UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 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 OCTOBER 28, 2006
----- ----------------------------------
COMMON STOCK, $.01 PAR VALUE 9,775,477
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
Page No.
--------
PART I. Financial Information:
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of
September 30, 2006 and December 31, 2005 3
Condensed consolidated statements of income for the three
and nine months ended September 30, 2006 and 2005 4
Condensed consolidated statements of cash flow for the
nine months ended September 30, 2006 and 2005 5
Notes to condensed consolidated financial statements 6 - 16
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 26
Item 4 Controls and Procedures 26
PART II. Other Information:
Item 1 Legal Proceedings 27
Item 1a Risk Factors 27
Item 2c Stock Repurchase 28
Item 6 Exhibits 29
Signatures 30
Certifications 32 - 35
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, December 31,
(In thousands) 2006 2005
------------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 4,629 $ 4,579
Receivables, net 10,534 8,359
Inventories 7,430 6,036
Refundable income taxes 178 295
Deferred tax assets 2,614 2,735
Other current assets 455 258
------- -------
Total current assets 25,840 22,262
------- -------
Fixed assets, net 5,922 4,510
Goodwill 1,469 1,469
Deferred tax assets 702 557
Intangible and other assets, net of accumulated
amortization of $102 and $41, respectively 529 534
------- -------
8,622 7,070
------- -------
Total assets $34,462 $29,332
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 3,268 $ 2,859
Accrued liabilities 4,337 3,198
Accrued restructuring expenses 420 420
Deferred revenue 456 410
------- -------
Total current liabilities 8,481 6,887
------- -------
Accrued restructuring expenses, net of current portion 281 587
Deferred revenue, net of current portion 562 270
Other liabilities 327 331
------- -------
1,170 1,188
------- -------
Total liabilities 9,651 8,075
------- -------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock 104 102
Additional paid-in capital 18,866 19,334
Retained earnings 10,422 7,489
Unamortized restricted stock compensation -- (1,837)
Accumulated other comprehensive income 138 36
Treasury stock, 597,300 and 505,000 shares at cost (4,719) (3,867)
------- -------
Total shareholders' equity 24,811 21,257
------- -------
Total liabilities and shareholders' equity $34,462 $29,332
======= =======
See notes to condensed consolidated financial statements.
3
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
(In thousands, except per share data) 2006 2005 2006 2005
------- ------- ------- -------
Net sales $15,276 $14,210 $48,615 $38,592
Cost of sales 9,838 9,634 31,744 26,085
------- ------- ------- -------
Gross profit 5,438 4,576 16,871 12,507
------- ------- ------- -------
Operating expenses:
Engineering, design and product development 621 637 2,151 2,107
Selling and marketing 1,593 1,627 4,884 4,523
General and administrative 1,671 1,624 5,271 4,578
------- ------- ------- -------
3,885 3,888 12,306 11,208
------- ------- ------- -------
Operating income 1,553 688 4,565 1,299
------- ------- ------- -------
Other income (expense):
Interest, net 25 19 62 59
Other, net (55) 7 (137) 22
------- ------- ------- -------
(30) 26 (75) 81
------- ------- ------- -------
Income before income taxes 1,523 714 4,490 1,380
Income taxes 504 40 1,557 276
------- ------- ------- -------
Net income $ 1,019 $ 674 $ 2,933 $ 1,104
======= ======= ======= =======
Net income per common share:
Basic $ 0.11 $ 0.07 $ 0.31 $ 0.11
Diluted $ 0.10 $ 0.07 $ 0.30 $ 0.11
Shares used in per-share calculation
Basic 9,623 9,817 9,588 9,932
Diluted 9,898 10,078 9,898 10,268
See notes to condensed consolidated financial statements.
4
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
(In thousands) 2006 2005
------- -------
Cash flows from operating activities:
Net income $ 2,933 $ 1,104
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Share-based compensation expense 422 326
Deferred income taxes (24) (111)
Incremental tax benefits from stock options
exercised (275) --
Depreciation and amortization 1,190 1,165
Changes in operating assets and liabilities:
Receivables (2,175) (456)
Inventories (1,394) 477
Refundable income taxes 117 --
Other current assets (197) 195
Other assets (76) 2
Accounts payable 409 (245)
Accrued liabilities and other liabilities 1,748 (830)
Accrued restructuring expenses (306) (333)
------- -------
Net cash provided by operating activities 2,372 $ 1,294
------- -------
Cash flows from investing activities:
Purchases of fixed assets (2,521) (2,042)
Purchases of intangible assets -- (510)
------- -------
Net cash used in investing activities (2,521) (2,552)
------- -------
Cash flows from financing activities:
Proceeds from stock option exercises 674 332
Purchases of common stock for treasury (852) (3,135)
Incremental tax benefits from stock options
exercised 275 --
Payment of expenses related to preferred stock
conversion and registration of common stock -- (3)
------- -------
Net cash provided by (used in) financing
activities 97 (2,806)
------- -------
Effect of exchange rate changes 102 (66)
------- -------
Increase (decrease) in cash and cash equivalents 50 (4,130)
Cash and cash equivalents at beginning of period 4,579 8,628
------- -------
Cash and cash equivalents at end of period $ 4,629 $ 4,498
======= =======
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 directly to end-users. Our product distribution spans
across the Americas, Europe, the Middle East, Africa, the Caribbean Islands
and the South Pacific. We also generate revenue from 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 state fairly our financial
position as of September 30, 2006, the results of our operations for the
three and nine months ended September 30, 2006 and 2005, and our cash flows
for the nine months ended September 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 nine months ended September 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 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 nine months ended September 30, 2006 was $5.91.
