UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 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 Identification No.)
incorporation or organization)
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 JULY 28, 2006
-------------- -------------------------------
COMMON STOCK,
$.01 PAR VALUE 9,773,278
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
Page No.
--------
PART I. Financial Information:
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of
June 30, 2006 and December 31, 2005 3
Condensed consolidated statements of income
for the three and six months ended
June 30, 2006 and 2005 4
Condensed consolidated statements of cash
flow for the six months ended June 30, 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 - 25
Item 4 Controls and Procedures 25
PART II. Other Information:
Item 1 Legal Proceedings 25 - 26
Item 1a Risk Factors 26
Item 2c Stock Repurchase 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 6 Exhibits 27
Signatures 28
Certifications 29 - 33
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
(In thousands) 2006 2005
-------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 5,721 $ 4,579
Receivables, net 10,012 8,359
Inventories 8,276 6,036
Refundable income taxes 150 295
Deferred tax assets 2,735 2,735
Other current assets 355 258
------- -------
Total current assets 27,249 22,262
------- -------
Fixed assets, net 5,561 4,510
Goodwill 1,469 1,469
Deferred tax assets 557 557
Intangible and other assets, net of accumulated
amortization of $81 and $41, respectively 559 534
------- -------
8,146 7,070
------- -------
Total assets $35,395 $29,332
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,349 $ 2,859
Accrued liabilities 4,606 3,198
Accrued restructuring expenses 420 420
Deferred revenue 402 410
------- -------
Total current liabilities 10,777 6,887
------- -------
Accrued restructuring expenses, net of current portion 380 587
Deferred revenue, net of current portion 316 270
Other liabilities 338 331
------- -------
1,034 1,188
------- -------
Total liabilities 11,811 8,075
------- -------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock 104 102
Additional paid-in capital 18,548 19,334
Retained earnings 9,403 7,489
Unamortized restricted stock compensation -- (1,837)
Accumulated other comprehensive income 94 36
Treasury stock, 579,800 and 505,000 shares at cost (4,565) (3,867)
------- -------
Total shareholders' equity 23,584 21,257
------- -------
Total liabilities and shareholders' equity $35,395 $29,332
======= =======
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
(In thousands, except per share data) 2006 2005 2006 2005
------- -------- ------- -------
Net sales $16,905 $ 12,346 $33,339 $24,382
Cost of sales 11,159 8,092 21,906 16,451
------- -------- ------- -------
Gross profit 5,746 4,254 11,433 7,931
------- -------- ------- -------
Operating expenses:
Engineering, design and product
development 769 739 1,530 1,470
Selling and marketing 1,711 1,547 3,291 2,896
General and administrative 1,890 1,590 3,600 2,954
------- -------- ------- -------
4,370 3,876 8,421 7,320
------- -------- ------- -------
Operating income 1,376 378 3,012 611
------- -------- ------- -------
Other income (expense):
Interest, net 23 20 37 40
Other, net (71) 16 (82) 15
------- -------- ------- -------
(48) 36 (45) 55
------- -------- ------- -------
Income before income taxes 1,328 414 2,967 666
Income tax provision 471 147 1,053 236
------- -------- ------- -------
Net income $ 857 $ 267 $ 1,914 $ 430
======= ======== ======= =======
Net income per common share:
Basic $ 0.09 $ 0.03 $ 0.20 $ 0.04
Diluted $ 0.09 $ 0.03 $ 0.19 $ 0.04
Shares used in per-share calculation
Basic 9,581 9,970 9,570 9,990
Diluted 9,927 10,246 9,898 10,379
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------
(In thousands) 2006 2005
------- -------
Cash flows from operating activities:
Net income $ 1,914 $ 430
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Share-based compensation expense 311 194
Deferred income taxes -- (60)
Incremental tax benefits from stock options exercised (233) --
Depreciation and amortization 782 808
Changes in operating assets and liabilities:
Receivables (1,653) (756)
Inventories (2,240) 158
Refundable income taxes 145 --
Other current assets (97) 159
Other assets (83) 1
Accounts payable 2,490 (1,377)
Accrued liabilities and other liabilities 1,686 (532)
Accrued restructuring expenses (207) (223)
------- -------
Net cash provided by (used in) operating activities 2,815 $(1,198)
------- -------
Cash flows from investing activities:
Purchases of fixed assets (1,775) (1,495)
Purchases of intangible assets -- (475)
------- -------
Net cash used in investing activities (1,775) (1,970)
------- -------
Cash flows from financing activities:
Proceeds from option exercises 509 311
Purchases of common stock for treasury (698) (984)
Incremental tax benefits from stock options exercised 233 --
Payment of expenses related to preferred stock conversion and
registration of common stock -- (3)
------- -------
Net cash provided by (used in) financing activities 44 (676)
------- -------
Effect of exchange rate changes 58 (43)
------- -------
Increase (decrease) in cash and cash equivalents 1,142 (3,887)
Cash and cash equivalents at beginning of period 4,579 8,628
------- -------
Cash and cash equivalents at end of period $ 5,721 $ 4,741
======= =======
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. Our printers are designed based on market specific
requirements and are sold under the Ithaca(R) and Epic product brands. We
distribute our 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. We also focus on the after-market side of the
business, providing printer service, supplies and spare parts.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
for complete financial statements. 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 our financial
position as of June 30, 2006, the results of our operations for the three
and six months ended June 30, 2006 and 2005, and our cash flows for the six
months ended June 30, 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 the local currency as the functional currency. Assets
and liabilities of such subsidiary have been translated at end of period
exchange rates, and related revenues and expenses have been translated at
weighted average exchange rates with the resulting translation gain or loss
recorded in accumulated other comprehensive income. Transaction gains and
losses are included in other income.
