<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| X | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 NO. 0-10966
NATIONAL TRANSACTION NETWORK, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 75-1535237
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
117 Flanders Road
WESTBOROUGH, MASSACHUSETTS 01581
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 870-3200
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS: COMMON STOCK, $.15 PAR VALUE
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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 at least the past 90 days.
Yes_X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 6, 1998: $355,395, based on the average low bid
and high asked prices on the over-the-counter market as reported on that date.
Number of shares outstanding of registrant's common stock, $.15 par
value, as of March 6, 1998: 3,280,662.
Documents are incorporated by reference:
Portions of the Registrant's Definitive Proxy Statement
for the Annual Meeting of Stockholders are incorporated
by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
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THE COMPANY AND ITS MARKETS
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National Transaction Network, Inc., a Delaware corporation ("NTN" or
the "Company"), is engaged in designing, developing, integrating, marketing, and
maintaining electronic payment systems for use in retail applications. NTN
software products are used to perform some or all of the tasks involved in
electronic payment transactions, including the collection of payment-related
data at the point of sale; the secure transmission of this data to a processing
computer; the authorization of the transaction; the collection of the completed
transactions; and the processing of these transactions for accountability, funds
management, and reporting reasons. NTN also provides support services relating
to the deployment and on-going operation of these systems.
The Company's predecessor was incorporated under Texas law on September
26, 1976. It completed an initial public offering of shares of its common stock
in February 1983. In June 1987, the Company's predecessor completed a subsequent
public offering of units of shares of its common stock and common stock purchase
warrants. In March 1988, the stockholders of the Company's predecessor Texas
corporation approved the merger of the predecessor company with and into
National Transaction Network, Inc., a Delaware corporation which was a
wholly-owned subsidiary of the predecessor company. As a result of the merger,
National Transaction Network, Inc. has succeeded to all of the properties,
assets and liabilities of the predecessor company, and has carried on the
business of the predecessor company.
In September 1996, International Verifact Inc. ("IVI"), a Toronto,
Ontario, Canada-based company, 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. Due to the percentage
ownership of NTN acquired as a result of this transaction, NTN has become a
subsidiary of IVI and the financial position and results of operations of NTN
are included in IVI's consolidated financial position and results of operations
from the date of acquisition. See Management's Discussion and Analysis of
Financial Condition and Results of Operations.
In January 1998, the Company purchased the rights to certain software
products from BancTec USA, Inc. ("BancTec"). Also included in the purchase were
certain customer software maintenance contracts and tangible assets used to
support such contracts. The software products acquired by the Company complement
NTN's existing software products and services. The purchase price is based on
75% of the revenues derived by the Company from the software maintenance
contracts acquired for the twelve-month period following the date of purchase.
It is estimated that the revenues from such software maintenance contracts will
be approximately $400,000. As a consequence, the purchase price for the BancTec
software products is estimated to approximate $300,000 and is payable 30 days
following receipt of such revenue.
ELECTRONIC PAYMENT SYSTEMS
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Electronic Payment Systems ("EPS") automate the acceptance of non-cash
payment media at a retail location. This automation process speeds customer
service, reduces retail operating expenses and attracts new customers by
allowing new forms of payment to be accepted. Automation reduces fraud and
eliminates many of the paper documents traditionally associated with non-cash
payments. Common types of payment media automated by EPS include:
o Electronic Funds Transfer ("EFT") using consumer ATM access (debit) cards. EFT
transactions result in the nearly immediate transfer of funds from the
consumer's bank account to the merchant's bank account in exchange for
merchandise and cash. On-line EFT requires the secure transmission of the
consumer's Personal Identification Number ("PIN") for verification at the
financial institution, as well as capture and transmission of the transactional
data.
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o Credit Cards. This includes bank issued cards (MasterCard, Visa), travel and
entertainment cards (American Express, Diner's Club) and retailer issued cards
(Sears, Discover, J.C. Penney, etc.). Credit card transactions are authorized
and electronically captured, resulting in faster service and lower operating
costs.
o Checks. Payments by check may be automated to verify the consumer's past check
payment history and assure that no returned check items are outstanding. Often,
customer identification is based on a valid driver's license or a retailer
issued check cashing card.
o Electronic checks using the Automated Clearing House ("ACH"). This consumer
payment option replaces a paper check with an electronic item submitted to the
ACH for settlement between financial institutions. EPS identify the consumer,
capture the data and eliminate the need for the traditional paper check.
o Electronic Government Benefits Transfer ("EBT"). EBT replaces labor intensive
paper food stamps and other forms of government benefits with electronic
transactions. These programs are in pilot tests or roll-out in several states.