The table below indicates the key assumptions used in the option valuation
calculations for options granted in the nine months ended September 30,
2006 and a discussion of our methodology for developing each of the
assumptions used in the valuation model:
Nine months ended
September 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 September 30,
2006, or the three and nine months ended September 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 nine
months ended September 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 Nine months ended
September 30, September 30,
(In thousands, except per share data) 2005 2005
------------------ -----------------
Net income available to common shareholders:
Net income available to common
shareholders, as reported $ 674 $1,104
Add: Stock-based compensation expense
included in reported net income, net
of tax 84 206
Deduct: Stock-based compensation expense
determined under fair value based
method for all awards, net of tax (167) (556)
----- ------
Pro forma net income available to common
shareholders $ 591 $ 754
===== ======
Net income per common share:
Basic:
As reported $0.07 $ 0.11
Pro forma $0.06 $ 0.08
Diluted:
As reported $0.07 $ 0.11
Pro forma $0.06 $ 0.07
The pro forma effects of estimated share-based compensation expense on net
income and earnings per common share for the three and nine months ended
September 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, second and
third quarters of 2006. During the three and nine months ended September
30, 2006, we recognized compensation expense of $26,000 and $80,000,
respectively, for stock options and $85,000 and $341,000, 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 $39,000 and $149,000 for the three
and nine months ended September 30, 2006. No expense related to stock
options was recorded in the three and nine months ended September 30, 2005.
The following table illustrates the impact of the adoption of FAS 123R on
reported amounts:
Three months ended Nine months ended
September 30, 2006 September 30, 2006
----------------------- -----------------------
Impact of Impact of
FAS 123R FAS 123R
As Reported Adoption As Reported Adoption
----------- --------- ----------- ---------
Operating income $1,553 $ 26 $4,565 $ 80
Income before income taxes $1,523 $ 26 $4,490 $ 80
Net income $1,019 $ 17 $2,933 $ 52
Earnings per share:
Basic $ 0.11 $0.00 $ 0.31 $0.01
Diluted $ 0.10 $0.00 $ 0.30 $0.01
For the three and nine months ended September 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 was applied using MPA and, accordingly, has 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 September 30, 2006, approximately 462,000 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 (132,607) $ 5.08
Canceled (13,000) $10.62
--------
Options outstanding at
September 30, 2006 710,894 $ 6.65 5.85 $2,560
========
Options exercisable at
September 30, 2006 605,894 $ 6.27 5.25 $2,507
========
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------------
Weighted-
Average
Weighted- Remaining
Outstanding at Average Contractual Exercisable at
Range of September 30, Exercise Life (in September 30, Weighted-Average
Exercise Prices 2006 Price years) 2006 Exercise Price
--------------- -------------- --------- ----------- -------------- ----------------
$ 2.00 - $ 5.00 426,719 $ 3.70 5.29 426,719 $ 3.70
5.01 - 7.50 116,175 $ 6.53 4.59 116,175 $ 6.53
7.51 - 10.00 118,750 $ 8.74 8.41 13,750 $ 8.09
10.01 - 25.00 13,500 $16.50 7.32 13,500 $16.50
25.01 - 35.00 35,750 $31.66 7.66 35,750 $31.66
------- -------
710,894 $ 6.65 5.85 605,894 $ 6.27
======= =======
As of September 30, 2006, unrecognized compensation cost related to stock
options totaled $540,000, which is expected to be recognized over a
weighted average period of 4.3 years.
The total intrinsic value of stock options exercised was $116,000 and
$808,000, during the three and nine months ended September 30, 2006. No
stock options vested during the three and nine months ended September 30,
2006.
Cash received from stock option exercises for the three and nine months
ended September 30, 2006 was $165,000 and $674,000, 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 (11,500) 12.70
-------
Nonvested shares at September 30, 2006 154,366 $12.22
=======
As of September 30, 2006, unrecognized compensation cost related to
restricted stock totaled $1,557,000, which is expected to be recognized
over a weighted average period of 3.3 years. The total fair value of
restricted stock that vested during the three and nine months ended
September 30, 2006 was $0 and $338,000, respectively.
4. INVENTORIES
The components of inventories are:
September 30, December 31,
(In thousands) 2006 2005
------------- ------------
Raw materials and purchased component parts $6,976 $5,788
Finished goods 454 248
------ ------
$7,430 $6,036
====== ======
5. ACCRUED PRODUCT WARRANTY LIABILITY
The following table summarizes the activity recorded in the accrued product
warranty liability during the three and nine months ended September 30,
2006 and 2005.
