UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2006
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
incorporation or organization) Identification No.)
7 LASER LANE, WALLINGFORD, CT 06492
(Address of principal executive offices)
(Zip Code)
(203) 859-6800
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 AS OF APRIL 26, 2006
----- --------------------------------
COMMON STOCK,
$.01 PAR VALUE 9,714,068
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
Page No.
--------
PART I. Financial Information:
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of March
31, 2006 and December 31, 2005 3
Condensed consolidated statements of income for
the three months ended March 31, 2006 and 2005 4
Condensed consolidated statements of cash flow
for the three months ended March 31, 2006 and 2005 5
Notes to condensed consolidated financial statements 6 - 15
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 22
Item 4 Controls and Procedures 22 - 23
PART II. Other Information:
Item 1 Legal Proceedings 23
Item 1a Risk Factors 24
Item 2c Stock Repurchase 24
Item 6 Exhibits 25
Signatures 26
Certifications 28 - 31
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, December 31,
2006 2005
--------- ------------
(In thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 5,289 $ 4,579
Receivables, net 10,082 8,359
Inventories 7,225 6,036
Refundable income taxes 150 295
Deferred tax assets 2,735 2,735
Other current assets 478 258
------- -------
Total current assets 25,959 22,262
------- -------
Fixed assets, net 5,144 4,510
Goodwill 1,469 1,469
Deferred tax assets 565 557
Intangible and other assets, net of accumulated
amortization of $61 and $41, respectively 504 534
------- -------
7,682 7,070
------- -------
Total assets $33,641 $29,332
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,531 $ 2,859
Accrued liabilities 4,094 3,198
Accrued restructuring expenses 420 420
Deferred revenue 455 410
------- -------
Total current liabilities 10,500 6,887
------- -------
Accrued restructuring expenses, net of current portion 480 587
Deferred revenue, net of current portion 331 270
Other liabilities 338 331
------- -------
1,149 1,188
------- -------
Total liabilities 11,649 8,075
------- -------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock 103 102
Additional paid-in capital 17,864 19,334
Retained earnings 8,546 7,489
Unamortized restricted stock compensation -- (1,837)
Accumulated other comprehensive income 44 36
Treasury stock, 579,800 and 505,000 shares at cost (4,565) (3,867)
------- -------
Total shareholders' equity 21,992 21,257
------- -------
Total liabilities and shareholders' equity $33,641 $29,332
======= =======
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- -------
(In thousands, except per share data)
Net sales $16,434 $12,036
Cost of sales 10,747 8,359
------- -------
Gross profit 5,687 3,677
------- -------
Operating expenses:
Engineering, design and product development 761 731
Selling and marketing 1,580 1,349
General and administrative 1,710 1,364
------- -------
4,051 3,444
------- -------
Operating income 1,636 233
------- -------
Other income (expense):
Interest, net 14 20
Other, net (11) (1)
------- -------
3 19
------- -------
Income before income taxes 1,639 252
Income tax provision 582 89
------- -------
Net income $ 1,057 $ 163
======= =======
Net income per common share:
Basic $ 0.11 $ 0.02
Diluted $ 0.11 $ 0.02
Shares used in per-share calculation
Basic 9,558 10,010
Diluted 9,868 10,452
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-----------------
2006 2005
------- -------
(In thousands)
Cash flows from operating activities:
Net income $ 1,057 $ 163
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Share-based compensation expense 155 69
Incremental tax benefits from stock options exercised (35) --
Depreciation and amortization 368 408
Changes in operating assets and liabilities:
Receivables (1,723) (235)
Inventories (1,189) 36
Refundable income taxes 145 --
Other current assets (220) 32
Other assets 1 --
Accounts payable 2,672 (805)
Accrued liabilities and other liabilities 1,044 18
Accrued restructuring expenses (107) (109)
------- -------
Net cash provided by (used in) operating activities 2,168 $ (423)
------- -------
Cash flows from investing activities:
Purchases of fixed assets (973) (887)
------- -------
Net cash used in investing activities (973) (887)
------- -------
Cash flows from financing activities:
Proceeds from option exercises 170 281
Purchases of common stock for treasury (698) --
Incremental tax benefits from stock options exercised 35 --
------- -------
Net cash provided by (used in) financing activities (493) 281
------- -------
Effect of exchange rate changes 8 (3)
------- -------
Increase (decrease) in cash and cash equivalents 710 (1,032)
Cash and cash equivalents at beginning of period 4,579 8,628
------- -------
Cash and cash equivalents at end of period $ 5,289 $ 7,596
======= =======
Non-cash financing activities:
Conversion of preferred stock to common stock $ -- $ (3)
Issuance of restricted stock, net of cancellations -- 960
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, market-specific printers for
transaction-based industries. These industries include gaming, lottery,
banking and hospitality. Each individual market has distinct, critical
requirements for printing and the transaction isn't complete until the
receipt and/or ticket is produced. TransAct printers are designed from the
ground up based on market specific requirements and are sold under the
Ithaca(R) and Epic product brands. TransAct distributes its products
through OEMs, value-added resellers, selected distributors, and direct to
end-users. Our product distribution spans across the Americas, Europe, the
Middle East, Africa, the Caribbean Islands and the South Pacific. TransAct
also focuses on the after-market side of the business, providing printer
service, supplies and spare parts.
2. BASIS OF PRESENTATION
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, 2005. 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 March 31,
2006, the results of our operations for the three months ended March 31,
2006 and 2005, and our cash flows for the three months ended March 31, 2006
and 2005. The December 31, 2005 condensed consolidated balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the
United States of America. These interim financial statements should be read
in conjunction with the audited financial statements for the year ended
December 31, 2005 included in our Annual Report on Form 10-K.
