UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ]NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING OCTOBER 28, 2005
- ----- ----------------------------
COMMON STOCK,
$.01 PAR VALUE 9,822,271
</Table>
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
PART I. Financial Information: Page No.
- ------- ---------------------- --------
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of September 30, 2005 and
December 31, 2004 3
Condensed consolidated statements of income for the three and nine
months ended September 30, 2005 and 2004 4
Condensed consolidated statements of cash flow for the nine months ended
September 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 21
PART II. Other Information:
Item 1 Legal Proceedings 22
Item 2c Stock Repurchase 22
Item 6 Exhibits 23
Signatures 24
Certifications 26-29
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
SEPTEMBER 30, December 31,
(In thousands) 2005 2004
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents $ 4,498 $ 8,628
Receivables, net 9,366 8,910
Inventories 7,597 8,074
Refundable income taxes 510 510
Deferred tax assets 2,614 2,370
Other current assets 391 586
------------- -------------
Total current assets 24,976 29,078
------------- -------------
Fixed assets, net 4,100 3,177
Goodwill 1,469 1,469
Deferred tax assets 191 274
Other assets 563 101
------------- -------------
6,323 5,021
------------- -------------
Total assets $ 31,299 $ 34,099
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,559 $ 3,804
Accrued liabilities 3,188 3,812
Accrued restructuring 420 420
Deferred revenue 394 717
------------- -------------
Total current liabilities 7,561 8,753
------------- -------------
Accrued restructuring 701 1,034
Accrued product warranty 139 153
Deferred revenue 330 444
------------- -------------
1,170 1,631
------------- -------------
Total liabilities 8,731 10,384
------------- -------------
Shareholders' equity:
Common stock 102 100
Additional paid-in capital 19,237 17,401
Retained earnings 8,216 7,112
Unamortized restricted stock compensation (1,955) (1,067)
Accumulated other comprehensive income 103 169
Treasury stock, 408,900 and 0 shares at cost (3,135) --
------------- -------------
Total shareholders' equity 22,568 23,715
------------- -------------
Total liabilities and shareholders' equity $ 31,299 $ 34,099
============= =============
</Table>
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
(In thousands, except per share data) 2005 2004 2005 2004
-------- -------- -------- --------
Net sales $ 14,210 $ 15,482 $ 38,592 $ 45,251
Cost of sales 9,634 9,585 26,085 28,319
-------- -------- -------- --------
Gross profit 4,576 5,897 12,507 16,932
-------- -------- -------- --------
Operating expenses:
Engineering, design and product
development 637 643 2,107 1,805
Selling and marketing 1,627 1,254 4,523 3,834
General and administrative 1,624 1,528 4,578 4,423
-------- -------- -------- --------
3,888 3,425 11,208 10,062
-------- -------- -------- --------
Operating income 688 2,472 1,299 6,870
-------- -------- -------- --------
Interest and other income (expense):
Interest, net 19 4 59 (8)
Other, net 7 4 22 3
-------- -------- -------- --------
26 8 81 (5)
-------- -------- -------- --------
Income before income taxes 714 2,480 1,380 6,865
Income tax provision 40 855 276 2,433
-------- -------- -------- --------
Net income $ 674 $ 1,625 $ 1,104 $ 4,432
======== ======== ======== ========
Net income available to common shareholders $ 674 $ 1,625 $ 1,104 $ 4,201
Net income per common share:
Basic $ 0.07 $ 0.16 $ 0.11 $ 0.44
Diluted $ 0.07 $ 0.15 $ 0.11 $ 0.41
Shares used in per-share calculation
Basic 9,817 9,853 9,932 9,483
Diluted 10,078 10,556 10,268 10,278
</Table>
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
(In thousands) 2005 2004
-------- --------
Cash flows from operating activities:
Net income $ 1,104 $ 4,432
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Non-cash compensation expense 326 224
Deferred income taxes (111) 667
Depreciation and amortization 1,165 1,237
Changes in operating assets and liabilities:
Receivables (456) (242)
Inventories 477 (484)
Other current assets 195 134
Other assets 2 2
Accounts payable (245) 392
Accrued liabilities and other liabilities (830) 139
Accrued restructuring expenses (333) (333)
-------- --------
Net cash provided by operating activities 1,294 6,168
-------- --------
Cash flows from investing activities:
Purchases of fixed assets (2,042) (850)
Purchase of intangible assets (510) --
-------- --------
Net cash used in investing activities (2,552) (850)
-------- --------
Cash flows from financing activities:
Term loan repayments -- (420)
Proceeds from option exercises, employee stock purchase plan and
common stock warrants 332 1,112
Purchases of common stock for treasury (3,135) --
Payment of cash dividends -- (91)
Payment of expenses related to preferred stock conversion and
registration of common stock (3) (74)
-------- --------
Net cash (used in) provided by financing activities (2,806) 527
-------- --------
Effect of exchange rate changes (66) --
-------- --------
(Decrease) increase in cash and cash equivalents (4,130) 5,845
Cash and cash equivalents at beginning of period 8,628 498
-------- --------
Cash and cash equivalents at end of period $ 4,498 $ 6,343
======== ========
Non-cash financing activities:
Conversion of preferred stock to common stock $ -- $ 3,926
Tax benefit related to employee stock sales 295 1,656
Accretion of preferred stock discount and issuance costs -- 24
Issuance of restricted stock, net of cancellations 1,215 1,400
</Table>
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 ("POS") and banking 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 fairly
state TransAct's financial position as of September 30, 2005, the
results of our operations for the three and nine months ended September
30, 2005 and 2004, and our cash flows for the nine months ended
September 30, 2005 and 2004. The condensed consolidated balance sheet
as of December 31, 2004 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 nine months ended
September 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 the 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 the related compensation expense and unearned
compensation previously recognized are reversed.
