FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1996
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 0-10966
NATIONAL TRANSACTION NETWORK, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 75-1535237
-------- --------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9 Kane Industrial Drive
Hudson, Massachusetts 01749
--------------------------- ----------
(Address of principal executive offices) (Zip Code)
(508) 562-6500
--------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, $.15
par value per share, outstanding as of November 12, 1996: 3,248,606 shares.
NATIONAL TRANSACTION NETWORK, INC.
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets
September 30, 1996 and December 31, 1995 3
Statements of Operations
Three months ended September 30, 1996 and 1995 5
Nine months ended September 30, 1996 and 1995 6
Statements of Cash Flows
Nine months ended September 30, 1996 and 1995 7
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION 14
SIGNATURES 16
2
PART I - FINANCIAL STATEMENTS
ITEM I. FINANCIAL STATEMENTS
- ----------------------------
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
ASSETS
----------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $667,975 $407,257
Accounts receivable
(Net of allowance for doubtful accounts
of $100,000 at September 30, 1996
and December 31, 1995) 703,725 1,384,222
Inventory 248,829 274,159
Prepaid expenses 40,001 26,847
---------- ---------
TOTAL CURRENT ASSETS 1,660,530 2,092,485
---------- ---------
PROPERTY AND EQUIPMENT 782,536 709,139
Less accumulated depreciation
and amortization (538,439) (460,605)
---------- ---------
PROPERTY AND
EQUIPMENT - NET 244,097 248,534
---------- ---------
OTHER ASSETS:
Deposits 4,959 3,679
---------- ---------
TOTAL OTHER ASSETS 4,959 3,679
---------- ---------
TOTAL $1,909,586 $2,344,698
========== ==========
</TABLE>
See Notes to Financial Statements.
3
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $457,509 $661,742
Accounts payable to stockholder 38,119 0
Accrued liabilities 428,914 387,634
Deferred revenue 202,198 42,968
---------- ---------
TOTAL CURRENT LIABILITIES 1,126,740 1,092,344
---------- ---------
LONG-TERM LIABILITIES:
Deferred revenue 227 3,109
---------- ---------
TOTAL LONG-TERM LIABILITIES 227 3,109
---------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value;
authorized, 5,000,000 shares;
none outstanding
Common stock, $.15 par value; authorized, 6,666,667 shares;
issued and outstanding, 3,248,606 shares at September 30,
1996 and
December 31, 1995 487,291 487,291
Additional paid-in capital 12,589,255 12,589,255
Deficit (12,293,927) (11,827,301)
---------- ---------
TOTAL STOCKHOLDERS'
EQUITY 782,619 1,249,245
---------- ---------
TOTAL $1,909,586 $2,344,698
========== =========
</TABLE>
See Notes to Financial Statements.
4
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1996 1995
---------- -----------
<S> <C> <C>
REVENUE $ 1,130,596 $ 1,284,281
----------- -----------
COST AND EXPENSES
Cost of revenue 601,603 718,600
Sales and marketing 297,681 432,602
Research and development 207,315 234,415
General and administrative 370,418 178,710
----------- -----------
Total 1,477,017 1,564,327
----------- -----------
LOSS FROM OPERATIONS (346,421) (280,046)
----------- -----------
OTHER INCOME
Interest income 7,206 4,354
----------- -----------
Total 7,206 4,354
----------- -----------
NET LOSS ($339,215) ($275,692)
=========== ===========
NET LOSS PER COMMON SHARE ($0.10) ($0.08)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,248,606 3,248,606
=========== ===========
</TABLE>
See Notes to Financial Statements.
5
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1996 1995
----------- ----------
<S> <C> <C>
REVENUE $3,657,927 $6,090,964
---------- ----------
COST AND EXPENSES
Cost of revenue 1,809,739 3,548,485
Sales and marketing 866,623 1,418,429
Research and development 687,956 721,596
General and administrative 776,603 561,542
---------- ----------
Total 4,140,921 6,250,052
---------- ----------
LOSS FROM OPERATIONS (482,994) (159,088)
---------- ----------
OTHER INCOME
Interest income 16,368 13,050
---------- ----------
Total 16,368 13,050
---------- ----------
NET LOSS ($466,626) ($146,038)
========== ==========
NET LOSS PER COMMON SHARE ($0.14) ($0.04)
========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,248,606 3,248,606
========== ==========
</TABLE>
See Notes to Financial Statements.
