operations of our foreign
subsidiary are measured using local currency as the functional currency.
Assets and liabilities of such subsidiary have been translated at end of
period exchange rates, and related revenues and expenses have been
translated at weighted average exchange rates with the resulting
translation gain or loss recorded in accumulated other comprehensive
income. Transaction gains and losses are included in other income.
The results of operations for the three months ended March 31, 2005
are not necessarily indicative of the results to be expected for the full
year.
On March 4, 2004, we announced that our Board of Directors approved
a three-for-two stock split of our common stock to be effected in the form
of a 50 percent stock dividend. The additional shares were payable April
2, 2004 to shareholders of record at the close of business on March 17,
2004. As a result of the stock dividend, all shareholders of record
received one additional share of common stock for every two shares of
common stock held on the record date, and cash instead of any fractional
shares. All share and per share amounts within the accompanying condensed
consolidated financial statements and footnotes reflect the stock split on
a retroactive basis.
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACCOUNTING FOR STOCK-BASED COMPENSATION
We have elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for stock options. Since the exercise price
of employee stock options granted by the Company equals the market price
of the underlying stock on the date of grant, no compensation expense is
recorded. We have adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), as amended by Statement of Financial Standards
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FAS 123" ("FAS 148").
During the three months ended March 31, 2005, we granted 96,400
shares of restricted stock to key employees under the 1996 Stock Plan and
the 2001 Employee Stock Plan. Deferred compensation of $960,000 was
recorded with respect to these grants in the three months ended March 31,
2005 and will be recognized into compensation expense over the vesting
period (between three and five years).
The following table illustrates the effect on net income,
compensation expense and net income per share as if the Black-Scholes fair
value method pursuant to FAS 123 had been applied to our stock plans.
Three months ended
March 31,
-----------------------
(In thousands, except per share data) 2005 2004
--------- ---------
Net income available to common
shareholders:
Net income available to common
shareholders, as reported $ 163 $ 1,165
Add: Stock-based compensation expense
included in reported net income,
net of tax 44 44
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (579) (70)
--------- ---------
Pro forma net income (loss) available to common
shareholders $ (372) $ 1,139
========= =========
Net income (loss) per common share:
Basic:
As reported $ 0.02 $ 0.13
Pro forma $ (0.04) $ 0.13
Diluted:
As reported $ 0.02 $ 0.12
Pro forma $ (0.04) $ 0.12
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACCOUNTING FOR STOCK-BASED COMPENSATION (CONT)
During the three months ended March 31, 2005 and 2004, we received
cash proceeds of approximately $284,000 and $423,000, respectively, from
the issuance of approximately 61,000 and 109,000 shares of common stock
resulting from stock option and warrant exercises. We also recorded a
related tax benefit that was credited to Additional Paid-In Capital of
approximately $282,000 and $503,000 in the three months ended March 31,
2005 and 2004, respectively, resulting from subsequent employee stock
sales.
3. INVENTORIES
The components of inventories are:
March 31, December 31,
(In thousands) 2005 2004
--------- ------------
Raw materials and component parts $7,585 $7,869
Finished goods 453 205
------ ------
$8,038 $8,074
====== ======
4. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the accrued
product warranty liability during the three months ended March 31, 2005
and 2004.
Three months ended
March 31,
------------------
(In thousands) 2005 2004
----- -----
Balance, beginning of period $ 597 $ 495
Additions related to warranties issued 198 175
Warranty costs incurred (151) (143)
----- -----
Balance, end of period $ 644 $ 527
===== =====
The current portion of the accrued product warranty liability is
included in accrued liabilities in the accompanying balance sheet.
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING
In February 2001, we undertook a plan to consolidate all
manufacturing and engineering into our existing Ithaca, NY facility and
close our Wallingford, CT manufacturing facility (the "Consolidation"). As
of December 31, 2001, substantially all Wallingford product lines were
successfully transferred to Ithaca, NY. We continue to apply the consensus
set forth in EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)" in recognizing the accrued
restructuring expenses relating to the consolidation. The remaining
accrued restructuring balance relates to lease and other occupancy costs
related to unused space at our Wallingford facility through the end of the
lease term.