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED)
During the three months ended September 30, 2005, no shares of
restricted stock were granted. During the nine months ended September
30, 2005, we granted 123,150 shares of restricted stock, net of
cancellations, to directors and key employees under the 1996 Stock
Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan. Deferred
compensation of $1,215,000 was recorded with respect to these grants in
the nine months ended September 30, 2005 and will be recognized into
compensation expense over the vesting period (between three and five
years). The Company recorded compensation expense of $132,000 and
$326,000 for the three and nine months ended September 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.
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(In thousands, except per share data)
Net income available to common
shareholders:
Net income available to common
shareholders, as reported $ 674 $ 1,625 $ 1,104 $ 4,201
Add: Stock-based compensation expense
included in reported net income,
net of tax 84 53 206 143
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (167) (148) (556) (233)
---------- ---------- ---------- ----------
Pro forma net income available to common
shareholders $ 591 $ 1,530 $ 754 $ 4,111
========== ========== ========== ==========
Net income per common share:
Basic:
As reported $ 0.07 $ 0.16 $ 0.11 $ 0.44
Pro forma $ 0.06 $ 0.16 $ 0.08 $ 0.43
Diluted:
As reported $ 0.07 $ 0.15 $ 0.11 $ 0.41
Pro forma $ 0.06 $ 0.14 $ 0.07 $ 0.40
</Table>
During the three and nine months ended September 30, 2005, we
received cash proceeds of approximately $21,000 and $332,000,
respectively, from the issuance of approximately 6,000 and 68,000
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 $12,000 and
$295,000 in the three and nine months ended September 30, 2005,
respectively, resulting from subsequent employee stock sales.
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORIES
The components of inventories are as follows:
<Table>
<Caption>
September 30, December 31,
(In thousands) 2005 2004
------------- -------------
Raw materials and component parts $ 7,250 $ 7,869
Finished goods 347 205
------------- -------------
$ 7,597 $ 8,074
============= =============
4. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the
accrued product warranty liability during the three and nine months
ended September 30, 2005 and 2004.
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30,
(In thousands) 2005 2004 2005 2004
------------- ------------- ------------- -------------
Balance, beginning of period $ 664 $ 516 $ 597 $ 495
Additions related to warranties issued 115 100 473 405
Warranty costs incurred (137) (78) (428) (362)
------------- ------------- ------------- -------------
Balance, end of period $ 642 $ 538 $ 642 $ 538
============= ============= ============= =============
</Table>
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 nine months ended
September 30, 2005 and 2004.
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2005 2004 2005 2004
------------- ------------- ------------- -------------
Accrual balance, beginning of
period $ 1,231 $ 1,904 $ 1,454 $ 2,125
Cash payments (110) (112) (333) (333)
------------- ------------- ------------- -------------
Accrual balance, end of period $ 1,121 $ 1,792 $ 1,121 $ 1,792
============= ============= ============= =============
</Table>
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):
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------- -------- -------- --------
Net income $ 674 $ 1,625 $ 1,104 $ 4,432
Dividends and accretion charges on
preferred stock -- -- -- (111)
Earnings allocation to preferred
shareholders -- -- -- (120)
-------- -------- -------- --------
Net income available to common
shareholders $ 674 $ 1,625 $ 1,104 $ 4,201
======== ======== ======== ========
Shares:
Basic: Weighted average common shares
outstanding 9,817 9,853 9,932 9,483
Add: Dilutive effect of outstanding
options, warrants and restricted stock as
determined by the treasury stock method
261 703 336 795
-------- -------- -------- --------
Diluted: Weighted average common and
common equivalent shares outstanding 10,078 10,556 10,268 10,278
======== ======== ======== ========
Net income per common share:
Basic $ 0.07 $ 0.16 $ 0.11 $ 0.44
Diluted $ 0.07 $ 0.15 $ 0.11 $ 0.41
</Table>
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 nine months ended September 30, 2005,
potentially dilutive shares that were excluded from the earnings per
share calculation consisted of out-of-the-money stock options and
amounted to 55,250 and 52,250 shares, respectively.
