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 June 30, 1997
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)
117 Flanders Road
Westborough, Massachusetts 01581
---------------------------- -------
(Address of principal executive offices) (Zip Code)
(508) 870-3200
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(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 August 11, 1997: 3,248,606 shares.
NATIONAL TRANSACTION NETWORK, INC.
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets
June 30, 1997 and December 31, 1996 3
Statements of Operations
Three months ended June 30, 1997 and 1996 5
Six months ended June 30, 1997 and 1996 6
Statements of Cash Flows
Six months ended June 30, 1997 and 1996 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 13
SIGNATURES 15
2
PART I - FINANCIAL STATEMENTS
ITEM I. FINANCIAL STATEMENTS
- ----------------------------
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
ASSETS
-------------
(Unaudited)
June 30, December 31,
1997 1996
------------- ---------------
CURRENT ASSETS:
Cash and equivalents $49,735 $266,045
Accounts receivable
(Net of allowance for doubtful accounts
of $100,000 at June 30, 1997
and December 31, 1996) 610,082 1,406,113
Accounts receivable-stockholder 14,079 0
Inventory 160,525 233,590
Prepaid expenses 39,391 36,394
------------- ---------------
TOTAL CURRENT ASSETS 873,812 1,942,142
------------- ---------------
PROPERTY AND EQUIPMENT 921,853 785,051
Less accumulated depreciation
and amortization (641,225) (578,032)
------------- ---------------
PROPERTY AND
EQUIPMENT - NET 280,628 207,019
------------- ---------------
OTHER ASSETS:
Deposits 14,663 11,931
Capitalized software costs 15,248 0
------------- ---------------
TOTAL $1,184,351 $2,161,092
------------- ---------------
------------- ---------------
See Notes to Financial Statements.
3
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------
(Unaudited)
June 30, December 31,
1997 1996
------------- ---------------
CURRENT LIABILITIES:
Accounts payable $230,418 $497,569
Accounts payable-stockholder 10,813 95,287
Accrued liabilities 200,048 348,786
Deferred revenue 390,506 561,982
Short term portion of capital lease 29,241 9,224
------------- ---------------
TOTAL CURRENT LIABILITIES 861,026 1,512,848
------------- ---------------
LONG TERM LIABILITIES:
Long term portion of capital lease 55,425 12,053
Deferred revenue 8,214 1,941
------------- ---------------
TOTAL LONG TERM LIABILITIES 63,639 13,994
------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value;
authorized, 5,000,000 shares;
none outstanding
Common stock, $.15 par value;
authorized, 20,000,000 shares;
issued and outstanding, 3,248,606
shares at June 30, 1997 and
December 31, 1996 487,291 487,291
Additional paid-in capital 12,589,255 12,589,255
Accumulated deficit (12,816,860) (12,442,296)
------------- ---------------
TOTAL STOCKHOLDERS'
EQUITY 259,686 634,250
------------- ---------------
TOTAL $1,184,351 $2,161,092
------------- ---------------
------------- ---------------
See Notes to Financial Statements.
4
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
------------- ----- ---------------
1997 1996
------------- ---------------
REVENUE:
Systems and equipment $388,075 $534,635
Software and services 552,338 624,574
------------- ---------------
Total 940,413 1,159,209
------------- ---------------
COST AND EXPENSES:
Cost of revenue 474,898 487,942
Sales and marketing 236,946 292,457
Research and development 272,900 236,019
General and administrative 187,069 200,168
------------- ---------------
Total 1,171,813 1,216,586
------------- ---------------
LOSS FROM OPERATIONS (231,400) (57,377)
------------- ---------------
OTHER INCOME (EXPENSE):
Interest income 32 6,052
Interest expense (4,595) 0
------------- ---------------
Total (4,563) 6,052
------------- ---------------
NET LOSS ($235,963) ($51,325)
------------- ---------------
------------- ---------------
NET LOSS PER COMMON SHARE ($0.07) ($0.02)
------------- ---------------
------------- ---------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,248,606 3,248,606
------------- ---------------
------------- ---------------
See Notes to Financial Statements.
