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: June 30, 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 JULY 29, 2005
- ----- -------------------------
COMMON STOCK, $.01 PAR VALUE 10,103,472
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
Page No.
--------
PART I. Financial Information:
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of June 30, 2005
and December 31, 2004 3
Condensed consolidated statements of income for the three
and six months ended June 30, 2005 and 2004 4
Condensed consolidated statements of cash flow for the
six months ended June 30, 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 20
PART II. Other Information:
Item 1 Legal Proceedings 21
Item 2c Stock Repurchase 21
Item 5 Submission of Matters to a Vote of Security Holders 21
Item 6 Exhibits 22
Signatures 23
Certifications 25 - 29
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
(In thousands) 2005 2004
-------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 4,741 $ 8,628
Receivables, net 9,666 8,910
Inventories 7,916 8,074
Refundable income taxes 510 510
Deferred tax assets 2,419 2,370
Other current assets 427 586
------- -------
Total current assets 25,679 29,078
------- -------
Fixed assets, net 3,881 3,177
Goodwill 1,469 1,469
Deferred tax assets 334 274
Other assets 558 101
------- -------
6,242 5,021
------- -------
Total assets $31,921 $34,099
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,427 $ 3,804
Accrued liabilities 3,523 3,812
Accrued restructuring 420 420
Deferred revenue 357 717
------- -------
Total current liabilities 6,727 8,753
------- -------
Accrued restructuring 811 1,034
Accrued product warranty 128 153
Deferred revenue 352 444
------- -------
1,291 1,631
------- -------
Total liabilities 8,018 10,384
------- -------
Shareholders' equity:
Common stock 102 100
Additional paid-in capital 19,207 17,401
Retained earnings 7,542 7,112
Unamortized restricted stock compensation (2,090) (1,067)
Accumulated other comprehensive income 126 169
Treasury stock, at cost (984) --
------- -------
Total shareholders' equity 23,903 23,715
------- -------
Total liabilities and shareholders' equity $31,921 $34,099
======= =======
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
(In thousands, except per share data) 2005 2004 2005 2004
------- ------- ------- -------
Net sales $12,346 $14,694 $24,382 $29,769
Cost of sales 8,092 9,077 16,451 18,734
------- ------- ------- -------
Gross profit 4,254 5,617 7,931 11,035
------- ------- ------- -------
Operating expenses:
Engineering, design and product
development 739 548 1,470 1,162
Selling and marketing 1,547 1,218 2,896 2,580
General and administrative 1,590 1,563 2,954 2,895
------- ------- ------- -------
3,876 3,329 7,320 6,637
------- ------- ------- -------
Operating income 378 2,288 611 4,398
------- ------- ------- -------
Interest and other income (expense):
Interest, net 20 (2) 40 (12)
Other, net 16 2 15 (1)
------- ------- ------- -------
36 -- 55 (13)
------- ------- ------- -------
Income before income taxes 414 2,288 666 4,385
Income taxes 147 823 236 1,578
------- ------- ------- -------
Net income $ 267 $ 1,465 $ 430 $ 2,807
======= ======= ======= =======
Net income available to common shareholders $ 267 $ 1,421 $ 430 $ 2,578
Net income per common share:
Basic $ 0.03 $ 0.15 $ 0.04 $ 0.28
Diluted $ 0.03 $ 0.14 $ 0.04 $ 0.25
Shares used in per-share calculation
Basic 9,970 9,620 9,990 9,292
Diluted 10,246 10,447 10,379 10,133
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------
(In thousands) 2005 2004
------- ------
Cash flows from operating activities:
Net income $ 430 $2,807
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash compensation expense 194 142
Deferred income taxes (60) --
Depreciation and amortization 808 822
Changes in operating assets and liabilities:
Receivables (756) 679
Inventories 158 (621)
Other current assets 159 260
Other assets 1 1
Accounts payable (1,377) 82
Accrued liabilities and other liabilities (532) 742
Accrued restructuring expenses (223) (221)
------- ------
Net cash (used in) provided by operating activities (1,198) 4,693
------- ------
Cash flows from investing activities:
Purchases of fixed assets (1,495) (447)
Purchase of intangible assets (475) --
------- ------
Net cash used in investing activities (1,970) (447)
------- ------
Cash flows from financing activities:
Term loan repayments -- (420)
Proceeds from option and warrant exercises 311 826
Purchases of common stock for treasury (984) --
Payment of cash dividends -- (91)
Payment of expenses related to preferred stock conversion and
registration of common stock (3) (52)
------- ------
Net cash (used in) provided by financing activities (676) 263
------- ------
Effect of exchange rate changes (43) 4
------- ------
(Decrease) increase in cash and cash equivalents (3,887) 4,513
Cash and cash equivalents at beginning of period 8,628 498
------- ------
Cash and cash equivalents at end of period $ 4,741 $5,011
======= ======
Non-cash financing activities:
Conversion of preferred stock to common stock $ -- $3,926
Tax benefit related to employee stock sales 283 1,173
Accretion of preferred stock discount and issuance costs -- 24
Issuance of restricted stock 1,217 1,339
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
June 30, 2005, the results of our operations for the three and six months
ended June 30, 2005 and 2004, and our cash flows for the six months ended
June 30, 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 and six months ended June 30,
2005 are not necessarily indicative of the results to be expected for the
full year.