7. COMPREHENSIVE INCOME
The following table summarizes the Company's comprehensive
income:
<Table>
<Caption>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2005 2004 2005 2004
-------- -------- -------- --------
Net income $ 674 $ 1,625 $ 1,104 $ 4,432
Foreign currency translation
adjustment (23) (4) (66) --
-------- -------- -------- --------
Total comprehensive income $ 651 $ 1,621 $ 1,038 $ 4,432
======== ======== ======== ========
</Table>
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, plus the costs of effecting
the acquisition (approximately $35,000). 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 were 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 being amortized 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):
<Table>
Purchased technology $ 364
Covenant not to compete 146
-----
Consideration paid $ 510
=====
9. INCOME TAXES
The Company recorded an income tax provision of $40,000 and $855,000 in
the third quarter of 2005 and 2004, respectively, at an effective rate
of 5.6% and 34.5%, respectively. The lower effective tax rate for the
third quarter of 2005 resulted from approximately $138,000 of certain
discrete tax benefits recognized during the third quarter of 2005, as
well as a downward revision of the Company's estimated effective tax
rate for 2005 based on the Company's anticipated taxable income.
10. 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.
10
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
11. 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. During the three months
ended September 30, 2005, the Company repurchased a total of 286,900
shares of common stock for approximately $2,151,000 at an average price
of $7.50 per share. As of September 30, 2005, the Company repurchased a
total of 408,900 shares of common stock for approximately $3,135,000 at
an average price of $7.67 per share.
On March 28, 2005, we amended our credit facility with TD
Banknorth 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 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. No new awards will be made under any other
existing TransAct equity plan.
12. SUBSEQUENT EVENTS
On November 2, 2005, the Compensation Committee of the Board
of Directors approved accelerating the vesting of all outstanding
unvested stock options granted to directors, officers and employees of
the Company under the Company's applicable stock incentive plans. The
closing price of the Company's common stock on the Nasdaq National
Market Quotation System to be used for measurement of compensation as
of the date of acceleration was $6.99. As a result of the acceleration,
options to acquire approximately 109,500 shares of the Company's common
stock, which otherwise would have vested from time to time over the
next four years, become immediately exercisable. All other terms and
conditions applicable to outstanding stock option grants remain in
effect. The option plans under which accelerated grants were issued are
the Company's 1996 Stock Plan, 1996 Directors' Stock Plan and the 2001
Employee Stock Plan.
The Compensation Committee's decision to accelerate the
vesting of affected stock options was primarily based upon the
Company's required adoption of FAS 123R effective January 1, 2006. The
Company believes that the acceleration of vesting unvested options will
eliminate the need to recognize any future compensation expense in the
Company's income statement with respect to these options. However,
there is no assurance that the acceleration of the options may not
result in some future compensation expense. By accelerating the vesting
of unvested options, the Company will be required to record an
immaterial amount of compensation expense in the fourth quarter of
2005.
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 nine months
ended September 30, 2005.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2004
NET SALES. Net sales by business unit for the current and prior year's quarter
were as follows:
<Table>
<Caption>
Three months ended Three months ended Change
(In thousands) September 30, 2005 September 30, 2004 $ %
------------------ ------------------ ------------------
Point of sale and banking $ 5,544 39.0% $ 3,968 25.6% $ 1,576 39.7%
Gaming and lottery 5,833 41.0% 8,924 57.7% (3,091) (34.6%)
TransAct Services Group 2,833 20.0% 2,590 16.7% 243 9.4%
------------------ ----------------- -------
$14,210 100.0% $15,482 100.0% $(1,272) (8.2%)
================== ================= =======
International * $ 4,220 29.7% $ 1,658 10.7% $ 2,562 154.5%
================== ================= =======
*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 third quarter of 2005 decreased $1,272,000, or 8%, from the
same period last year due primarily to lower printer shipments into our gaming
and lottery market (a decrease of approximately $3,091,000, or 35%) partially
offset by an increase in printer shipments into our point of sale ("POS") and
banking market (an increase of approximately $1,576,000, or 40%). Sales from our
Services Group increased by $243,000, or 9%, as our installed base of printers
grows and as we continue to aggressively pursue these after-market sales.
Overall, international sales increased by $2,562,000, or 155%, due largely to
higher international shipments of our gaming printers, primarily to Europe and
Australia.