6
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1996 1995
-------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($466,626) ($146,038)
--------- ---------
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 77,834 90,406
Increase (decrease) in cash from:
Accounts receivable 680,497 10,067
Inventory 25,330 643,023
Prepaid expenses (13,154) 43,579
Deposits (1,280) 0
Accounts payable to stockholder 38,119 (162,670)
Accounts payable and accrued
liabilities (162,953) (163,669)
Deferred revenue 156,348 45,077
--------- ---------
Total adjustments 800,741 505,813
--------- ---------
Net cash provided by operating activities 334,115 359,775
--------- ---------
Cash Flows Used In Investing Activities:
Purchases of property and equipment (73,397) (18,443)
--------- ---------
Net cash used for investing activities (73,397) (18,443)
--------- ---------
Net increase (decrease) in cash and
equivalents 260,718 341,332
Cash and Equivalents, Beginning of Period 407,257 74,032
--------- ---------
Cash and Equivalents, End of Period $667,975 $415,364
========= =========
</TABLE>
See Notes to Financial Statements.
7
NATIONAL TRANSACTION NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. The accompanying financial statements and notes do not include all of
the disclosures made in the Company's Form 10-K for the year ended
December 31, 1995 which should be read in conjunction with these
statements. In the opinion of the Company, the statements include all
adjustments necessary for a fair presentation of the quarterly results.
2. Net income (loss) per common share is computed based on the weighted
average number of common shares outstanding during each quarter. Shares
issuable upon exercise of outstanding stock options have been excluded
from the computations since their effect would be antidilutive.
3. The results of operations for the nine month period ended September 30,
1996 are not necessarily indicative of the results to be expected for
the full year.
4. On March 21, 1996, the Company received a commitment from its bank for
the renewal of its working capital line of credit through January 5,
1997. Maximum available borrowings under the line are the lesser of
$400,000 or certain levels of eligible accounts receivable and are
subject to monthly and quarterly financial performance covenants.
Borrowings bear interest at a rate per annum equal to the Prime Rate
(8.25% at November 12, 1996) plus 4% and are secured by the Company's
assets. At September 30, 1996, there were no borrowings outstanding
under the credit line nor have there been any borrowings through
November 12, 1996. Borrowing availability under the credit line was
$204,236 at September 30, 1996.
5. The Company accounts for Research and Development costs in accordance
with Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." It is the Company's policy to capitalize costs
relating to the development of its products until such time when
products are available for general release to customers, provided that
the recoverability of such costs is reasonably assured through
expected sales revenue less related selling expenses. For the quarter
ended September 30, 1996, there were no costs incurred that required
capitalization. Upon availability of products for general release to
customers, any related capitalized development costs are amortized
over a suitable period based on the products' estimated economic life.
8
6. Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." The Company has continued to account for its
stock-based transactions to employees in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and will include the pro forma disclosures required by SFAS
No. 123, if material, in its annual financial statements for 1996.
Also, effective January 1, 1996, the Company adopted Statement of
Financial Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." SFAS No.
121 requires that long-lived assets held and used by an entity be
reviewed for impairment whenever circumstances indicate that the
carrying amount of an asset may not be recoverable. It also requires
that long-lived assets to be disposed of be reported at the lower of
the carrying amount or the fair value less the cost to sell. The
adoption of SFAS No. 121 did not have a material effect on the
Company's financial position or results of operations for the quarter
ended September 30, 1996.
7. On September 13, 1996, International Verifact Inc. ("IVI") acquired
beneficial ownership of approximately 84% of the outstanding common
stock, $.15 par value ("the Common Stock") of the Company. IVI
acquired such beneficial ownership by purchasing all of the
outstanding shares of Common Stock held by BCE Investments (Canada)
Inc. and Nelson Doubleday. The aggregate amount of consideration paid
by IVI for such shares was approximately $1,254,000. The source of
such consideration was IVI's issue from treasury of such number of
previously unissued IVI common shares having an aggregated market
value of approximately $1,254,000.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue for the quarter ended September 30, 1996 decreased by 12.0% to
$1,130,596 compared to the quarter ended September 30, 1995. For the nine month
period ended September 30, 1996, revenue decreased by 39.9% from the same period
in the prior year. The decreases in revenue were primarily due to the Company's
inability to generate a sufficient number of qualified sales opportunities in
the increasing saturated supermarket market segment. In addition, there
continues to be delays in the generation of qualified sales leads in the general
retail market as a result of the slow acceptance of debit card payments in these
other market segments despite the widespread acceptance of these cards in the
supermarket industry. For the quarter ended September 30, 1996, these decreases
were partially offset by a significant customer's decision to upgrade a large
number of systems in several divisions. The revenue from this customer accounted
for approximately $610,000 (54% of the Company's total revenue) for the quarter
ended September 30, 1996 compared to approximately 23% of total revenue for the
same period in 1995. Uncertainties with respect to future orders from existing
or potential customers could have a material impact on net sales or earning in
the future.