The following table summarizes the activity recorded in accrued
restructuring expenses during the three months ended March 31, 2005 and
2004.
Three Months Ended
March 31,
------------------
(In thousands) 2005 2004
------- -------
Accrual balance, beginning of
period $ 1,454 $ 2,125
Cash payments (109) (131)
------- -------
Accrual balance, end of period $ 1,345 $ 1,994
======= =======
6. EARNINGS PER SHARE
Beginning in the second quarter of 2004, the Company applied the
consensus set forth in EITF 03-06 "Participating Securities and the
Two-Class Method under FASB Statement No. 128, Earnings Per Share", which
requires the two-class method of computing earnings per share when
participating securities, such as our previously outstanding redeemable
preferred stock, are outstanding. The two-class method is an earnings
allocation formula that determines earnings per share for common stock and
participating securities based upon an allocation of earnings as if all of
the earnings for the period had been distributed in accordance with
participation rights on undistributed earnings. EITF 03-6 became effective
for reporting periods beginning after March 31, 2004. The calculation of
earnings per share for the three months ended March 31, 2004 has been
retroactively restated to reflect this guidance.
9
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. EARNINGS PER SHARE (CONTINUED)
Three Months Ended
------------------
March 31,
2005 2004
------- -------
Net income $ 163 $ 1,342
Dividends and accretion charges on
preferred stock -- (90)
Earnings allocation to preferred
shareholders -- (87)
------- -------
Net income available to common
shareholders $ 163 $ 1,165
======= =======
Shares:
Basic: Weighted average common shares
outstanding 10,010 8,966
Add: Dilutive effect of outstanding
options, warrants and restricted stock as
determined by the treasury stock method
442 834
======= =======
Diluted: Weighted average common and
common equivalent shares outstanding 10,452 9,800
======= =======
Net income per common share:
Basic $ 0.02 $ 0.13
Diluted $ 0.02 $ 0.12
Unvested restricted stock is excluded from the calculation of
weighted average common shares for basic EPS. For diluted EPS, weighted
average common shares include the impact of restricted stock under the
treasury method.
For the three months ended March 31, 2005 and March 31, 2004,
potentially dilutive shares that were excluded from the earning per share
calculation consisted of out-of-the-money stock options and warrants, and
amounted to 44,250 and 750 shares, respectively. In addition, for the
three months ended March 31, 2004, diluted earnings per share calculations
assumed no conversion of the convertible mandatorily redeemable preferred
stock (which was converted into 666,665 shares of common stock, partly on
April 20, 2004 and the remainder on April 26, 2004), as the effect would
have been anti-dilutive.
7. COMPREHENSIVE INCOME
The following table summarizes the Company's comprehensive income:
Three Months Ended
March 31,
------------------
(In thousands) 2005 2004
------ ------
Net income $ 163 $1.342
Foreign currency translation
adjustment (3) 6
------ ------
Total comprehensive income $ 160 $1,348
====== ======
10
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FOREIGN EARNINGS REPATRIATION: In December 2004, the FASB issued
FASB Staff Position No. 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation
Act of 2004" ("FSP 109-2"), which provides guidance under FAS 109,
"Accounting for Income Taxes," with respect to recording the potential
impact of the repatriation provisions of the American Jobs Creation Act of
2004 (the "Jobs Act") on enterprises' income tax expense and deferred tax
liability. The Jobs Act was enacted on October 22, 2004. The Jobs Act
creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. FSP
109-2 states that an enterprise is allowed time beyond the financial
reporting period of enactment to evaluate the effect of the Jobs Act on
its plan for reinvestment or repatriation of foreign earnings for purposes
of applying FAS 109. The deduction is subject to a number of limitations
and uncertainty remains as to how to interpret certain provisions in the
Act. As such, we have not yet determined whether, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the
U.S.