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 increased approximately $1,576,000, or 40%.
<Table>
<Caption>
Three months ended Three months ended Change
(In thousands) September 30, 2005 September 30, 2004 $ %
------------------ ------------------ ------------------
Domestic $ 5,173 93.3% $ 3,570 90.0% $ 1,603 44.9%
International 371 6.7% 398 10.0% (27) (6.8%)
------------------ ----------------- -------
$ 5,544 100.0% $ 3,968 100.0% $ 1,576 39.7%
================== ================= =======
</Table>
Domestic POS and banking revenue increased to $5,173,000, representing a
$1,603,000, or 45%, increase from the third quarter of 2004, due to
significantly higher sales of our Bankjet(R) line of inkjet printers, as we
benefited from shipments of printers to the top-tier financial services company
who selected our Bankjet(R) printer for use in up to 6,000 of their bank teller
stations in a sale that was announced in June 2005. In addition, we experienced
increased shipments of our Bankjet(R) printers to an existing financial services
customer in the third quarter of 2005 compared to the third quarter of 2004.
Excluding banking printers, sales of our POS printers decreased by 11% in the
third quarter of 2005 compared to the third quarter of 2004, due primarily to a
decrease in sales of our legacy impact POS printers to our domestic
distributors.
International POS and banking printer shipments decreased slightly by
approximately $27,000, or 7%, to $371,000, due primarily to lower sales to our
international POS distributors in the Pacific Rim.
We expect sales into the POS and banking market for the fourth quarter of 2005
to be lower than those reported for the third quarter of 2005, as we have
substantially completed shipments of Bankjet(R) printers for the new bank teller
application win explained above. Although we are currently pursuing additional
banking opportunities, due to the project-oriented nature of these sales, we do
not expect to close another significant banking deal in the fourth quarter of
2005. In addition, historically, sales of printers in the POS market have
increased in the third quarter and decreased in the fourth quarter, as retailers
typically reduce purchases of new POS equipment in the fourth quarter due to the
increased volume of consumer transactions in that holiday period.
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 printers decreased by $3,091,000, or 35%, from the
third quarter a year ago, primarily due to a decrease in sales of lottery
printers to GTECH, as well as a decrease in sales of slot machine printers in
North America. This decrease was partially offset by higher international sales
of our slot machine and other gaming printers in Europe and Australia.
13
<Table>
<Caption>
Three months ended Three months ended Change
(In thousands) September 30, 2005 September 30, 2004 $ %
------------------ ------------------ ------------------
Domestic $ 2,720 46.6% $ 8,208 92.0% $ (5,488) (66.9%)
International 3,113 53.4% 716 8.0% 2,397 334.8%
------------------ ----------------- --------
$ 5,833 100.0% $ 8,924 100.0% $ (3,091) (34.6%)
================== ================= ========
</Table>
Domestic sales of our gaming and lottery printers declined by $5,488,000, or
67%, to $2,720,000. Due to the continued decline in slot machine sales into the
domestic casino market, including the effects of Hurricane Katrina, and the loss
of revenue from a large slot machine manufacturer as it works through an
inventory issue, we experienced significantly lower sales of our TITO casino
printers throughout North America in the third quarter of 2005. We expect the
downturn in domestic casino slot machine sales to continue into the fourth
quarter of 2005.
In addition, 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 $1,492,000, or 50%, in the third quarter of
2005 compared to the third quarter of 2004. This was due largely to shipments of
legacy impact printers to GTECH in the third quarter of 2004 that did not recur
in the third quarter of 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 fourth quarter of 2005 to be higher than those reported in the
third quarter of 2005.
International gaming and lottery printer sales increased $2,397,000, or 335%, to
$3,113,000 in the third quarter of 2005 compared to the third quarter of 2004.
Such sales represented 53% and 8% of total sales into our gaming and lottery
market during the third quarters of 2005 and 2004, respectively. We continued to
experience growth in international gaming printer sales as markets in Europe and
Australia begin to adopt ticket printing in slot machines and other gaming and
amusement machines. We expect international sales of our gaming printers related
to the rollout of ticket printing to be lower in the fourth quarter of 2005 as
compared to the third quarter of 2005, as we do not expect these sales in the
fourth quarter of 2005 to rise to the same level as sales into Europe in the
third quarter 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 $243,000, or 9%.