The financial position and results of operations of our foreign subsidiary
are measured using local currency as the functional currency. Assets and
liabilities of such subsidiary have been translated at end of period
exchange rates, and related revenues and expenses have been translated at
weighted average exchange rates with the resulting translation gain or loss
recorded in accumulated other comprehensive income. Transaction gains and
losses are included in other income.
The results of operations for the three months ended March 31, 2006 are not
necessarily indicative of the results to be expected for the full year.
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SHARE-BASED PAYMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") revised
Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" ("FAS 123R"), which establishes accounting for
share-based awards exchanged for employee services and requires companies
to expense the estimated fair value of these awards over the requisite
employee service period. On April 14, 2005, the U.S. Securities and
Exchange Commission adopted a new rule amending the effective dates for FAS
123R. In accordance with the new rule, we adopted the accounting provisions
of FAS 123R beginning in the first quarter of 2006. Prior to January 1,
2006, we accounted for share-based compensation to employees in accordance
with Accounting Principles Board Opinion No. 25, ("APB 25") "Accounting for
Stock Issued to Employees," and related interpretations. We also followed
the disclosure requirements of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended
by Statement of Financial Accounting Standards 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("FAS 148").
Under FAS 123R, share-based compensation expense is measured at the grant
date, based on the estimated fair value of the award, and is recognized as
expense over the employee's requisite service period. We have no awards
with market or performance conditions. We adopted the provisions of FAS
123R on January 1, 2006, using a modified prospective application ("MPA"),
which provides for certain changes to the method for valuing share-based
compensation. Under the MPA, prior periods are not revised for comparative
purposes. The valuation provisions of FAS 123R apply to new awards and to
awards that are outstanding on the effective date and subsequently modified
or cancelled.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3,
"Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards." We have elected to adopt the alternative transition method
provided in this FASB Staff Position for calculating the tax effects of
share-based compensation pursuant to FAS 123R. The alternative transition
method includes a simplified method to establish the beginning balance of
the additional paid-in capital pool ("APIC pool") related to the tax
effects of employee share-based compensation, which is available to absorb
tax deficiencies recognized subsequent to the adoption of FAS 123R.
We use the Black-Scholes option-pricing model to calculate the fair value
of share based awards. The key assumptions for this valuation method
include the expected term of the option, stock price volatility, risk-free
interest rate, dividend yield and exercise price. Many of these assumptions
are judgmental and highly sensitive in the determination of compensation
expense. In addition, we estimate forfeitures when recognizing compensation
expense, and we will adjust our estimate of forfeitures over the requisite
service period based on the extent to which actual forfeitures differ, or
are expected to differ, from such estimates. Changes in estimated
forfeitures will be recognized through a cumulative true-up adjustment in
the period of change and will also impact the amount of compensation
expense to be recognized in future periods.
Under the assumptions indicated below, the weighted-average fair value of
stock option grants for the three months ended March 31, 2006 was $5.91.
The table below indicates the key assumptions used in the option valuation
calculations for options granted in the three months ended March 31, 2006
and a discussion of our methodology for developing each of the assumptions
used in the valuation model:
Three Months Ended
March 31, 2006
------------------
Expected option term 5.2 years
Expected volatility 78.4%
Risk-free interest rate 4.5%
Dividend yield 0%
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SHARE-BASED PAYMENTS (CONTINUED)
No assumptions have been disclosed for the three months ended March 31,
2005, as no stock option grants were made.
Expected Option Term - This is the weighted average period of time over
which the options granted are expected to remain outstanding giving
consideration to our historical exercise patterns. Options granted have a
maximum term of ten years. An increase in the expected term will increase
compensation expense.
Expected Volatility - The stock volatility for each grant is measured using
the weighted average of historical daily price changes of our common stock
over the most recent period equal to the expected option term of the grant.
An increase in the expected volatility factor will increase compensation
expense.
Risk-Free Interest Rate - This is the U.S. Treasury rate in effect at the
time of grant having a term approximately equal to the expected term of the
option. An increase in the risk-free interest rate will increase
compensation expense.
Dividend Yield - We have not made any dividend payments on common stock,
and we have no plans to pay dividends in the foreseeable future. An
increase in the dividend yield will decrease compensation expense.
Prior to adopting the provisions of FAS 123R, we recorded estimated
compensation expense for employee stock options based upon their intrinsic
value on the date of grant pursuant to APB 25 and provided the required pro
forma disclosures of FAS 123. Because we established the exercise price
based on the fair market value of our common stock at the date of grant,
the stock options had no intrinsic value upon grant, and therefore no
estimated expense was recorded prior to adopting FAS 123R. We recorded
compensation expense for restricted stock at the fair value of the stock at
the date of grant, recognized over the service period. Each accounting
period, we reported the potential dilutive impact of stock options in our
diluted earnings per common share using the treasury-stock method.
Out-of-the-money stock options (i.e., the average stock price during the
period was below the strike price of the stock option) were not included in
diluted earnings per common share as their effect was anti-dilutive.
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SHARE-BASED PAYMENTS (CONTINUED)
For purposes of pro forma disclosures under FAS 123 for the three months
ended March 31, 2005, the estimated fair value of the share-based awards
was assumed to be amortized to expense over the stock option's vesting
periods. The pro forma effects of recognizing estimated compensation
expense under the fair value method on net income and net income per common
share were as follows:
Three months ended
March 31,
2005
------------------
(In thousands, except per share data)
Net income (loss) available to common
shareholders:
Net income available to common
shareholders, as reported $ 163
Add: Stock-based compensation expense included
in reported net income, net of tax 44
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (579)
------
Pro forma net loss available to common
shareholders $ (372)
======
Net income (loss) per common share:
Basic:
As reported $ 0.02
Pro forma $(0.04)
Diluted:
As reported $ 0.02
Pro forma $(0.04)
The pro forma effects of estimated share-based compensation expense on net
income and earnings per common share for the three months ended March 31,
2005 were estimated at the date of grant using the Black-Scholes
option-pricing model.
