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, 2007
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.)
ONE HAMDEN CENTER, 2319 WHITNEY AVENUE, SUITE 3B, HAMDEN, CT 06518
(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 30, 2007
----- -------------------------------
COMMON STOCK,
$.01 PAR VALUE 9,500,886
TRANSACT TECHNOLOGIES INCORPORATED
INDEX
Page No.
--------
PART I. Financial Information:
Item 1 Financial Statements (unaudited)
Condensed consolidated balance sheets as of June
30, 2007 and December 31, 2006 3
Condensed consolidated statements of income for the three
and six months ended June 30, 2007 and 2006 4
Condensed consolidated statements of cash flow for the
six months ended June 30, 2007 and 2006 5
Notes to condensed consolidated financial statements 6 - 11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 19
Item 4 Controls and Procedures 20
PART II. Other Information:
Item 1 Legal Proceedings 20 - 21
Item 1a Risk Factors 21
Item 2c Stock Repurchase 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 6 Exhibits 22
Signatures 23
Certifications 25 - 28
2
ITEM 1. FINANCIAL STATEMENTS
TRANSACT TECHNOLOGIES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
(In thousands) 2007 2006
-------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 2,483 $ 3,436
Receivables, net 10,920 11,422
Inventories, net 9,048 7,567
Refundable income taxes 197 42
Deferred tax assets 2,615 2,167
Other current assets 327 506
-------- -------
Total current assets 25,590 25,140
-------- -------
Fixed assets, net 6,693 5,938
Goodwill 1,469 1,469
Deferred tax assets 556 542
Intangible and other assets, net of accumulated amortization of $163
and $122, respectively 556 617
-------- -------
9,274 8,566
-------- -------
Total assets $ 34,864 $33,706
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,688 $ 3,997
Accrued liabilities 3,193 3,796
Accrued restructuring expenses 14 315
Deferred revenue 350 389
-------- -------
Total current liabilities 9,245 8,497
-------- -------
Deferred revenue, net of current portion 340 508
Accrued warranty, net of current portion 120 160
Accrued rent 521 251
Other liabilities 112 --
-------- -------
1,093 919
-------- -------
Total liabilities 10,338 9,416
-------- -------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock 104 104
Additional paid-in capital 19,467 19,105
Retained earnings 11,784 11,405
Accumulated other comprehensive income 184 168
Treasury stock, 871,300 and 801,300 shares at cost (7,013) (6,492)
-------- -------
Total shareholders' equity 24,526 24,290
-------- -------
Total liabilities and shareholders' equity $ 34,864 $33,706
======== =======
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) 2007 2006 2007 2006
------- -------- ------- -------
Net sales $13,947 $16,905 $25,415 $33,339
Cost of sales 9,007 11,159 16,722 21,906
------- ------- ------- -------
Gross profit 4,940 5,746 8,693 11,433
------- ------- ------- -------
Operating expenses:
Engineering, design and product
development 779 769 1,493 1,530
Selling and marketing 1,708 1,711 3,350 3,291
General and administrative 2,022 1,890 3,872 3,600
Business consolidation and restructuring 12 -- 12 --
------- ------- ------- -------
4,521 4,370 8,727 8,421
------- ------- ------- -------
Operating income (loss) 419 1,376 (34) 3,012
------- ------- ------- -------
Other income (expense):
Interest, net 10 23 38 37
Other, net 13 (71) 12 (82)
------- ------- ------- -------
23 (48) 50 (45)
------- ------- ------- -------
Income before income taxes 442 1,328 16 2,967
Income tax provision (benefit) 158 471 (45) 1,053
------- ------- ------- -------
Net income $ 284 $ 857 $ 61 $ 1,914
======= ======= ======= =======
Net income per common share:
Basic $ 0.03 $ 0.09 $ 0.01 $ 0.20
Diluted $ 0.03 $ 0.09 $ 0.01 $ 0.19
Shares used in per-share calculation
Basic 9,384 9,581 9,404 9,570
Diluted 9,574 9,927 9,626 9,898
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) 2007 2006
------- -------
Cash flows from operating activities:
Net income $ 61 $ 1,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Share-based compensation expense 361 311
Deferred income taxes (350) --
Incremental tax benefits from stock options exercised -- (233)
Depreciation and amortization 902 782
Gain on sale of assets (22) --
Changes in operating assets and liabilities:
Receivables 502 (1,653)
Inventories (1,481) (2,240)
Refundable income taxes (155) 145
Other current assets 179 (97)
Other assets 14 (83)
Accounts payable 1,691 2,490
Accrued liabilities and other liabilities (262) 1,686
Accrued restructuring expenses (301) (207)
------- -------
Net cash provided by operating activities 1,139 2,815
------- -------
Cash flows from investing activities:
Purchases of fixed assets (1,622) (1,775)
Proceeds from sale of assets 37 --
------- -------
Net cash used in investing activities (1,585) (1,775)
------- -------
Cash flows from financing activities:
Proceeds from option exercises 1 509
Purchases of common stock for treasury (521) (698)
Incremental tax benefits from stock options exercised -- 233
Payment of deferred financing costs (3) --
------- -------
Net cash provided by (used in) financing activities (523) 44
------- -------
Effect of exchange rate changes 16 58
------- -------
Increase (decrease) in cash and cash equivalents (953) 1,142
Cash and cash equivalents at beginning of period 3,436 4,579
------- -------
Cash and cash equivalents at end of period $ 2,483 $ 5,721
======= =======
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 Hamden, 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, kiosk 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, Asia, Australia, 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 financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
These accounting principles were applied on a basis consistent with those
of the consolidated financial statements contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2006. 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, 2007, the
results of our operations for the three and six months ended June 30, 2007
and 2006, and our cash flows for the six months ended June 30, 2007 and
2006. The December 31, 2006 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, 2006 included in our Annual Report on Form 10-K. Certain
amounts from the December 31, 2006 condensed consolidated balance sheet
have been reclassified to conform with the current period presentation.