9. SIGNIFICANT TRANSACTIONS
On March 25, 2005, our Board of Directors approved a stock
repurchase program (the "Stock Repurchase Program"). Under the program, we
are authorized to repurchase up to $10 million of our outstanding shares
of common stock from time to time on the open market over the next three
years. As of March 31, 2005, we had not repurchased any shares of our
common stock under the program.
On March 28, 2005, we amended the Banknorth Credit Facility to
permit us to repurchase our common stock pursuant to the terms of the
Stock Repurchase Program.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements included in this report, including without limitation
statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements generally can be identified by the use of
forward-looking terminology, such as "may", "will", "expect", "intend",
"estimate", "anticipate", "believe", "project" or "continue" or the negative
thereof or other similar words. All forward-looking statements involve risks and
uncertainties, including, but not limited to, customer acceptance and market
share gains, both domestically and internationally, in the face of substantial
competition from competitors that have broader lines of products and greater
financial resources; introduction of new products into the marketplace by
competitors; successful product development; dependence on significant
customers; dependence on significant vendors; the ability to recruit and retain
quality employees as we grow; dependence on third parties for sales outside the
United States including Australia, New Zealand, Europe and Latin America;
economic and political conditions in the United States, Australia, New Zealand,
Europe and Latin America; marketplace acceptance of new products; availability
of third-party components at reasonable prices; and the absence of price wars or
other significant pricing pressures affecting our products in the United States
and abroad. Actual results may differ materially from those discussed in, or
implied by, the forward-looking statements. The forward-looking statements speak
only as of the date of this report and we assume no duty to update them to
reflect new, changing or unanticipated events or circumstances.
CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared by us in accordance with accounting principles generally accepted in
the United States of America. The presentation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets
and liabilities. Our estimates include those related to revenue recognition,
inventory obsolescence, the valuation of deferred tax assets and liabilities,
depreciable lives of equipment, warranty obligations, contingent liabilities and
restructuring accruals. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. For a complete description of our accounting policies, see Item 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Critical Accounting Policies and Estimates," included in our Form
10-K for the year ended December 31, 2004. There were no material changes to the
application of our critical accounting policies for the three months ended March
31, 2005
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
NET SALES. Net sales by business unit for the current and prior year's quarter
were as follows:
Three months ended Three months ended Change
(In thousands) March 31, 2005 March 31, 2004 $ %
--------------------- --------------------- -----------------------
Point of sale and banking $ 3,954 32.8% $ 5,006 33.2% $(1,052) (21.0%)
Gaming and lottery 5,471 45.5% 7,608 50.5% (2,137) (28.1%)
TransAct Services Group 2,611 21.7% 2,461 16.3% 150 6.1%
--------------------- --------------------- -------
$12,036 100.0% $15,075 100.0% $(3,039) (20.2%)
===================== ===================== =======
International * $ 2,083 17.3% $ 1,216 8.1% $ 867 71.3%
===================== ===================== =======
*International sales do not include sales of printers made to domestic
distributors or other customers who in turn ship those printers to international
destinations.
12
Net sales for the first quarter of 2005 decreased $3,039,000, or 20%, from the
same period last year due primarily to lower printer shipments into our gaming
and lottery (a decrease of approximately $2,137,000, or 28%) and point of sale
("POS") and banking (a decrease of approximately $1,052,000, or 21%) markets.
Sales from our Services Group increased by $150,000, or 6%, as our installed
base of printers grows and we continue to aggressively pursue these after-market
sales. Overall, international sales increased by $867,000, or 71%, due largely
to higher international shipments of our gaming printers, primarily to Australia
and Europe.
POINT OF SALE AND BANKING:
Revenue from the POS and banking market includes sales of inkjet, thermal and
impact printers used primarily by retailers in the hospitality, restaurant
(including fine dining, casual dining and fast food) and specialty retail
industries to print receipts for consumers, validate checks, or print on other
inserted media. Revenue from this market also includes sales of printers used by
banks, credit unions and other financial institutions to print and/or validate
receipts at bank teller stations Sales of our POS and banking printers worldwide
decreased approximately $1,052,000, or 21%.