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 our
applicable stock incentive plans. As a result of the acceleration, options
to acquire approximately 109,500 shares of our common stock, which
otherwise would have vested from time to time over the next four years,
became immediately exercisable. All other terms and conditions applicable
to the outstanding stock option grants remain in effect. The option plans
under which accelerated grants were issued are our 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 our required adoption of FAS 123R
effective January 1, 2006. Due to the acceleration of vesting of unvested
options prior to the adoption of FAS123R, we will only record compensation
expense related to stock options granted in 2006 and beyond. We recorded
approximately $26,000 of compensation expense in the fourth quarter of 2005
related to the acceleration of vesting.
9
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SHARE-BASED PAYMENTS (CONTINUED)
Upon adoption of FAS 123R, we recognized compensation expense associated
with awards granted after January 1, 2006, and the unvested portion of
previously granted awards that remain outstanding as of January 1, 2006, in
our condensed consolidated statement of income for the first quarter of
2006. During the quarter ended March 31, 2006, we recognized compensation
expense of $21,000 for stock options and $134,000 for restricted stock,
which was recorded in our condensed consolidated statement of income. The
income tax benefits from share-based payments recorded in the income
statement totaled $57,000 for the three months ended March 31, 2006. No
expense related to stock options was recorded in the three months ended
March 31, 2005. The following table illustrates the impact of the adoption
of FAS 123R on reported amounts:
Three months ended
March 31, 2006
-----------------------
Impact of
FAS 123R
As Reported Adoption
----------- ---------
Operating income $1,636 $ 21
Income before income taxes $1,639 $ 21
Net income $1,057 $ 14
Earnings per share:
Basic $ 0.11 $0.00
Diluted $ 0.11 $0.00
For the three months ended March 31, 2006, the adoption of FAS 123R
resulted in tax benefits from stock options exercised in the period being
classified as financing activities in the 2006 statement of cash flows.
Shares that are issued upon exercise of employee stock options are newly
issued shares and not issued from treasury stock. Upon the adoption of FAS
123R, we also reclassified the unamortized restricted stock compensation
account of $1,837,000 against additional paid-in capital. These adjustments
are applied using MPA and, accordingly, have not been reflected in the 2005
financial statements.
STOCK INCENTIVE PLANS. We currently have four primary stock incentive
plans: the 1996 Stock Plan, which provides for the grant of awards to
officers and other key employees of the Company; the 1996 Directors' Stock
Plan, which provides for non-discretionary awards to non-employee
directors; the 2001 Employee Stock Plan, which provides for the grant of
awards to key employees of the Company and other non-employees who may
provide services to the Company; and the 2005 Equity Incentive Plan, which
provides for awards to executives, key employees, directors and
consultants. The plans generally provide for awards in the form of: (i)
incentive stock options, (ii) non-qualified stock options, (iii) restricted
stock, (iv) restricted stock units, (v) stock appreciation rights or (vi)
limited stock appreciation rights. However, the 2001 Employee Stock Plan
does not provide for incentive stock option awards. Options granted under
these plans are at prices equal to 100% of the fair market value of the
common stock at the date of grant. Options granted have a ten-year term and
generally vest over a three- to five-year period, unless automatically
accelerated for certain defined events. Effective upon the approval of the
2005 Equity Incentive Plan on May 25, 2005, no new awards will be made
under the 1996 Stock Plan, the 1996 Directors' Stock Plan or the 2001
Employee Stock Plan. At March 31, 2006, approximately 467,000 shares of
common stock remained available for issuance under the 2005 Equity
Incentive Plan.
10
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SHARE-BASED PAYMENTS (CONTINUED)
The 1996 Stock Plan, 1996 Directors' Stock Plan, 2001 Employee Stock Plan
and 2005 Equity Incentive Plan option activity is summarized below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Life Intrinsic Value
Options Price (in years) (in thousands)
------- -------- ---------------- ---------------
Options outstanding at December 31, 2005: 741,501 $ 6.10
Granted 115,000 $ 8.83
Exercised (31,198) $ 5.45
Canceled (3,000) $16.62
-------
Options outstanding at March 31, 2006 822,303 $ 6.47 5.89 $3,356
=======
Options exercisable at March 31, 2006 707,303 $ 6.09 5.24 $3,267
=======
Options Outstanding
------------------------------------------------------ Options Exercisable
Weighted-Average ---------------------------------
Outstanding at Remaining Exercisable at
March 31, Weighted-Average Contractual Life March 31, Weighted-Average
Range of Exercise Prices 2006 Exercise Price (in years) 2006 Exercise Price
------------------------ -------------- ---------------- ------------------ -------------- ----------------
$ 2.00 - $ 5.00 458,366 $ 3.67 5.78 458,366 $ 3.67
5.01 - 7.50 185,437 $ 6.22 3.44 185,437 $ 6.22
7.51 - 10.00 129,250 $ 8.75 8.95 14,250 $ 8.12
10.01 - 25.00 13,500 $16.50 7.82 13,500 $16.50
25.01 - 35.00 35,750 $31.66 8.16 35,750 $31.66
------- -------
822,303 $ 6.47 5.89 707,303 $ 6.09
======= =======
As of March 31, 2006, unrecognized compensation cost related to stock
options totaled $659,000, which is expected to be recognized over a
weighted average period of 4.8 years.
The total intrinsic value of stock options exercised was $117,000, during
the three months ended March 31, 2006. No stock options vested during the
three months ended March 31, 2006.
Cash received from stock option exercises for the three months ended March
31, 2006 was $170,000.