The results of operations for the three and six months ended June 30, 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. 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
modifications or cancellations of awards that are outstanding on the
effective date.
In November 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 six months ended June 30, 2006 was $5.91. The
table below indicates the key assumptions used in the option valuation
calculations for options granted in the six months ended June 30, 2006 and
a discussion of our methodology for developing each of the assumptions used
in the valuation model:
Six months ended
June 30, 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 June 30,
2006, or the three and six months ended June 30, 2005, as no stock option
grants were made during these periods.
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 our 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
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 and six
months ended June 30, 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 Six months ended
June 30, June 30,
2005 2005
------------------ ---------------------
(In thousands, except per share data)
Net income available to common
shareholders:
Net income available to common
shareholders, as reported $ 267 $ 430
Add: Stock-based compensation expense included
in reported net income, net of tax 81 125
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (226) (395)
----- -----
Pro forma net income available to common shareholders $ 122 $ 160
===== =====
Net income per common share:
Basic:
As reported $0.03 $0.04
Pro forma $0.01 $0.02
Diluted:
As reported $0.03 $0.04
Pro forma $0.01 $0.02
The pro forma effects of estimated share-based compensation expense on net
income and earnings per common share for the three and six months ended
June 30, 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 the acceleration of 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 and second
quarter of 2006. During the three and six months ended June 30, 2006, we
recognized compensation expense of $34,000 and $55,000, respectively, for
stock options and $122,000 and $256,000, respectively, 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 $55,000 and $110,000 for the three and six months
ended June 30, 2006. No expense related to stock options was recorded in
the three and six months ended June 30, 2005. The following table
illustrates the impact of the adoption of FAS 123R on reported amounts:
Three months ended Six months ended
June 30, 2006 June 30, 2006
-------------------- --------------------
Impact of Impact of
As FAS 123R As FAS 123R
Reported Adoption Reported Adoption
-------- --------- -------- ---------
Operating income $1,376 $ 34 $3,012 $ 55
Income before income taxes $1,328 $ 34 $2,967 $ 55
Net income $ 857 $ 22 $1,914 $ 36
Earnings per share:
Basic $ 0.09 $0.00 $ 0.20 $0.00
Diluted $ 0.09 $0.00 $ 0.19 $0.00
For the three and six months ended June 30, 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 have exercise 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 June 30, 2006, approximately 452,000 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 Aggregate
Average Remaining Intrinsic
Exercise Contractual Value (in
Options Price Life (in years) thousands)
-------- -------- --------------- ----------
Options outstanding at December 31, 2005: 741,501 $ 6.10
Granted 115,000 $ 8.83
Exercised (102,971) $ 4.95
Canceled (3,000) $16.62
--------
Options outstanding at June 30, 2006 750,530 $ 6.64 5.93 $3,597
========
Options exercisable at June 30, 2006 635,530 $ 6.24 5.27 $3,427
========
Options Outstanding
-------------------------------------
Weighted- Options Exercisable
Average -----------------------
Outstanding Weighted- Remaining Exercisable Weighted-
at Average Contractual at Average
Range of Exercise June 30, Exercise Life (in June 30, Exercise
Prices 2006 Price years) 2006 Price
----------------- ----------- --------- ----------- ----------- ---------
$ 2.00 - $ 5.00 428,268 $ 3.69 5.55 428,268 $ 3.69
5.01 - 7.50 144,262 $ 6.36 3.93 144,262 $ 6.36
7.51 - 10.00 128,750 $ 8.75 8.73 13,750 $ 8.09
10.01 - 25.00 13,500 $16.50 7.57 13,500 $16.50
25.01 - 35.00 35,750 $31.66 7.91 35,750 $31.66
------- -------
750,530 $ 6.64 5.93 635,530 $ 6.24
======= =======
As of June 30, 2006, unrecognized compensation cost related to stock
options totaled $625,000, which is expected to be recognized over a
weighted average period of 4.6 years.
The total intrinsic value of stock options exercised was $575,000 and
$692,000, during the three and six months ended June 30, 2006. No stock
options vested during the three and six months ended June 30, 2006.
Cash received from stock option exercises for the three and six months
ended June 30, 2006 was $339,000 and $509,000, respectively.