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, 2007
are not necessarily indicative of the results to be expected for the full
year.
3. SHARE-BASED PAYMENTS
STOCK OPTION ACTIVITY. 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, 2006: 707,344 $6.67
Granted 144,500 $8.82
Exercised (199) $4.54
Canceled (35,500) $9.71
-------
Options outstanding at June 30, 2007 816,145 $6.92 5.70 $955
=======
Options exercisable at June 30, 2007 603,145 $6.25 4.43 $955
=======
6
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SHARE-BASED PAYMENTS (CONTINUED)
As of June 30, 2007, unrecognized compensation cost related to stock
options totaled $1,150,000, which is expected to be recognized over a
weighted average period of 4.3 years. The total intrinsic value of stock
options exercised was $575,000 during the three months ended June 30, 2006.
No stock options were exercised during the three months ended June 30,
2007. The total intrinsic value of stock options exercised was $1,000 and
$692,000, during the six months ended June 30, 2007 and 2006, respectively.
RESTRICTED STOCK ACTIVITY. 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, 2006 154,116 $12.22
Granted -- --
Vested (37,683) 13.01
Canceled (6,750) 9.74
-------
Nonvested shares at June 30, 2007 109,683 $12.10
=======
As of June 30, 2007, unrecognized compensation cost related to restricted
stock totaled $1,103,000, which is expected to be recognized over a
weighted average period of 2.6 years. The intrinsic value of restricted
stock that vested was $43,000 and $48,000, during the three months ended
June 30, 2007 and 2006, respectively. The intrinsic value of restricted
stock that vested was $280,000 and $338,000, during the six months ended
June 30, 2007 and 2006, respectively.
SHARE-BASED COMPENSATION EXPENSE. During the three months ended June 30,
2007 and 2006, we recognized compensation expense of $61,000 and $34,000,
respectively, for stock options and $124,000 and $122,000, respectively,
for restricted stock, which was recorded in our condensed consolidated
statements of income in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS No. 123(R)"). The income tax benefits from
share-based payments recorded in the income statement totaled $68,000 and
$55,000 for the three months ended June 30, 2007 and 2006, respectively.
During the six months ended June 30, 2007 and 2006, we recognized
compensation expense of $104,000 and $55,000, respectively, for stock
options and $257,000 and $256,000, respectively, for restricted stock. The
income tax benefits from share-based payments recorded in the income
statement totaled $133,000 and $112,000 for the six months ended June 30,
2007 and 2006, respectively.
ASSUMPTIONS FOR ESTIMATING FAIR VALUE OF SHARE-BASED PAYMENTS. 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.
7
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. SHARE-BASED PAYMENTS (CONTINUED)
Under the assumptions indicated below, the weighted-average fair value of
stock option grants for the three and six months ended June 30, 2007 was
$4.68 and $5.81. No assumptions have been disclosed for the three months
ended June 30, 2006, as no stock option grants were made during that
period. 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 respective periods:
Three months ended Six months ended
June 30, June 30,
-------------------------- ---------------------
2007 2006 2007 2006
--------- -------------- --------- ---------
Expected option term 7.4 years Not applicable 6.0 years 5.2 years
Expected volatility 73.8% Not applicable 71.2% 78.4%
Risk-free interest rate 4.6% Not applicable 4.5% 4.5%
Dividend yield 0% Not applicable 0% 0%
4. INVENTORIES
The components of inventories are:
June 30, December 31,
(In thousands) 2007 2006
-------- ------------
Raw materials and purchased component parts $8,613 $7,337
Work in progress 1 --
Finished goods 434 230
------ ------
$9,048 $7,567
====== ======
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, 2007 and
2006.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2007 2006 2007 2006
----- ----- ----- -----
Balance, beginning of period $ 608 $ 600 $ 603 $ 644
Additions related to warranties issued 124 244 216 312
Warranty costs incurred (152) (242) (239) (354)
----- ----- ----- -----
Balance, end of period $ 580 $ 602 $ 580 $ 602
===== ===== ===== =====
The current portion of the accrued product warranty liability is included
in accrued liabilities and the long term portion is included in accrued
warranty, net of current portion in the accompanying balance sheets.
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.
8
TRANSACT TECHNOLOGIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING (CONTINUED)
In November 2006, we executed an agreement effective May 1, 2007 to
terminate the lease agreement for our Wallingford, CT facility (the
"Release Agreement"). Prior to the execution of the Release Agreement, we
accrued for the remaining non-cancelable lease payments and other related
costs for the unused portion of this facility through the expiration date
of the lease (March 31, 2008). As a result of the Release Agreement and the
early termination of the lease, we were released from the legal obligation
for lease payments after May 1, 2007 and, accordingly, we reversed
approximately $479,000 of previously accrued restructuring reserve in the
fourth quarter of 2006. During the second quarter of 2007, we recorded an
additional $12,000 of expense to finalize the termination of the lease
agreement. As of June 30, 2007, our restructuring accrual was $14,000,
which represents the estimated remaining non-cancelable lease payments and
other related costs for the unused portion of this facility through the new
termination date of the lease (May 1, 2007).