11
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SHARE-BASED PAYMENTS (CONTINUED)
RESTRICTED STOCK: Under the 1996 Stock Plan, 2001 Employee Stock Plan and
2005 Equity Incentive Plan, we have granted shares of restricted common
stock, for no consideration, to our officers, directors and certain key
employees. Restricted stock activity for the 1996 Stock Plan, 2001 Employee
Stock Plan and 2005 Equity Incentive Plan is summarized below:
Weighted Average
Grant Date Fair
Restricted Stock Value
---------------- -----------------
Nonvested shares at December 31, 2005 187,550 $12.23
Granted -- --
Vested (33,084) 12.66
Canceled -- --
-------
Nonvested shares at March 31, 2006 154,466 $12.14
=======
As of March 31, 2006, unrecognized compensation cost related to restricted
stock totaled $1,703,000, which is expected to be recognized over a
weighted average period of 3.6 years. The total fair value of restricted
stock that vested during the three months ended March 31, 2006 was
$290,000.
4. INVENTORIES
The components of inventories are:
March 31, December 31,
2006 2005
--------- ------------
(In thousands)
Raw materials and purchased component parts $6,804 $5,788
Finished goods 421 248
------ ------
$7,225 $6,036
====== ======
5. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the accrued product
warranty liability during the three months ended March 31, 2006 and 2005.
Three months ended
March 31,
------------------
2006 2005
----- -----
(In thousands)
Balance, beginning of period $ 644 $ 597
Additions related to warranties issued 68 198
Warranty costs incurred (112) (151)
----- -----
Balance, end of period $ 600 $ 644
===== =====
The current portion of the accrued product warranty liability is included
in accrued liabilities in the accompanying balance sheet.
12
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. 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 to close our
Wallingford, CT manufacturing facility (the "Consolidation"). As of
December 31, 2001, substantially all Wallingford product lines were
successfully transferred to Ithaca, NY. We continue to apply the consensus
set forth in EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)" in recognizing the accrued
restructuring expenses relating to the Consolidation. The remaining accrued
restructuring balance relates to lease and other occupancy costs related to
unused space at our Wallingford facility through March 31, 2008.
The following table summarizes the activity recorded in accrued
restructuring expenses during the three months ended March 31, 2006 and
2005.
Three Months Ended
March 31,
------------------
2006 2005
------ ------
(In thousands)
Accrual balance, beginning of period $1,007 $1,454
Cash payments (107) (109)
------ ------
Accrual balance, end of period $ 900 $1,345
====== ======
7. EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share."
The following table sets forth the reconciliation of basic weighted average
shares outstanding and diluted weighted average shares outstanding:
Three Months Ended
March 31,
------------------
2006 2005
------ -------
Net income $1,057 $ 163
====== =======
Shares:
Basic: Weighted average common shares
outstanding 9,558 10,010
Add: Dilutive effect of outstanding options
and restricted stock as determined by
the treasury stock method 310 442
------ -------
Diluted: Weighted average common and common
equivalent shares outstanding 9,868 10,452
====== =======
Net income per common share:
Basic $ 0.11 $ 0.02
Diluted $ 0.11 $ 0.02
13
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. EARNINGS PER SHARE (CONTINUED)
Unvested restricted stock is excluded from the calculation of weighted
average common shares for basic EPS. For diluted EPS, weighted average
common shares include the impact of restricted stock under the treasury
method.
For the three months ended March 31, 2006 and 2005, potentially dilutive
shares that were excluded from the net income per share calculation,
consisting of out-of-the-money stock options and warrants, amounted to
109,750 and 44,250 shares, respectively.
8. COMPREHENSIVE INCOME
The following table summarizes the Company's comprehensive income:
Three Months Ended
March 31,
------------------
2006 2005
------ -----
(In thousands)
Net income $1,057 $163
Foreign currency translation adjustment 8 (3)
------ ----
Total comprehensive income $1,065 $160
====== ====
9. STOCKHOLDER'S EQUITY
Changes in stockholders' equity for the three months ended March 31, 2006
were as follows (in thousands):
Balance at December 31, 2005 $21,257
Net income 1,057
Issuance of shares from exercise of stock options 170
Purchases of treasury stock (698)
Share-based compensation 155
Tax benefits from employee stock transactions 43
Foreign currency translation adjustment 8
-------
Balance at March 31, 2006 $21,992
=======
10. SIGNIFICANT TRANSACTIONS
On March 25, 2005, our Board of Directors approved a stock repurchase
program (the "Stock Repurchase Program"). Under the program, we are
authorized to repurchase up to $10 million of our outstanding shares of
common stock from time to time on the open market over a three year period
ending on March 25, 2008, depending on market conditions, share price and
other factors. During the three months ended March 31, 2006, we repurchased
a total of 74,800 shares of common stock for approximately $698,000 at an
average price of $9.33 per share. As of March 31, 2006, we repurchased a
total of 579,800 shares of common stock for approximately $4,565,000 at an
average price of $7.87 per share since the inception of the Stock
Repurchase Program.
14
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. COMMITMENTS AND CONTINGENCIES
In April 2005, we announced a complaint against FutureLogic, Inc.
("FutureLogic"), which charges FutureLogic with disseminating false and
misleading statements. We assert claims of defamation and certain other
charges. In May 2005, FutureLogic filed a complaint against us, asserting
false advertising, defamation, trade libel and certain other charges. The
action is currently in the pre-trial motion stage, and, as of March 31,
2006, we are currently unable to estimate any potential liability or range
of loss associated with this litigation. Accordingly, no amounts have been
accrued in the financial statements related to this matter.
15
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; the 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; the absence of 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, 2005. We have reviewed those policies and determined
that, in addition to the policies noted below, they remain our critical
accounting policies for the three months ended March 31, 2006.
SHARE-BASED PAYMENTS - As of January 1, 2006, we account for employee
stock-based compensation costs in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R").