Gross margins as a percent of revenue increased to 46.8% for the
quarter ended September 30, 1996 compared to 44.0% for the quarter ended
September 30, 1995. For the nine months ended September 30, 1996, gross margins
increased to 50.5% compared to 41.7% for the nine months ended September 30,
1995. The increases in both periods were due primarily to higher margin software
and services revenue comprising a larger percentage of total revenue for the
quarter and nine months ended September 30, 1996 as compared to the same periods
in 1995.
Total operating expenses for the quarter ended September 30, 1996
increased by 3.5% compared to the quarter ended September 30, 1995. For the nine
months ended September 30, 1996, total operating expenses decreased by 13.7%
compared to the nine months ended September 30, 1995. Sales and marketing
expenses decreased by 31.2% ($134,900) for the quarter ended September 30, 1996.
Lower compensation and benefits expenses ($108,000), lower telephone and
utilities expenses ($9,500), and lower travel and entertainment expenses
($47,000) during the quarter ended September 30, 1996 compared to the quarter
ended September 30, 1995 reflect a reduction in marketing and sales personnel
between the two quarterly periods. Additionally, the decrease in revenue for the
quarter ended September 30, 1996 compared to the quarter ended September 30,
1995 resulted in a decrease in sales commission expense of approximately
$22,000. These decreases were partially offset by increases in trade show
expenses related to increased trade show participation ($24,000) and consulting
expenses ($30,000) related to providing transaction processing services for
certain specialized proprietary transactions of one customer. For the nine month
period ended September 30, 1996, sales and marketing
10
expenses decreased by 38.9% ($551,800) compared to the same period in 1995.
Decreases in compensation and benefits expense ($304,700), travel and
entertainment expense ($160,000), and sales commission expense ($137,000) were
partially offset by an increase in outside consultant/services expense ($45,000)
due primarily to the same factors as discussed above.
Research and development expenses decreased by 11.6% ($27,000) and 4.7%
($33,600) respectively, for the quarter and nine months ended September 30, 1996
compared to the quarter and nine months ended September 30, 1995. These
decreases were primarily due to a reduction in the level of utilization of
outside contract programming resources required for the development of the
Company's products on new payment terminal platforms.
General and administrative expenses increased by 107.3% ($191,700) and
38.3% ($215,100) respectively, for the quarter and nine months ended September
30, 1996 compared to the quarter and nine months ended September 30, 1995. These
increases were primarily due to the accrual of severance expenses associated
with the termination of the Company's former president and recruiting and
relocation expenses related to the hiring of a new General Manager for the
Company. The accrual of these expenses, totaling approximately $170,000,
resulted from the acquisition of approximately 84% of the Company's outstanding
common stock by International Verifact Inc. (see discussion below).
Additionally, the Company accrued certain expenses totaling approximately
$25,000 during the quarter ended September 30, 1996 related to the planned
relocation of its headquarters to a new facility in the local area.
Interest income increased by 65.5% ($2,900) and 25.4% ($3,300)
respectively, for the quarter and nine months ended September 30, 1996 compared
to quarter and nine months ended September 30, 1995 due to a increase in the
amount of funds available for investment throughout these periods.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1996 was $533,790 compared to
$1,000,141 at December 31, 1995. Decreases in inventory ($25,330) and accounts
receivable ($680,497) coupled with an increase in deferred revenue on hardware
and software maintenance contracts ($156,348) were partially offset by increases
in cash ($260,718) and prepaid expenses ($13,154) as well as a decrease in
accounts payable and accrued liabilities ($162,953). Net cash used in investing
activities between December 31, 1995 and September 30, 1996 totaled
approximately $73,400 and related to capital equipment purchases, principally
for computer, test, and sales demonstration equipment.
In March 1996, the Company received a commitment from its bank for the
renewal of its working capital line of credit through January 5, 1997. Maximum
available borrowings under the line are the lesser of $400,000 or certain levels
of eligible accounts receivable and are subject to monthly and quarterly
financial performance covenants.
11
Borrowings on the credit line bear interest at a rate per annum equal to the
Prime Rate (8.25% at November 12, 1996) plus 4% and are secured by the Company's
assets. At September 30, 1996, there were no borrowings outstanding under the
credit line nor have there been any borrowings through November 12, 1996.
Borrowing availability under the line of credit was $204,236 at September 30,
1996.