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").
Unearned compensation for restricted stock awards granted is recorded
on the date of the grant based on the fair value of such awards. Such
unearned compensation is expensed, using a straight-line method, over the
period during which the related restrictions on such stock lapse. Upon
termination of employment, unvested restricted stock awards are forfeited
and compensation expense and unearned compensation previously recognized
are reversed.
During the three and six months ended June 30, 2005, we granted 27,000
and 123,400 shares of restricted stock, respectively, to directors and key
employees under the 1996 Stock Plan, 2001 Employee Stock Plan and 2005
Equity Incentive Plan. Deferred compensation of $257,000 and $1,217,000 was
recorded with respect to these grants in the three and six months ended
June 30, 2005, respectively, and will be recognized into compensation
expense over the vesting period (between three and five years).
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED)
The Company recorded compensation expense of $69,000 and $194,000 for the
three and six months ended June 30, 2005, respectively.
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 Six months ended
June 30, June 30,
------------------ ----------------
(In thousands, except per share data) 2005 2004 2005 2004
----- ------ ----- ------
Net income available to common
shareholders:
Net income available to common
shareholders, as reported $ 267 $1,421 $ 430 $2,578
Add: Stock-based compensation expense
included in reported net income,
net of tax 81 46 125 90
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (226) (15) (395) (85)
----- ------ ----- ------
Pro forma net income available to common
shareholders $ 122 $1,452 $ 160 $2,583
===== ====== ===== ======
Net income per common share:
Basic:
As reported $0.03 $ 0.15 $0.04 $ 0.28
Pro forma $0.01 $ 0.15 $0.02 $ 0.28
Diluted:
As reported $0.03 $ 0.14 $0.04 $ 0.25
Pro forma $0.01 $ 0.14 $0.02 $ 0.25
During the three and six months ended June 30, 2005, we received cash
proceeds of approximately $27,000 and $311,000, respectively, from the
issuance of approximately 4,000 and 65,000 shares of common stock resulting
from stock option and stock purchase plan exercises. We also recorded a
related tax benefit that was credited to Additional Paid-In Capital of
approximately $1,000 and $283,000 in the three and six months ended June
30, 2005, respectively, resulting from subsequent employee stock sales.
3. INVENTORIES
The components of inventories are as follows:
June 30, December 31,
(In thousands) 2005 2004
-------- ------------
Raw materials and component parts $7,610 $7,869
Finished goods 306 205
------ ------
$7,916 $8,074
====== ======
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the accrued
product warranty liability during the three and six months ended June 30,
2005 and 2004.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2005 2004 2005 2004
----- ----- ----- -----
Balance, beginning of period $ 644 $ 527 $ 597 $ 495
Additions related to warranties issued 160 130 358 305
Warranty costs incurred (140) (141) (291) (284)
----- ----- ----- -----
Balance, end of period $ 664 $ 516 $ 664 $ 516
===== ===== ===== =====
The current portion of the accrued product warranty liability is
included in accrued liabilities in the accompanying balance sheet.
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 Emerging Issues Task Force ("EITF") No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring)" in
recognizing the accrued restructuring expenses relating to the
consolidation. The remaining accrued restructuring balance relates to lease
and other occupancy costs related to unused space at our Wallingford
facility through the end of the lease term.
The following table summarizes the activity recorded in accrued
restructuring expenses during the three and six months ended June 30, 2005
and 2004.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(In thousands) 2005 2004 2005 2004
------ ------ ------ ------
Accrual balance, beginning of
period $1,345 $1,994 $1,454 $2,125
Cash payments (114) (90) (223) (221)
------ ------ ------ ------
Accrual balance, end of period $1,231 $1,904 $1,231 $1,904
====== ====== ====== ======
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. EARNINGS PER SHARE
Earnings per share were computed as follows (in thousands, except per
share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2005 2004 2005 2004
------- ------- ------- -------
Net income $ 267 $ 1,465 $ 430 $ 2,807
Dividends and accretion charges on
preferred stock -- (21) -- (111)
Earnings allocation to preferred
shareholders -- (23) -- (118)
------- ------- ------- -------
Net income available to common
shareholders $ 267 $ 1,421 $ 430 $ 2,578
======= ======= ======= =======
Shares:
Basic: Weighted average common shares
outstanding 9,970 9,620 9,990 9,292
Add: Dilutive effect of outstanding
options, warrants and restricted stock as
determined by the treasury stock method 276 827 389 841
------- ------- ------- -------
Diluted: Weighted average common and
common equivalent shares outstanding 10,246 10,447 10,379 10,133
======= ======= ======= =======
Net income per common share:
Basic $ 0.03 $ 0.15 $ 0.04 $ 0.28
Diluted $ 0.03 $ 0.14 $ 0.04 $ 0.25
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 and six months ended June 30, 2005, 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 55,250 and
52,250 shares, respectively.