We utilize the Black-Scholes option pricing model to estimate the fair value of
employee stock based compensation at the date of grant, which requires the input
of highly subjective assumptions, including expected volatility and expected
term. Further, as required under FAS 123R, we now estimate forfeitures for
options granted, which are not expected to vest. Changes in these inputs and
assumptions can materially affect the measure of estimated fair value of our
share-based compensation. We adopted the provisions of FAS 123R on January 1,
2006, using a modified prospective application, which provides for certain
changes to the method for valuing share-based compensation. Under the modified
prospective application, prior periods are not revised for comparative purposes.
The valuation provisions of FAS 123R apply to new awards and to awards that are
outstanding on the effective date and subsequently modified or cancelled.
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 our applicable
stock incentive plans. As a result of the acceleration, options to acquire
approximately 109,500 shares of our common stock, which otherwise would have
vested from time to time over the next four years, became immediately
exercisable. All other terms and conditions applicable to the outstanding stock
option grants remain in effect. The option plans under which accelerated grants
were issued are our 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 our required adoption of FAS 123R
effective January 1, 2006. Due to the acceleration of vesting of unvested
16
options prior to the adoption of FAS123R, we will only record compensation
expense related to stock options granted in 2006 and beyond. We recorded
approximately $26,000 of compensation expense in the fourth quarter of 2005
related to the acceleration of vesting.
Upon adoption of FAS 123R, we recognized compensation expense associated with
awards granted after January 1, 2006, and the unvested portion of previously
granted awards that remain outstanding as of January 1, 2006, in our condensed
consolidated statement of income for the first quarter of 2006. During the
quarter ended March 31, 2006, we recognized compensation expense of $21,000 for
stock options and $134,000 for restricted stock, which was recorded in our
condensed consolidated statement of income. The income tax benefits from
share-based payments recorded in the income statement totaled $57,000 for the
three months ended March 31, 2006. No expense related to stock options was
recorded in the three months ended March 31, 2005. For the three months ended
March 31, 2006, the adoption of FAS 123R resulted in tax benefits from stock
options exercised in the period being classified as financing activities in the
2006 statement of cash flows. Shares that are issued upon exercise of employee
stock options are newly issued shares and not issued from treasury stock. Upon
the adoption of FAS 123R, we also reclassified the unamortized restricted stock
compensation account of $1,837,000 against additional paid-in capital. These
adjustments are applied using MPA and, accordingly, have not been reflected in
the 2005 financial.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
NET SALES. Net sales, which include printer sales and sales of spare parts,
consumables and repair services, by market for the three months ended March 31,
2006 and 2005 were as follows:
Change
Three months ended Three months ended -------------
March 31, 2006 March 31, 2005 $ %
------------------ ------------------ ------ ----
(In thousands)
Point of sale and banking $ 4,664 28.4% $ 3,954 32.8% $ 710 18.0%
Gaming and lottery 8,644 52.6% 5,471 45.5% 3,173 58.0%
TransAct Services Group 3,126 19.0% 2,611 21.7% 515 19.7%
------- ------ ------- ----- ------
$16,434 100.0% $12,036 100.0% $4,398 36.5%
======= ====== ======= ===== ======
International * $ 3,809 23.2% $ 2,083 17.3% $1,726 82.9%
======= ====== ======= ===== ======
* International sales do not include sales of printers made to domestic
distributors or other customers who in turn ship those printers to
international destinations.
Net sales for the first quarter of 2006 increased $4,398,000, or 37%, from the
same period last year due to double-digit sales increases in all three of our
markets: point of sale ("POS") and banking (an increase of approximately
$710,000, or 18%); gaming and lottery (an increase of approximately $3,173,000,
or 58%); and the TransAct Services Group ("TSG") (an increase of $515,000, or
20%). Overall, international sales increased by $1,726,000, or 83%, due largely
to higher international shipments of our gaming printers, primarily to Europe,
as well as international shipments of our lottery printers to GTECH.
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 $710,000, or 18%.
Change
Three months ended Three months ended ---------------
March 31, 2006 March 31, 2005 $ %
------------------ ------------------ ----- -------
(In thousands)
Domestic $4,262 91.4% $3,418 86.4% $ 844 24.7%
International 402 8.6% 536 13.6% (134) (25.0%)
------ ----- ------ ----- -----
$4,664 100.0% $3,954 100.0% $ 710 18.0%
====== ===== ====== ===== =====
Domestic POS and banking revenue increased to $4,262,000, representing an
$844,000, or 25%, increase from the first quarter of 2005, due primarily to
higher sales of (1) our iTherm(TM)280 thermal printer, (2) our new line of
17
printers launched in 2005 exclusively for POS distributors, and (3) our line of
inkjet printers, with the most significant increase in our Bankjet(R) line of
inkjet printers to an existing banking customer. Although we are currently
pursuing several banking opportunities, due to the project-oriented nature of
these sales, we cannot predict if and when future sales may occur. These
increases were partially offset by decreasing sales of our legacy POS impact
printers, as expected, as these printers are being replaced by our newer thermal
and inkjet printers. International POS and banking printer shipments decreased
by approximately $134,000, or 25%, to $402,000, due primarily to lower sales to
one of our international POS distributors in Latin America.
We expect sales into the POS and banking market for the second quarter of 2006
to be higher than those reported for the first quarter of 2006, as our
additional sales staff and initiatives put in place during 2005 continue to take
hold.
GAMING AND LOTTERY:
Revenue from the gaming and lottery market includes sales of printers used in
slot machines, video lottery terminals ("VLTs") and other gaming machines that
print tickets instead of issuing coins ("ticket-in, ticket-out" or "TITO") at
casinos, racetracks ("racinos") and other gaming venues 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 increased by $3,173,000, or 58%, from the
first quarter of 2005, primarily due to higher sales of lottery printers to
GTECH, both domestically and internationally, and an increase in sales of our
slot machine and other gaming printers, both domestically and internationally.