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
Restricted Date Fair
Stock Value
---------- -------------
Nonvested shares at December 31, 2005 187,550 $12.23
Granted 15,000 13.78
Vested (36,684) 12.78
Canceled -- --
-------
Nonvested shares at June 30, 2006 165,866 $12.25
=======
As of June 30, 2006, unrecognized compensation cost related to restricted
stock totaled $1,788,000, 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 and six months ended June 30, 2006 was
$48,000 and $338,000, respectively.
4. INVENTORIES
The components of inventories are:
June 30, December 31,
(In thousands) 2006 2005
-------- ------------
Raw materials and purchased component parts $7,456 $5,788
Finished goods 820 248
------ ------
$8,276 $6,036
====== ======
5. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the accrued product
warranty liability during the three and six months ended June 30, 2006 and
2005.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2006 2005 2006 2005
----- ------ ----- -----
Balance, beginning of period $ 600 $ 644 $ 644 $ 597
Additions related to warranties issued 244 160 312 358
Warranty costs incurred (242) (140) (354) (291)
----- ----- ----- -----
Balance, end of period $ 602 $ 664 $ 602 $ 664
===== ===== ===== =====
The current portion of the accrued product warranty liability is included
in accrued liabilities and the long term portion is included in other
liabilities in the accompanying balance sheets.
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 and six months ended June 30, 2006
and 2005.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2006 2005 2006 2005
----- ------ ------ ------
Accrual balance, beginning of period $ 900 $1,345 $1,007 $1,454
Cash payments (100) (114) (207) (223)
----- ------ ------ ------
Accrual balance, end of period $ 800 $1,231 $ 800 $1,231
===== ====== ====== ======
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 Six months ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
------ ------- ------ -------
Net income $ 857 $ 267 $1,914 $ 430
====== ======= ====== =======
Shares:
Basic: Weighted average common
shares outstanding 9,581 9,970 9,570 9,990
Add: Dilutive effect of outstanding
options and restricted stock as
determined by the treasury stock
method 346 276 328 389
------ ------- ------ -------
Diluted: Weighted average common and
common equivalent shares outstanding 9,927 10,246 9,898 10,379
====== ======= ====== =======
Net income per common share:
Basic $ 0.09 $ 0.03 $ 0.20 $ 0.04
Diluted $ 0.09 $ 0.03 $ 0.19 $ 0.04
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 and six months ended June 30, 2006, potentially dilutive
shares that were excluded from the net income per share calculation,
consisting of out-of-the-money stock options, amounted to 49,250 and 49,250
shares, respectively.
For the three and six months ended June 30, 2005, potentially dilutive
shares that were excluded from the net income per share calculation,
consisting of out-of-the-money stock options, amounted to 55,250 and 52,250
shares, respectively.
8. COMPREHENSIVE INCOME
The following table summarizes the Company's comprehensive income:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2006 2005 2006 2005
---- ---- ------ ----
Net income $857 $267 $1,914 $430
Foreign currency translation adjustment 50 (40) 58 (43)
---- ---- ------ ----
Total comprehensive income $907 $227 $1,972 $387
==== ==== ====== ====
9. STOCKHOLDER'S EQUITY
Changes in stockholders' equity for the six months ended June 30, 2006 were
as follows (in thousands):
Balance at December 31, 2005 $21,257
Net income 1,914
Issuance of shares from exercise of stock options 509
Purchases of treasury stock (698)
Share-based compensation 311
Tax benefits from employee stock transactions 233
Foreign currency translation adjustment 58
-------
Balance at June 30, 2006 $23,584
=======
10. SIGNIFICANT TRANSACTIONS
In March 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 June 30, 2006, no repurchases were made.
During the six months ended June 30, 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 June 30, 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")in Connecticut, 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 in
California, asserting false advertising, defamation, trade libel and
certain other charges. 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 Connecticut. In the
alternative, we moved to stay the California action pending the resolution
of jurisdictional motions in the Connecticut court. In January 2006, the
California 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 Connecticut court for
consolidation with the action pending in that forum. The jurisdictional
motions before the Connecticut court were fully briefed in February 2006
and await the decision of the Connecticut court. The action is currently in
the pre-trial motion stage, and, as of June 30, 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.
12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation 48, "Accounting for
Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for
recognizing the benefits of tax return positions in the financial
statements as "more-likely-than-not" to be sustained by the taxing
authority. The recently issued literature also provides guidance on the
derecognition, measurement and classification of income tax uncertainties,
along with any related interest and penalties. FIN 48 also includes
guidance concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with any recorded
income tax uncertainties.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The
differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after
adoption will be accounted for as a cumulative-effect adjustment recorded
to the beginning balance of retained earnings. Because the guidance was
recently issued, we have not yet determined the impact, if any, of adopting
the provisions of FIN 48 on our financial position, results of operations
and liquidity.
13. SUBSEQUENT EVENT
On July 31, 2006, we amended the TD Banknorth Credit Facility to extend the
expiration date of our $11.5 million revolving credit line to November 29,
2006.