The following table summarizes the activity recorded in accrued
restructuring expenses during the three and six months ended June 30, 2007
and 2006.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2007 2006 2007 2006
----- ----- ----- ------
Accrual balance, beginning of
period $ 205 $ 900 $ 315 $1,007
Business consolidation and
restructuring expenses 12 -- 12 --
Cash payments (203) (100) (313) (207)
----- ----- ----- ------
Accrual balance, end of period $ 14 $ 800 $ 14 $ 800
===== ===== ===== ======
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,
------------------ -----------------
2007 2006 2007 2006
------ ------ ------ --------
Net income $ 284 $ 857 $ 61 $1,914
====== ====== ====== ======
Shares:
Basic: Weighted average common shares
outstanding 9,384 9,581 9,404 9,570
Add: Dilutive effect of outstanding
options and restricted stock as
determined by the treasury stock
method 190 346 222 328
------ ------ ------ ------
Diluted: Weighted average common and
common equivalent shares outstanding 9,574 9,927 9,626 9,898
====== ====== ====== ======
Net income per common share:
Basic $ 0.03 $ 0.09 $ 0.01 $ 0.20
Diluted $ 0.03 $ 0.09 $ 0.01 $ 0.19
9
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 six months ended June 30, 2007, potentially dilutive
shares that were excluded from the net income per share calculation,
consisting of out-of-the-money stock options, amounted to 315,500 and
248,000 shares, respectively.
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.
8. COMPREHENSIVE INCOME
The following table summarizes the Company's comprehensive income:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(In thousands) 2007 2006 2007 2006
---- ---- ---- ------
Net income $284 $857 $61 $1,914
Foreign currency translation
adjustment 16 50 16 58
---- ---- --- ------
Total comprehensive income $300 $907 $77 $1,972
==== ==== === ======
9. STOCKHOLDER'S EQUITY
Changes in stockholders' equity for the six months ended June 30, 2007 were
as follows (in thousands):
Balance at December 31, 2006 $ 24,290
Net income 61
Proceeds from issuance of shares from exercise of stock options 1
Purchases of treasury stock (521)
Share-based compensation expense 361
Adjustment resulting from the adoption of FIN 48 318
Foreign currency translation adjustment 16
-------
Balance at June 30, 2007 $24,526
=======
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, 2007, no repurchases were made.
During the six months ended June 30, 2007, we repurchased a total of 70,000
shares of common stock for approximately $521,000 at an average price of
$7.44 per share. As of June 30, 2007, we have repurchased a total of
871,300 shares of common stock for approximately $7,013,000 at an average
price of $8.05 per share since the inception of the Stock Repurchase
Program.
10
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 charged FutureLogic with
disseminating false and misleading statements. We asserted 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 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.
On June 12, 2007, we answered FutureLogic's complaint and filed a
counterclaim that FutureLogic infringes U.S. Patent No. 6,924,903 (the "903
Patent"). We also filed a motion for a preliminary injunction to stop
infringement by FutureLogic's dual port printers. Our motion for
preliminary injunction was heard on July 30, 2007. Through our preliminary
injunction motion and hearing, we showed that FutureLogic has constructed a
prototype printer, the GEN2 Universal with the ProMatrix system, which the
judge ruled has a likelihood of infringing the 903 Patent covering dual
port technology. The court denied our motion on August 6, 2007, but the
court ruled that "Should TransAct discover that FutureLogic has sold or
offered to sell any GEN2 Universal printers with the ProMatrix system that
infringe the 903 Patent during the course of this action, it may renew this
motion on an expedited ex parte basis and - assuming it shows the requisite
likelihood of success on the merits - the court will afford it the relief
it seeks." Discovery is now under way in the case.
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. INCOME TAXES
We adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"), at the beginning of fiscal year 2007. As a result of the
implementation we recognized a decrease to reserves for uncertain tax
positions. This decrease was accounted for as a $318,000 adjustment to the
beginning balance of retained earnings on the Condensed Consolidated
Balance Sheet. Including the cumulative effect decrease, at the beginning
of 2007 we had approximately $79,000 of total gross unrecognized tax
benefits that, if recognized, would favorably affect the effective income
tax rate in any future periods.
At June 30, 2007, we had approximately $112,000 of total gross unrecognized
tax benefits that, if recognized, would favorably affect the effective
income tax rate in any future periods. We are not aware of any events that
could occur within the next twelve months that could cause a significant
change in the total amount of unrecognized tax benefits.
We are subject to U.S. federal income tax as well as income tax of certain
state and foreign jurisdictions. We have substantially concluded all U.S.
federal income tax, state and local, and foreign tax matters through 2002.
Our federal tax returns for the years 2003 - 2005 remain open to
examination. Various state and foreign tax jurisdiction tax years remain
open to examination as well, though we believe that any additional
assessment would be immaterial to the consolidated financial statements. No
state or foreign tax jurisdiction income tax returns are currently under
examination.
We do not anticipate that the total unrecognized tax benefits will
significantly change due to the settlement of audits and the expiration of
statute of limitations prior to June 30, 2008.
We recognize interest and penalties related to uncertain tax positions in
income tax expense. As of June 30, 2007, we have approximately $3,000 of
accrued interest related to uncertain tax positions.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements included in this report, including without limitation
statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are not historical facts are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements generally can be identified by the use of
forward-looking terminology, such as "may", "will", "expect", "intend",
"estimate", "anticipate", "believe", "project" or "continue" or the negative
thereof or other similar words. Forward-looking statements involve risks and
uncertainties, including, but not limited to those listed in Item 1A of our most
recently filed Form 10-K. 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, 2006. 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, 2007.