The government expects to measure results based on reduced administrative
expenses and reduced fraud.
o Retailer-issued Gift Certificates. Traditionally, gift certificates have been
treated as manually processed, paper-based transactions. Due to renewed emphasis
on increased speed of acceptance, detailed management reporting, and fraud
protection, retailers are using EPS to automate this process by converting to
plastic card-based programs.
o Frequent Shopper Transactions. Retailers are rewarding their best customers
and incenting these and other customers to exhibit chain loyalty through
frequent shopper and targeted marketing programs. EPS are being used to collect
the customer history and to evaluate the effect of certain promotions on the
recipients of these promotions.
PRODUCT STRATEGY
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NTN seeks to identify specific niches in the retail industry and to
design complete electronic payment systems to meet the needs of its targeted
markets. Components of an electronic payment system may include transaction
terminals and peripherals, software at the point of sale for originating
transactions and communicating to other systems in the store, such as electronic
cash registers, communications methodologies for transmitting the transactions
to a processing computer, software for authorizing, processing, or re-routing
the transactions to a service provider, and support services to ensure the
smooth operation of these disparate parts.
NTN in-store systems are primarily built around the Company's software
products operating in customer-activated terminals and back office personal
computers. NTN products address the requirements for in-store systems, which are
usually connected to one or more of many host processors.
NTN selects hardware platforms for characteristics providing easy
consumer operation, data security, reliability and availability. The Company's
software products are written to enhance and complement these features.
NTN communications controllers manage a number of terminals and provide
communications over a single telephone line or satellite uplink. NTN works with
the retailer and the transaction processing service provider to determine the
most appropriate communications strategy given retailer requirements for economy
and speed. In addition to consolidating communications, the controller handles
reporting on in-store EPS activity.
The Mainsail software product acquired by the Company from BancTec
("Mainsail") allows retailers to authorize and process such retailer's EFT
transactions at their corporate office as opposed to utilizing the services of
an outside, third party transaction processor. The Mainsail product enables
retailers to centralize their check and EFT transaction authorizations thereby
significantly reducing the retailer's costs of handling
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electronic payments by reducing their reliance on costly third party processors.
By delivering both store and corporate level products, NTN now offers a single
source, end-to-end electronic payment solution to retailers giving the Company a
significant technical and price advantage over competitors who offer payment
solutions at either the store or corporate level only.
NTN has sought to standardize its product offerings as much as
possible. In 1997, the Company continued to standardize its products by
releasing both UNIX and Microsoft NT operating system-based versions of its
in-store electronic payment system products. Significant development was also
completed on the Company's next generation products based on the Microsoft NT
and JAVA operating system platforms in order to enable NTN to adapt to the new
technologies used by retailers. This product development effort further
reinforces the Company's initiative to conform with new retail technology
requirements such as Microsoft's Active Store products, the Internet, and the
new system products of major point of sale cash register vendors.
INTELLECTUAL PROPERTY
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NTN relies on a combination of trade secrets, copyrights, and
trademarks to protect its intellectual property.
STRATEGIC ALLIANCES
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To facilitate product development and marketing, NTN has entered into
several key strategic alliances which provide access to hardware platforms and
markets for the Company's products. These alliances are all related to NTN's
strategic direction of providing products and services to meet the EPS needs of
retailers.
In December 1990, NTN entered into a distribution agreement with IVI.
Pursuant to the distribution agreement, IVI granted the Company a two year,
non-exclusive right to market, distribute and sell IVI products in the United
States. Since the expiration of the agreement on December 31, 1992, the Company
has continued working with IVI under an informal extension of the non-exclusive
distribution agreement. In September 1996, IVI acquired beneficial ownership of
approximately 84% of the outstanding common stock of NTN. IVI's product line
includes point of sale terminals and peripherals for electronic transaction
processing applications. Alternate sources of supply are available.
In January 1993, NTN entered into a value-added reseller agreement with
Inacom Corporation. The agreement allows NTN to purchase IBM or compatible
personal computers from Inacom at preferential prices. These personal computers
may be used as the communications controller for NTN's payment systems. The
initial one year term of the agreement automatically renews for successive one
year terms unless the agreement is otherwise terminated by either party, which
has not occurred to date.