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; risks associated with potential future acquisitions; 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 six months ended June 30, 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 ("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 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 in our condensed consolidated statement of income for
the first and second quarter of 2006. During the three and six months ended June
30, 2006, we recognized compensation expense of $34,000 and $55,000,
respectively, for stock options and $122,000 and $256,000, respectively, 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 $55,000 and $110,000 for the three and six months ended June
30, 2006. No expense related to stock options was recorded in the three and six
months ended June 30, 2005. For the three and six months ended June 30, 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. This adjustment is applied
using MPA and, accordingly, have not been reflected in the 2005 financial
statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 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 June 30,
2006 and 2005 were as follows:
Change
Three months ended Three months ended -------------
(In thousands) June 30, 2006 June 30, 2005 $ %
------------------ ------------------ ------ ----
Point of sale and banking $ 4,448 26.3% $ 3,155 25.6% $1,293 41.0%
Gaming and lottery 9,144 54.1% 6,027 48.8% 3,117 51.7%
TransAct Services Group 3,313 19.6% 3,164 25.6% 149 4.7%
------- ----- ------- ----- ------
$16,905 100.0% $12,346 100.0% $4,559 36.9%
======= ===== ======= ===== ======
International * $ 3,068 18.1% $ 2,941 23.8% $ 127 4.3%
======= ===== ======= ===== ======
* International sales do not include sales of printers made to domestic
distributors or other customers who in turn ship those printers to
international destinations.
Net sales for the second quarter of 2006 increased $4,559,000, or 37%, from the
same period last year due to sales increases in each of our markets: point of
sale ("POS") and banking (an increase of approximately $1,293,000, or 41%);
gaming and lottery (an increase of approximately $3,117,000, or 52%); and the
TransAct Services Group ("TSG") (an increase of $149,000, or 5%). Overall,
international sales increased by $127,000, or 4%, due largely to higher
international shipments of our gaming printers.
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 $1,293,000, or 41%.
Change
Three months ended Three months ended --------------
(In thousands) June 30, 2006 June 30, 2005 $ %
------------------ ------------------ ------ -----
Domestic $4,074 91.6% $2,463 78.1% $1,611 65.4%
International 374 8.4% 692 21.9% (318) (46.0%)
------ ----- ------ ----- ------
$4,448 100.0% $3,155 100.0% $1,293 41.0%
====== ===== ====== ===== ======
Domestic POS and banking printer revenue increased to $4,074,000, representing a
$1,611,000, or 65%, increase from the second quarter of 2005, due primarily to
higher sales of (1) our line of thermal printers including our new
17
thermal printer launched in 2005 exclusively for POS distributors and (2) our
line of inkjet printers, with the most significant increase in our Bankjet(R)
line of inkjet printers to existing banking customers. 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. International
POS and banking printer shipments decreased by approximately $318,000, or 46%,
to $374,000, due primarily to lower sales to our international POS distributors
in Europe and Latin America.
We expect sales into the POS and banking market for the third quarter of 2006 to
be lower than those reported for the second quarter of 2006 due to lower
expected banking printer shipments.
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 $3,117,000, or 52%, from the
second quarter of 2005, primarily due to higher sales of lottery printers to
GTECH and higher international gaming printer sales, partially offset by a
decrease in domestic sales of our slot machine and other gaming printers.
Change
Three months ended Three months ended -------------
(In thousands) June 30, 2006 June 30, 2005 $ %
------------------ ------------------ ------ ----
Domestic $7,205 78.8% $4,494 74.6% $2,711 60.3%
International 1,939 21.2% 1,533 25.4% 406 26.5%
------ ----- ------ ----- ------
$9,144 100.0% $6,027 100.0% $3,117 51.7%
====== ===== ====== ===== ======
Domestic sales of our gaming and lottery printers increased by $2,711,000, or
60%, due largely to a significant increase in sales of lottery printers to
GTECH. Lottery printer sales to GTECH Corporation, which include thermal on-line
lottery printers, increased by approximately $3,776,000, or 963%, in the second
quarter of 2006 compared to the second 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 as a result, may fluctuate
significantly quarter-to-quarter. Our sales to GTECH are not indicative of
GTECH's overall business or revenue. Based on the timing of orders, we expect
sales of lottery printers to GTECH for the third quarter of 2006 to be less than
those reported in the second quarter of 2006.
The increase in domestic lottery printer sales from GTECH was partially offset
by a decrease in sales of our thermal casino printers domestically, as the
domestic casino market remains weak and a large slot machine manufacturer
continues to deplete a large inventory position of our printers. However,
despite lower domestic gaming sales, we believe that we continue to increase
market share as we realize benefits from our new sales relationship with JCM
American Corporation.
International gaming and lottery printer sales increased $406,000, or 27%, to
$1,939,000 in the second quarter of 2006. Such sales represented 21% and 25% of
total sales into our gaming and lottery market during the second quarter of 2006
and 2005, respectively. This increase was led primarily by continued growth in
international gaming printer sales, primarily in Australia and Canada, somewhat
offset by a decrease in gaming printer sales in Europe. We expect sales of our
international gaming and lottery printers for the third quarter of 2006 to be
higher than those reported for the second quarter of 2006, as we expect the
rollout of ticket printing in Australia to accelerate.