INCOME TAXES - We adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," ("FIN 48")
on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position that an entity takes or expects to take in a tax return. Additionally,
FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. Under FIN
48, an entity may only recognize or continue to recognize tax positions that
meet a "more likely than not" threshold. See Footnote No. 12, "Income Taxes,"
for additional information.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006
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,
2007 and 2006 were as follows:
Change
Three months ended Three months ended ---------------
(In thousands) June 30, 2007 June 30, 2006 $ %
------------------ ------------------ ------- -----
Point-of-sale and banking $ 3,073 22.0% $ 4,448 26.3% $(1,375) (30.9%)
Gaming and lottery 7,506 53.8% 9,144 54.1% (1,638) (17.9%)
TransAct Services Group 3,368 24.2% 3,313 19.6% 55 1.7%
------- ----- ------- ----- -------
$13,947 100.0% $16,905 100.0% $(2,958) (17.5%)
======= ===== ======= ===== =======
International * $ 3,243 23.3% $ 3,068 18.1% $ 175 5.7%
======= ===== ======= ===== =======
* 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 2007 decreased $2,958,000, or 18%, from the
same period last year due primarily to sales decreases in two of our markets:
(i) point-of-sale ("POS") and banking (a decrease of approximately $1,375,000,
or 31%) and (ii) gaming and lottery (a decrease of approximately $1,638,000, or
18%). Sales from the
12
TransAct Services Group ("TSG") increased $55,000, or 2%. Overall, international
sales increased by $175,000, or 6%, 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 decreased approximately $1,375,000, or 31%.
Change
Three months ended Three months ended ---------------
(In thousands) June 30, 2007 June 30, 2006 $ %
------------------ ------------------ ------- -----
Domestic $2,740 89.2% $4,074 91.6% $(1,334) (32.7%)
International 333 10.8% 374 8.4% (41) (11.0%)
------ ----- ------ ----- -------
$3,073 100.0% $4,448 100.0% $(1,375) (30.9%)
====== ===== ====== ===== =======
Domestic POS and banking printer revenue decreased to $2,740,000, representing a
$1,334,000, or 33%, decrease from the second quarter of 2006, due primarily to
the nonrecurrence of significant sales (approximately $900,000) of our
Bankjet(R) line of inkjet printers to two large banking customers that were made
during the second quarter of 2006. 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. In addition to lower banking
printer sales, we also experienced a decline in sales from our line of POS
thermal printers due primarily to a large hospitality customer that has slowed
and deferred equipment purchases while it implements a new point-of-sale
software system. We also experienced a decline in sales of our legacy line of
POS impact printers as these printers are being replaced by our newer thermal
and inkjet printers. We expect sales of our legacy impact printers to continue
to decline for the remainder of 2007 as these printers are being replaced by our
newer thermal and inkjet printers.
International POS and banking printer shipments decreased by approximately
$41,000, or 11%, to $333,000, due primarily to lower sales to our international
POS distributors in Mexico and Latin America, partially offset by higher sales
to our international POS distributors in Europe.
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 and receipts 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
Lottomatica's GTECH Corporation ("GTECH"), the world's largest provider of
lottery terminals, for various lottery applications. Sales of our gaming and
lottery printers decreased by $1,638,000, or 18%, from the second quarter of
2006, primarily due to lower sales of lottery printers to GTECH, both
domestically and internationally, and lower domestic gaming printer sales,
partially offset by an increase in international sales of our slot machine and
other gaming printers.
Change
Three months ended Three months ended ---------------
(In thousands) June 30, 2007 June 30, 2006 $ %
------------------ ------------------ ------- -----
Domestic $5,325 70.9% $7,205 78.8% $(1,880) (26.1%)
International 2,181 29.1% 1,939 21.2% 242 12.5%
------ ----- ------ ----- -------
$7,506 100.0% $9,144 100.0% $(1,638) (17.9%)
====== ===== ====== ===== =======
Domestic sales of our gaming and lottery printers decreased by $1,880,000, or
26%, due largely to a decrease in domestic sales of lottery printers to GTECH
and, to a lesser extent, a decrease in sales of thermal casino printers due to
continued softness in the domestic casino market during the second quarter of
2007.
Domestic and international printer sales to GTECH, which include thermal on-line
lottery printers, decreased by approximately $1,494,000, or 39%, in the second
quarter of 2007 compared to the second quarter of 2006, with the entire decrease
being caused by declining domestic sales. 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.
13
International gaming and lottery printer sales increased $242,000, or 13%, to
$2,181,000 in the second quarter of 2007. Such sales represented 29% and 21% of
total sales into our gaming and lottery market during the second quarter of 2007
and 2006, respectively. This increase was led primarily by continued growth in
international gaming printer sales, primarily in Europe and Asia.
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 $55,000, or 2%.
Change
Three months ended Three months ended -----------
(In thousands) June 30, 2007 June 30, 2006 $ %
------------------ ------------------ ---- ----
Domestic $2,639 78.4% $2,558 77.2% $ 81 3.2%
International 729 21.6% 755 22.8% (26) (3.4%)
------ ----- ------ ----- ----
$3,368 100.0% $3,313 100.0% $ 55 1.7%
====== ===== ====== ===== ====
Domestic revenue from TSG increased by approximately $81,000, to $2,639,000
largely due to increased sales of consumable products, including higher sales of
inkjet cartridges as we continue to benefit from the agreement we signed in
August 2006 to supply inkjet cartridges to a leading national office supply
chain. The increase in domestic revenue was also due, to a lesser extent, to
maintenance and repair services performed as we continue to win new service
contracts and expand existing contracts for our service products, including
extended warranty contracts and our 24-hour guaranteed replacement product
service called TransAct Xpress(TM). These increases were somewhat offset by a
decline in the sale of refurbished printers and replacement parts for certain
legacy printers, as the installed base of these legacy printers in the market
continues to decline. Internationally, TSG revenue decreased by approximately
$26,000, or 3%, to $729,000 due largely to a decrease in sales of consumable
products in Europe.