7. COMPREHENSIVE INCOME
The following table summarizes the Company's comprehensive income:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(In thousands) 2005 2004 2005 2004
---- ------ ---- ------
Net income $267 $1,465 $430 $2,807
Foreign currency translation
adjustment (40) (2) (43) 4
---- ------ ---- ------
Total comprehensive income $227 $1,463 $387 $2,811
==== ====== ==== ======
9
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. INTANGIBLE ASSETS
On June 30, 2005, the Company acquired certain intangible assets
related to casino ticket printer designs and technology from Bally Gaming,
Inc. ("Bally") for $475,000. Prior to the acquisition, pursuant to the
terms of a license agreement, we were required to pay Bally a royalty on
sales of certain gaming printers utilizing the licensed technology. As a
result of the acquisition, effective July 1, 2005, we are no longer
required to pay any future royalties to Bally.
The purchase price was allocated based on management's estimates to
intangible assets based on their relative fair value at the date of
acquisition. The Company utilized the assistance of an independent
valuation firm in determining the relative fair values. The fair value of
the intangibles, comprised of purchased technology and a covenant not to
compete, was determined using the future cash flows method. The intangible
assets are amortized each year on a straight-line basis over six and seven
years, respectively, for the estimated life of the assets.
The following summarizes the allocation of the purchase price for the
acquisition of certain intangible assets from Bally (in thousands):
Purchased technology $339
Covenant not to compete 136
----
Consideration paid $475
====
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SHARE-BASED PAYMENT: In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R replaced SFAS 123, and superseded APB 25.
In March 2005, the U.S. Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 107 ("SAB 107"), which expresses views of the
SEC staff regarding the interaction between SFAS 123R and certain SEC rules
and regulations, and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. SFAS 123R will
require compensation cost related to share-based payment transactions to be
recognized in the financial statements. SFAS 123R requires measurement of
the cost of share-based payment transactions to employees at the fair value
of the award on the grant date and recognition of expense over the
requisite service or vesting period. SFAS 123R requires implementation
using a modified prospective method, under which compensation expense for
the unvested portion of previously granted awards and all new awards will
be recognized on or after the date of adoption. SFAS 123R also allows
companies to adopt SFAS 123R by restating previously issued financial
statements, basing the amounts on the expense previously calculated and
reported in their pro forma footnote disclosures required under SFAS 123.
In April 2005, the FASB changed the implementation date for SFAS 123R and
the provisions of this statement will now be effective for the Company
during the first quarter of 2006.
ACCOUNTING CHANGES AND ERROR CORRECTIONS: In May 2005, FASB issued
Statement of Financial Accounting Standards No. 154, "Accounting Changes
and Error Corrections" ("SFAS 154"), a replacement of Accounting Principles
Board Opinion No. 20 "Accounting Changes" and Statement of Financial
Accounting Standards No. 3 "Reporting Accounting Changes in Interim
Financial Statements -- An Amendment of APB Opinion No. 28." SFAS 154
applies to all voluntary changes in accounting principle and changes
required by an accounting pronouncement where no specific transition
provisions are included. SFAS 154 requires retrospective application to
prior period's financial statements of changes in accounting principle,
unless it is impracticable to determine either the period-specific effects
or the cumulative effect of the change. The provisions of SFAS 154 are
effective for accounting changes and correction of errors made in fiscal
periods that begin after December 15, 2005, although early adoption is
permitted. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
10
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. SIGNIFICANT TRANSACTIONS
On March 25, 2005, the 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 the Company's
outstanding shares of common stock from time to time on the open market
over the next three years depending on market conditions, share price and
other factors. As of June 30, 2005, we repurchased a total of 122,000
shares of common stock for approximately $984,000 at an average price of
$8.07 per share.
On March 28, 2005, we amended the TD Banknorth Credit Facility to
permit us to repurchase our common stock pursuant to the terms of the Stock
Repurchase Program.
On May 25, 2005, our shareholders approved the adoption of the 2005
Employee Equity Incentive Plan (the "2005 Plan"). The 2005 Plan provides
for awards to executives, key employees, directors and consultants in the
form of stock options, stock appreciation rights, restricted stock,
restricted stock units and performance awards. A maximum of 600,000 shares
of common stock may be issued in satisfaction of awards made under the 2005
Plan. Upon adoption of the 2005 Plan, no new awards will be made under any
other existing TransAct equity plan.
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; price wars or other significant
pricing pressures affecting our products in the United States and abroad; and
the outcome of lawsuits between TransAct and FutureLogic, Inc.. 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 and six months
ended June 30, 2005
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
NET SALES. Net sales by business unit for the current and prior year's quarter
were as follows:
Change
Three months ended Three months ended ---------------
(In thousands) June 30, 2005 June 30, 2004 $ %
------------------ ------------------ ------- -----
Point of sale and banking $ 3,155 25.6% $ 4,623 31.5% $(1,468) (31.8%)
Gaming and lottery 6,027 48.8% 7,574 51.5% (1,547) (20.4%)
TransAct Services Group 3,164 25.6% 2,497 17.0% 667 26.7%
------- ----- ------- ----- -------
$12,346 100.0% $14,694 100.0% $(2,348) (16.0%)
======= ===== ======= ===== =======
International * $ 2,941 23.8% $ 1,375 9.4% $ 1,566 113.9%
======= ===== ======= ===== =======
* 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 second quarter of 2005 decreased $2,348,000, or 16%, from the
same period last year due primarily to lower printer shipments into our gaming
and lottery (a decrease of approximately $1,547,000, or 20%) and point of sale
("POS") and banking (a decrease of approximately $1,468,000, or 32%) markets.