TRANSACT SERVICES GROUP:
Revenue from the TransAct Services Group ("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 $149,000, or 5%.
Change
Three months ended Three months ended ------------
(In thousands) June 30, 2006 June 30, 2005 $ %
------------------ ------------------ ------ ---
Domestic $2,558 77.2% $2,448 77.4% $110 4.5%
International 755 22.8% 716 22.6% 39 5.4%
------ ----- ------ ----- ----
$3,313 100.0% $3,164 100.0% $149 4.7%
====== ===== ====== ===== ====
18
Domestic revenue from TSG increased by approximately $110,000, to $2,558,000
largely due to higher maintenance and repair services revenue and increased
sales of refurbished printers and consumable products. These increases were
somewhat offset by a decline in the sale of replacement parts for certain legacy
printers, as the installed base of these legacy printers in the market decline.
Internationally, TSG revenue for the second quarter of 2006 was consistent with
that reported for the second quarter of 2005, increasing by approximately
$39,000. We expect sales from TSG to continue to grow throughout the remainder
of 2006, as our installed base of printers continues to grow and we derive
benefits from the additional sales staff and our service center in Las Vegas, NV
and expanded service center in Wallingford, CT.
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 $1,492,000, or 35%, due primarily to a higher volume of sales
in the second quarter of 2006 compared to the second quarter of 2005. Gross
margin decreased to 34.0% from 34.5%, due primarily to a less favorable sales
mix. We expect gross margin for the third quarter of 2006 to be consistent with
the gross margin reported for the second 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 $769,000, as we incurred higher expenses related
to increased engineering staffing and product development expenses related to
our new line of off-premise gaming printers, 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 $50,000 of IGT Integration costs in the second quarter of 2005
that did not recur in the second quarter of 2006. Engineering and product
development expenses decreased as a percentage of net sales to 4.6% from 6.0%,
due primarily to higher sales in the second quarter of 2006 compared to the
second quarter of 2005. We expect engineering and product development expenses
for the third quarter of 2006 to be lower than those reported in the second
quarter of 2006 due to lower expected outside development expenses.
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 second quarter of 2006
increased by $164,000, or 11%, to $1,711,000, 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 travel, trade show and other
promotional marketing expenses compared with the second quarter of 2005. Selling
and marketing expenses decreased as a percentage of net sales to 10.1% from
12.5%, due primarily to higher sales volume in the second quarter of 2006
compared to the second quarter of 2005. We expect selling and marketing expenses
to be higher in the third quarter of 2006 compared to the second quarter of
2006, as we expect to incur higher trade show, promotional marketing, and
compensation-related 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 $300,000, or 19%, to
$1,890,000, due primarily to approximately $220,000 of legal and consulting
services related to a potential acquisition that will not be consummated. The
increase was also attributable to the full-quarter effect in 2006 of
compensation-related expenses associated with the relocation of our accounting
department from Ithaca, NY to Wallingford, CT during 2005 and increased
telecommunications expenses associated with the implementation of our new
companywide phone system in the first quarter of 2006. General and
administrative expenses decreased as a percentage of net sales to 11.2% from
12.9%, due primarily to increased sales in proportion to higher expenses in the
second quarter of 2006 as compared to the second quarter of 2005. We expect
general and administrative expenses to be lower in the third quarter of 2006
compared to the second quarter of 2006, as the expenses we incurred related to a
potential acquisition in the second quarter of 2006 are not expected to recur.
OPERATING INCOME. During the second quarter of 2006 we reported operating income
of $1,376,000, or 8.1% of net sales, compared to $378,000, or 3.1% of net sales
in the second quarter of 2005. The substantial increase in our operating income
and operating margin was due largely to the operating leverage we experienced in
the second
19
quarter of 2006 resulting from higher sales and gross profit, somewhat offset by
higher operating expenses, including those related to the potential acquisition
explained above, compared to that of 2005.
INTEREST. We recorded net interest income of $23,000 in the second quarter of
2006 compared to $20,000 in the second quarter of 2005. Our average cash balance
was slightly higher in the second quarter of 2006 as compared to the second
quarter of 2005, as we did not repurchase any common stock during the second
quarter of 2006. 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.
OTHER INCOME (EXPENSE). We recorded other expense of $71,000 in the second
quarter of 2006 due primarily to transaction exchange losses recorded by our UK
subsidiary resulting from the weakening of the U.S. dollar against the British
pound. The U.S. dollar lost approximately 10% of its value compared to the
British pound during this period. We recorded other income of $16,000 in the
second quarter of 2005 due primarily to transaction exchange gains recorded
resulting from the strengthening of the U.S. dollar against the British pound
during this period.
INCOME TAXES. We recorded an income tax provision of $471,000 and $147,000 in
the second quarter of 2006 and 2005, respectively, at an effective rate of 35.5%
in each period. We expect our annual effective tax rate for 2006 to be between
35% and 36%.