5
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30,
------------- ----- ---------------
1997 1996
------------- ---------------
REVENUE:
Systems and equipment $964,341 $1,388,193
Software and services 1,198,225 1,139,138
------------- ---------------
Total 2,162,566 2,527,331
------------- ---------------
COST AND EXPENSES:
Cost of revenue 1,086,479 1,208,136
Sales and marketing 498,943 568,941
Research and development 520,883 480,641
General and administrative 428,009 406,186
------------- ---------------
Total 2,534,314 2,663,904
------------- ---------------
LOSS FROM OPERATIONS (371,748) (136,573)
------------- ---------------
OTHER INCOME (EXPENSE):
Interest income 1,779 9,162
Interest expense (4,595) 0
------------- ---------------
Total (2,816) 9,162
------------- ---------------
NET LOSS ($374,564) ($127,411)
------------- ---------------
NET LOSS PER COMMON SHARE ($0.12) ($0.04)
------------- ---------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,248,606 3,248,606
------------- ---------------
------------- ---------------
See Notes to Financial Statements.
6
<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------- ---------------
1997 1996
------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($374,564) ($127,411)
------------- ---------------
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 63,193 52,736
Increase (decrease) in cash from:
Accounts receivable 796,031 487,737
Accounts receivable-stockholder (14,079) 0
Inventory 73,065 (50,182)
Prepaid expenses (2,997) (26,469)
Deposits (2,732) (1,280)
Accounts payable-stockholder (84,474) 0
Accounts payable and accrued
liabilities (415,889) (312,986)
Deferred revenue (165,203) 316,906
------------- ---------------
Total adjustments 246,915 466,462
------------- ---------------
Net cash provided by (used for) operating activities (127,649) 339,051
------------- ---------------
Cash Flows From Investing Activities:
Purchases of property and equipment (73,413) (52,800)
Capitalization of software development costs (15,248) 0
------------- ---------------
Net cash used for investing activities (88,661) (52,800)
------------- ---------------
Cash Flows From Financing Activities:
Proceeds from bank line of credit 100,000 0
Repayment of bank line of credit (100,000) 0
------------- ---------------
Net cash provided by (used for) financing
activities 0 0
------------- ---------------
Net increase (decrease) in cash and
equivalents (216,310) 286,251
Cash and Equivalents, Beginning of Period 266,045 407,257
------------- ---------------
Cash and Equivalents, End of Period $49,735 $693,508
------------- ---------------
------------- ---------------
Non-Cash Transactions:
Capital lease additions $63,389 $0
------------- ---------------
------------- ---------------
</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, 1996 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. The results of operations for the six month period ended June 30, 1997
are not necessarily indicative of the results to be expected for the full
year.
3. On September 13, 1996, International Verifact Inc. (IVI) acquired
beneficial ownership of approximately 84% of the outstanding common
stock, $.15 par value, of the Company in a private transaction. IVI
acquired such shares in exchange for IVI common shares having an
aggregated market value of approximately $1,254,000.
4. Net 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.
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which the Company will adopt in the fourth quarter of 1997. Had
SFAS No. 128 been effective for the quarter and six months ended June 30,
1997 and June 30, 1996, basic and diluted net loss per share under SFAS
No. 128 would have been the same as the reported net loss per common
share.
5. In March 1997, the Company renewed its working capital line of credit
with its bank through January 4, 1998. Maximum available borrowings under
the line are the lesser of $750,000 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 bank's prime rate plus 1.5%, are secured by the Company's assets,
and are guaranteed by IVI. At June 30, 1997, there were no borrowings
outstanding under the credit line. Borrowing availability under the
credit line was $365,576 at June 30, 1997.
-8-
6. 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 once technological
feasibility has been achieved 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. Upon availability of products for general
release to customers, all related capitalized development costs are
amortized over a suitable period based on the products' estimated
economic life. For the quarter ended June 30, 1997, capitalized software
development costs amounted to $15,248.
7. At the Company's annual meeting of stockholders held on June 10, 1997,
the stockholders approved an increase in the number of shares of common
stock, par value $.15, authorized for issuance from 6,666,667 shares to
20,000,000 shares.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
Revenue for the quarter ended June 30, 1997 decreased by 18.9% to
$940,413 compared to $1,159,209 for the quarter ended June 30, 1996. For the six
months ended June 30, 1997, revenue decreased by 14.4% to $2,162,566 compared to
$2,527,331 for the six months ended June 30, 1996. The decreases in revenue were
primarily due to delays, resulting from resource constraints, in the Company's
ability to develop and deliver payment system products to meet the new
technology demands of its customers and prospects. IVI's acquisition of
approximately 84% of the Company's outstanding common stock in September 1996
has made available the additional resources of IVI needed by the Company to
begin development of such products.
