UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: September 30, 2005 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to: ---------------- -------------------- Commission file number: 0-21121 ----------------------------------------- TRANSACT TECHNOLOGIES INCORPORATED - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 06-1456680 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7 LASER LANE, WALLINGFORD, CT 06492 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (203) 269-1198 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ]NO [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING OCTOBER 28, 2005 - ----- ---------------------------- COMMON STOCK, $.01 PAR VALUE 9,822,271
TRANSACT TECHNOLOGIES INCORPORATED INDEX PART I. Financial Information: Page No. - ------- ---------------------- -------- Item 1 Financial Statements (unaudited) Condensed consolidated balance sheets as of September 30, 2005 and December 31, 2004 3 Condensed consolidated statements of income for the three and nine months ended September 30, 2005 and 2004 4 Condensed consolidated statements of cash flow for the nine months ended September 30, 2005 and 2004 5 Notes to condensed consolidated financial statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 4 Controls and Procedures 21 PART II. Other Information: Item 1 Legal Proceedings 22 Item 2c Stock Repurchase 22 Item 6 Exhibits 23 Signatures 24 Certifications 26-29 2
ITEM 1. FINANCIAL STATEMENTS TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. DESCRIPTION OF BUSINESS TransAct Technologies Incorporated ("TransAct"), which has its headquarters in Wallingford, CT and its primary operating facility in Ithaca, NY, operates in one industry segment, transaction-based printers and related products. TransAct designs, develops, manufactures and markets transaction-based printers under the Ithaca(R) brand name. Our printers are used worldwide to provide transaction records such as receipts, tickets, coupons, register journals and other documents. We focus on two core markets: point-of-sale ("POS") and banking and gaming and lottery. In addition, we market related consumables, spare parts and service. We sell our products to original equipment manufacturers ("OEMs"), value-added resellers, selected distributors and directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, the Caribbean Islands and the South Pacific. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state TransAct's financial position as of September 30, 2005, the results of our operations for the three and nine months ended September 30, 2005 and 2004, and our cash flows for the nine months ended September 30, 2005 and 2004. The condensed consolidated balance sheet as of December 31, 2004 has been derived from the audited financial statements at that date. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2004 included in our Annual Report on Form 10-K. The financial position and results of operations of our foreign subsidiary are measured using local currency as the functional currency. Assets and liabilities of such subsidiary have been translated at end of period exchange rates, and related revenues and expenses have been translated at weighted average exchange rates with the resulting translation gain or loss recorded in accumulated other comprehensive income. Transaction gains and losses are included in other income. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year. 2. ACCOUNTING FOR STOCK-BASED COMPENSATION We have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for stock options. Since the exercise price of employee stock options granted by the Company equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended by Statement of Financial Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FAS 123" ("FAS 148"). Unearned compensation for restricted stock awards granted is recorded on the date of the grant based on the fair value of such awards. Such unearned compensation is expensed, using the straight-line method, over the period during which the related restrictions on such stock lapse. Upon termination of employment, unvested restricted stock awards are forfeited and the related compensation expense and unearned compensation previously recognized are reversed. 6
TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 2. ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED) During the three months ended September 30, 2005, no shares of restricted stock were granted. During the nine months ended September 30, 2005, we granted 123,150 shares of restricted stock, net of cancellations, to directors and key employees under the 1996 Stock Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan. Deferred compensation of $1,215,000 was recorded with respect to these grants in the nine months ended September 30, 2005 and will be recognized into compensation expense over the vesting period (between three and five years). The Company recorded compensation expense of $132,000 and $326,000 for the three and nine months ended September 30, 2005, respectively. The following table illustrates the effect on net income, compensation expense and net income per share as if the Black-Scholes fair value method pursuant to FAS 123 had been applied to our stock plans.
TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. INVENTORIES The components of inventories are as follows:
TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. EARNINGS PER SHARE Earnings per share were computed as follows (in thousands, except per share amounts):
TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 8. INTANGIBLE ASSETS On June 30, 2005, the Company acquired certain intangible assets related to casino ticket printer designs and technology from Bally Gaming, Inc. ("Bally") for $475,000, plus the costs of effecting the acquisition (approximately $35,000). Prior to the acquisition, pursuant to the terms of a license agreement, we were required to pay Bally a royalty on sales of certain gaming printers utilizing the licensed technology. As a result of the acquisition, effective July 1, 2005, we were no longer required to pay any future royalties to Bally. The purchase price was allocated, based on management's estimates, to intangible assets based on their relative fair value at the date of acquisition. The Company utilized the assistance of an independent valuation firm in determining the relative fair values. The fair value of the intangibles, comprised of purchased technology and a covenant not to compete, was determined using the future cash flows method. The intangible assets are being amortized on a straight-line basis over six and seven years, respectively, for the estimated life of the assets. The following summarizes the allocation of the purchase price for the acquisition of certain intangible assets from Bally (in thousands):
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development expenses primarily include salary and payroll related expenses for our engineering staff, depreciation and design expenses (including prototype printer expense, outside design and testing services, and supplies). Such expenses decreased slightly by $6,000, or 1%, to $637,000, from the third quarter of 2004. Engineering and product development expenses increased as a percentage of net sales to 4.5% from 4.2%, due primarily to the lower sales in the third quarter of 2005 compared to the third quarter of 2004. We expect engineering and product development expenses for the fourth quarter of 2005 to be slightly higher than those reported in the third quarter of 2005 as we continue our product development to significantly expand our product offerings in both the POS and banking, and gaming and lottery markets. SELLING AND MARKETING. Selling and marketing expenses primarily include salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses and other promotional marketing expenses. Selling and marketing expenses increased by $373,000, or 30%, to $1,627,000, due primarily to increased expenses related to (1) the addition of new sales staff for our three business units and our new service centers in Las Vegas, NV and Wallingford, CT, (2) marketing, promotional and trade show expenses related to the Company's increased presence at this year's Global Gaming Exposition (G2E) trade show in Las Vegas, NV, and (3) the hiring of a Senior Vice President of Marketing during the second quarter of 2005. Selling and marketing expenses increased as a percentage of net sales to 11.5% from 8.1%, due primarily to the increased expenses noted above in addition to lower sales volume in the third quarter of 2005 compared to the third quarter of 2004. We expect selling and marketing expenses to be slightly higher in the fourth quarter of 2005 compared to the third quarter of 2005, due to the addition of new sales staff at the end of the third quarter of 2005. GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily include salaries and payroll related expenses for our executive, accounting, human resource and information technology staff, expenses for our corporate headquarters, professional and legal expenses, and telecommunication expenses. General and administrative expenses increased by $96,000, or 6%, to $1,624,000, due largely to increased recruiting and compensation related expenses associated with the re-location of the accounting department from Ithaca, NY to Wallingford, CT, and increased software maintenance and temporary help expenses associated with the Company's Oracle implementation. These increases were offset by a decrease of approximately $95,000 related to a one-time listing fee incurred in the third quarter of 2004 resulting from the Company's move back onto the NASDAQ National Market from the NASDAQ SmallCap Market. General and administrative expenses increased as a percentage of net sales to 11.4% from 9.9% due primarily to the increased expenses noted above in proportion to lower volume of sales in the third quarter of 2005 compared to the third quarter of 2004. We expect general and administrative expenses in the fourth quarter of 2005 to be consistent with those reported in the third quarter of 2005. OPERATING INCOME. During the third quarter of 2005, we reported operating income of $688,000, or 4.8% of net sales, compared to $2,472,000, or 16.0% of net sales in the third quarter of 2004. The substantial decrease in our operating income and operating