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
(In thousands) 2006 2005 2006 2005
-------- ------- -------- ------
Balance, beginning of period $ 602 $ 664 $ 644 $ 597
Additions related to warranties issued 84 115 396 473
Warranty costs incurred (144) (137) (498) (428)
----- ----- ----- -----
Balance, end of period $ 542 $ 642 $ 542 $ 642
===== ===== ===== =====
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 nine months ended September 30,
2006 and 2005.
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
(In thousands) 2006 2005 2006 2005
---- ------ ------ ------
Accrual balance, beginning of period $800 $1,231 $1,007 $1,454
Cash payments (99) (110) (306) (333)
---- ------ ------ ------
Accrual balance, end of period $701 $1,121 $ 701 $1,121
==== ====== ====== ======
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 Nine months ended
September 30, September 30,
------------------ -----------------
2006 2005 2006 2005
------ ------- ------ -------
Net income $1,019 $ 674 $2,933 $ 1,104
====== ======= ====== =======
Shares:
Basic: Weighted average common shares
outstanding 9,623 9,817 9,588 9,932
Add: Dilutive effect of outstanding
options and restricted stock as
determined by the treasury stock
method
275 261 310 336
------ ------- ------ -------
Diluted: Weighted average common and
common equivalent shares outstanding 9,898 10,078 9,898 10,268
====== ======= ====== =======
Net income per common share:
Basic $ 0.11 $ 0.07 $ 0.31 $ 0.11
Diluted $ 0.10 $ 0.07 $ 0.30 $ 0.11
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
stock method.
For the three and nine months ended September 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
101,750 and 49,250 shares, respectively. For the three and nine months
ended September 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 Nine months ended
September 30, September 30,
------------------ -----------------
(In thousands) 2006 2005 2006 2005
------ ---- ------ ------
Net income $1,019 $674 $2,933 $1,104
Foreign currency translation
adjustment 44 (23) 102 (66)
------ ---- ------ ------
Total comprehensive income $1,063 $651 $3,035 $1,038
====== ==== ====== ======
9. STOCKHOLDER'S EQUITY
Changes in stockholders' equity for the nine months ended September 30,
2006 were as follows (in thousands):
Balance at December 31, 2005 $21,257
Net income 2,933
Issuance of shares from exercise of stock options 674
Purchases of treasury stock (852)
Share-based compensation 422
Tax benefits from employee stock transactions 275
Foreign currency translation adjustment 102
-------
Balance at September 30, 2006 $24,811
=======
14
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. STOCK REPURCHASE PROGRAM
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 September 30, 2006, we repurchased a total of
17,500 shares of common stock for approximately $154,000 at an average
price of $8.81 per share. During the nine months ended September 30, 2006,
we repurchased a total of 92,300 shares of common stock for approximately
$852,000 at an average price of $9.23 per share. As of September 30, 2006,
we have repurchased a total of 597,300 shares of common stock for
approximately $4,719,000 at an average price of $7.90 per share since the
inception of the Stock Repurchase Program.
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 case will be transferred to the Connecticut court for
consolidation with the action pending in that forum. In September 2006, the
District of Connecticut dismissed our case because of a lack of
jurisdiction. The decision was not on the merits of our claims, but on the
jurisdiction of the court in which the suit was brought. The California
District Court has been notified of this development. The action is
currently in the pre-trial motion stage and, as of September 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 of adopting the provisions of FIN 48 on our financial
position, results of operations and liquidity.
15
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements". SAB No. 108
requires analysis of misstatements using both an income statement
(rollover) approach and balance sheet (iron curtain) approach in assessing
materiality and provides for a one-time cumulative effect transition
adjustment. SAB No. 108 is effective for our fiscal year 2006 annual
financial statements. Because the guidance was recently issued, management
has not yet determined the impact, if any, of adopting the provisions of
SAB No. 108 on the Company's financial position and results of operations;
the impact is not expected to be material.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FASB 157") which is
effective for fiscal years beginning after November 15, 2007 and for
interim periods within those years. This statement defines fair value,
establishes a framework for measuring fair value and expands the related
disclosure requirements. Because the guidance was recently issued,
management has not yet determined the impact, if any, of adopting the
provisions of FASB 157 on the Company's financial position and results of
operations.
16
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, Latin America and Asia;
economic and political conditions in the United States, Australia, New
Zealand, Europe, Latin America and Asia; 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 in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. 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 nine months ended September 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.
17
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.