<Table>
<Caption>
Three months ended Three months ended Change
(In thousands) September 30, 2005 September 30, 2004 $ %
------------------ ------------------ ------------------
Domestic $ 2,097 74.0% $ 2,046 79.0% $ 51 2.5%
International 736 26.0% 544 21.0% 192 35.3%
------------------ ----------------- -------
$ 2,833 100.0% $ 2,590 100.0% $ 243 9.4%
================== ================= =======
</Table>
Domestic TSG revenue increased by approximately $51,000 or 3%, to $2,097,000
largely due to higher sales of maintenance and repair services and refurbished
printer sales. Internationally, sales increased by approximately $192,000 to
$736,000 due largely to an increase in services revenue. We expect sales from
TSG to continue to grow during the fourth quarter 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 $1,321,000 to $4,576,000, or 22%, and gross
margin decreased to 32.2% from 38.1%, due primarily to lower volume of sales in
the third quarter of 2005 compared to the third quarter of 2004 and higher
component product cost due to the transition from our Model 850 thermal ticket
casino printer to our Epic 950(TM) thermal ticket casino printer. We expect
margins on the Epic 950(TM) printer to improve in the fourth quarter of 2005 as
we complete the planned transition for the sourcing of components from domestic
to overseas vendors. Despite lower than expected sales volume, we expect gross
margin for the fourth quarter of 2005 to be consistent with the gross margin
reported for the third quarter of 2005.
14
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
decreased slightly by $6,000, or 1%, to $637,000, from the third quarter of
2004. Engineering and product development expenses increased as a percentage of
net sales to 4.5% from 4.2%, due primarily to the lower sales in the third
quarter of 2005 compared to the third quarter of 2004. We expect engineering and
product development expenses for the fourth quarter of 2005 to be slightly
higher than those reported in the third quarter of 2005 as we continue our
product development to significantly expand our product offerings in both the
POS and banking, 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 increased by $373,000, or 30%, to
$1,627,000, 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 Company's increased presence at this year's Global
Gaming Exposition (G2E) trade show in Las Vegas, NV, and (3) the hiring of a
Senior Vice President of Marketing during the second quarter of 2005. Selling
and marketing expenses increased as a percentage of net sales to 11.5% from
8.1%, due primarily to the increased expenses noted above in addition to lower
sales volume in the third quarter of 2005 compared to the third quarter of 2004.
We expect selling and marketing expenses to be slightly higher in the fourth
quarter of 2005 compared to the third quarter of 2005, due to the addition of
new sales staff at the end of the third 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 by $96,000, or 6%, to $1,624,000,
due largely to increased recruiting and compensation related expenses associated
with the re-location of the accounting department from Ithaca, NY to
Wallingford, CT, and increased software maintenance and temporary help expenses
associated with the Company's Oracle implementation. These increases were offset
by a decrease of approximately $95,000 related to a one-time listing fee
incurred in the third quarter of 2004 resulting from the Company's move back
onto the NASDAQ National Market from the NASDAQ SmallCap Market. General and
administrative expenses increased as a percentage of net sales to 11.4% from
9.9% due primarily to the increased expenses noted above in proportion to lower
volume of sales in the third quarter of 2005 compared to the third quarter of
2004. We expect general and administrative expenses in the fourth quarter of
2005 to be consistent with those reported in the third quarter of 2005.
OPERATING INCOME. During the third quarter of 2005, we reported operating income
of $688,000, or 4.8% of net sales, compared to $2,472,000, or 16.0% of net sales
in the third quarter of 2004. The substantial decrease in our operating income
and operating margin was due largely to lower sales and gross margin and
increased selling and marketing expenses in the third quarter of 2005 compared
to that of 2004.
INTEREST. We recorded net interest income of $19,000 and $4,000 in the third
quarter of 2005 and 2004, respectively, due to higher average cash balances and
slightly higher interest rates during the third quarter of 2005 as compared to
the third quarter of 2004. We do not expect to draw on our revolving borrowings
and we expect to continue to report net interest income for the remainder of
2005. See "Liquidity and Capital Resources" below for more information.
INCOME TAXES. We recorded an income tax provision of $40,000 and $855,000 in the
third quarter of 2005 and 2004, respectively, at an effective rate of 5.6% and
34.5%, respectively. The planned lower effective tax rate for the third quarter
of 2005 resulted primarily from the recognition of approximately $138,000 of
certain discrete tax benefits during the third quarter of 2005 as compared to
the same quarter of 2004. We expect that we will likely continue to recognize
certain discrete tax benefits in the third quarter of future fiscal years, and
therefore expect that our future effective tax rate in the third quarter of each
year will likely be lower than our overall annual effective tax rate in effect
during that year. However, the effect and timing of recognition of such discrete
benefits in any given year may vary based on factors including, but not limited
to, the Company's level of pretax income, outcome of state or federal tax
audits, filing dates of tax returns, and changes in tax laws or regulations. Our
effective tax rate for the third quarter of 2005 was also impacted, to a lesser
extent, by a downward revision of our estimated effective tax rate for the year
based on the Company's anticipated taxable income.