Change
Three months ended Three months ended --------------
March 31, 2006 March 31, 2005 $ %
------------------ ------------------ ------ -----
(In thousands)
Domestic $6,003 69.4% $4,481 81.9% $1,522 34.0%
International 2,641 30.6% 990 18.1% 1,651 166.8%
------ ----- ------ ----- ------
$8,644 100.0% $5,471 100.0% $3,173 58.0%
====== ===== ====== ===== ======
Domestic sales of our gaming and lottery printers increased by $1,522,000, or
34%, due largely to an increase in domestic sales of lottery printers to GTECH
and, to a lesser extent, an increase in sales of our thermal casino printers
driven by increased market share as we begin to realize benefits from our new
sales relationship with JCM American Corporation.
Domestic and international printer sales to GTECH Corporation (a worldwide
lottery terminal provider and major customer), which include impact and thermal
on-line lottery printers, increased by approximately $1,756,000, or 98%, in the
first quarter of 2006 compared to the first quarter of 2005. Our quarterly sales
to GTECH are directly dependent on the timing and number of new and upgraded
lottery terminal installations GTECH performs, and are not indicative of GTECH's
overall business or revenue. Based on the timing of orders, we expect sales of
lottery printers to GTECH for the second quarter of 2006 to be less than those
reported in the first quarter of 2006.
International gaming and lottery printer sales increased $1,651,000, or 167%, to
$2,641,000 in the first quarter of 2006. Such sales represented 31% and 18% of
total sales into our gaming and lottery market during the first quarter of 2006
and 2005, respectively. This increase was led primarily by continued growth in
international gaming printer sales, primarily in Europe, as Europe continues to
expand ticket printing in slot machines and other gaming and amusement machines.
In addition, we experienced higher international lottery printer sales to GTECH.
We expect sales of our international gaming and lottery printers for the second
quarter of 2006 to be lower than those reported for the first quarter of 2006,
as we expect lower international lottery printer shipments to GTECH.
TRANSACT SERVICES GROUP:
Revenue from TSG includes sales of consumable products (inkjet cartridges,
ribbons and paper), replacement parts, maintenance and repair services,
refurbished printers, and shipping and handling charges. Sales from TSG
increased by approximately $515,000, or 20%.
Change
Three months ended Three months ended -----------
March 31, 2006 March 31, 2005 $ %
------------------ ------------------ ---- ----
(In thousands)
Domestic $2,360 75.5% $2,054 78.7% $306 14.9%
International 766 24.5% 557 21.3% 209 37.5%
------ ----- ------ ----- ----
$3,126 100.0% $2,611 100.0% $515 19.7%
====== ===== ====== ===== ====
18
Domestic revenue from our TSG group increased by approximately $306,000, to
$2,360,000 largely due to higher maintenance and repair services revenue, and
increased sales of replacement parts, refurbished printers and inkjet
cartridges. These increases were somewhat offset by a decline in consumable
products for our legacy impact printers. Internationally, TSG revenue increased
by approximately $209,000 to $766,000 due largely to an increase in maintenance
and repair services revenue. We expect TSG revenue for the second quarter of
2006 to be consistent with those reported in the first quarter of 2006.
GROSS PROFIT. Gross profit is measured as revenue less cost of goods sold. Cost
of goods sold includes primarily the cost of all raw materials and component
parts, direct labor, and the associated manufacturing overhead expenses. Gross
profit increased $2,010,000, or 55%, and gross margin increased to 34.6% from
30.6%, due primarily to a higher volume of sales in the first quarter of 2006
compared to the first quarter of 2005. We expect gross margin for the second
quarter of 2006 to be consistent with the gross margin reported for the first
quarter of 2006.
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 $30,000, or 4%, to $761,000, as we incurred higher expenses related
to increased engineering staffing and other employee compensation expenses,
which were largely offset by a decrease in costs associated with IGT's
integration and attainment of jurisdictional approvals for our new Epic 950(TM)
thermal casino printer on all of IGT's slot platforms worldwide (the "IGT
Integration"). We incurred approximately $100,000 of IGT Integration costs in
the first quarter of 2005 that did not recur in the first quarter of 2006.
Engineering and product development expenses decreased as a percentage of net
sales to 4.6% from 6.1%, due primarily to higher sales in the first quarter of
2006 compared to the first quarter of 2005. We expect engineering and product
development expenses for the second quarter of 2006 to be consistent with those
reported in the first quarter of 2006.
SELLING AND MARKETING. Selling and marketing expenses primarily include salaries
and payroll related expenses for our sales and marketing staff, sales
commissions, travel expenses, expenses associated with the lease of sales
offices, advertising, trade show expenses and other promotional marketing
expenses. Selling and marketing expenses for the first quarter of 2006 increased
by $231,000, or 17%, to $1,580,000, as we incurred the full-quarter effect of
expenses related to the addition of new corporate marketing staff, and new sales
staff for our three Strategic Sales Units including those for our new service
centers in Las Vegas, NV and Wallingford, CT made throughout 2005. These
increases were somewhat offset by lower trade show and promotional expenses
compared with the first quarter of 2005. Selling and marketing expenses
decreased as a percentage of net sales to 9.6% from 11.2%, due primarily to
higher sales volume in the first quarter of 2006 compared to the first quarter
of 2005. We expect selling and marketing expenses to be higher in the second
quarter of 2006 compared to the first quarter of 2006, as we expect to incur
higher trade show and promotional marketing expenses.