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, second and third quarters of
2006. During the three and nine months ended September 30, 2006, we recognized
compensation expense of $26,000 and $80,000, respectively, for stock options and
$85,000 and $341,000, 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 $39,000 and
$149,000 for the three and nine months ended September 30, 2006. No expense
related to stock options was recorded in the three and nine months ended
September 30, 2005. For the three and nine months ended September 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, has not been reflected in the 2005 financial
statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
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 September
30, 2006 and 2005 were as follows:
Change
Three months ended Three months ended ---------------
(In thousands) September 30, 2006 September 30, 2005 $ %
------------------ ------------------ ------- -----
Point of sale and banking $ 3,606 23.6% $ 5,544 39.0% $(1,938) (35.0%)
Gaming and lottery 8,495 55.6% 5,833 41.0% 2,662 45.6%
TransAct Services Group 3,175 20.8% 2,833 20.0% 342 12.1%
------- ----- ------- ----- -------
$15,276 100.0% $14,210 100.0% $ 1,066 7.5%
======= ===== ======= ===== =======
International* $ 3,790 24.8% $ 4,220 29.7% $ (430) (10.2%)
======= ===== ======= ===== =======
* 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 third quarter of 2006 increased $1,066,000, or 8%, from the
same period last year due primarily to higher printer shipments into our gaming
and lottery market (an increase of approximately $2,662,000, or 46%), offset by
lower printer shipments into our point of sale ("POS") and banking market (a
decrease of approximately $1,938,000, or 35%). Sales by the TransAct Services
Group ("TSG") also contributed to the net increase in sales for the third
quarter of 2006 (an increase of $342,000, or 12%). Overall, international sales
decreased by $430,000, or 10%, due to lower international shipments of both our
POS and 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 decreased approximately $1,938,000, or 35%.
18
Change
Three months ended Three months ended ---------------
(In thousands) September 30, 2006 September 30, 2005 $ %
------------------ ------------------ ------- -----
Domestic $3,449 95.6% $5,173 93.3% $(1,724) (33.3%)
International 157 4.4% 371 6.7% (214) (57.7%)
------ ----- ------ ----- -------
$3,606 100.0% $5,544 100.0% $(1,938) (35.0%)
====== ===== ====== ===== =======
Domestic POS and banking printer revenue decreased to $3,449,000, representing a
$1,724,000, or 33%, decrease from the third quarter of 2005, due primarily to
lower sales of (1) our Bankjet(R) line of inkjet printers due to shipments to a
top-tier financial services company in the third quarter 2005 that did not
repeat in the third quarter of 2006 and (2) our legacy line of POS impact
printers as these printers are being replaced by our newer thermal and inkjet
printers. Our sales into the POS and banking market over the last several years
have been impacted by a shift in technology in the market from impact printing
technology to thermal and inkjet printing technology. This change in technology
has resulted in declining sales of our impact printers that were at higher
average selling prices and increasing sales of our thermal and inkjet printers
that were at lower average selling prices. And, although our unit sales volume
has remained relatively consistent in 2006 as compared to 2005, our total sales
have declined due to lower average selling prices of thermal and inkjet printers
as compared to impact printers. These decreases were partly offset by increased
printer shipments of our line of thermal printers including our new thermal
printer launched exclusively for POS distributors. 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
$214,000, or 58%, to $157,000, due primarily to lower sales to our international
POS distributors in Latin America.
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 $2,662,000, or 46%, from the
third quarter of 2005, primarily due to higher domestic gaming printer sales,
partially offset by a decrease in international sales of our slot machine and
other gaming printers.
Change
Three months ended Three months ended ---------------
(In thousands) September 30, 2006 September 30, 2005 $ %
------------------ ------------------ ------- -----
Domestic $5,727 67.4% $2,720 46.6% $3,007 110.6%
International 2,768 32.6% 3,113 53.4% (345) (11.1%)
------ ----- ------ ----- ------
$8,495 100.0% $5,833 100.0% $2,662 45.6%
====== ===== ====== ===== ======
Domestic sales of our gaming and lottery printers increased by $3,007,000, or
111%, due largely to an increase of approximately $2,845,000 in sales of our
thermal casino printers driven primarily by increased market share as we realize
benefits from our sales relationship with JCM American Corporation. Lottery
printer sales to GTECH (excluding any international sales), which include
thermal on-line lottery printers, increased by approximately $162,000, or 12%,
in the third quarter of 2006 compared to the third quarter of 2005. However, our
quarterly sales for the third quarter of 2006 to GTECH decreased $2,361,000 from
the second quarter of 2006. Our quarterly sales are directly dependent on the
timing and number of new and upgraded lottery terminal installations GTECH
performs, and as a result, may fluctuate significantly between quarters. Our
sales to GTECH are not indicative of GTECH's overall business or revenue.
International gaming and lottery printer sales decreased $345,000, or 11%, to
$2,768,000 in the third quarter of 2006. Such sales represented 33% and 53% of
total sales into our gaming and lottery market during the third quarter of 2006
and 2005, respectively. This decrease was due primarily to decreased sales of
our gaming printers in (1) Canada and (2) Europe, primarily due to government
issues that have suspended new installations of casino printers in Russia. These
decreases were offset by continued growth in gaming printer sales in Asia and
Australia as these international markets continue to expand ticket printing in
slot machines and other gaming machines.
TRANSACT SERVICES GROUP:
19
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 $342,000, or 12%.