Sales from our Services Group increased by $667,000, or 27%, as our installed
base of printers grows and as we continue to aggressively pursue these
after-market sales. Overall, international sales increased by $1,566,000, or
114%, 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 $1,468,000, or 32%.
Change
Three months ended Three months ended ---------------
(In thousands) June 30, 2005 June 30, 2004 $ %
------------------ ------------------ ------- -----
Domestic $2,463 78.1% $4,153 89.8% $(1,690) (40.7%)
International 692 21.9% 470 10.2% 222 47.2%
------ ----- ------ ----- -------
$3,155 100.0% $4,623 100.0% $(1,468) (31.8%)
====== ===== ====== ===== =======
Domestic POS and banking revenue decreased to $2,463,000, representing a
$1,690,000, or 41%, decrease from the second quarter of 2004, due to
significantly lower sales of our Bankjet(R) line of inkjet printers, as we
benefited from shipments of printers to two major financial services companies
to upgrade bank teller stations during 2004 that did not recur in 2005. However,
in June 2005, we announced that a top-tier financial services company selected
our Bankjet(R) printer for use in up to 6,000 of their bank teller stations. We
shipped a small number of printers to this customer in the second quarter of
2005, and expect to ship the remainder in the third quarter of 2005. Although we
are currently pursuing additional banking opportunities, due to the
project-oriented nature of these sales, we cannot predict if and when future
sales may occur. The decrease in banking printer sales was partially offset by
increasing sales of our POS printers, primarily our iTherm(TM)280 thermal
printer and our new line of printers exclusively for POS distributors. Excluding
banking printers, sales of our POS printers increased by 12% in the second
quarter of 2005 compared to the second quarter of 2004.
International POS and banking printer shipments increased by approximately
$222,000, or 47%, to $692,000, due primarily to higher sales through our network
of international POS distributors (primarily in Europe and Latin America).
We expect sales into the POS and banking market for the third quarter of 2005 to
be significantly higher than those reported for the second quarter of 2005, as
we expect to ship substantially more Bankjet(R) printers for our new bank teller
application win explained above, and our additional sales staff and initiatives
put in place in the first half of 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 $1,547,000, or 20%, from the
second quarter a year ago, primarily due to a decrease in sales of lottery
printers to GTECH and 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.
Change
Three months ended Three months ended ---------------
(In thousands) June 30, 2005 June 30, 2004 $ %
------------------ ------------------ ------- -----
Domestic $4,494 74.6% $7,205 95.1% $(2,711) (37.6%)
International 1,533 25.4% 369 4.9% 1,164 315.4%
------ ----- ------ ----- -------
$6,027 100.0% $7,574 100.0% $(1,547) (20.4%)
====== ===== ====== ===== =======
13
Domestic sales of our gaming and lottery printers declined by $2,711,000, or
38%, due primarily to two factors. First, due to the continued significant
decline in slot machine sales into the domestic casino market, we experienced
significantly lower sales of our TITO casino printers throughout North America
in the second quarter of 2005. We expect the downturn in domestic casino slot
machine sales to continue in the third quarter of 2005.
Secondly, printer sales to GTECH Corporation (a worldwide lottery terminal
provider and major customer), which include impact and thermal on-line lottery
printers, decreased by approximately $1,046,000, or 74%, in the second quarter
of 2005 compared to the second quarter of 2004. This was due to the timing of
orders from GTECH and shipments of legacy impact printers to GTECH in the second
quarter of 2004 that did not recur in 2005. We do not expect any future orders
for legacy impact printers, as GTECH replaced our legacy impact on-line lottery
printer with our new thermal on-line lottery printer. 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 third quarter of 2005 to be higher than those
reported in the second quarter of 2005.
International gaming and lottery printer sales increased $1,164,000, or 315%, to
$1,533,000 in the second quarter of 2005. Such sales represented 25% and 5% of
total sales into our gaming and lottery market during the second 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 continue to
accelerate in Europe and Australia 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 and
refurbished printers. Sales from TSG increased by approximately $667,000, or
27%.
Change
Three months ended Three months ended -----------
(In thousands) June 30, 2005 June 30, 2004 $ %
------------------ ------------------ ---- ----
Domestic $2,448 77.4% $1,961 78.5% $487 24.8%
International 716 22.6% 536 21.5% 180 33.6%
------ ----- ------ ----- ----
$3,164 100.0% $2,497 100.0% $667 26.7%
====== ===== ====== ===== ====
Domestic TSG revenue increased by approximately $487,000 or 25%, to $2,448,000
largely due to higher sales of maintenance and repair services and spare parts.
Internationally, sales increased by approximately $180,000 to $716,000 due
largely to an increase in services revenue. We expect sales from TSG to continue
to grow throughout the remainder of 2005, as we derive benefits from the
additional sales staff, our new service center in Las Vegas, NV and our expanded
service center in Wallingford, CT.