NET INCOME. We reported net income during the second quarter of 2006 of
$857,000, or $0.09 per diluted share, compared to net income of $267,000, or
$0.03 per diluted share, for the second quarter of 2005.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
NET SALES. Net sales by business unit for the current and prior year's six month
period were as follows:
Change
Six months ended Six months ended -------------
(In thousands) June 30, 2006 June 30, 2005 $ %
---------------- ---------------- ------ ----
Point of sale and banking $ 9,112 27.3% $ 7,109 29.1% $2,003 28.2%
Gaming and lottery 17,788 53.4% 11,498 47.2% 6,290 54.7%
TransAct Services Group 6,439 19.3% 5,775 23.7% 664 11.5%
------- ----- ------- ----- ------
$33,339 100.0% $24,382 100.0% $8,957 36.7%
======= ===== ======= ===== ======
International * $6,877 20.6% $ 5,024 20.6% $1,853 36.9%
======= ===== ======= ===== ======
* 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 half of 2006 increased $8,957,000, or 37%, from the
prior year's first half due to double-digit sales increases in all three of our
markets: POS and banking (an increase of approximately $2,003,000, or 28%);
gaming and lottery (an increase of approximately $6,290,000, or 55%); and TSG
(an increase of $664,000, or 12%). Overall, international sales increased by
$1,853,000, or 37%, due to higher international shipments of our gaming and
lottery printers, somewhat offset by lower shipments of our POS and banking
printers.
POINT OF SALE AND BANKING:
Sales of our POS and banking printers worldwide increased approximately
$2,003,000, or 28%.
Change
Six months ended Six months ended --------------
(In thousands) June 30, 2006 June 30, 2005 $ %
---------------- ---------------- ------ -----
Domestic $8,336 91.5% $5,881 82.7% $2,455 41.7%
International 776 8.5% 1,228 17.3% (452) (36.8%)
------ ----- ------ ----- ------
$9,112 100.0% $7,109 100.0% $2,003 28.2%
====== ===== ====== ===== ======
Domestic POS and banking printer sales increased to $8,336,000, representing a
$2,455,000, or 42%, increase from the first half of 2005, due primarily to
higher sales of (1) our line of thermal printers including our new thermal
printer launched in 2005 exclusively for POS distributors and (2) our line of
inkjet printers, with the most significant increase in our Bankjet(R) line of
inkjet printers to existing banking customers. Although we are
20
currently pursuing additional 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
$452,000, or 37%, to $776,000, due primarily to lower sales to our international
POS distributors in Europe and Latin America.
We expect sales into the POS and banking market for the third quarter of 2006 to
be lower than those reported for the second quarter of 2006 due to lower
expected banking printer shipments.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers increased by $6,290,000, or 55%, from
the first half 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 internationally. These increases were
somewhat offset by lower domestic sales of our slot machine and other gaming
printers.
Change
Six months ended Six months ended -------------
(In thousands) June 30, 2006 June 30, 2005 $ %
---------------- ---------------- ------ ----
Domestic $13,208 74.3% $ 8,975 78.1% $4,233 47.2%
International 4,580 25.7% 2,523 21.9% 2,057 81.5%
------- ----- ------- ----- ------
$17,788 100.0% $11,498 100.0% $6,290 54.7%
======= ===== ======= ===== ======
Domestic sales of our gaming and lottery printers increased by $4,233,000, or
47%, due largely to a significant increase in sales of lottery printers to
GTECH. Lottery printer sales to GTECH, which include thermal on-line lottery
printers, increased by approximately $5,705,000, or 262%, in the first half of
2006 compared to the first half 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 as a result, may fluctuate significantly
quarter-to-quarter. Our sales to GTECH are not indicative of GTECH's overall
business or revenue. Based on the timing of orders, we expect sales of lottery
printers to GTECH for the third quarter of 2006 to be less than those reported
in the second quarter of 2006.
The increase in domestic lottery printer sales from GTECH was partially offset
by a decrease in sales of our thermal casino printers domestically, as the
domestic casino market remains weak and a large slot machine manufacturer
continues to deplete a large inventory position of our printers. However,
despite lower domestic gaming sales, we believe that we continue to gain
increased market share as we realize benefits from our new sales relationship
with JCM American Corporation.
International gaming and lottery printer sales increased $2,057,000, or 82%, to
$4,580,000 in the first half of 2006 compared to the first half of 2005. Such
sales represented 26% and 22% of total sales into our gaming and lottery market
during the first half of 2006 and 2005, respectively. This increase was led
primarily by continued growth in international gaming printer sales, primarily
in Europe and Australia, as these international markets continue to expand
ticket printing in slot machines and other gaming and amusement machines. In
addition, we experienced higher gaming printer sales in Canada and higher
international lottery printer sales to GTECH. We expect sales of our
international gaming and lottery printers for the third quarter of 2006 to be
higher than those reported for the second quarter of 2006, as we expect the
rollout of ticket printing in Australia to accelerate.