Change
Three months ended Three months ended ---------------
(In thousands) September 30, 2006 September 30, 2005 $ %
------------------ ------------------ ---- ----
Domestic $2,310 72.8% $2,097 74.0% $213 10.2%
International 865 27.2% 736 26.0% 129 17.5%
------ ----- ------ ----- ----
$3,175 100.0% $2,833 100.0% $342 12.1%
====== ===== ====== ===== ====
Domestic revenue from TSG increased by approximately $213,000, to $2,310,000
largely due to higher maintenance contract revenue and increased sales of
consumable products, including higher sales of inkjet cartridges as we began to
benefit from the new agreement we signed in August 2006 to supply inkjet
cartridges to a leading national office supply chain. These increases were
somewhat offset by a decline in the sale of replacement parts for certain legacy
impact printers, as the installed base of these legacy printers in the market
declines. Internationally, TSG revenue increased by approximately $129,000 to
$865,000 largely due to an increase in services revenue and increased sales of
consumable products.
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 $862,000, or 19%, and gross margin increased to 35.6% from
32.2% due primarily to a higher volume of sales and a more favorable sales mix
in the third quarter of 2006 compared to the third quarter of 2005, as well as
lower product costs resulting from increased sourcing of components for our
printers in Asia. We expect gross margin for the fourth quarter of 2006 to be
consistent with the gross margin reported for the third 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
expenses, outside design and testing services, and supplies). Such expenses
decreased by $16,000, or 3%, to $621,000, as we incurred lower outside design
and development expenses, which were largely offset by higher expenses related
to increased engineering staffing and other employee compensation expenses.
Engineering and product development expenses decreased as a percentage of net
sales to 4.1% from 4.5%, due primarily to higher sales in the third quarter of
2006 compared to the third quarter of 2005. We expect engineering and product
development expenses for the fourth quarter of 2006 to be higher than those
reported in the third quarter of 2006 due to higher 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 third quarter of 2006 decreased
by $34,000, or 2%, to $1,593,000, due primarily to lower travel, trade show,
advertising and other promotional marketing expenses compared with the third
quarter of 2005. These decreases were largely offset by 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 and
increased expenses related to the redesign of our website that we re-launched in
August 2006. Selling and marketing expenses decreased as a percentage of net
sales to 10.4% from 11.4%, due primarily to higher sales volume in the third
quarter of 2006 compared to the third quarter of 2005. We expect selling and
marketing expenses to be higher in the fourth quarter of 2006 compared to the
third quarter of 2006, as we expect to incur higher trade show and promotional
marketing expenses due to the increased number of trade shows we typically
attend in the fourth quarter (including FS/Tec, BAI Retail Delivery Conference &
Expo and the Global Gaming Expo), as well as higher 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 $47,000, or 3%, to $1,671,000,
due primarily to increased incentive compensation expenses and expenses
associated with the Company's Oracle implementation including temporary help,
travel and compensation related expenses. These increases were partially offset
by lower professional fees. General and administrative expenses decreased as a
percentage of net sales to 10.9% from 11.4%, due primarily to higher sales
volume in the third quarter of 2006 compared to the third quarter of 2005. We
expect general and
20
administrative expenses to be higher in the fourth quarter of 2006 compared to
the third quarter of 2006 due to expected higher professional fees related to
the Company's year-end audit and compensation related expenses.
OPERATING INCOME. During the third quarter of 2006 we reported operating income
of $1,553,000, or 10.2% of net sales, compared to $688,000, or 4.8% of net sales
in the third quarter of 2005. The substantial increase in our operating income
and operating margin was due largely to the operating leverage we experienced in
the third quarter of 2006 resulting from higher sales and gross profit, and a
consistent level of operating expenses, compared to that of 2005.
INTEREST. We recorded net interest income of $25,000 in the third quarter of
2006 compared to $19,000 in the third quarter of 2005, as we improved our
overall rate of return on our invested cash balance during the third quarter of
2006 as compared to the third 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.
OTHER INCOME (EXPENSE). We recorded other expense of $55,000 in the third
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. We recorded other income of $7,000 in the third 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 $504,000 and $40,000 in the
third quarter of 2006 and 2005, respectively, at an effective rate of 33.1% and
5.6%, respectively. The lower effective tax rate for the third quarter of 2005
resulted primarily from the recognition of approximately $138,000 of certain
discrete tax benefits combined with a low level of taxable income during the
third quarter of 2005 as compared to the third quarter of 2006. In addition, our
effective tax rate for the third quarter of 2005 was also impacted, to a lesser
extent, by a downward revision of our estimated effective tax rate for 2005
based on the Company's anticipated taxable income. The effective tax rate for
the third quarter of 2006 was impacted by the recognition of approximately
$38,000 of discrete tax benefits during the quarter. We expect our annual
effective tax rate for the full year 2006 to be approximately 35%.
NET INCOME. We reported net income during the third quarter of 2006 of
$1,019,000, or $0.10 per diluted share, compared to net income of $674,000, or
$0.07 per diluted share, for the third quarter of 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2005
NET SALES. Net sales by market for the current and prior year's nine month
period were as follows:
Change
Nine months ended Nine months ended --------------
(In thousands) September 30, 2006 September 30, 2005 $ %
------------------ ------------------ ------- ----
Point of sale and banking $12,718 26.2% $12,653 32.8% $ 65 0.5%
Gaming and lottery 26,283 54.0% 17,331 44.9% 8,952 51.7%
TransAct Services Group 9,614 19.8% 8,608 22.3% 1,006 11.7%
------- ----- ------- ----- -------
$48,615 100.0% $38,592 100.0% $10,023 26.0%
======= ===== ======= ===== =======
International* $10,667 21.9% $ 9,244 24.0% $ 1,423 15.4%
======= ===== ======= ===== =======
* International sales do not include sales of printers made to domestic
distributors or other customers who in turn ship those printers to
international destinations.