margin was due largely to lower sales and gross margin and increased selling and marketing expenses in the third quarter of 2005 compared to that of 2004. INTEREST. We recorded net interest income of $19,000 and $4,000 in the third quarter of 2005 and 2004, respectively, due to higher average cash balances and slightly higher interest rates during the third quarter of 2005 as compared to the third quarter of 2004. We do not expect to draw on our revolving borrowings and we expect to continue to report net interest income for the remainder of 2005. See "Liquidity and Capital Resources" below for more information. INCOME TAXES. We recorded an income tax provision of $40,000 and $855,000 in the third quarter of 2005 and 2004, respectively, at an effective rate of 5.6% and 34.5%, respectively. The planned lower effective tax rate for the third quarter of 2005 resulted primarily from the recognition of approximately $138,000 of certain discrete tax benefits during the third quarter of 2005 as compared to the same quarter of 2004. We expect that we will likely continue to recognize certain discrete tax benefits in the third quarter of future fiscal years, and therefore expect that our future effective tax rate in the third quarter of each year will likely be lower than our overall annual effective tax rate in effect during that year. However, the effect and timing of recognition of such discrete benefits in any given year may vary based on factors including, but not limited to, the Company's level of pretax income, outcome of state or federal tax audits, filing dates of tax returns, and changes in tax laws or regulations. Our effective tax rate for the third quarter of 2005 was also impacted, to a lesser extent, by a downward revision of our estimated effective tax rate for the year based on the Company's anticipated taxable income. 15
NET INCOME. We reported net income during the third quarter of 2005 of $674,000, or $0.07 per diluted share, compared to net income of $1,625,000, or $0.15 per diluted share, for the third quarter of 2004. NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004 NET SALES. Net sales by business unit for the current and prior year's nine month period were as follows:
to the launch of our new line of printers exclusively for POS distributors and the Company's increased presence at this year's Global Gaming Exposition (G2E) trade show in Las Vegas, NV, and (3) the recruitment and hiring of a Senior Vice President of Marketing during the second quarter of 2005. Selling and marketing expenses increased as a percentage of net sales to 11.7% from 8.5%, due primarily to these increased expenses in proportion to lower sales volume in the first nine months of 2005 compared to the first nine months of 2004. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $155,000, or 4%, to $4,578,000, due primarily to increased recruiting and compensation related expenses associated with the re-location of the accounting department from Ithaca, NY to Wallingford, CT, higher professional expenses, including legal fees related to our lawsuit filed against FutureLogic, Inc., and increased software maintenance and temporary help expenses associated with the Company's Oracle implementation. General and administrative expenses increased as a percentage of net sales to 11.9% from 9.8% due primarily to these increased expenses in proportion to lower sales volume in the first nine months of 2005 compared to the first nine months of 2004. OPERATING INCOME. During the first nine months of 2005, we reported operating income of $1,299,000, or 3.4% of net sales, compared to $6,870,000, or 15.2% of net sales in the first nine months of 2004. The substantial decrease in our operating income and operating margin was due largely to lower sales and an increase in operating expenses in the first nine months of 2005 compared to that of 2004. INTEREST. We recorded net interest income of $59,000 in the first nine months of 2005 compared to net interest expense of $8,000 in the first nine months of 2004, as we repaid all outstanding revolving borrowings, and our term loan, by January 2004. We do not expect to draw on our revolving borrowings, and we expect to continue to report net interest income for the remainder of 2005. See "Liquidity and Capital Resources" below for more information. INCOME TAXES. We recorded an income tax provision of $276,000 and $2,433,000 in the first nine months of 2005 and 2004, respectively, at an effective rate of 20.0% and 35.4%, respectively. The planned lower effective tax rate for the first nine months of 2005 resulted primarily from the recognition of approximately $138,000 of certain discrete tax benefits during the third quarter of 2005 as compared to the same quarter of 2004. Our effective tax rate for the nine months of 2005 was also impacted, to a lesser extent, by a downward revision of our estimated effective tax rate for the year based on the Company's anticipated taxable income. NET INCOME. We reported net income during the first nine months of 2005 of $1,104,000, or $0.11 per diluted share, compared to net income of $4,432,000, or $0.41 per diluted share, for the first nine months of 2004. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW Overview: In the first nine months of 2005, our cash flows were impacted by lower sales volume and net income, the repurchase of outstanding common stock (approximately $3.1 million), the purchase of certain intangible assets from Bally Gaming, Inc. ("Bally") (approximately $0.5 million), and increased investment in new systems, product tooling and our new service center in Las Vegas, NV (approximately $2.0 million). We ended the quarter with $4,498,000 in cash and cash equivalents. We expect to earn interest income on our available cash balance for the remainder of 2005. Operating activities: The following significant factors affected our cash provided by operations of $1,294,000 in the first nine months of 2005: o We reported net income of $1,104,000 o We recorded depreciation, amortization and non-cash compensation expense of $1,491,000 o Accounts receivable increased by $456,000 due to timing of sales during the quarter o Inventories decreased by $477,000 due to lower inventory purchases related to lower sales volume and continued improved inventory management o Accounts payable decreased by $245,000 due to lower inventory purchases related to lower sales volume o Accrued liabilities and other liabilities decreased by $830,000 due to following (1) lower compensation related accruals, (2) lower deferred revenue balances based on the completion of a significant prepaid service contract in 2004 and (3) lower royalty accruals associated with the purchase of intangible assets from Bally's 18
The following payments also affected our cash from operations during the first nine months of 2005: Accrued Restructuring Payments: As of September 30, 2005 and December 31, 2004, our restructuring accrual amounted to $1,121,000 and $1,454,000, respectively. The decrease of $333,000 is related solely to payments made on our Wallingford lease obligation. We continue to actively seek to sublease our Wallingford facility, and to consider opportunities to modify or exit our existing lease. However, there can be no assurance that we will be successful in these endeavors. Absent our ability to sublease or modify our existing Wallingford facility lease, we expect to pay approximately $420,000 of these expenses per year from 2005 through 2007, and the remaining $176,000 in 2008. These payments from 2005 through 2008 relate primarily to lease obligation costs for unused space in our Wallingford, CT facility. Investing activities: Our capital expenditures were approximately $2,042,000 and $850,000 in the first nine months of 2005 and 2004, respectively. Expenditures in 2005 included approximately $760,000 for the purchase of hardware, software and outside consulting costs related to our implementation of a new Oracle ERP system, approximately $150,000 for office renovations to our new gaming and lottery headquarters and western region service center in Las Vegas, NV, and the remaining amount primarily for the purchase of new product tooling. We expect capital expenditures for the full year 2005 to be approximately $2,500,000. During 2005, we are investing in two significant projects: (1) the purchase and implementation of Oracle software expected to be finalized in 2006 and (2) office renovations to our new gaming and lottery headquarters and western region service center in Las Vegas, NV. We believe these projects will provide us with improved efficiency and will enable us to streamline and more cost effectively manage our business as it grows in size, number of locations and overall complexity. In addition to these projects, we also expect to continue our focus on product development and the purchase of tooling for new products and enhanced versions of existing products. During the second quarter of 2005, we acquired certain intangible assets related to casino printer designs and technology from Bally for $475,000, plus the costs of effecting the acquisition (approximately $35,000). Prior to the acquisition, pursuant to the terms of a license agreement, we were required to pay Bally a royalty on sales of certain gaming printers utilizing the licensed technology. As a result of the acquisition, effective July 1, 2005, we were no longer required to pay any future royalties to Bally. The elimination of future royalty payments to Bally resulted in a cost savings to the Company beginning in the third quarter of 2005. Financing activities: We used approximately $2,806,000 in financing activities during the first nine months of 2005, largely due to the repurchase of Company stock (approximately $3,135,000), partly offset by proceeds from stock option exercises and employee stock purchase plan transactions (approximately $332,000). WORKING CAPITAL Our working capital decreased to $17,415,000 at September 30, 2005 from $20,325,000 at December 31, 2004. The current ratio remained at 3.3 to 1 at September 30, 2005 compared to 3.3 to 1 at December 31, 2004. The decrease in our working capital is due largely to the lower cash balance at September 30, 2005 as compared to December 31, 2004. DEFERRED TAXES As of