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
margin increased to 35.4% from 34.0%, due primarily to lower component part and
labor costs resulting from our initiatives to increasingly move production to
Asia and a more favorable sales mix in the second quarter of 2007 compared to
the second quarter of 2006. Gross profit decreased $806,000, or 14%, due
primarily to a lower volume of sales in the second quarter of 2007 compared to
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 for
the second quarter 2007 were relatively consistent with those for the second
quarter of 2006, increasing by $10,000, or 1%, to $779,000. Engineering and
product development expenses increased as a percentage of net sales to 5.6% from
4.6%, due primarily to lower sales volume in the second quarter of 2007 compared
to the second quarter of 2006.
SELLING AND MARKETING. Selling and marketing expenses primarily include salaries
and payroll related expenses for our sales and marketing staff, sales
commissions, travel expenses, expenses associated with the lease of sales
offices, advertising, trade show expenses and other promotional marketing
expenses. Selling and marketing expenses for the second quarter of 2007 remained
consistent with the second quarter of 2006. Selling and marketing expenses
increased as a percentage of net sales to 12.3% from 10.1%, due primarily to
lower sales volume in the second quarter of 2007 compared to the second quarter
of 2006.
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 $132,000, or 7%, to $2,022,000,
due primarily to (1) higher legal expense, including approximately $175,000
related to our patent infringement counterclaim against FutureLogic, Inc., (2)
higher depreciation and amortization expense associated with the completion of
the implementation of new Oracle software at the beginning of 2007 and the
purchase of office furniture and leasehold improvements for our new Corporate
headquarters in Hamden, CT and (3) increased compensation-related expenses
including annual salary increases, the hiring of our new vice president of human
resources, and recruiting and employee relocation expenses largely for our
newly-hired gaming sales manager in Macau. These increases were somewhat offset
by a decrease
14
in acquisition-related expenses, as we incurred approximately $220,000 of legal
and consulting services related to a potential acquisition in the second quarter
of 2006 that was not consummated. These expenses did not recur during the second
quarter of 2007. General and administrative expenses increased as a percentage
of net sales to 14.5% from 11.2% due primarily to lower volume of sales and
increased expenses in the second quarter of 2007 as compared to the second
quarter of 2006.
BUSINESS CONSOLIDATION AND RESTRUCTURING. During the second quarter of 2007, we
recorded an additional $12,000 in expense to finalize the termination of the
lease agreement for our prior corporate headquarters and eastern region service
center facility located in Wallingford, CT.
OPERATING INCOME. During the second quarter of 2007 we reported operating income
of $419,000, or 3.0% of net sales, compared to $1,376,000, or 8.1% of net sales
in the second quarter of 2006. The substantial decrease in our operating income
and operating margin was due largely to lower sales and the resulting lower
gross profit, coupled with higher administrative expenses, in the second quarter
of 2007 compared to that of 2006.
INTEREST. We recorded net interest income of $10,000 in the second quarter of
2007 compared to $23,000 in the second quarter of 2006. Our average cash balance
was lower in the second quarter of 2007 as compared to 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 2007. As a result, we expect to
continue to report net interest income throughout 2007. See "Liquidity and
Capital Resources" below for more information.
OTHER INCOME (EXPENSE). We recorded other income of $13,000 in the second
quarter of 2007 due primarily to gains recorded from the sale of certain assets
from our prior Corporate headquarters and Eastern Regional Service Center in
Wallingford, CT partially offset by transaction exchange losses recorded by our
UK subsidiary resulting from the weakening of the U.S. dollar against the
British pound. 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.
INCOME TAXES. We recorded an income tax provision of $158,000 and $471,000 in
the second quarter of 2007 and 2006, respectively, at an effective rate of 35.7%
and 35.5%, respectively. Due to the income tax benefit recorded during the first
quarter of 2007, the expected recognition of credits during 2007 and our near
breakeven level of income before income taxes for the six months ended June 30,
2007, we expect our annual effective tax rate for 2007 to be lower than that
reported in the second quarter of 2007.
NET INCOME. We reported net income during the second quarter of 2007 of
$284,000, or $0.03 per diluted share, compared to net income of $857,000, or
$0.09 per diluted share, for the second quarter of 2006.
SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006
NET SALES. Net sales by market for the current and prior year's six month period
were as follows:
Change
Six months ended Six months ended ---------------
(In thousands) June 30, 2007 June 30, 2006 $ %
---------------- ---------------- ------- -----
Point-of-sale and banking $ 5,724 22.5% $ 9,112 27.3% $(3,388) (37.2%)
Gaming and lottery 12,779 50.3% 17,788 53.4% (5,009) (28.2%)
TransAct Services Group 6,912 27.2% 6,439 19.3% 473 7.3%
------- ----- ------- ----- -------
$25,415 100.0% $33,339 100.0% $(7,924) (23.8%)
======= ===== ======= ===== =======
International * $ 5,839 23.0% $ 6,877 20.6% $(1,038) (15.1%)
======= ===== ======= ===== =======
* 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 2007 decreased $7,924,000, or 24%, from the
prior year's first half due primarily to sales decreases in two of our markets:
(i) POS and banking (a decrease of approximately $3,388,000, or 37%) and (ii)
gaming and lottery (a decrease of approximately $5,009,000, or 28%). However,
sales from TSG increased $473,000, or 7%. Overall, international sales decreased
by $1,038,000, or 15%, due largely to lower international shipments of our POS
and banking printers and our gaming and lottery printers.
15
POINT-OF-SALE AND BANKING:
Sales of our POS and banking printers worldwide decreased approximately
$3,388,000, or 37%.