Net sales for the first nine months of 2006 increased $10,023,000, or 26%, from
the prior year's first nine months due to sales increases in all three of our
markets: POS and banking (an increase of approximately $65,000, or 1%); gaming
and lottery (an increase of approximately $8,952,000, or 52%); and TSG (an
increase of $1,006,000, or 12%). Overall, international sales increased by
$1,423,000, or 15%, due to higher international shipments of our gaming and
lottery printers as well as increased TSG sales internationally, somewhat offset
by lower international shipments of our POS and banking printers.
POINT OF SALE AND BANKING:
Sales of our POS and banking printers worldwide increased approximately $65,000,
or 1%.
21
Change
Nine months ended Nine months ended ---------------
(In thousands) September 30, 2006 September 30, 2005 $ %
------------------ ------------------ ------- -----
Domestic $11,785 92.7% $11,054 87.4% $ 731 6.6%
International 933 7.3% 1,599 12.6% (666) (41.7%)
------- ----- ------- ----- -----
$12,718 100.0% $12,653 100.0% $ 65 0.5%
======= ===== ======= ===== =====
Domestic POS and banking printer sales increased to $11,785,000, representing a
$731,000, or 7%, increase from the first nine months of 2005, due primarily to
higher sales of (1) our Bankjet(R) line of inkjet printers to existing banking
customers and (2) our line of thermal printers including our new thermal printer
launched in 2005 exclusively for POS distributors. Although we are currently
pursuing additional banking opportunities, due to the project-oriented nature of
these sales, we cannot predict if and when future sales may occur. These
increases were offset by lower sales of our legacy line of POS impact printers,
as expected, as these printers are being replaced by our newer thermal and
inkjet printers. Our sales into the POS and banking market over the last several
years have been impacted by a shift in technology in the market from impact
printing technology to thermal and inkjet printing technology. This change in
technology has resulted in declining sales of our impact printers that were at
higher average selling prices and increasing sales of our thermal and inkjet
printers that were at lower average selling prices. And, although our unit sales
volume has remained relatively consistent in 2006 compares to 2005, our total
sales has declined due to lower average selling prices of thermal and inkjet
printers as compared to impact printers.
International POS and banking printer shipments decreased by approximately
$666,000, or 42%, to $933,000, due primarily to lower sales to our international
POS distributors in Europe and Latin America.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers increased by $8,952,000, or 52%, from
the first nine months 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
Nine months ended Nine months ended --------------
(In thousands) September 30, 2006 September 30, 2005 $ %
------------------ ------------------ ------- ----
Domestic $18,935 72.0% $11,695 67.5% $7,240 61.9%
International 7,348 28.0% 5,636 32.5% 1,712 30.4%
------- ----- ------- ----- ------
$26,283 100.0% $17,331 100.0% $8,952 51.7%
======= ===== ======= ===== ======
Domestic sales of our gaming and lottery printers increased by $7,240,000, or
62%, due largely to a significant increase in both sales of lottery printers to
GTECH and thermal casino printers. Lottery printer sales to GTECH (excluding any
international sales), which include thermal on-line lottery printers, increased
by approximately $4,826,000, or 138%, in the first nine months of 2006 compared
to the first nine months of 2005. Our 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 between quarters. Our
sales to GTECH are not indicative of GTECH's overall business or revenue.
Domestic casino printer sales increased by approximately $2,414,000 driven
primarily by increased market share as we continue to benefit from our sales
relationship with JCM American Corporation.
International gaming and lottery printer sales increased $1,712,000, or 30%, to
$7,348,000 in the first nine months of 2006 compared to the first nine months of
2005. Such sales represented 28% and 33% of total sales into our gaming and
lottery market during the first nine months of 2006 and 2005, respectively. This
increase was led primarily by continued growth in international gaming printer
sales, primarily in Australia and Asia, as these international markets continue
to expand ticket printing in slot machines and other gaming machines. In
addition, we experienced higher gaming printer sales in Canada and higher
international lottery printer sales to GTECH.
TRANSACT SERVICES GROUP ("TSG"):
Sales from TSG increased by approximately $1,006,000, or 12%.
22
Change
Nine months ended Nine months ended --------------
(In thousands) September 30, 2006 September 30, 2005 $ %
------------------ ------------------ ------- ----
Domestic $7,228 75.2% $6,599 76.7% $ 629 9.5%
International 2,386 24.8% 2,009 23.3% 377 18.8%
------ ----- ------ ----- ------
$9,614 100.0% $8,608 100.0% $1,006 11.7%
====== ===== ====== ===== ======
Domestic TSG revenue increased by approximately $629,000, or 10%, to $7,228,000,
largely due to higher sales of maintenance and repair services, as well as
increased sales of refurbished printers and consumable products. These increases
were somewhat offset by a decline in the sale of replacement parts for certain
legacy impact printers, as the installed base of these legacy printers in the
market declines. Internationally, TSG sales increased by approximately $377,000,
or 19%, to $2,386,000, due largely to an increase in maintenance and repair
services revenue, as well as increased sales of consumable products.