GROSS PROFIT. Gross profit decreased $1,363,000 to $4,254,000, or 24%, and gross
margin decreased to 34.5% from 38.2%, due primarily to a lower volume of sales
and a less favorable sales mix in the second quarter of 2005 compared to the
second quarter of 2004. We expect gross margin for the third quarter of 2005 to
be consistent with the gross margin reported for the second 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 $191,000, or 35%, to $739,000, as we incurred expenses related to
(1) increased engineering staffing, (2) 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"), and (3) increased
development expenses related to the launch of our new line of printers
exclusively for POS distributors. Engineering and product development expenses
increased as a percentage of net sales to 6.0% from 3.7%, due primarily to these
increased costs in proportion to lower sales in the second quarter of 2005
compared to the second quarter of 2004. We expect engineering and product
development expenses for the third quarter of 2005 to be consistent with those
reported in the second quarter of 2005 as we continue our product development to
significantly expand our product offerings in both the POS and gaming and
lottery markets.
14
SELLING AND MARKETING. Selling and marketing expenses primarily include salaries
and payroll related expenses for our sales and marketing staff, sales
commissions, travel expenses, expenses associated with the lease of sales
offices, advertising, trade show expenses and other promotional marketing
expenses. Selling and marketing expenses increased by $329,000, or 27%, to
$1,547,000, due primarily to increased expenses related to (1) the addition of
new sales staff for our three business units and our new service centers in Las
Vegas, NV and Wallingford, CT, (2) marketing, promotional and trade show
expenses related to the launch of our new line of printers exclusively for POS
distributors, and (3) the recruitment and hire of a SVP Marketing during the
second quarter of 2005. Selling and marketing expenses increased as a percentage
of net sales to 12.5% from 8.3%, due primarily to increased expenses in
proportion to lower sales volume in the second quarter of 2005 compared to the
second quarter of 2004. We expect selling and marketing expenses to be higher in
the third quarter of 2005 compared to the second quarter of 2005, due largely to
higher trade show expenses for the Global Gaming Exposition (G2E) and the
full-quarter effect of the addition of new sales and marketing staff made during
the second quarter of 2005.
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 slightly by $27,000, or 2%, to
$1,590,000. General and administrative expenses increased as a percentage of net
sales to 12.9% from 10.6% due primarily to lower volume of sales in the second
quarter of 2005 compared to the second quarter of 2004. We expect general and
administrative expenses in the third quarter of 2005 to be higher than those
reported in the second quarter of 2005, largely due to higher expected audit
expenses related to Sarbanes-Oxley compliance and legal expenses related to our
lawsuit against FutureLogic, Inc.
OPERATING INCOME. During the second quarter of 2005, we reported operating
income of $378,000, or 3.1% of net sales, compared to $2,288,000, or 15.6% of
net sales in the second quarter of 2004. The substantial decrease in our
operating income and operating margin was due largely to lower sales in the
second quarter of 2005 compared to that of 2004.
INTEREST. We recorded net interest income of $20,000 compared to net interest
expense of $2,000 in the second 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 and 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 $147,000 and $823,000 in
the second quarter of 2005 and 2004, respectively, at an effective rate of 35.5%
and 36.0%, respectively. We expect our effective tax rate for the third quarter
of 2005 to be lower than that reported for the second quarter of 2005 due to
certain discrete tax benefits expected in the third quarter.
NET INCOME. We reported net income during the second quarter of 2005 of
$267,000, or $0.03 per diluted share, compared to net income of $1,465,000, or
$0.14 per diluted share, for the second quarter of 2004.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
NET SALES. Net sales by business unit for the current and prior year's six month
period were as follows:
Change
Six months ended Six months ended ---------------
(In thousands) June 30, 2005 June 30, 2004 $ %
---------------- ---------------- ------- -----
Point of sale and banking $ 7,109 29.1% $ 9,629 32.3% $(2,520) (26.2%)
Gaming and lottery 11,498 47.2% 15,182 51.0% (3,684) (24.3%)
TransAct Services Group 5,775 23.7% 4,958 16.7% 817 16.5%
------- ----- ------- ----- -------
$24,382 100.0% $29,769 100.0% $(5,387) (18.1%)
======= ===== ======= ===== =======
International * $ 5,024 20.6% $ 2,591 8.7% $ 2,433 93.9%
======= ===== ======= ===== =======
* International sales do not include sales of printers made to domestic
distributors or other customers who in turn ship those printers to
international destinations.
15
Net sales for the first half of 2005 decreased $5,387,000, or 18%, from the
prior year's first half due to significantly lower printer shipments
(approximately $6,204,000, or 25%) into both our gaming and lottery market and
POS and banking market. Sales from our TransAct Services Group increased by
$817,000, or 17%, as our installed base of printers grows and as we continue to
aggressively pursue these sales. Overall, international sales increased by
$2,433,000, or 94%, due primarily to higher international shipments of our
gaming printers.
POINT OF SALE AND BANKING:
Sales of our POS and banking printers worldwide decreased approximately
$2,520,000, or 26%.