15
NET INCOME. We reported net income during the third quarter of 2005 of $674,000,
or $0.07 per diluted share, compared to net income of $1,625,000, or $0.15 per
diluted share, for the third quarter of 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2004
NET SALES. Net sales by business unit for the current and prior year's nine
month period were as follows:
<Table>
<Caption>
Nine months ended Nine months ended Change
(In thousands) September 30, 2005 September 30, 2004 $ %
------------------ ------------------ ------------------
Point of sale and banking $12,653 32.8% $13,597 30.0% $ (944) (6.9%)
Gaming and lottery 17,331 44.9% 24,106 53.3% (6,775) (28.1%)
TransAct Services Group 8,608 22.3% 7,548 16.7% 1,060 14.0%
------------------ ----------------- -------
$38,592 100.0% $45,251 100.0% $(6,659) (14.7%)
================== ================= =======
International * $ 9,244 24.0% $ 4,249 9.4% $ 4,995 117.6%
================== ================= =======
</Table>
*International sales do not include sales of printers made to domestic
distributors or other customers who in turn ship those printers to international
destinations.
Net sales for the first nine months of 2005 decreased $6,659,000, or 15%, from
the prior year's first nine months due to significantly lower printer shipments
into our gaming and lottery market (approximately $6,775,000 or 28%) and lower
shipments into our POS and banking market (approximately 944,000 or 7%). Sales
from our TransAct Services Group increased by $1,060,000, or 14%, as our
installed base of printers grows and as we continue to aggressively pursue these
sales. Overall, international sales more than doubled to $9,244,000, 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
$944,000, or 7%.
<Table>
<Caption>
Nine months ended Nine months ended Change
(In thousands) September 30, 2005 September 30, 2004 $ %
------------------ ------------------ ------------------
Domestic $11,054 87.4% $12,393 91.1% $(1,339) (10.8%)
International 1,599 12.6% 1,204 8.9% 395 32.8%
------------------ ----------------- -------
$12,653 100.0% $13,597 100.0% $ (944) (6.9%)
================== ================= =======
Domestic POS and banking printer sales decreased to $11,054,000, representing a
$1,339,000, or 11%, decrease from the first nine months of 2004, due largely to
significantly more shipments of our Bankjet(R) line of inkjet printers occurring
in the first nine months of 2004 as compared to the first nine months of 2005.
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 first nine months of 2005
compared to the first nine months of 2004.
International POS and banking printer shipments increased by approximately
$395,000, or 33%, to $1,599,000, due primarily to higher sales through our
network of international POS distributors located in Europe and Latin America,
somewhat offset by lower sales to distributors in the Pacific Rim.
16
GAMING AND LOTTERY:
Sales of our gaming and lottery printers decreased by $6,775,000, or 28%, from
the first nine months of 2004, primarily due to a decrease in sales of our slot
machine printers in North America, and to a lesser extent, a decrease in lottery
printer sales to GTECH. These decreases were partially offset by higher
international sales of our slot machine and other gaming printers in Europe and
Australia.
<Table>
<Caption>
Nine months ended Nine months ended Change
(In thousands) September 30, 2005 September 30, 2004 $ %
------------------ ------------------ -------------------
Domestic $11,695 67.5% $22,733 94.3% $(11,038) (48.6%)
International 5,636 32.5% 1,373 5.7% 4,263 310.5%
------------------ ----------------- --------
$17,331 100.0% $24,106 100.0% $ (6,775) (28.1%)
================== ================= ========
</Table>
Domestic sales of our gaming and lottery printers declined by $11,038,000, or
49%, to $11,695,000. Due to the continued decline in slot machine sales into the
domestic casino market, including the effects of Hurricane Katrina, and the loss
of revenue from a large slot machine manufacturer as it works through an
inventory issue, we experienced lower sales of our TITO casino printers
throughout North America during the first nine months of 2005.
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 $1,968,000, or 35%, in the first nine months of 2005
compared to the first nine months of 2004. This was due largely to shipments of
legacy impact printers to GTECH in the first nine months 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.
International gaming and lottery printer sales increased $4,263,000, or 311%, to
$5,636,000 in the first nine months of 2005 compared to the first nine months of
2004. Such sales represented 33% and 6% of total sales into our gaming and
lottery market during the first nine months of 2005 and 2004, respectively. We
continued to experience growth in international gaming printer sales as markets
in Europe and Australia begin to adopt ticket printing in slot machines and
other gaming and amusement machines.
TRANSACT SERVICES GROUP ("TSG"):
Sales from TSG increased by approximately $1,060,000, or 14%.