Management believes that sources of liquidity for future needs can be
generated from existing cash balances, cash generated from operations and
borrowings available to the Company under its bank-financed working capital line
of credit.
ACQUISITION OF COMPANY'S COMMON STOCK
On September 13, 1996, International Verifact Inc. ("IVI"), a
Canadian-based company, acquired beneficial ownership of approximately 84% of
the outstanding common stock, $.15 par value (the "Common Stock"), of the
Company. IVI acquired such beneficial ownership by purchasing all of the
outstanding shares of Common Stock held by BCE Investments (Canada) Inc. and
Nelson Doubleday. The aggregate amount of consideration paid by IVI for such
shares was approximately $1,254,000. The source of such consideration was IVI's
issue from treasury of such number of previously unissued IVI common shares
having an aggregated market value of approximately $1,254,000.
IVI is engaged in the design, development, and sale of electronic
payment solutions for retailers, financial institutions, governments, and other
businesses in the United States and internationally. IVI's hardware and software
products include point of sale debit/credit/EFT/EBT terminals, check readers,
smart card readers, check encoders, and secure PIN (personal identification
number) entry devices.
The impact of the IVI transaction on the Company's business is yet
uncertain in areas including the Company's ability to successfully incorporate
and market IVI's products with its own or expand the Company's customer base,
and the ability of the Company to maintain existing vendor and reseller
relationships with other providers of electronic payment system products and
solutions.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of the future performance of the
Company. The forward looking statements in the Form 10-Q are made under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results of operation and financial condition have varied and
may in the future differ materially from those contained in the forward-looking
statements contained herein. The Company's future results remain difficult to
predict and depend on factors
12
including, without limitation, the successful integration of the Company and
IVI, the ability to successfully market and distribute IVI products, market
acceptance of existing and new products of both companies, fluctuations in
quarterly results, dependence on large customers, dependence on principle
products, dependence on third parties for hardware and equipment, rapid
technological changes, potential for new product delays and defects, and
fluctuations in economic and market conditions. Because of these and other
factors, past financial performance should not be considered an indication of
future performance.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has no material legal proceedings at this time.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the security holders
in the quarter ended September 30, 1996.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on September 13, 1996 and is
incorporated herein by reference. The contents of the report
are summarized below:
On September 13, 1996, International Verifact Inc. ("IVI")
acquired beneficial ownership of approximately 84% of the
outstanding common stock, $.15 par value (the "Common
Stock") of the Company. IVI acquired such beneficial
ownership by purchasing all of the outstanding shares of
Common Stock held by BCE Investments (Canada) Inc. and
Nelson Doubleday. The aggregate amount of consideration paid
by IVI for such shares was approximately $1,254,000. The
source of such consideration was IVI's issue from treasury
of such number of previously unissued IVI common shares
having an aggregated market value of approximately
$1,254,000.
14
In connection with the sale of the Company's Common Stock,
Nelson Doubleday and BCE Investments (Canada) Inc. agreed to
cause such of Company's directors to resign as IVI
specified. On September 13, 1996, (i) the following
directors resigned: Jeffrey Finestone; Robert Forbes;
Christopher Illick; Brian Kouri; Paul Siegenthaler; and
Charles Thompson and (ii) IVI executed a Written Consent of
Holder of Common Stock pursuant to Delaware law electing
George Whitton, L. Barry Thomson, and Kenneth Kubler as
directors to serve until the next annual meeting of
stockholders.
15
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.
NATIONAL TRANSACTION NETWORK, INC.
DATE: November 12, 1996 By: /s/ L. Barry Thomson
-------------------------
L. Barry Thomson, Chief Executive
Officer and President
DATE: November 12, 1996 By: /s/ Milton A. Alpern
----------------------------
Milton A. Alpern, Vice President of Finance
and Administration (Principal Financial and
Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 667,975
<SECURITIES> 0
<RECEIVABLES> 803,725
<ALLOWANCES> 100,000
<INVENTORY> 248,829
<CURRENT-ASSETS> 1,660,530
<PP&E> 782,536
<DEPRECIATION> 538,439
<TOTAL-ASSETS> 1,909,586
<CURRENT-LIABILITIES> 1,126,740
<BONDS> 0
0
0
<COMMON> 487,291
<OTHER-SE> 295,328
<TOTAL-LIABILITY-AND-EQUITY> 1,909,586
<SALES> 3,657,927
<TOTAL-REVENUES> 3,657,927
<CGS> 1,809,739
<TOTAL-COSTS> 1,809,739
<OTHER-EXPENSES> 2,331,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (466,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (466,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (466,626)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