Three months ended Three months ended Change
(In thousands) March 31, 2005 March 31, 2004 $ %
--------------------- --------------------- -----------------------
Domestic $ 3,418 86.4% $ 4,670 93.3% $(1,252) (26.8%)
International 536 13.6% 336 6.7% 200 59.5%
--------------------- --------------------- -------
$ 3,954 100.0% $ 5,006 100.0% $(1,052) (21.0%)
===================== ===================== =======
Domestic POS and banking revenue decreased to $3,418,000, representing a
$1,252,000, or 27%, decrease from the first quarter of 2004, due to
significantly lower sales (approximately 85%) of our Bankjet(R) line of inkjet
printers, as we substantially completed shipments to two major financial
services companies to upgrade bank teller stations during 2004. Although we are
currently pursuing several banking opportunities, due to the project-oriented
nature of these sales, we cannot predict if and when future sales may occur.
This decrease was partially offset by increasing sales of our other POS product
lines, including our iTherm(TM)280 thermal printer and our family of impact
printers. Excluding banking printers, sales of our POS printers increased by
over 50% in the first quarter of 2005 compared to the first quarter of 2004.
International POS and banking printer shipments increased by approximately
$200,000, or 60%, to $536,000, due primarily to higher sales through our network
of international POS distributors.
We expect sales into the POS and banking market for the second quarter of 2005
to be higher than those reported for the first quarter of 2005, as our
additional sales staff and initiatives put in place in 2005 begin to take hold.
GAMING AND LOTTERY:
Revenue from the gaming and lottery market includes sales of printers used in
slot machines and video lottery terminals ("VLT") that print tickets instead of
issuing coins ("ticket-in, ticket-out" or "TITO") at casinos worldwide. Revenue
from this market also includes sales of lottery printers to GTECH, the world's
largest provider of lottery terminals, for various lottery applications. Sales
of our gaming and lottery products decreased by $2,137,000, or 28%, from the
first quarter a year ago, primarily due to a decrease in sales of our slot
machine and other gaming printers in North America. This decrease was somewhat
offset by higher international sales of our slot machine and other gaming
printers in Australia and Europe and by higher sales of lottery printers to
GTECH.
Three months ended Three months ended Change
(In thousands) March 31, 2005 March 31, 2004 $ %
--------------------- --------------------- -----------------------
Domestic $ 4,481 81.9% $ 7,320 96.2% $(2,839) (38.8%)
International 990 18.1% 288 3.8% 702 243.8%
--------------------- --------------------- -------
$ 5,471 100.0% $ 7,608 100.0% $(2,137) (28.1%)
===================== ===================== =======
Domestic sales of our gaming and lottery printers declined by $2,839,000, or
39%. Due to a significant decline in slot machine sales into the domestic casino
market, we experienced significantly lower sales of our TITO casino printers
throughout North America. We expect the significant downturn in domestic casino
slot machine sales to continue at least through the second quarter of 2005.
13
Printer sales to GTECH Corporation (a worldwide lottery terminal provider and
major customer), which include impact and thermal on-line lottery printers,
increased by approximately 47% in the first quarter of 2005 compared to the
first quarter of 2004. Our quarterly sales to GTECH are directly dependent on
the timing and number of new and upgraded lottery terminal installations GTECH
performs, and are not indicative of GTECH's overall business or revenue. Based
on the timing of orders, we expect sales of lottery printers to GTECH for the
second quarter of 2005 to be less than those reported in the first quarter of
2005.
We also sell spare parts and provide repair services for GTECH's significant
installed base of impact and thermal lottery printers. Such sales are included
in those reported for the TransAct Services Group.