TRANSACT SERVICES GROUP ("TSG"):
Sales from TSG increased by approximately $664,000, or 12%.
Change
Six months ended Six months ended -----------
(In thousands) June 30, 2006 June 30, 2005 $ %
---------------- ---------------- ---- ----
Domestic $4,918 76.4% $4,502 78.0% $416 9.2%
International 1,521 23.6% 1,273 22.0% 248 19.5%
------ ----- ------ ----- ----
$6,439 100.0% $5,775 100.0% $664 11.5%
====== ===== ====== ===== ====
Domestic TSG revenue increased by approximately $416,000, or 9%, to $4,918,000,
largely due to higher sales of maintenance and repair services, as well as
increased sales of refurbished printers and consumable products. These increases
were partly offset by a decline in the sale of replacement parts for certain
legacy printers, as the installed base of these legacy printers in the market
decline.
21
Internationally, TSG sales increased by approximately $248,000, or 20%, to
$1,521,000, due largely to an increase in maintenance and repair services
revenue. We expect sales from TSG to continue to grow throughout the remainder
of 2006, as our installed base of printers continues to grow and we derive
benefits from the additional sales staff and our service center in Las Vegas, NV
and expanded service center in Wallingford, CT.
GROSS PROFIT. Gross profit increased $3,502,000, or 44%, to $11,433,000 and
gross margin increased to 34.3% from 32.5%, due primarily to a higher volume of
sales, somewhat offset by a less favorable sales mix, in the first half of 2006
compared to the first half of 2005. We expect gross margin for the third quarter
of 2006 to be consistent with the gross margin reported for the second quarter
of 2006.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $60,000, or 4%, to $1,530,000, as we incurred higher
expenses related to increased engineering staffing and product development
expenses related to our new line of off-premise gaming printers, which were
largely offset by a decrease in costs associated with IGT's integration and
attainment of jurisdictional approvals for our Epic 950(TM) thermal casino
printer on all of IGT's slot platforms worldwide (the "IGT Integration"). We
incurred approximately $150,000 of IGT Integration costs in the first half of
2005 that did not recur in the first half of 2006. Engineering and product
development expenses decreased as a percentage of net sales to 4.6% from 6.0%,
due primarily to higher sales in the first half of 2006 compared to the first
half of 2005. We expect engineering and product development expenses for the
third quarter of 2006 to be lower than those reported in the second quarter of
2006 due to lower expected outside development expenses.
SELLING AND MARKETING. Selling and marketing expenses increased by $395,000, or
14%, to $3,291,000, as we incurred the full six-month 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 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 half of 2005. Selling and marketing expenses decreased as a percentage of
net sales to 9.9% from 11.9%, due primarily to higher sales volume in the first
half of 2006 compared to the first half of 2005. We expect selling and marketing
expenses to be higher in the third quarter of 2006 compared to the second
quarter of 2006, as we expect to incur higher trade show, promotional marketing,
and compensation-related expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$646,000, or 22%, to $3,600,000, due primarily to (1) the full six-month effect
in 2006 of compensation related expenses associated with the relocation of our
accounting department from Ithaca, NY to Wallingford, CT during 2005, (2) data
conversion expenses associated with our Oracle software implementation, (3)
legal and consulting services related to a potential acquisition that will not
be consummated 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
half of 2005 related to the relocation of our accounting department and the
increased staffing of the TSG sales unit that did not recur in the first half of
2006. General and administrative expenses decreased as a percentage of net sales
to 10.8% from 12.1%, due primarily to increased sales in proportion to higher
expenses in the first half of 2006 as compared to the first half of 2005. We
expect general and administrative expenses to be lower in the third quarter of
2006 compared to the second quarter of 2006, as the expenses we incurred related
to a potential acquisition in the second quarter of 2006 are not expected to
recur.
OPERATING INCOME. During the first half of 2006, we reported operating income of
$3,012,000, or 9.0% of net sales, compared to $611,000, or 2.5% of net sales in
the first half of 2005. The substantial increase in our operating income and
operating margin was due largely to the operating leverage we experienced in the
first half of 2006 resulting from higher sales and gross profit, somewhat offset
by higher operating expenses, compared to that of 2005.
INTEREST. We recorded net interest income of $37,000 in the first half of 2006
compared to net interest income of $40,000 in the first half of 2005, due to our
lower average cash balances during the first half of 2006 as compared to the
first half of 2005. Our average cash balance was lower in the first half of 2006
due largely to the repurchase of $700,000 of our common stock under our stock
repurchase program. We do not expect to draw on our revolving borrowings and we
expect to continue to report net interest income throughout 2006. See "Liquidity
and Capital Resources" below for more information.
OTHER INCOME (EXPENSE). We recorded other expense of $82,000 in the first half
of 2006 due primarily to transaction exchange losses recorded by our UK
subsidiary resulting from the weakening of the U.S. dollar against the British
pound. We recorded other income of $15,000 in the first half of 2005 due
primarily to transaction
22
exchange gains recorded resulting from the strengthening of the U.S. dollar
against the British pound during this period.