GROSS PROFIT. Gross profit increased $4,364,000, or 35%, to $16,871,000 and
gross margin increased to 34.7% from 32.4%, due primarily to a higher volume of
sales and a more favorable sales mix in the first nine months of 2006 compared
to the first nine months of 2005, as well as lower product costs resulting from
increased sourcing of components for our printers in Asia.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses increased by $44,000, or 2%, to $2,151,000, 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 International Game
Technology's ("IGT") 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 nine months of 2005 that did not recur in the first nine
months of 2006. Engineering and product development expenses decreased as a
percentage of net sales to 4.4% from 5.5%, due primarily to higher sales in the
first nine months of 2006 compared to the first nine months of 2005.
SELLING AND MARKETING. Selling and marketing expenses increased by $361,000, or
8%, to $4,884,000, as we incurred the full nine-month effect in 2006 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. We also incurred
increased expenses related to the redesign of our website that we re-launched in
August 2006. These increases were somewhat offset by lower travel, trade show,
advertising and other promotional marketing expenses compared with the first
nine months of 2005. Selling and marketing expenses decreased as a percentage of
net sales to 10.0% from 11.7%, due primarily to higher sales volume in
proportion to a higher level of expenses in the first nine months of 2006
compared to the first nine months of 2005.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$693,000, or 15%, to $5,271,000, due primarily to (1) the full nine-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)
expenses associated with the Company's Oracle implementation including data
conversion expenses, temporary help, travel and compensation related expenses,
(3) approximately $220,000 of legal and consulting services related to a
potential acquisition that was not consummated and (4) increased
telecommunications expenses associated with the implementation of our new
company-wide phone system. These increases were partially offset by lower travel
expenses and a decrease in recruiting costs incurred during the first nine
months 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 nine
months of 2006. General and administrative expenses decreased as a percentage of
net sales to 10.8% from 11.9%, due primarily to increased sales in proportion to
higher expenses in the first nine months of 2006 as compared to the first nine
months of 2005.
OPERATING INCOME. During the first nine months of 2006, we reported operating
income of $4,565,000, or 9.4% of net sales, compared to $1,299,000, or 3.4% of
net sales in the first nine months of 2005. The substantial increase in our
operating income and operating margin was due largely to the operating leverage
we experienced in the first nine months 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 $62,000 in the first nine months of
2006 compared to net interest income of $59,000 in the first nine months of
2005. We do not expect to draw on our revolving borrowings and we expect to
continue to report net interest income for the remainder of 2006. See "Liquidity
and Capital Resources" below for more information.
23
OTHER INCOME (EXPENSE). We recorded other expense of $137,000 in the first nine
months 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 $22,000 in the first nine months 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 $1,557,000 and $276,000 in
the first nine months of 2006 and 2005, respectively, at an effective rate of
34.7% and 20.0%, respectively. The lower effective tax rate for the first nine
months of 2005 resulted primarily from the recognition of approximately $138,000
of certain discrete tax benefits combined with a low level of taxable income
during the first nine months of 2005 as compared to the first nine months of
2006. In addition, our effective tax rate for the first nine months of 2005 was
also impacted, to a lesser extent, by a downward revision of our estimated
effective tax rate for 2005 based on the Company's anticipated taxable income.
The effective tax rate for the first nine months of 2006 was impacted by the
recognition of approximately $38,000 of discrete tax benefits during the period.
We expect our annual effective tax rate for the full year 2006 to be
approximately 35%.
NET INCOME. We reported net income during the first nine months of 2006 of
$2,933,000, or $0.30 per diluted share, compared to net income of $1,104,000, or
$0.11 per diluted share, for the first nine months of 2005.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first nine months of 2006, our cash flows reflected the results
of higher sales volume, increased investment in infrastructure, and our stock
repurchase program, compared to the same period in 2005. Even with the
repurchase of approximately $852,000 of our common stock and capital
expenditures of $2,521,000 during the first nine months of 2006, we still ended
the third quarter of 2006 with approximately $4.6 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 $2,372,000 in the first nine months of 2006:
- We reported net income of $2,933,000.
- We recorded depreciation and amortization expense of $1,190,000.
- We recorded share-based compensation expense of $422,000.
- Accounts receivable increased by $2,175,000 due to higher sales and
the timing of sales during the quarter.
- Inventory increased by $1,394,000 and accounts payable increased by
$409,000 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 $1,748,000 due to the following: (1)
higher income tax accrual based on the increased level of income
before taxes, (2) higher deferred revenue balances related to
increased sales of extended service contracts, (3) higher legal and
audit services accruals and (4) higher consulting services accruals
related to our Oracle software implementation. These increases were
partly offset by a decrease in warranty accruals.