International gaming and lottery printer sales increased $702,000, or 244%, to
$990,000 in the first quarter of 2005. Such sales represented 18% and 4% of
total sales into our gaming and lottery market during the first quarter of 2005
and 2004, respectively. We continued to experience growth in international
printer sales as markets in Europe and Australia begin to adopt ticket printing
in slot machines and other gaming and amusement machines. We expect sales of our
gaming printers related to the rollout of ticket printing to accelerate in
Europe and Australia in the second quarter of 2005, and more substantially in
the second half of 2005.
TRANSACT SERVICES GROUP ("TSG"):
Revenue from TSG includes sales of consumable products (inkjet cartridges,
ribbons and paper), replacement parts, maintenance and repair services,
refurbished printers, and shipping and handling charges. Sales from TSG
increased by approximately $150,000, or 6%
Three months ended Three months ended Change
(In thousands) March 31, 2005 March 31, 2004 $ %
-------------------- --------------------- -----------------------
Domestic $2,054 78.7% $ 1,869 75.9% $ 185 9.9%
International 557 21.3% 592 24.1% (35) (5.9)%
-------------------- --------------------- -------
$2,611 100.0% $ 2,461 100.0% $ 150 6.1%
==================== ===================== =======
Sales in our TSG group increased domestically by approximately $185,000, to
$2,054,000 largely due to higher sales of inkjet cartridges, spare parts and
refurbished printers. Internationally, sales decreased by approximately $35,000
to $557,000 due largely to a decrease in services revenue. We expect sales from
TSG to accelerate throughout the remainder of 2005, as the additional sales
staff and our new service center in Las Vegas, NV and expanded service center in
Wallingford, CT gain momentum. Sales from TSG in the first quarter of 2004
included unusually high sales to one of our major customers.
GROSS PROFIT. Gross profit decreased $1,741,000, or 32%, and gross margin
decreased to 30.6% from 35.9%, due primarily to a lower volume of sales and a
less favorable sales mix, including lower sales of higher margin gaming and
lottery printers, in the first quarter of 2005 compared to the first quarter of
2004. We expect gross margin for the second quarter of 2005 to be consistent
with the gross margin reported for the first quarter of 2005.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses primarily include salary and payroll related expenses for our
engineering staff, depreciation and design expenses (including prototype printer
expense, outside design and testing services, and supplies). Such expenses
increased by $117,000, or 19%, to $731,000, as we incurred expenses related to
IGT's integration and attainment of jurisdictional approvals for our new
Epic950(TM) thermal casino printer on all of IGT's slot platforms worldwide (the
"IGT Integration") (approximately $100,000). Engineering and product development
expenses increased as a percentage of net sales to 6.1% from 4.1%, due primarily
to these increased costs in proportion to lower sales in the first quarter of
2005 compared to the first quarter of 2004. We expect engineering and product
development expenses for the second quarter of 2005 to be somewhat higher than
those reported in the first quarter of 2005 as we have added engineering staff
and continue to increase product development to significantly expand our product
offerings in both the POS and gaming and lottery markets.
SELLING AND MARKETING. Selling and marketing expenses primarily include salaries
and payroll related expenses for our sales and marketing staff, sales
commissions, travel expenses, expenses associated with the lease of sales
offices, advertising, trade show expenses and other promotional marketing
expenses. Selling and marketing expenses for the first quarter of 2005 were
consistent with those reported for the first quarter of 2004, decreasing
slightly by $13,000, or 1%, to $1,349,000. Lower spending on marketing and other
promotional activities was largely offset by increased expenses related to the
addition of new sales staff and our new service centers in Las Vegas, NV and
Wallingford, CT. Selling and marketing expenses increased as a percentage of net
sales to 11.2% from 9.0%, due primarily to
14
lower sales volume in the first quarter of 2005 compared to the first quarter of
2004. We expect selling and marketing expenses to be higher in the second
quarter of 2005 compared to the first quarter of 2005, as we experience the
full-quarter effect of the addition of new sales and marketing staff (including
the initial staffing of our newly-formed TransAct Services Group) and the
establishment our two new service centers during the first quarter of 2005. We
believe that this investment in selling and marketing is necessary in 2005 to
achieve our sales growth strategy for 2005 and beyond.
GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
include salaries and payroll related expenses for our executive, accounting,
human resource and information technology staff, expenses for our corporate
headquarters, professional and legal expenses; and telecommunication expenses.
General and administrative expenses increased by $32,000, or 2%, to $1,364,000,
due primarily to higher professional expenses, including those related to
compliance with Sarbanes-Oxley. General and administrative expenses increased as
a percentage of net sales to 11.3% from 8.8% due primarily to the factor listed
above, and due to lower volume of sales. We expect general and administrative
expenses to be higher in the second quarter of 2005 than the first quarter of
2005, largely due to higher expected legal expenses related to our lawsuit
against a competitor, increased staffing in finance and accounting, and expenses
associated with our implementation of a new Oracle ERP system.
OPERATING INCOME. During the first quarter of 2005 we reported operating income
of $233,000, or 1.9% of net sales, compared to $2,110,000, or 14.0% of net sales
in the first quarter of 2004. The substantial decrease in our operating income
and operating margin was due largely to lower sales in the first quarter of 2005
compared to that of 2004.
INTEREST. We recorded net interest income of $20,000 compared to net interest
expense of $10,000 in the first quarter of 2004, as we repaid all outstanding
revolving borrowings, and our term loan, by January 2004. We do not expect to
draw on our revolving borrowings as we continue to generate cash from operations
through the remainder of 2005. As a result, we expect to continue to report net
interest income throughout 2005. See "Liquidity and Capital Resources" below for
more information.
INCOME TAXES. We recorded an income tax provision of $89,000 and $755,000 in the
first quarter of 2005 and 2004, respectively, at an effective rate of 35.3% and
36.0%, respectively.
NET INCOME. We reported net income during the first quarter of 2005 of $163,000,
or $0.02 per diluted share, compared to net income of $1,342,000, or $0.12 per
diluted share, for the first quarter of 2004. Earnings per share for the first
quarter of 2004 has been retroactively restated for adoption of EITF 03-06
"Participating Securities and the Two-Class Method under FASB Statement No. 128,
Earnings Per Share", which requires the two-class method of computing earnings
per share. The two-class method is an earnings allocation formula that
determines earnings per share for common stock and participating securities
based upon an allocation of earnings as if all of the earnings for the period
had been distributed in accordance with participation rights on undistributed
earnings. There were no preferred stock dividend payments or allocation of
earnings to preferred shareholders beyond the second quarter of 2004, as the
preferred stock was converted to common stock in April 2004.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first three months of 2005, our cash flows reflected the
results of lower sales volume and our increased investment in infrastructure,
compared to the same period in 2004. Cash decreased by $1,032,000 from December
31, 2004, due in large part to increased capital spending in the first quarter
of 2005. We ended the quarter with approximately $7.6 million in cash and cash
equivalents. We expect to earn interest income on our available cash balance
throughout 2005.
Operating activities: The following significant factors affected our cash used
in operations of $423,000 in the first three months of 2005:
- We reported net income of $163,000
- We recorded depreciation, amortization and non-cash compensation
expense of $476,000
- Accounts receivable increased by $235,000 due to timing of sales
during the quarter
- Accounts payable decreased by $805,000 due to lower inventory
purchases related to lower sales volume during the quarter
- Deferred tax assets increased by $195,000, primarily due to a tax
benefit of $282,000 related to employee stock sales
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The following payments also affected our cash from operations during the
quarter:
Royalty Payments:
During the second quarter of 2004, we signed a cross licensing agreement with
Seiko Epson. Under the agreement, Seiko Epson received a license to three of our
patents, and we received a license to eighteen of Seiko Epson's patents relating
to printing applications for the point of sale and banking markets. In addition,
we agreed to pay $900,000 as a royalty for the usage of certain Seiko Epson
technology prior to January 1, 2003. We had accrued for the $900,000 royalty for
past usage as of December 31, 2003. In accordance with the terms of the
agreement, we paid $525,000 of the royalty in the second quarter of 2004, and
have paid the remaining $375,000 in the first quarter of 2005. Under the
agreement, we continue to pay royalties on a quarterly basis related to the
current sales of licensed printers, which is reflected in cost of sales.