Change
Six months ended Six months ended ---------------
(In thousands) June 30, 2005 June 30, 2004 $ %
---------------- ---------------- ------- -----
Domestic $5,881 82.7% $8,823 91.6% $(2,942) (33.3%)
International 1,228 17.3% 806 8.4% 422 52.4%
------ ----- ------ ----- -------
$7,109 100.0% $9,629 100.0% $(2,520) (26.2%)
====== ===== ====== ===== =======
Domestic POS and banking printer sales decreased to $5,881,000, representing a
$2,942,000, or 33%, decrease from the first half of 2004, due to significantly
lower sales of our Bankjet(R) line of inkjet printers, as we benefited from
shipments of printers to two major financial services companies to upgrade bank
teller stations during 2004 that did not recur in 2005. However, in June 2005,
we announced that a top-tier financial services company selected our Bankjet(R)
printer for use in up to 6,000 of their bank teller stations. We shipped a small
number of printers to this customer in the second quarter of 2005, and expect to
ship the remainder in the third quarter of 2005. Although we are currently
pursuing additional banking opportunities, due to the project-oriented nature of
these sales, we cannot predict if and when future sales may occur. The decrease
in banking printer sales was partially offset by increasing sales of our POS
printers, primarily our iTherm(TM)280 thermal printer and our new line of
printers exclusively for POS distributors. Excluding banking printers, sales of
our POS printers increased by 28% in the first half of 2005 compared to the
first half of 2004.
International POS and banking printer shipments increased by approximately
$422,000, or 52%, to $1,228,000, due primarily to higher sales through our
network of international POS distributors (primarily in Europe and Latin
America).
We expect sales into the POS and banking market for the third quarter of 2005 to
be significantly higher than those reported for the second quarter of 2005, as
we expect to ship substantially more Bankjet(R) printers for our new bank teller
application win explained above, and our additional sales staff and initiatives
put in place in the first half of 2005 begin to take hold.
GAMING AND LOTTERY:
Sales of our gaming and lottery products decreased by $3,684,000, or 24%, from
the first half of 2004, primarily due to a decrease in sales of our slot machine
and other gaming printers in North America, and to a lesser extent, a decrease
in lottery printer sales to GTECH. These decreases were somewhat offset by
higher international sales of our slot machine and other gaming printers in
Australia and Europe.
Change
Six months ended Six months ended ---------------
(In thousands) June 30, 2005 June 30, 2004 $ %
---------------- ---------------- ------- -----
Domestic $ 8,975 78.1% $14,525 95.7% $(5,550) (38.2%)
International 2,523 21.9% 657 4.3% 1,866 284.0%
------- ----- ------- ----- -------
$11,498 100.0% $15,182 100.0% $(3,684) (24.3%)
======= ===== ======= ===== =======
Domestic sales of our gaming and lottery printers declined by $5,550,000, or
38%, to $8,975,000. Due to the continued significant decline in slot machine
sales into the domestic casino market, we experienced significantly lower sales
of our TITO casino printers throughout North America during the first half of
2005. We expect the downturn in domestic casino slot machine sales to continue
in the third quarter of 2005.
16
Printer sales to GTECH Corporation (a worldwide lottery terminal provider and
major customer), which include impact and thermal on-line lottery printers,
decreased by approximately $476,000, or 18%, in the first half of 2005 compared
to the first half of 2004. This was due to the timing of orders from GTECH and
shipments of legacy impact printers to GTECH in the first half of 2004 that did
not recur in 2005. We do not expect any future orders for legacy impact
printers, as GTECH replaced our legacy impact on-line lottery printer with our
new thermal on-line lottery printer. 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 third quarter of 2005 to be higher than those reported in the
second quarter of 2005.
International gaming and lottery printer sales increased $1,866,000, or 284%, to
$2,523,000 in the first half of 2005 compared to the first half of 2004. Such
sales represented 22% and 4% of total sales into our gaming and lottery market
during the first half 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 continue to accelerate in Europe and Australia in the second
half of 2005.
TRANSACT SERVICES GROUP ("TSG"):
Sales from TSG increased by approximately $817,000, or 17%.
Change
Six months ended Six months ended -----------
(In thousands) June 30, 2005 June 30, 2004 $ %
---------------- ---------------- ---- ----
Domestic $4,502 78.0% $3,830 77.2% $672 17.5%
International 1,273 22.0% 1,128 22.8% 145 12.9%
------ ----- ------ ----- ----
$5,775 100.0% $4,958 100.0% $817 16.5%
====== ===== ====== ===== ====
Domestic TSG revenue increased by approximately $672,000, or 18%, to $4,502,000,
largely due to higher sales of spare parts, and to a lesser extent, higher
revenue from maintenance and repair services. Internationally, TSG sales
increased by approximately $145,000, or 13%, to $1,273,000, due largely to an
increase in services revenue. We expect sales from TSG to continue to grow
throughout the remainder of 2005, as we derive benefits from the additional
sales staff and our new service center in Las Vegas, NV and expanded service
center in Wallingford, CT.