<Table>
<Caption>
Nine months ended Nine months ended Change
(In thousands) September 30, 2005 September 30, 2004 $ %
------------------ ------------------ ------------------
Domestic $ 6,599 76.7% $ 5,876 77.8% $ 723 12.3%
International 2,009 23.3% 1,672 22.2% 337 20.2%
------------------ ----------------- -------
$ 8,608 100.0% $ 7,548 100.0% $ 1,060 14.0%
================== ================= =======
</Table>
Domestic TSG revenue increased by approximately $723,000, or 12%, to $6,599,000,
largely due to higher sales of spare parts, and to a lesser extent, higher
revenue from maintenance and repair services. International TSG sales increased
by approximately $337,000, or 20%, to $2,009,000, due largely to an increase in
services revenue.
GROSS PROFIT. Gross profit decreased $4,425,000, or 26%, to $12,507,000 and
gross margin decreased to 32.4% from 37.4%, due primarily to lower volume of
sales and a less favorable sales mix, in the first nine months of 2005 compared
to the first nine months of 2004.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $302,000, or 17%, to $2,107,000, as we incurred expenses
related to (1) increased engineering staffing, and (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").
Engineering and product development expenses increased as a percentage of net
sales to 5.4% from 4.0%, due primarily to these increased costs in proportion to
lower sales in the first nine months of 2005 compared to the first nine months
of 2004.
SELLING AND MARKETING. Selling and marketing expenses increased by $689,000, or
18%, to $4,523,000, 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
17
to the launch of our new line of printers exclusively for POS distributors and
the Company's increased presence at this year's Global Gaming Exposition (G2E)
trade show in Las Vegas, NV, and (3) the recruitment and hiring of a Senior Vice
President of Marketing during the second quarter of 2005. Selling and marketing
expenses increased as a percentage of net sales to 11.7% from 8.5%, due
primarily to these increased expenses in proportion to lower sales volume in the
first nine months of 2005 compared to the first nine months of 2004.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$155,000, or 4%, to $4,578,000, due primarily to increased recruiting and
compensation related expenses associated with the re-location of the accounting
department from Ithaca, NY to Wallingford, CT, higher professional expenses,
including legal fees related to our lawsuit filed against FutureLogic, Inc., and
increased software maintenance and temporary help expenses associated with the
Company's Oracle implementation. General and administrative expenses increased
as a percentage of net sales to 11.9% from 9.8% due primarily to these increased
expenses in proportion to lower sales volume in the first nine months of 2005
compared to the first nine months of 2004.
OPERATING INCOME. During the first nine months of 2005, we reported operating
income of $1,299,000, or 3.4% of net sales, compared to $6,870,000, or 15.2% of
net sales in the first nine months of 2004. The substantial decrease in our
operating income and operating margin was due largely to lower sales and an
increase in operating expenses in the first nine months of 2005 compared to that
of 2004.
INTEREST. We recorded net interest income of $59,000 in the first nine months of
2005 compared to net interest expense of $8,000 in the first nine months 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 for the remainder of 2005. See
"Liquidity and Capital Resources" below for more information.
INCOME TAXES. We recorded an income tax provision of $276,000 and $2,433,000 in
the first nine months of 2005 and 2004, respectively, at an effective rate of
20.0% and 35.4%, respectively. The planned lower effective tax rate for the
first nine months of 2005 resulted primarily from the recognition of
approximately $138,000 of certain discrete tax benefits during the third quarter
of 2005 as compared to the same quarter of 2004. Our effective tax rate for the
nine months of 2005 was also impacted, to a lesser extent, by a downward
revision of our estimated effective tax rate for the year based on the Company's
anticipated taxable income.
NET INCOME. We reported net income during the first nine months of 2005 of
$1,104,000, or $0.11 per diluted share, compared to net income of $4,432,000, or
$0.41 per diluted share, for the first nine months of 2004.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first nine months of 2005, our cash flows were impacted by
lower sales volume and net income, the repurchase of outstanding common stock
(approximately $3.1 million), the purchase of certain intangible assets from
Bally Gaming, Inc. ("Bally") (approximately $0.5 million), and increased
investment in new systems, product tooling and our new service center in Las
Vegas, NV (approximately $2.0 million). We ended the quarter with $4,498,000 in
cash and cash equivalents. We expect to earn interest income on our available
cash balance for the remainder of 2005.
Operating activities: The following significant factors affected our cash
provided by operations of $1,294,000 in the first nine months of 2005:
o We reported net income of $1,104,000
o We recorded depreciation, amortization and non-cash
compensation expense of $1,491,000
o Accounts receivable increased by $456,000 due to timing of
sales during the quarter
o Inventories decreased by $477,000 due to lower inventory
purchases related to lower sales volume and continued improved
inventory management
o Accounts payable decreased by $245,000 due to lower inventory
purchases related to lower sales volume
o Accrued liabilities and other liabilities decreased by
$830,000 due to following (1) lower compensation related
accruals, (2) lower deferred revenue balances based on the
completion of a significant prepaid service contract in 2004
and (3) lower royalty accruals associated with the purchase of
intangible assets from Bally's
18
The following payments also affected our cash from operations during the first
nine months of 2005:
Accrued Restructuring Payments: As of September 30, 2005 and December 31, 2004,
our restructuring accrual amounted to $1,121,000 and $1,454,000, respectively.