Gross margins as a percent of revenue were 49.5% and 49.8%,
respectively, for the quarter and six months ended June 30, 1997 compared to
57.9% and 52.2%, respectively, for the quarter and six months ended June 30,
1996. The decreases in gross margin percentages were primarily due to increases
in compensation and fringe benefit expenses and occupancy expense allocations,
resulting from the assignment of certain personnel and related expenses
previously assigned to sales and marketing expenses in the quarter and six
months ended June 30, 1996 to costs of goods sold in the quarter and six months
ended June 30, 1997. The resulting decreases in gross margin percentages were
partially offset by a shift in mix between hardware, software, and professional
services revenue. Higher margin software and professional services revenue
accounted for approximately 59% and 55%, respectively, of total revenue for the
quarter and six months ended June 30, 1997 compared to approximately 54% and
45%, respectively, for the quarter and six months ended June 30, 1996.
Sales and marketing expenses in the second quarter of 1997 decreased by
19.0% to $236,946 compared to $292,457 in the second quarter of 1996. For the
six months ended June 30, 1997, sales and marketing expenses decreased by 12.3%
to $498,943 compared to $568,941 for the six months ended June 30, 1996. As
noted above, a change in the assignment of certain personnel and related
expenses, previously assigned to sales and marketing expenses in the quarter and
six months ended June 30, 1996 to costs of goods sold in the quarter and six
months ended June 30, 1997, was primarily responsible for the decreases in sales
and marketing expenses. Additionally, decreases in sales commission expenses,
due to the decreases in revenues, also contributed to the decreases in sales and
marketing expenses for the quarter and six months ended June 30, 1997 compared
to the quarter and six months ended June 30, 1996.
-10-
Research and development expenses increased by 15.6% to $272,900 for the
quarter ended June 30, 1997 compared to $236,019 for the quarter ended June 30,
1996. For the six months ended June 30, 1997, research and development expenses
increased by 8.4% to $520,883 compared to $480,641 for the six months ended June
30, 1996. Increases in outside consulting expenses due to the utilization of
contract programmers and recruiting expenses related to the hiring of additional
research and development staff were primarily responsible for the increases in
research and development expenses for the quarter and six months ended June 30,
1997 compared to the quarter and six months ended June 30, 1996. The increases
were partially offset by the capitalization of certain software development
costs in the quarter ended June 30, 1997 totaling approximately $15,000 in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
For the quarter and six months ended June 30, 1996, there were no research and
development expenses incurred that required capitalization.
General and administrative expenses decreased by 6.5% to $187,069 for
the quarter ended June 30, 1997 compared to $200,168 for the quarter ended June
30, 1996. For the six months ended June 30, 1997, general and administrative
expenses increased by 5.4% to $428,009 compared to $406,186 for the six months
ended June 30, 1996. For both the quarter and six months ended June 30,1997,
increases in compensation, fringe benefit, and travel and entertainment expenses
resulted due to certain management personnel changes made immediately following
the acquisition in September 1996 of approximately 84% of the Company's common
stock by IVI. In addition, increases in outside services expense resulted
primarily from the utilization of an outside consultant assisting the Company
with business expansion initiatives. In the quarter ended June 30, 1997, a
change in the estimated accrual for management relocation, which was established
at the end of 1996, resulted in a net decrease in general and administrative
expenses compared to the quarter ended June 30, 1996.
Decreases in interest income for the quarter and six months ended June
30, 1997 compared to the quarter and six months ended June 30, 1996 were due to
decreases in the amount of funds available for investment. Interest expense for
the quarter and six months ended June 30, 1997 was incurred on capitalized lease
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances at June 30, 1997 were $49,735 compared to $266,045 at
December 31, 1996. Net cash used for operating activities was $127,649 for the
six months ended June 30, 1997. The net loss for the six months ended June 30,
1997, coupled with decreases in accounts payable, accrued expenses and deferred
revenue and offset by a decrease in
-11-
accounts receivable, primarily accounted for the cash used by operations during
the period. Net cash used in investing activities for the six months ended June
30, 1997 totaled $88,661 and represented capital equipment expenditures,
principally for computer and office equipment, and the capitalization of certain
software development expenses.