INCOME TAXES. We recorded an income tax provision of $1,053,000 and $236,000,
respectively, in the first half of 2006 and 2005, at an effective rate of 35.5%
and 35.4%, 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 half of 2006 of $1,914,000,
or $0.19 per diluted share, compared to net income of $430,000, or $0.04 per
diluted share, for the first half of 2005.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first half 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 $1,775,000 during the first half of
2006, our cash balance increased by $1,142,000 from December 31, 2005. We ended
the second quarter of 2006 with approximately $5.7 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 $2,815,000 in the first half of 2006:
- We reported net income of $1,914,000.
- We recorded depreciation and amortization expense of $782,000.
- Accounts receivable increased by $1,653,000 due to higher sales and
the timing of sales during the quarter.
- Inventory increased by $2,240,000 due to anticipated future demand for
our products.
- Accounts payable increased by $2,490,000 due to increased inventory
purchases and inventory levels related to higher sales volume during
the quarter and to meet our expected future sales demand.
- Accrued liabilities increased by $1,686,000 due to the following: (1)
higher income tax accrual based on the increased level of income
before taxes, (2) legal and consulting services accruals related to a
potential acquisition that did not come to fruition and (3) higher
consulting services accruals related to the implementation of our new
companywide phone system and Oracle software.
- As of June 30, 2006 and December 31, 2005, our restructuring accrual
amounted to $800,000 and $1,007,000, respectively. The decrease of
$207,000 is related solely to payments made on our Wallingford lease
obligation. We expect to pay approximately $420,000 of these expenses
per year in 2006 and 2007, and the remainder 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 $1,775,000 and
$1,495,000 in the first six months of 2006 and 2005, respectively. Expenditures
in 2006 included approximately $600,000 for the purchase of hardware, software
and outside consulting costs related to our Oracle software implementation,
$350,000 for the purchase of hardware and consulting costs related to our new
phone system, $200,000 for the purchase of leasehold improvements made on the
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 generated approximately $44,000 from financing
activities during the first six months of 2006, largely due to proceeds and tax
benefits from stock option exercises (approximately $742,000) partly offset by
the repurchase of Company stock (approximately $698,000).
WORKING CAPITAL
Our working capital increased to $16,472,000 at June 30, 2006 from $15,375,000
at December 31, 2005. The current ratio decreased to 2.5 to 1 at June 30, 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
23
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 June 30, 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.
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 originally expiring
on July 31, 2006, and a $1 million equipment loan facility, which expired in
July 2005. On July 31, 2006, we amended the TD Banknorth Credit Facility to
extend the expiration date of our $11.5 million revolving credit line to
November 29, 2006. 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.
In February 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 June 30, 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 June 30, 2006. However, our maximum additional
available borrowings under the facility were limited to approximately $9,300,000
at June 30, 2006 based on the borrowing base of our collateral. We were in
compliance with all financial covenants of the TD Banknorth Credit Facility at
June 30, 2006.
STOCK REPURCHASE PROGRAM
In March 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 six months ended June 30, 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 June 30, 2006, we have 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 $2,327,000 to $23,584,000 at June 30, 2006
from $21,257,000 at December 31, 2005. The increase was primarily due to the
following for the six months ended June 30, 2006: (1) net income of $1,914,000
(2) proceeds of approximately $509,000 from the issuance of approximately
103,000 shares of common stock from stock option exercises, (3) an increase in
additional paid in capital of approximately $233,000 resulting from 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 $311,000.
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 June 30, 2006. We
have no material off-balance sheet arrangements as defined in Regulation S-K
303(a)(4)(ii).
24
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 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
25
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. On July
20, 2006, we filed a motion with the Connecticut court seeking a status
conference to determine the future schedule of the case and the status of the
jurisdictional motions. The Connecticut court has not yet scheduled such a
conference. 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.
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 and six months ended June 30, 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 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 six months ended June 30, 2006, we had 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 June 30, 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.
No common stock was repurchased in the three months ended June 30, 2006.
Approximately $5,435,000 remains available to purchase common stock pursuant to
the stock repurchase program.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 18, 2006. Matters
voted upon at the meeting and the number of votes cast for, against, withheld or
abstentions are as follows:
(1) To consider and act upon a proposal to elect one Director to serve until the
2009 Annual Meeting of Stockholders or until the Director's successor has been
duly elected and qualified. Nominee was Charles A. Dill. Votes cast were as
follows: 8,406,260 shares for; and 59,929 shares withheld.
(2) To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent registered public accounting firm for 2006. Votes cast were as
follows: 8,443,671 shares for; 18,558 shares against; and 3,960 shares
abstained.
26
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
27
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)
/s/ Steven A. DeMartino
----------------------------------------
August 8, 2006 Steven A. DeMartino
Executive Vice President, Chief
Financial Officer, Treasurer and
Secretary
(Principal Financial and Accounting
Officer)
28
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
29