September 30, 2005, we had a net deferred tax asset of approximately $2,805,000. In order to utilize this deferred tax asset, we will need to generate approximately $8.0 million of taxable income in future years. Based on future projections of taxable income, we have determined that it is more likely than not that the existing net deferred tax asset will be realized. CREDIT FACILITY AND BORROWINGS On August 6, 2003, we entered into a $12.5 million credit facility (the "TD Banknorth Credit Facility") with TD Banknorth N.A. The TD Banknorth Credit Facility provides for an $11.5 million revolving credit line expiring on July 31, 2006, and a $1 million equipment loan facility which, as amended, may be drawn down through July 2005. Borrowings under the revolving credit line bear a floating rate of interest at the prime rate. Borrowings under the equipment loan bear a floating rate of interest at the prime rate plus 0.25% and are secured by a lien on the assets of the company. The Banknorth Credit Facility imposes certain quarterly financial covenants on the Company and restricts the payment of dividends on its common stock and the creation of other liens. On November 12, 2004, we amended the TD Banknorth Credit Facility. Under the terms of the agreement, we renewed, through July 31, 2005, our $1.0 million equipment loan facility. However, this equipment loan facility expired on July 31, 2005 and was not renewed. The amendment also revised certain other terms of the revolving credit facility. 19
On March 28, 2005, we amended the TD Banknorth Credit Facility to permit us to repurchase our common stock pursuant to the terms of the Stock Repurchase Program as explained below. The borrowing base of the revolving credit line under TD Banknorth Credit Facility is based on the lesser of (a) $11.5 million or (b) 85% of eligible accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of eligible raw material inventory plus 50% of eligible finished goods inventory, less (ii) a $40,000 credit reserve. As of September 30, 2005, we had no balances outstanding on the revolving credit line and term loan, respectively. Undrawn commitments under the TD Banknorth Credit Facility were approximately $11,500,000 at September 30, 2005. However, our maximum additional available borrowings under the facility were limited to approximately $7,900,000 at September 30, 2005 based on the borrowing base of our collateral. We were in compliance with all financial covenants of the TD Banknorth Credit Facility at September 30, 2005. STOCK REPURCHASE PROGRAM On March 25, 2005, the Board of Directors approved a stock repurchase program ("the Stock Repurchase Program"). Under the Stock Repurchase Program, management is authorized to repurchase up to $10 million of the Company's outstanding shares of common stock from time to time in the open market over the next three years, depending on market conditions, share price and other factors. For the three months ended September 30, 2004, the Company had repurchased a total of 286,900 shares of common stock for approximately $2,151,000. As of September 30, 2005, the Company had repurchased a total of 408,900 shares of common stock for approximately $3,135,000, at an average price of $7.67 per share. PREFERRED STOCK In connection with our 7% Series B Cumulative Convertible Redeemable Preferred Stock (the "Preferred Stock"), we paid $70,000 of cash dividends per quarter. In April 2004, all holders of our Series B Preferred Stock converted all their preferred shares into common stock. Under the conversion, a total 666,665 new shares of common stock were issued. No future dividend payments were required beyond the second quarter of 2004. SHAREHOLDERS' EQUITY Shareholders' equity decreased by $1,147,000 to $22,568,000 at September 30, 2005 from $23,715,000 at December 31, 2004. The decrease was primarily due to treasury stock purchases of 408,900 shares of common stock for approximately $3,135,000, offset by (1) net income of $1,104,000 (2) proceeds of approximately $332,000 from the issuance of approximately 70,000 shares of common stock from stock option and stock purchase plan exercises, (3) an increase in additional paid-in capital of approximately $295,000 resulting from the tax benefits resulting from the sale of employee stock from stock option exercises, (4) compensation expense related to restricted stock grants of $326,000. CONTRACTUAL OBLIGATIONS We have experienced no material changes in our contractual obligations outside the ordinary course of business during the three or nine months ended September 30, 2005. RESOURCE SUFFICIENCY We believe that our cash on hand and cash flows generated from operations and borrowings available under the TD Banknorth Credit Facility will provide sufficient resources to meet our working capital needs, to finance our capital expenditures, to fund our Stock Repurchase Program, and meet our liquidity requirements through at least the next 12 months. 20
ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this quarterly report, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was conducted under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were adequate and designed to ensure that information required to be disclosed by the Company in this report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in internal controls or in other factors that could be reasonably likely to materially affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses in internal controls, during the period covered by this report. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 21
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 28, 2005 we announced that we filed a complaint in Connecticut Superior Court against FutureLogic, Inc. ("FutureLogic") of Glendale, California. The complaint charges FutureLogic with disseminating false and misleading statements, which impugn the business reputation of TransAct with the intent of damaging TransAct's business. TransAct asserts claims of defamation, tortious interference with contractual relations, tortious interference with business expectancy, and violation of the Connecticut Unfair Trade Practices Act, and seeks an award of compensatory and punitive damages, attorneys' fees and costs. On May 20, 2005, FutureLogic filed a complaint in the United States District Court for the Central District of California against TransAct. The complaint charges TransAct with false advertising, defamation, trade libel, intentional interference with prospective economic advantage, common law unfair competition and statutory unfair competition and seeks an award of compensatory and punitive damages, attorneys' fees and costs. On August 3, 2005, FutureLogic amended its complaint in California to seek a declaratory judgment that Patent No. 6,924,903, issued by the United States Patent and Trademark Office ("PTO") to TransAct on August 2, 2005, for its dual-port printer technology, is invalid, and that FutureLogic is not infringing TransAct's patent. We believe that the California action is retaliatory in nature and without merit, and we intend to vigorously defend ourselves. FutureLogic did not specify any factual basis upon which it alleges that the Company's patent is invalid. We also believe that their claims regarding our patent are without merit, that our patent was thoroughly reviewed by the PTO and that our patent is valid. This action is in the pre-trial motion stage and management is currently unable to calculate any potential or probable liability associated with this action at this time. ITEM 2c. STOCK REPURCHASE On March 25, 2005, the Board of Directors approved a stock repurchase program ("the Stock Repurchase Program"). Under the Stock Repurchase Program, management is authorized to repurchase up to $10 million of the Company's outstanding shares of common stock from time to time in the open market over the next three years, depending on market conditions, share price and other factors. For the three months ended September 30, 2005, the Company had repurchased a total of 286,900 shares of common stock for approximately $2,151,000. As of September 30, 2005, the Company had repurchased a total of 408,900 shares of common stock for approximately $3,135,000 at an average price of $7.67 per share. The following table summarizes repurchases of our common stock in the three and nine months ended September 30, 2005.
ITEM 6. EXHIBITS a. Exhibits filed herein Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 23
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANSACT TECHNOLOGIES INCORPORATED ---------------------------------- (Registrant) November 9, 2005 /s/ Steven A. DeMartino ----------------------------------------------- Steven A. DeMartino Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 24
EXHIBIT LIST The following exhibits are filed herewith.
EXHIBIT 31.1 CERTIFICATION I, Bart C. Shuldman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TransAct Technologies Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2005 /s/ Bart C. Shuldman - -------------------- Bart C. Shuldman Chairman, President and Chief Executive Officer 26
EXHIBIT 31.2 CERTIFICATION I, Steven A. DeMartino, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TransAct Technologies Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2005 /s/ Steven A. DeMartino - ----------------------- Steven A. DeMartino Executive Vice President, Chief Financial Officer, Treasurer and Secretary 27
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 In connection with the Quarterly Report of TransAct Technologies Incorporated (the "Company") on Form 10-Q for the period ending September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bart C. Shuldman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 9, 2005 /s/ Bart C. Shuldman - -------------------- Bart C. Shuldman Chief Executive Officer 28
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 In connection with the Quarterly Report of TransAct Technologies Incorporated (the "Company") on Form 10-Q for the period ending September 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven A. DeMartino, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 9, 2005 /s/ Steven A. DeMartino - ----------------------- Steven A. DeMartino Chief Financial Officer 29