GROSS PROFIT. Gross profit decreased $3,104,000, or 28%, to $7,931,000 and gross
margin decreased to 32.5% from 37.1%, due primarily to a lower volume of sales
and a less favorable sales mix, in the first half of 2005 compared to the first
half of 2004. We expect gross margin for the third quarter of 2005 to be
consistent with the gross margin reported for the second quarter of 2005.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $308,000, or 27%, to $1,470,000, as we incurred expenses
related to (1) increased engineering staffing, (2) 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"), and
(3) increased development expenses related to the launch of our new line of
printers exclusively for POS distributors. Engineering and product development
expenses increased as a percentage of net sales to 6.0% from 3.9%, due primarily
to these increased costs in proportion to lower sales in the first half of 2005
compared to the first half of 2004. We expect engineering and product
development expenses for the third quarter of 2005 to be consistent with those
reported in the second quarter of 2005, as we continue our product development
to significantly expand our product offerings in both the POS and gaming and
lottery markets.
SELLING AND MARKETING. Selling and marketing expenses increased by $316,000, or
12%, to $2,896,000, due primarily to increased expenses related to (1) the
addition of new sales staff for our three business units and our new service
centers in Las Vegas, NV and Wallingford, CT, (2) marketing, promotional and
trade show expenses related to the launch of our new line of printers
exclusively for POS distributors, and (3) the recruitment and hire of a SVP
Marketing during the second quarter of 2005. Selling and marketing expenses
increased as a percentage of net sales to 11.9% from 8.7%, due primarily to
increased expenses in proportion to lower sales volume in the first half of 2005
compared to the first half of 2004. We expect selling and marketing expenses to
be higher in the third quarter of 2005 compared to the second quarter of 2005,
due largely to higher trade show expenses for the Global Gaming Exposition (G2E)
and the full-quarter effect of the addition of new sales and marketing staff
made during the second quarter of 2005.
17
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$59,000, or 2%, to $2,954,000, due primarily to higher professional expenses,
including legal fees related to our lawsuit filed against FutureLogic, Inc.
General and administrative expenses increased as a percentage of net sales to
12.1% from 9.7% due primarily to lower volume of sales in the first half of 2005
compared to the first half of 2004. We expect general and administrative
expenses in the third quarter of 2005 to be higher than those reported in the
second quarter of 2005, largely due to higher expected audit expenses related to
Sarbanes-Oxley compliance and legal expenses related to our lawsuit against
FutureLogic, Inc.
OPERATING INCOME. During the first half of 2005, we reported operating income of
$611,000, or 2.5% of net sales, compared to $4,398,000, or 14.8% of net sales in
the first half of 2004. The substantial decrease in our operating income and
operating margin was due largely to lower sales in the first half of 2005
compared to that of 2004.
INTEREST. We recorded net interest income of $40,000 in the first half of 2005
compared to net interest expense of $12,000 in the first half 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, and 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 $236,000 and $1,578,000 in
the first half of 2005 and 2004, respectively, at an effective rate of 35.4% and
36.0%, respectively. We expect our effective tax rate for the third quarter of
2005 to be lower than that reported for the second quarter of 2005 due to
certain discrete tax benefits expected in the third quarter.
NET INCOME. We reported net income during the first half of 2005 of $430,000, or
$0.04 per diluted share, compared to net income of $2,807,000, or $0.25 per
diluted share, for the first half of 2004.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first half of 2005, our cash flows reflected the results of
lower sales volume, our repurchase of outstanding common stock, the purchase of
certain intangible assets from Bally Gaming, Inc. ("Bally"), and our increased
investment in infrastructure, compared to the same period in 2004. Cash
decreased by $3,887,000 from December 31, 2004, due in large part to increased
capital spending in the first half of 2005, the repurchase of nearly $1.0
million of outstanding common stock, and the purchase of certain intangible
assets related to casino printer designs and technology from Bally. We ended the
quarter with approximately $4,741,000 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 $1,198,000 in the first half of 2005:
- We reported net income of $430,000
- We recorded depreciation, amortization and non-cash compensation
expense of $1,002,000
- Accounts receivable increased by $756,000 due to timing of sales
during the quarter
- Accounts payable decreased by $1,377,000 due to lower inventory
purchases related to lower sales volume during the quarter
The following payments also affected our cash from operations during the first
half of 2005:
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 POS and banking markets. In
addition, we agreed to pay $900,000 as a royalty payment 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 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 June 30, 2005 and December 31, 2004, our
restructuring accrual amounted to $1,231,000 and $1,454,000, respectively. The
decrease of $223,000 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.
18
Investing activities: Our capital expenditures were approximately $1,495,000 and
$447,000 in the first six months of 2005 and 2004, respectively. Expenditures in
2005 included approximately $600,000 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 expected to be
finalized in 2006 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.
During the second quarter of 2005, we acquired certain intangible assets related
to casino printer designs and technology from Bally for $475,000. Prior to the
acquisition, pursuant to the terms of a license agreement, we were required to
pay Bally a royalty on sales of certain gaming printers utilizing the licensed
technology. As a result of the acquisition, effective July 1, 2005, we are no
longer required to pay any future royalties to Bally. We expect the elimination
of future royalty payments to Bally to result in a cost savings to the Company
beginning in the third quarter of 2005.
Financing activities: We used approximately $676,000 in financing activities
during the first six months of 2005, largely due to the repurchase of company
stock ($984,000), partly offset by proceeds from stock option exercises and
other stock transactions (approximately $308,000).