Change
Six months ended Six months ended ---------------
(In thousands) June 30, 2007 June 30, 2006 $ %
---------------- ---------------- ------- -----
Domestic $5,171 90.3% $8,336 91.5% $(3,165) (38.0%)
International 553 9.7% 776 8.5% (223) (28.7%)
------ ----- ------ ----- -------
$5,724 100.0% $9,112 100.0% $(3,388) (37.2%)
====== ===== ====== ===== =======
Domestic POS and banking printer sales decreased to $5,171,000, representing a
$3,165,000, or 38%, decrease from the first half of 2006, due largely to
approximately $2.2 million of Bankjet(R) bank teller printer sales to two large
banking customers in the first half of 2006 that did not recur in the first half
of 2007. 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. In addition to lower banking printer sales, we also
experienced a decline in sales from our line of POS thermal printers due
primarily to a large hospitality customer that has slowed and deferred equipment
purchases while it implements new point-of-sale software system. We also
experienced a decline in sales of our legacy line of POS impact printers as
these printers are being replaced by our newer thermal and inkjet printers. We
expect sales of our legacy impact printers to continue to decline for the
remainder of 2007 as these printers are being replaced by our newer thermal and
inkjet printers.
International POS and banking printer shipments decreased by approximately
$223,000, or 29%, to $553,000, due primarily to lower sales to our international
POS distributors in Mexico and Latin America, offset by higher sales to our
international POS distributors in Europe.
GAMING AND LOTTERY:
Sales of our gaming and lottery printers decreased by $5,009,000, or 28%, from
the first half of 2007, primarily due to lower sales of lottery printers to
GTECH, both domestically and internationally, and lower domestic gaming printer
sales.
Change
Six months ended Six months ended ---------------
(In thousands) June 30, 2007 June 30, 2006 $ %
---------------- ---------------- ------- -----
Domestic $ 9,039 70.7% $13,208 74.3% $(4,169) (31.6%)
International 3,740 29.3% 4,580 25.7% (840) (18.3%)
------- ----- ------- ----- -------
$12,779 100.0% $17,788 100.0% $(5,009) (28.2%)
======= ===== ======= ===== =======
Domestic sales of our gaming and lottery printers decreased by $4,169,000, or
32%, due primarily to a decrease in domestic sales of lottery printers to GTECH
and, to a lesser extent, a decrease in sales of thermal casino printers due to
continued softness in the domestic casino market during the first half of 2007
as compared to the first half of 2006.
Domestic and international printer sales to GTECH, which include thermal on-line
lottery printers, decreased by approximately $3,895,000, or 53%, in the first
half of 2007 compared to the first half of 2006, with domestic sales declining
approximately $3,326,000 and international sales declining approximately
$569,000. 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.
International gaming and lottery printer sales decreased $840,000, or 18%, to
$3,740,000 in the first half of 2007 compared to the first half of 2006. Such
sales represented 29% and 26% of total sales into our gaming and lottery market
during the first half of 2007 and 2006, respectively. This decrease was
primarily due to lower international lottery printer sales to GTECH offset by
continued growth in international gaming printer sales, primarily in Europe and
Asia.
TRANSACT SERVICES GROUP ("TSG"):
Sales from TSG increased by approximately $473,000, or 7%.
16
Change
Six months ended Six months ended ----------
(In thousands) June 30, 2007 June 30, 2006 $ %
---------------- ---------------- ---- ---
Domestic $5,366 77.6% $4,918 76.4% $448 9.1%
International 1,546 22.4% 1,521 23.6% 25 1.6%
------ ----- ------ ----- ----
$6,912 100.0% $6,439 100.0% $473 7.3%
====== ===== ====== ===== ====
Domestic TSG revenue increased by approximately $448,000, or 9%, to $5,366,000,
largely due to increased sales of consumable products, including higher sales of
inkjet cartridges as we continue to benefit from the agreement we signed in
August 2006 to supply inkjet cartridges to a leading national office supply
chain. The increase in domestic revenue was also due, to a lesser extent, to
maintenance and repair services performed as we continue to win new service
contracts and expand existing contracts for our service products including
extended warranty contracts and our 24-hour guaranteed replacement product
service called TransAct Xpress(TM). These increases were somewhat offset by a
decline in the sale of refurbished printers and replacement parts for certain
legacy printers, as the installed base of these legacy printers in the market
continues to decline.
Internationally, TSG sales increased by approximately $25,000, or 2%, to
$1,546,000, due largely to an increase in maintenance contract and repair
services revenue from a service contract with a single customer in the United
Kingdom, largely offset by lower sales of consumable products and replacement
parts.
The primary operations of our United Kingdom subsidiary, a European sales and
service center, relate to revenue generated from a service contract with a
single customer in the United Kingdom. The service contract was renewed in April
2007 at a lower minimum sales value compared to the minimum sales value of the
prior year's contract.
GROSS PROFIT. Gross profit decreased $2,740,000, or 24%, to $8,693,000 and gross
margin decreased to 34.2% from 34.3%, due primarily to a lower volume of sales,
somewhat offset by lower component part and labor costs resulting from our
initiatives to increasingly move production to Asia and a more favorable sales
mix, in the first half of 2007 compared to the first half of 2006.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development
expenses decreased by $37,000, or 2%, to $1,493,000, as we incurred lower
expenses related to product development and outside testing, which were partly
offset by higher expenses related to professional consulting related expenses in
the first half of 2007 as compared to the first half of 2006. Engineering and
product development expenses increased as a percentage of net sales to 5.9% from
4.6%, due primarily to lower sales in the first half of 2007 compared to the
first half of 2006.