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 $346,000, or 25%, to
$1,710,000, due primarily to (1) the full-quarter effect in 2006 of compensation
related expenses associated with the re-location of our accounting department
from Ithaca, NY to Wallingford, CT during 2005, (2) higher legal expenses
related to both our lawsuit against FutureLogic, Inc. and the expansion of our
international patent portfolio, (3) data conversion expenses associated with our
Oracle software implementation and (4) increased telecommunications expenses
associated with the implementation of our new companywide phone system. These
increases were partially offset by a decrease in recruiting costs incurred
during the first quarter of 2005 related to the re-location of our accounting
department and the increased staffing of the TSG sales unit that did not recur
in the first quarter of 2006. General and administrative expenses decreased as a
percentage of net sales to 10.4% from 11.3% due primarily to increased expenses
in proportion to higher volume of sales in the first quarter of 2006 as compared
to the first quarter of 2005. We expect general and administrative expenses to
be higher in the second quarter of 2006 compared to the first quarter of 2006,
largely to higher legal expenses related to the continued expansion of our
portfolio of international patents.
OPERATING INCOME. During the first quarter of 2006 we reported operating income
of $1,636,000, or 10.0% of net sales, compared to $233,000, or 1.9% of net sales
in the first quarter of 2005. The substantial increase in our operating income
and operating margin was due largely to higher sales and gross profit, somewhat
offset by higher operating expenses, in the first quarter of 2006 compared to
that of 2005.
INTEREST. We recorded net interest income of $14,000 in the first quarter of
2006 compared to $20,000 in the first quarter of 2005, due to our lower average
cash balances during the first quarter of 2006 as compared to the first
19
quarter of 2005. Our average cash balance was lower in the first quarter of 2006
due largely to the repurchase of $700,000 of our common stock under our stock
repurchase program. We did not repurchase any common stock during the first
quarter of 2005. We do not expect to draw on our revolving borrowings as we
expect to continue to generate cash from operations during 2006. As a result, we
expect to continue to report net interest income throughout 2006. See "Liquidity
and Capital Resources" below for more information.
INCOME TAXES. We recorded an income tax provision of $582,000 and $89,000 in the
first quarter of 2006 and 2005, respectively, at an effective rate of 35.5% and
35.3%, respectively. We expect our annual effective tax rate for 2006 to be
between 35% and 36%.
NET INCOME. We reported net income during the first quarter of 2006 of
$1,057,000, or $0.11 per diluted share, compared to net income of $163,000, or
$0.02 per diluted share, for the first quarter of 2005.
20
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first three months of 2006, our cash flows reflected the
results of higher sales volume and our increased investment in infrastructure,
compared to the same period in 2005. Despite the repurchase of approximately
$700,000 of our common stock and capital expenditures of $973,000 during the
first quarter of 2006, our cash balance increased by $710,000 from December 31,
2005. We ended the first quarter of 2006 with approximately $5.3 million in cash
and cash equivalents. We expect to earn interest income on our available cash
balance throughout 2006.
Operating activities: The following significant factors affected our cash
provided by operations of $2,168,000 in the first three months of 2006:
- We reported net income of $1,057,000.
- We recorded depreciation and amortization expense of $368,000.
- Accounts receivable increased by $1,723,000 due to higher sales and
timing of sales during the quarter.
- Inventory increased by $1,189,000 due to anticipated demand for our
products.
- Accounts payable increased by $2,672,000 due to increased inventory
purchases related to higher sales volume during the quarter.
- Accrued liabilities increased by $1,044,000 due to the following: (1)
higher income tax accrual based on the increased level of income
before taxes and (2) higher consulting services accruals related to
the implementation of our new companywide phone system and Oracle
software. These increased accruals were partially offset by lower
compensation related accruals.
- As of March 31, 2006 and December 31, 2005, our restructuring accrual
amounted to $900,000 and $1,007,000, respectively. The decrease of
$107,000 is related solely to payments made on our Wallingford lease
obligation. We expect to pay approximately $420,000 of these expenses
per year from 2006 through 2007, and the remaining $194,000 in 2008.
These payments from 2006 through 2008 relate primarily to lease
obligation costs for unused space in our Wallingford, CT facility.
Investing activities: Our capital expenditures were approximately $973,000 and
$887,000 in the first three months of 2006 and 2005, respectively. Expenditures
in 2006 included approximately $350,000 for the purchase of hardware, software
and outside consulting costs related to our Oracle software implementation,
$325,000 for the purchase of hardware and consulting costs related to our new
phone system, $100,000 for the purchase of leasehold improvements made on the
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 2006 to be
approximately $2,500,000. During the remainder of 2006, we expect to invest in
two significant projects: (1) the implementation of Oracle software and (2) new
product tooling and tooling enhancements to our existing products.
Financing activities: We used approximately $493,000 in financing activities
during the first three months of 2006, largely due to the repurchase of Company
stock (approximately $698,000), partly offset by proceeds from stock option
exercises (approximately $170,000).
WORKING CAPITAL
Our working capital increased to $15,459,000 at March 31, 2006 from $15,375,000
at December 31, 2005. The current ratio decreased to 2.5 to 1 at March 31, 2006
from 3.2 to 1 at December 31, 2005. The decrease in the current ratio was
largely due to higher accounts payable resulting from higher sales volume and
inventory purchases and an increase in income taxes payable resulting from a
higher level of income before taxes, somewhat offset by higher accounts
receivable and inventory levels.
DEFERRED TAXES
As of March 31, 2006, we had a net deferred tax asset of approximately
$3,300,000. In order to utilize this deferred tax asset, we will need to
generate approximately $7.9 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.
21
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 expired in July 2005.
Borrowings under the revolving credit line bear a floating rate of interest at
the prime rate and are secured by a lien on all the assets of the company. The
TD Banknorth Credit Facility imposes certain quarterly financial covenants on
the Company and restricts the payment of dividends on our common stock and the
creation of other liens. We expect to replace or renew our credit facility
during 2006.
On March 28, 2005, we received a consent from TD Banknorth, N.A. to permit us to
repurchase our common stock pursuant to the terms of the Stock Repurchase
Program.
On February 24, 2006, we amended the TD Banknorth Credit Facility to revise a
financial covenant effective December 31, 2005.