WORKING CAPITAL
Our working capital decreased to $18,952,000 at June 30, 2005 from $20,325,000
at December 31, 2004. The current ratio increased to 3.8 to 1 at June 30, 2005
from 3.3 to 1 at December 31, 2004. The decrease in working capital is due
largely to lower cash balances. The increase in the current ratio is due largely
to lower accounts payable and accrued liabilities, partly offset by lower cash
and cash equivalents compared to December 31, 2004.
DEFERRED TAXES
As of June 30, 2005, we had a net deferred tax asset of approximately
$2,753,000. 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 "TD
Banknorth Credit Facility") with TD Banknorth N.A. The TD 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 TD Banknorth Credit Facility. Under the
terms of the agreement, we renewed, through July 31, 2005, our $1.0 million
equipment loan facility. However, this facility expired on July 31, 2005 and was
not renewed. The amendment also revised certain other terms of the revolving
credit facility.
On March 28, 2005, we amended the TD 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 TD 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 June 30, 2005, we had no balances outstanding on the revolving credit line
and term loan, respectively. Undrawn commitments under the TD Banknorth Credit
Facility were approximately $12,500,000 at June 30, 2005. However, our maximum
additional available borrowings under the facility were limited to approximately
$8,500,000
19
at June 30, 2005 based on the borrowing base of our collateral. We were in
compliance with all financial covenants of the TD Banknorth Credit Facility at
June 30, 2005.
STOCK REPURCHASE PROGRAM
On March 25, 2005, the Board of Directors approved a stock repurchase program
("the Stock Repurchase Program"). Under the Stock Repurchase Program, management
is authorized to repurchase up to $10 million of the Company's 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 June
30, 2005, the Company had repurchased a total of 122,000 shares of common stock
for approximately $984,000, at an average price of $8.07 per share.
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 were required
beyond the second quarter of 2004.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $188,000 to $23,903,000 at June 30, 2005 from
$23,715,000 at December 31, 2004. The increase was primarily due to the
following for the six months ended June 30, 2005: (1) net income of $430,000 (2)
proceeds of approximately $311,000 from the issuance of approximately 65,000
shares of common stock from stock option and stock purchase plan exercises, (3)
an increase in additional paid-in capital of approximately $283,000 resulting
from the tax benefits resulting from the sale of employee stock from stock
option exercises, (4) compensation expense related to restricted stock grants of
$194,000, offset by treasury stock purchases of 122,000 shares of common stock
for approximately $984,000.
CONTRACTUAL OBLIGATIONS
We have experienced no material changes in our contractual obligations outside
the ordinary course of business during the three or six months ended June 30,
2005.
RESOURCE SUFFICIENCY
We believe that our cash on hand and cash flows generated from operations and
borrowings available under the TD 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.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 28, 2005 we announced that we filed a complaint in Connecticut Superior
Court against FutureLogic, Inc. ("FutureLogic") 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.
On May 20, 2005, FutureLogic filed a complaint in the United States District
Court for the Central District of California against TransAct. The complaint
charges TransAct with false advertising, defamation, trade libel, intentional
interference with prospective economic advantage, common law unfair competition
and statutory unfair competition and seeks an award of compensatory and punitive
damages, attorneys' fees and costs. On August 3, 2005, FutureLogic amended its
complaint in California to seek a declaratory judgment that Patent No.
6,924,903, issued by the United States Patent and Trademark Office ("PTO") to
TransAct on August 2, 2005, for its dual-port printer technology, is invalid,
and that FutureLogic is not infringing TransAct's patent. We believe that the
California action is retaliatory in nature and without merit, and we intend to
vigorously defend ourselves. FutureLogic did not specify any factual basis upon
which it alleges that the Company's patent is invalid. We also believe that
their claims regarding our patent are without merit, that our patent was
thoroughly reviewed by the PTO and that our patent is valid. This action is in
the pre-trial motion stage, and there is no basis for calculating any potential
or probable liability associated with this action.
ITEM 2C. STOCK REPURCHASE
On March 25, 2005, the Board of Directors approved a stock repurchase program
("the Stock Repurchase Program"). Under the Stock Repurchase Program, management
is authorized to repurchase up to $10 million of the Company's 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 June
30, 2005, the Company had repurchased a total of 122,000 shares of common stock
for approximately $984,000.
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 25, 2005. Matters
voted upon at the meeting and the number of votes cast for, against, withheld or
abstentions are as follows:
(1) To consider and act upon a proposal to elect two Directors to serve until
the 2008 Annual Meeting of Stockholders or until the Director's successor has
been duly elected and qualified. Nominees were Thomas R. Schwarz and Bart C.
Shuldman. Votes cast were as follows:
For Withheld
--------- ---------
Thomas R. Schwarz 6,575,635 1,748,192
Bart C. Shuldman 6,639,664 1,684,163
(2) To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent registered public accounting firm for 2005. Votes cast were as
follows: 8,012,719 shares for; 307,148 shares against; and 3,959 shares
abstained.
(3) To ratify and approve the 2005 Equity Incentive Plan. Votes cast were as
follows: 3,048,837 shares for; 878,797 shares against; and 99,251 shares
abstained.
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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
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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)
August 8, 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
24