Accrued Restructuring Payments:
As of March 31, 2005 and December 31, 2004, our restructuring accrual amounted
to $1,345,000 and $1,454,000, respectively. The decrease of $109,000 is related
solely to payments made on our Wallingford lease obligation. We expect to pay
approximately $420,000 of these expenses per year from 2005 through 2007, and
the remaining $194,000 in 2008. These payments from 2005 through 2008 relate
primarily to lease obligation costs for unused space in our Wallingford, CT
facility.
Investing activities: Our capital expenditures were approximately $887,000 and
$194,000 in the first three months of 2005 and 2004, respectively. Expenditures
in 2005 included approximately $500,000 for the purchase of hardware, software
and outside consulting costs related to our implementation of a new Oracle ERP
system, and the remaining amount primarily for the purchase of new product
tooling. We expect capital expenditures for the full year 2005 to be
approximately $3,000,000. During 2005, we expect to invest in two significant
projects: (1) the purchase and implementation of Oracle software and (2) office
renovations to our new gaming and lottery headquarters and western region
service center in Las Vegas, NV. We believe these projects will provide us with
improved efficiency and will enable us to streamline and more cost effectively
manage our business as it grows in size, number of locations and overall
complexity. In addition to these projects, we also expect to continue our focus
on product development and the purchase of tooling for new products and enhanced
versions of existing products.
Financing activities: We generated approximately $281,000 from financing
activities during the first three months of 2005, largely due to proceeds from
stock option exercises (approximately $284,000).
WORKING CAPITAL
Our working capital increased to $20,499,000 at March 31, 2005 from $20,325,000
at December 31, 2004. The current ratio also increased to 3.6 to 1 at March 31,
2005 from 3.3 to 1 at December 31, 2004. The increase in both working capital
and the current ratio was due largely to lower accounts payable and accrued
liabilities, partly offset by lower cash and cash equivalents ($7,596,000)
compared to December 31, 2004.
DEFERRED TAXES
As of March 31, 2005, we had a net deferred tax asset of approximately
$2,839,000. In order to utilize this deferred tax asset, we will need to
generate approximately $8.0 million of taxable income in future years. Based on
future projections of taxable income, we have determined that it is more likely
than not that the existing net deferred tax asset will be realized.
CREDIT FACILITY AND BORROWINGS
On August 6, 2003, we entered into a $12.5 million credit facility (the
"Banknorth Credit Facility") with Banknorth N.A. The Banknorth Credit Facility
provides for an $11.5 million revolving credit line expiring on July 31, 2006,
and a $1 million equipment loan facility which, as amended, may be drawn down
through July 2005. Borrowings under the revolving credit line bear a floating
rate of interest at the prime rate. Borrowings under the equipment loan bear a
floating rate of interest at the prime rate plus 0.25% and are secured by a lien
on the assets of the company. The Banknorth Credit Facility imposes certain
quarterly financial covenants on the Company and restricts the payment of
dividends on its common stock and the creation of other liens.
On November 12, 2004, we amended the Banknorth Credit Facility. Under the terms
of the agreement, we renewed, through July 31, 2005, our $1.0 million equipment
loan, which had expired on July 31, 2004. The amendment also revised certain
other terms of the revolving credit facility.
16
On March 28, 2005, we amended the Banknorth Credit Facility to permit us to
repurchase our common stock pursuant to the terms of the Stock Repurchase
Program as explained below.
The borrowing base of the revolving credit line under Banknorth Credit Facility
is based on the lesser of (a) $11.5 million or (b) 85% of eligible accounts
receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of eligible raw
material inventory plus 50% of eligible finished goods inventory, less (ii) a
$40,000 credit reserve.