The borrowing base of the revolving credit line under the 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 March 31, 2006, we had no balances outstanding on the revolving credit
line. Undrawn commitments under the TD Banknorth Credit Facility were
approximately $11,500,000 at March 31, 2006. However, our maximum additional
available borrowings under the facility were limited to approximately $8,100,000
at March 31, 2006 based on the borrowing base of our collateral. We were in
compliance with all financial covenants of the Banknorth Credit Facility at
March 31, 2006.
STOCK REPURCHASE PROGRAM
On March 25, 2005 our Board of Directors approved a stock repurchase program
("the Stock Repurchase Program"). Under the Stock Repurchase Program, we are
authorized to repurchase up to $10 million of the our outstanding shares of
common stock from time to time in the open market over a three-year period
ending March 25, 2008, depending on market conditions, share price and other
factors. For the three months ended March 31, 2006, we repurchased a total of
74,800 shares of common stock for approximately $698,000 at an average price of
$9.33 per share. As of March 31, 2006, we repurchased a total of 579,800 shares
of common stock for approximately $4,565,000 at an average price of $7.87 per
share since the inception of the Stock Repurchase Program.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $735,000 to $21,992,000 at March 31, 2006 from
$21,257,000 at December 31, 2005. The increase was primarily due to the
following for the three months ended March 31, 2006: (1) net income of
$1,057,000 (2) proceeds of approximately $170,000 from the issuance of
approximately 31,000 shares of common stock from stock option exercises, (3) an
increase in additional paid in capital of approximately $35,000 resulting from
the tax benefits resulting from the sale of employee stock from stock option
exercises, and (4) compensation expense related to stock options and restricted
stock of $155,000. These increases were offset by treasury stock purchases of
74,800 shares of common stock for approximately $698,000.
CONTRACTUAL OBLIGATIONS / OFF-BALANCE SHEET ARRANGEMENTS
We have experienced no material changes in our contractual obligations outside
the ordinary course of business during the three months ended March 31, 2006. We
have no material off-balance sheet arrangements as defined in Regulation S-K
303(a)(4)(ii).
RESOURCE SUFFICIENCY
We believe that our cash on hand and cash flows generated from operations 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
22
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.
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 our business reputation with the intent of damaging our
business. We assert claims of defamation, tortious interference with contractual
relations, tortious interference with business expectancy, and violation of the
Connecticut Unfair Trade Practices Act, and seek an award of compensatory and
punitive damages, attorneys' fees and costs. FutureLogic removed this action to
the United States District Court for the District of Connecticut and, on June 7,
2005, filed a motion to dismiss the claims for lack of jurisdiction. On December
7, 2005, we amended our complaint in the action pending in the District of
Connecticut to add claims that FutureLogic's conduct violated the Lanham Act's
bar on false and deceptive advertising.
On May 20, 2005, FutureLogic filed a complaint in the United States District
Court for the Central District of California against us. The complaint charges
us 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 to
us by the United States Patent and Trademark Office ("PTO") on August 2, 2005,
for our dual-port printer technology, is invalid, and that FutureLogic is not
infringing our patent. We moved to dismiss FutureLogic's action in California,
on the grounds that any claims raised in that action should have been brought as
part of the case filed by us in the District of Connecticut. In the alternative,
we moved to stay the California action pending the resolution of jurisdictional
motions in the Connecticut court.
On January 20, 2006, the California District Court filed an order granting our
motion to stay the California proceeding pending the resolution of
jurisdictional motions in the Connecticut case. Under the California court's
order, should the Connecticut court find that it has jurisdiction over
FutureLogic, FutureLogic's patent case will be transferred to the District of
Connecticut for consolidation with the action pending in that forum. The
jurisdictional motions before the District of Connecticut were fully briefed as
of February 17, 2006 and await the decision of the Connecticut court. Regardless
in what forum we eventually face FutureLogic's patent claims, we intend to
defend against the claims vigorously, as we believe them to be without merit or
factual basis. This action is in the pre-trial motion stage and we are currently
unable to calculate any potential or probable liability associated with this
action at this time.
23
ITEM 1A. RISK FACTORS
Risk factors that may impact future results include those disclosed in our Form
10-K for the year ended December 31, 2005. No changes have occurred during the
three months ended March 31, 2006.
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
ITEM 2C. STOCK REPURCHASE
On March 25, 2005 our Board of Directors approved a stock repurchase program
("the Stock Repurchase Program"). Under the Stock Repurchase Program, management
is authorized to repurchase up to $10 million of the our outstanding shares of
common stock from time to time in the open market over a three year period
ending March 25, 2008, depending on market conditions, share price and other
factors. For the three months ended March 31, 2006, we had repurchased a total
of 74,800 shares of common stock for approximately $698,000. As of March 31,
2006, we had repurchased a total of 579,800 shares of common stock for
approximately $4,565,000, at an average price of $7.87 per share since the
inception of the Stock Repurchase Program.
The following table summarizes repurchases of our common stock in the three
months ended March 31, 2006.
Total Number of Approximate Dollar
Shares Purchased as Value of Shares
Total Number Average Part of Publicly that May Yet Be
of Shares Price Paid Announced Purchased under the
Period Purchased per Share Plans or Programs Plans or Programs
------ ------------ ---------- ------------------- -------------------
January 1, 2006 - January 31, 2006 -- $ -- -- $6,133,000
February 1, 2006 - February 28, 2006 -- -- -- $6,133,000
March 1, 2006 - March 31, 2006 74,800 9.33 74,800 $5,435,000
------ ------
Total 74,800 $9.33 74,800
====== ======
24
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
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
(Registrant)
May 9, 2006 /s/ Steven A. DeMartino
----------------------------------------
Steven A. DeMartino
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
(Principal Financial and
Accounting Officer)
26
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
27