In March 1997, the Company renewed its working capital line of credit
with its bank through January 4, 1998. Maximum available borrowings under the
line are the lesser of $750,000 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 bank's
prime rate plus 1.5%, are secured by the Company's assets, and are guaranteed by
IVI. At June 30, 1997, there were no borrowings outstanding under the credit
line. Borrowing availability under the credit line was $365,576 at June 30,
1997.
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. In addition, the Company is currently negotiating a Convertible
Subordinated Note Purchase Agreement (the Note Agreement) with IVI. It is
anticipated that the Note Agreement will be signed by the parties in the next
fiscal quarter and will provide for the Company to issue and sell notes (the
Notes) from time to time to IVI in the aggregate amount of up to $1,000,000.
While the Note Agreement is not yet in final form, it is currently anticipated
that the Notes, when issued, shall (i) have a five year term, (ii) be
subordinate to the bank-financed working capital line of credit and secured by
the assets of the Company, (iii) be subject to certain registration rights in
the event that the Company determines to register additional shares of common
stock, par value $.15 (the Common Stock), under the Securities Act, and (iv) be
convertible at the option of IVI at any time and from time to time into shares
of the Company's Common Stock. The conversion price shall be the price per share
determined by mutual agreement of the parties, but shall be equal to no less
than the fair market value as determined in the Note Agreement.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which the Company will adopt in the fourth quarter of 1997. Had SFAS No.
128 been effective for the quarter and six months ended June 30, 1997 and June
30, 1996, basic and diluted net loss per share under SFAS No. 128 would have
been the same as the reported net loss per common share.
-12-
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.
----------------------------------------------------
(a) The Company held its annual meeting of stockholders on June 10,
1997. The number of shares issued, outstanding and eligible to
vote as of the record date of April 11, 1997 was 3,248,606. For
quorum, 2,883,759 shares of the eligible voting shares
tabulated.
(b) The following directors were elected at and continued in office
after the meeting: L. Barry Thomson, Kenneth M. Kubler,
Christopher F. Schellhorn, and George C. Whitton.
(c) The following matters were voted on at the annual stockholders
meeting:
1. To fix the number of Directors at four (4) and to elect a
Board of Directors for the ensuing year.
Director Number of Shares
-------- ----------------
Withhold
For Authority
--- ---------
L. Barry Thomson 2,881,614 2,145
Kenneth M. Kubler 2,881,614 2,145
Christopher F. Schellhorn 2,881,614 2,145
George C. Whitton 2,881,614 2,145
-13-
2. To ratify an amendment to the Company's Restated Certificate
of Incorporation increasing the numbers of shares of common
stock, par value $.15, authorized for issuance from 6,666,667
shares to 20,000,000 shares.
Number of Shares
----------------
For 2,880,666
Against 2,983
Abstain 110
3. To ratify the selection of the firm of Deloitte & Touche LLP
as auditors of the Company for the fiscal year ending
December 31, 1997.
Number of Shares
----------------
For 2,883,707
Against 22
Abstain 30
(d) Not applicable.
Item 5. Other Information.
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
-14-
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATIONAL TRANSACTION NETWORK, INC.
DATE: August 11, 1997 By: /s/ L. Barry Thomson
---------------------
L. Barry Thomson, Chief Executive
Officer, President and Chairman of the
Board (Principal Executive Officer)
DATE: August 11, 1997 By: /s/ Milton A. Alpern
---------------------
Milton A. Alpern, Vice President of Finance
and Administration (Principal Financial and
Accounting Officer)
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Apr-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 49,735
<SECURITIES> 0
<RECEIVABLES> 724,161
<ALLOWANCES> 100,000
<INVENTORY> 160,525
<CURRENT-ASSETS> 873,812
<PP&E> 921,853
<DEPRECIATION> 641,225
<TOTAL-ASSETS> 1,184,351
<CURRENT-LIABILITIES> 861,026
<BONDS> 0
0
0
<COMMON> 487,291
<OTHER-SE> (227,605)
<TOTAL-LIABILITY-AND-EQUITY> 1,184,351
<SALES> 940,413
<TOTAL-REVENUES> 940,413
<CGS> 474,898
<TOTAL-COSTS> 474,898
<OTHER-EXPENSES> 696,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,595
<INCOME-PRETAX> (235,963)
<INCOME-TAX> 0
<INCOME-CONTINUING> (235,963)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (235,963)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