SELLING AND MARKETING. Selling and marketing expenses increased by $59,000, or
2%, to $3,350,000, as we incurred increased promotional marketing expenses and
increased travel related expenses. These increases were somewhat offset by lower
demonstration printer expense compared with the first half of 2006. Selling and
marketing expenses increased as a percentage of net sales to 13.2% from 9.9%,
due primarily to lower sales volume in the first half of 2007 compared to the
first half of 2006.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
$272,000, or 8%, to $3,872,000, due primarily to (1) higher legal expense,
including approximately $175,000 related to our patent infringement counterclaim
against FutureLogic, Inc., and the expansion of our international patent
portfolio, (2) higher depreciation and amortization expense associated with the
completion of the implementation of new Oracle software at the beginning of 2007
and the purchase of office furniture and leasehold improvements for our new
Corporate headquarters in Hamden, CT, and (3) increased compensation-related
expenses including annual salary increases, the hiring of our new vice president
of human resources, and recruiting and employee relocation expenses largely for
our newly-hired gaming sales manager in Macau. These increases were somewhat
offset by a decrease in acquisition-related expenses, as we incurred
approximately $220,000 of legal and consulting services related to a potential
acquisition in the second quarter of 2006 that was not consummated. These
expenses did not recur during the first half of 2007. General and administrative
expenses increased as a percentage of net sales to 15.2% from 10.8%, due
primarily to lower volume of sales and increased expenses in the first half of
2007 as compared to the first half of 2006.
BUSINESS CONSOLIDATION AND RESTRUCTURING. During the second quarter of 2007, we
recorded an additional $12,000 in expense to finalize the termination of the
lease agreement for our prior corporate headquarters and eastern region service
center facility located in Wallingford, CT.
OPERATING INCOME. During the first half of 2007, we reported an operating loss
of $34,000, or 0.1% of net sales, compared to operating income of $3,012,000, or
9.0% of net sales in the first half of 2006. The substantial decrease
17
in our operating income and operating margin was due largely to lower sales and
the resulting lower gross profit, coupled with higher administrative expenses in
the first half of 2007 compared to that of 2006.
INTEREST. We recorded net interest income of $38,000 in the first half of 2007
compared to net interest income of $37,000 in the first half of 2006. We do not
expect to draw on our revolving borrowings and we expect to continue to report
net interest income throughout 2007. See "Liquidity and Capital Resources" below
for more information.
OTHER INCOME (EXPENSE). We recorded other income of $12,000 in the first half of
2007 due primarily to gains recorded from the sale of certain assets from our
prior Corporate headquarters and Eastern Regional Service Center in Wallingford,
CT, partially offset by transaction exchange losses recorded by our UK
subsidiary resulting from the weakening of the U.S. dollar against the British
pound. We recorded other expense of $82,000 in the first half of 2006 due
primarily to transaction exchange losses recorded resulting from the weakening
of the U.S. dollar against the British pound during that period.
INCOME TAXES. Despite reporting $16,000 of income before taxes in the first half
of 2007, we recorded an income tax benefit of $45,000, due to the near breakeven
level of income before taxes for the period combined with an increase in the
recognition of certain tax credits in the first quarter of 2007. We recorded an
income tax provision of $1,053,000, at an effective rate of 35.5%, in the first
half of 2006. Due to the income tax benefit recorded during the first quarter of
2007, the expected recognition of credits during 2007 and our near breakeven
level of income before income taxes for the six months ended June 30, 2007, we
expect our annual effective tax rate for 2007 to be lower than that reported in
the second quarter of 2007.
NET INCOME. We reported net income during the first half of 2007 of $61,000, or
$0.01 per diluted share, compared to net income of $1,914,000, or $0.19 per
diluted share, for the first half of 2006.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
Overview: In the first half of 2007, our cash flows reflected the investment in
the build-out of our new, leased Corporate headquarters in Hamden, CT, and the
results of lower sales volume compared to the same period in 2006. However, even
with the repurchase of approximately $521,000 of our common stock and capital
expenditures of approximately $1,622,000 during the first half of 2007, our cash
balance only decreased by $953,000 from December 31, 2006. We ended the first
half of 2007 with approximately $2.5 million in cash and cash equivalents and no
debt outstanding. We expect to earn interest income on our available cash
balance throughout 2007.
Operating activities: The following significant factors affected our cash
provided by operations of $1,139,000 in the first half of 2007:
- We reported net income of $61,000.
- We recorded depreciation and amortization expense of $902,000.
- Accounts receivable decreased by $502,000 due to lower sales during
the first half of 2007.
- Inventory increased by $1,481,000 due to an unanticipated slowdown in
sales beginning in the first quarter 2007, an increase in consignment
inventory programs with certain of our customers, and higher stocking
levels resulting from our initiatives to move increased production to
Asia.
- Accounts payable increased by $1,691,000 due to higher inventory
purchases and the timing of payments during the first half of the
year.
- Accrued liabilities decreased by $262,000 due to the following: (1)
lower compensation related accruals and (2) a lower income tax accrual
based on the decreased level of income before taxes. These decreases
were somewhat offset by an increase in accrued rent related to the
lease of our new Corporate headquarters in Hamden, CT.
- As of June 30, 2007 and December 31, 2006, our restructuring accrual
amounted to $14,000 and $315,000, respectively. The decrease of
$301,000 is related largely to payments made on our Wallingford lease
obligation.
Investing activities: Our capital expenditures were approximately $1,622,000 and
$1,775,000 in the first six months of 2007 and 2006, respectively. Expenditures
in 2007 included approximately $1,226,000 for the purchase of leasehold
improvements and office furniture for our new Corporate headquarters in Hamden,
CT, approximately $227,000 for the purchase of new computer hardware and
software, as well as outside consulting costs related to our Oracle software
implementation, and the remaining amount primarily for the purchase of new
product tooling.
18
Financing activities: We used approximately $523,000 from financing activities
during the first six months of 2007, largely due to the repurchase of Company
stock (approximately $521,000).