As of March 31, 2005, we had no balances outstanding on the revolving credit
line and term loan, respectively. Undrawn commitments under the Banknorth Credit
Facility were approximately $12,500,000 at March 31, 2005. However, our maximum
additional available borrowings under the facility were limited to approximately
$9,000,000 at March 31, 2005 based on the borrowing base of our collateral. We
were in compliance with all financial covenants of the Banknorth Credit Facility
at March 31, 2005.
STOCK REPURCHASE PROGRAM
On March 25, 2005 our Board of Directors approved a stock repurchase program
("the Stock Repurchase Program"). Under the Stock Repurchase Program, we are
authorized to repurchase up to $10 million of our outstanding shares of common
stock from time to time in the open market over the next three years, depending
on market conditions, share price and other factors. As of March 31, 2005, we
did not repurchase any shares of our common stock under the Stock Repurchase
Program.
PREFERRED STOCK
In connection with our 7% Series B Cumulative Convertible Redeemable Preferred
Stock (the "Preferred Stock"), we paid $70,000 of cash dividends per quarter. In
April 2004, all holders of our Series B Preferred Stock converted all their
preferred shares into common stock. Under the conversion, a total 666,665 new
shares of common stock were issued. No future dividend payments are required
beyond the second quarter of 2004.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $792,000 to $24,507,000 at March 31, 2005 from
$23,715,000 at December 31, 2004. The increase was primarily due to the
following for the three months ended March 31, 2005: (1) net income of $163,000
(2) proceeds of approximately $284,000 from the issuance of approximately 61,000
shares of common stock from stock option exercises, (3) an increase in
additional paid in capital of approximately $282,000 resulting from the tax
benefits resulting from the sale of employee stock from stock option exercises,
and (4) compensation expense related to restricted stock grants of $69,000.
CONTRACTUAL OBLIGATIONS
We have experienced no material changes in our contractual obligations outside
the ordinary course of business during the three months ended March 31, 2005.
RESOURCE SUFFICIENCY
We believe that our cash on hand and cash flows generated from operations and
borrowings available under the Banknorth Credit Facility will provide sufficient
resources to meet our working capital needs, including costs associated with the
Consolidation, to finance our capital expenditures, to fund our Stock Repurchase
Program, and meet our liquidity requirements through at least the next 12
months.
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ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an evaluation of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures was conducted under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer. Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were adequate
and designed to ensure that information required to be disclosed by the Company
in this report is recorded, processed, summarized and reported in a timely
manner, including that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
There were no significant changes in internal controls or in other factors that
could be reasonably likely to materially affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses in internal controls, during the period covered by this report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 28, 2005 we announced that we had filed a complaint in Connecticut
Superior Court against FutureLogic, Inc. of Glendale, California. The complaint
charges FutureLogic with disseminating false and misleading statements, which
impugn the business reputation of TransAct with the intent of damaging
TransAct's business. TransAct asserts claims of defamation, tortious
interference with contractual relations, tortious interference with business
expectancy, and violation of the Connecticut Unfair Trade Practices Act, and
seeks an award of compensatory and punitive damages, attorneys' fees and costs.
ITEM 2C. STOCK REPURCHASE
On March 25, 2005, our Board of Directors approved a stock repurchase program
("the Stock Repurchase Program"). Under the Stock Repurchase Program, we are
authorized to repurchase up to $10 million of our outstanding shares of common
stock from time to time in the open market over the next three years, depending
on market conditions, share price and other factors. As of March 31, 2005, we
did not repurchase any shares of our common stock under the Stock Repurchase
Program.
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ITEM 6. EXHIBITS
a. Exhibits filed herein
Exhibit 31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 10.22 Second Amendment to Revolving Credit, Equipment
Loan and Security Agreement dated as of March
28, 2005 between TransAct Technologies
Incorporated and Banknorth, N.A.
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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)
May 10, 2005 /s/ Steven A. DeMartino
-----------------------
Steven A. DeMartino
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
-------
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002
10.22 Second Amendment to Revolving Credit, Equipment Loan and
Security Agreement dated as of March 28, 2005 between
TransAct Technologies Incorporated and Banknorth, N.A.
21