The decrease of $333,000 is related solely to payments made on our Wallingford
lease obligation. We continue to actively seek to sublease our Wallingford
facility, and to consider opportunities to modify or exit our existing lease.
However, there can be no assurance that we will be successful in these
endeavors. Absent our ability to sublease or modify our existing Wallingford
facility lease, we expect to pay approximately $420,000 of these expenses per
year from 2005 through 2007, and the remaining $176,000 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 $2,042,000 and
$850,000 in the first nine months of 2005 and 2004, respectively. Expenditures
in 2005 included approximately $760,000 for the purchase of hardware, software
and outside consulting costs related to our implementation of a new Oracle ERP
system, approximately $150,000 for office renovations to our new gaming and
lottery headquarters and western region service center in Las Vegas, NV, and the
remaining amount primarily for the purchase of new product tooling. We expect
capital expenditures for the full year 2005 to be approximately $2,500,000.
During 2005, we are investing 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, plus the costs
of effecting the acquisition (approximately $35,000). 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 were no longer
required to pay any future royalties to Bally. The elimination of future royalty
payments to Bally resulted in a cost savings to the Company beginning in the
third quarter of 2005.
Financing activities: We used approximately $2,806,000 in financing activities
during the first nine months of 2005, largely due to the repurchase of Company
stock (approximately $3,135,000), partly offset by proceeds from stock option
exercises and employee stock purchase plan transactions (approximately
$332,000).
WORKING CAPITAL
Our working capital decreased to $17,415,000 at September 30, 2005 from
$20,325,000 at December 31, 2004. The current ratio remained at 3.3 to 1 at
September 30, 2005 compared to 3.3 to 1 at December 31, 2004. The decrease in
our working capital is due largely to the lower cash balance at September 30,
2005 as compared to December 31, 2004.
DEFERRED TAXES
As of September 30, 2005, we had a net deferred tax asset of approximately
$2,805,000. 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 equipment loan facility expired on July
31, 2005 and was not renewed. The amendment also revised certain other terms of
the revolving credit facility.
19
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 September 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 $11,500,000 at September 30, 2005. However,
our maximum additional available borrowings under the facility were limited to
approximately $7,900,000 at September 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 September 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. For the
three months ended September 30, 2004, the Company had repurchased a total of
286,900 shares of common stock for approximately $2,151,000. As of September 30,
2005, the Company had repurchased a total of 408,900 shares of common stock for
approximately $3,135,000, at an average price of $7.67 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 decreased by $1,147,000 to $22,568,000 at September 30,
2005 from $23,715,000 at December 31, 2004. The decrease was primarily due to
treasury stock purchases of 408,900 shares of common stock for approximately
$3,135,000, offset by (1) net income of $1,104,000 (2) proceeds of approximately
$332,000 from the issuance of approximately 70,000 shares of common stock from
stock option and stock purchase plan exercises, (3) an increase in additional
paid-in capital of approximately $295,000 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 $326,000.
CONTRACTUAL OBLIGATIONS
We have experienced no material changes in our contractual obligations outside
the ordinary course of business during the three or nine months ended September
30, 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, to finance our capital
expenditures, to fund our Stock Repurchase Program, and meet our liquidity
requirements through at least the next 12 months.
20
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.
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a controls system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance
with policies or procedures.
21
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 management is currently unable to calculate any
potential or probable liability associated with this action at this time.
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. For the
three months ended September 30, 2005, the Company had repurchased a total of
286,900 shares of common stock for approximately $2,151,000. As of September 30,
2005, the Company had repurchased a total of 408,900 shares of common stock for
approximately $3,135,000 at an average price of $7.67 per share.
The following table summarizes repurchases of our common stock in the three and
nine months ended September 30, 2005.
<Table>
<Caption>
Three Months Nine Months
Ended Ended
(In thousands,except shares September 30, September 30,
and per share data) 2005 2005
------------- -------------
Total number of shares
repurchased 286,900 408,900
============= =============
Total cost of shares
repurchased $ 2,151 $ 3,135
============= =============
Average price paid per share $ 7.50 $ 7.67
============= =============
</Table>
22
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
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
----------------------------------
(Registrant)
November 9, 2005
/s/ Steven A. DeMartino
-----------------------------------------------
Steven A. DeMartino
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
24
EXHIBIT LIST
The following exhibits are filed herewith.
<Table>
<Caption>
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
</Table>
25