WORKING CAPITAL
Our working capital decreased to $16,345,000 at June 30, 2007 from $16,643,000
at December 31, 2006. Our current ratio also decreased to 2.8 to 1 at June 30,
2007, compared to 3.0 to 1 at December 31, 2006. The decrease in our working
capital and current ratio was largely due to lower cash balances resulting from
increased capital expenditures, higher accounts payable resulting from higher
inventory purchases and the timing of payments, and lower accounts receivables
from lower sales volume, somewhat offset by higher inventory levels.
DEFERRED TAXES
As of June 30, 2007, we had a net deferred tax asset of approximately
$3,171,000. In order to utilize this deferred tax asset, we will need to
generate approximately $7.4 million of taxable income in future years. Based on
future projections of taxable income, we believe that it is more likely than not
that the existing net deferred tax asset will be realized.
CREDIT FACILITY AND BORROWINGS
On November 28, 2006, we signed a new, five-year $20 million credit facility
(the "New TD Banknorth Credit Facility") with TD Banknorth, N.A. ("TD
Banknorth"). The new credit facility provides for a $20 million revolving credit
line expiring on November 28, 2011. The New TD Banknorth Credit facility
replaces a previous $11.5 million credit facility also with TD Banknorth. Our
New TD Banknorth Credit Facility provides substantially improved terms compared
to our prior credit facility, including lower on-going costs, fewer financial
covenants, reduced reporting requirements and a lower interest rate. Borrowings
under the new revolving credit line bear a floating rate of interest at the
prime rate minus one percent and are secured by a lien on all of our assets. We
also pay a fee of 0.25% on unused borrowings under the revolving credit line.
The total deferred financing costs relating to expenses incurred to complete the
New TD Banknorth Credit Facility was $92,000. The New TD Banknorth Credit
Facility imposes certain quarterly financial covenants on us and restricts the
payment of dividends on our common stock and the creation of other liens. We
were in compliance with all financial covenants of the New TD Banknorth Credit
Facility at June 30, 2007.
As of June 30, 2007, we had no balances outstanding on the revolving credit
line. Undrawn commitments under the New TD Banknorth Credit facility were
approximately $20,000,000 at June 30, 2007.
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 outstanding shares of our
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. We did not repurchase any shares of our common stock during the second
quarter of 2007. For the six months ended June 30, 2007, we repurchased a total
of 70,000 shares of common stock for approximately $521,000 at an average price
of $7.44 per share. As of June 30, 2007, we have repurchased a total of 871,300
shares of common stock for approximately $7,013,000 at an average price of $8.05
per share since the inception of the Stock Repurchase Program.
SHAREHOLDERS' EQUITY
Shareholders' equity increased by $236,000 to $24,526,000 at June 30, 2007 from
$24,290,000 at December 31, 2006. The increase was primarily due to the
following for the six months ended June 30, 2007: (1) net income of $61,000, (2)
compensation expense related to stock options and restricted stock of $361,000,
and (3) a cumulative adjustment to retained earnings due to the implementation
of FIN 48 in the amount of $318,000. These increases were offset by treasury
stock purchases of 70,000 shares of common stock for approximately $521,000.
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, 2007. 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.
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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 control 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The implementation of our new Oracle enterprise resource planning and accounting
system, completed effective January 8, 2007, required us to modify and
add/remove certain internal controls and processes and procedures. Otherwise, no
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months
ended June 30, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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 U.S. Patent No. 6,924,903
(the "903 Patent") 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
20
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 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. On June 12, 2007,
we filed an answer to FutureLogic's amended complaint and filed a counterclaim
that FutureLogic infringes the 903 Patent. We also filed a motion for a
preliminary injunction to stop infringement by FutureLogic's dual port printers.
Our motion for preliminary injunction was heard on July 30, 2007. Through our
preliminary injunction motion and hearing, we showed that FutureLogic has
constructed a prototype printer, the GEN2 Universal with the ProMatrix system,
which the judge ruled has a likelihood of infringing the 903 Patent covering
dual port technology. The court denied our motion on August 6, 2007, but the
court ruled that "Should TransAct discover that FutureLogic has sold or offered
to sell any GEN2 Universal printers with the ProMatrix system that infringe the
903 Patent during the course of this action, it may renew this motion on an
expedited ex parte basis and - assuming it shows the requisite likelihood of
success on the merits - the court will afford it the relief it seeks." Discovery
is now under way in the case.
We intend to vigorously defend TransAct against FutureLogic's claims, which we
believe to be without merit. We also intend to pursue vigorously our claim
against FutureLogic for infringement of the 903 Patent. The case is at the
beginning of the discovery process. 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, 2006. No changes have occurred during the
three and six months ended June 30, 2007.
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, 2006, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
ITEM 2C. STOCK REPURCHASE
On March 25, 2005 our Board of Directors approved a stock repurchase program
("the Stock Repurchase Program"). Under the Stock Repurchase Program, management
is authorized to repurchase up to $10 million of the outstanding shares of our
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, 2007, we repurchased a total of
70,000 shares of common stock for approximately $521,000 at an average price of
$7.44 per share. As of June 30, 2007, we have repurchased a total of 871,300
shares of common stock for approximately $7,013,000, at an average price of
$8.05 per share since the inception of the Stock Repurchase Program.
We did not repurchase any shares of our common stock during the second quarter
of 2007. Approximately $2,987,000 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 15, 2007. 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
2010 Annual Meeting of Stockholders or until the Director's successor has been
duly elected and qualified. Nominee was Graham Y. Tanaka. 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 2007. Votes cast were as
follows: 8,443,671 shares for; 18,558 shares against; and 3,960 shares
abstained.
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ITEM 6. EXHIBITS
a. Exhibits filed herein
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
(Registrant)
August 8, 2007 /s/ Steven A. DeMartino
----------------------------------------
Steven A. DeMartino
Executive Vice President, Chief
Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
23
EXHIBIT LIST
The following exhibits are filed herewith.
Exhibit
-------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
24