- As of September 30, 2006 and December 31, 2005, our restructuring
accrual amounted to $701,000 and $1,007,000, respectively. The
decrease of $306,000 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 $2,521,000 and
$2,042,000 in the first nine months of 2006 and 2005, respectively. Expenditures
in 2006 included approximately $850,000 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, with the remaining amount primarily for the purchase of new product tooling.
We expect capital expenditures for the full year 2006 to be approximately
$2,800,000. During the remainder of 2006, we expect to continue to invest in two
significant projects: (1) the implementation of our Oracle software and (2) new
product tooling and tooling enhancements to our existing products.
24
Financing activities: We generated approximately $97,000 from financing
activities during the first nine months of 2006 as compared to utilizing
$2,806,000 during the first nine months of 2005. This was largely due to
proceeds and tax benefits from stock option exercises of approximately $949,000
during the first nine months of 2006 compared to $332,000, during the first nine
months of 2005, respectively. These proceeds were largely offset by the
repurchase of Company stock of approximately $852,000 for the first nine months
of 2006 as compared to $3,135,000 during the first nine months of 2005,
respectively.
WORKING CAPITAL
Our working capital increased to $17,359,000 at September 30, 2006 from
$15,375,000 at December 31, 2005. The current ratio decreased to 3.0 to 1 at
September 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 increase in income taxes payable
resulting from a higher level of income before taxes, somewhat offset by higher
accounts receivable and inventory levels. In addition, our working capital and
current ratio were impacted by our stock repurchase program, as we continue to
use available cash to repurchase shares of our common stock in the open market.
DEFERRED TAXES
As of September 30, 2006, we had a net deferred tax asset of approximately
$3,316,000. In order to utilize this deferred tax asset, we will need to
generate approximately $8.2 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 anticipate replacing or
renewing our credit facility during the fourth quarter of 2006.
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.
In February 2006, we amended the TD Banknorth Credit Facility to revise a
financial covenant effective December 31, 2005.
As of September 30, 2006, we had no balances outstanding on the revolving credit
line. Undrawn commitments under the TD Banknorth Credit Facility were
$11,500,000 at September 30, 2006. However, our maximum additional available
borrowings under the facility were limited to approximately $8,500,000 at
September 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
September 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 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
nine months ended September 30, 2006, we repurchased a total of 92,300 shares of
common stock for approximately $852,000 at an average price of $9.23 per share.
As of September 30, 2006, we have repurchased a total of 597,300 shares of
common stock for approximately $4,719,000 at an average price of $7.90 per share
since the inception of the Stock Repurchase Program.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $3,554,000 to $24,811,000 at September 30,
2006 from $21,257,000 at December 31, 2005. The increase was primarily due to
the following for the nine months ended September 30, 2006: (1) net income of
$2,933,000, (2) proceeds of approximately $674,000 from the issuance of
approximately 133,000 shares of common stock from stock option exercises, (3) an
increase in additional paid-in capital of approximately $275,000 resulting from
tax benefits resulting from the sale of employee stock from stock option
25
exercises, (4) compensation expense related to stock options and restricted
stock of $422,000, and (5) foreign currency translation adjustments of
approximately $102,000. These increases were offset by treasury stock purchases
of 92,300 shares of common stock for approximately $852,000.
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 September 30,
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 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 overriding 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.
26
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 case will be transferred to the District of
Connecticut for consolidation with the action pending in that forum. On
September 1, 2006, the District of Connecticut dismissed our case because of a
lack of jurisdiction. The decision was not on the merits of our claims, but on
the jurisdiction of the court in which the suit was brought. The California
District Court has been notified of this development. We intend to vigorously
defend TransAct against FutureLogic's claims, which we believe to be without
merit. At this stage in the proceedings we are unable to estimate any potential
or probable liability.
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 material changes have occurred to
the risk factors contained in our Form 10-K for the year ended December 31, 2005
during the nine months ended September 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.
27
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 nine months ended September 30, 2006, we had repurchased a
total of 92,300 shares of common stock for approximately $852,000 at an average
price of $9.23 per share. As of September 30, 2006, we had repurchased a total
of 597,300 shares of common stock for approximately $4,719,000, at an average
price of $7.90 per share since the inception of the Stock Repurchase Program.
The following table summarizes repurchases of our common stock in the three
months ended September 30, 2006.
Approximate
Total Dollar
Number of Value of
Shares Shares
Purchased that
as Part of May Yet Be
Total Average Publicly Purchased
Number of Price Announced under the
Shares Paid per Plans or Plans or
Period Purchased Share Programs Programs
------ --------- -------- ---------- -----------
July 1, 2006 - July 31, 2006 -- $ -- -- $5,435,000
August 1, 2006 - August 31, 2006 7,900 8.96 7,900 $5,364,000
September 1, 2006 - September 30, 2006 9,600 8.68 9,600 $5,281,000
------ ------
Total 17,500 $8.81 17,500
====== ======
28
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 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
Exhibit 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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
(Registrant)
November 9, 2006 /s/ Steven A. DeMartino
-----------------------------------------
Steven A. DeMartino
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
30
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
31