In September 1993, NTN entered into a master purchase agreement with
VeriFone, Inc., a leading manufacturer of electronic payment terminals. Pursuant
to the terms of the agreement, NTN receives discount pricing on VeriFone
hardware and software components. These VeriFone products are incorporated into
NTN's payment systems and sold to end-users in the United States on a
non-exclusive basis. The initial one year term of the agreement automatically
renews for successive one year terms unless the agreement is otherwise
terminated by either party, which has not occurred to date.
MARKETING
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NTN has historically focused on producing Electronic Payment Systems
specifically designed for supermarkets and similar multi-lane retailers. NTN has
also begun marketing into other retail markets to expand the market for the
Company's products to include additional applications.
NTN primarily markets its products through a direct selling force. The
Company's headquarters and regional sales offices provide the sales force with
nationwide coverage. The sales force focuses its efforts on supermarket
retailers primarily, with additional efforts targeted at retailers in other
industry segments and the
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field sales force of strategic partners of the Company. The direct sales force
is supported by promotional plans including trade show exhibits, regional
seminars, direct mail campaigns, and press coverage.
NTN also markets its products through several indirect sales channels.
These indirect channels influence the multi-lane retailer and EPS industries,
including cash register vendors, supermarket wholesalers, third party networks,
and other software developers.
The acquisition of approximately 84% of the Company's outstanding
common stock by IVI has made available to NTN the financial resources of IVI to
help the Company expand its products and markets. The Company believes that
additional benefits from IVI's investment are being achieved by (i) creating a
competitive advantage through combining complementary product offerings; (ii)
leveraging combined software development organizations and technologies; and
(iii) economies of scale in sales, product support, and marketing initiatives.
PRODUCTS
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NTN PINnacle(TM) Payment Systems are a family of standardized products
which provide retailers with the ability to accept electronic payments in a
variety of operating environments. These payment systems must work in
conjunction with several characteristics of the retailer's store environment
including the type of store system (cash register) used, the routing of
transactions for processing and the communications methods employed for
transmitting financial transactions. In addition, the retailer may choose one of
several models of electronic payment terminals on the market. The Company's
product line also includes services related to the operation of an electronic
payment system, such as systems integration, installation, training, and
hardware and software maintenance. All of these products and services are
designed to allow for development of common features across the Company's
customer base.
The NTN PINnacle(TM) Payment Controller is the heart of NTN's product
line. Controller software functionality centers around a variety of
communications interfaces, data collection routines and reporting of in-store
data. NTN is placing increased emphasis on being architecturally and
functionally compatible with the store system chosen by the retailer. NTN is
able to provide modifications and enhancements customized to the retailer's
needs.
NTN PINnacle(TM) Payment Terminal Software is compatible with the NTN
controller. Terminal software originates electronic transactions through cashier
and consumer input. In some environments, the terminal software interacts with
compatible software on the cash register system to share data and to use the
cash register printer for receipt generation. NTN software is compatible with
the products of major store system providers including Fujitsu-ICL, IBM, and
NCR.
NTN's Mainsail(TM) Software drives a retailer's corporate office-based,
in-house electronic payments processing system. An open systems software
application, Mainsail receives all of a retailer's electronic payment
transactions routed to it from its store locations, distinguishes transaction
type, and wherever applicable, re-routes transactions to the appropriate
financial institution authorizer. Mainsail also maintains a relational data base
of customer transaction information against which it validates in-house
transactions relating to check authorization and other retailer-sponsored
programs. The product's capability in this area is used by retailers to reduce
fraudulent check activity and enable expanded customer loyalty, gift
certificate, and electronic marketing programs.
Mainsail supports all types of electronic payment transactions and,
when integrated with NTN's complementary PINnacle product solutions, allows NTN
to serve as a retailer's single source electronic payments solution provider.
The Company's product offerings enable it to provide retailers with complete yet
economic end-to-end electronic payment solutions.
NTN assists its customers by offering a comprehensive set of
professional services necessary for the start-up and on-going support of
electronic payment systems. These services may include project management,
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procurement and preparation of hardware components, hardware and software
maintenance, installation, training, custom software design and development and
new product evaluation for specific customers.
CUSTOMERS
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NTN's customer base consists of large retail companies, principally in the
supermarket industry, located throughout the United States. In 1997, Albertsons,
Inc. accounted for 57% of the Company's total revenue.
COMPETITION
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NTN has positioned itself as a full service provider of EPS for
multi-lane retailers. This market niche has attracted other suppliers of
competing products and services, some of whom have significantly greater
financial and marketing resources than NTN and may develop products that are
superior to NTN's products or that achieve greater customer acceptance. These
suppliers include point of sale hardware vendors and EPS providers, system
integrators, cash register vendors, and third party transaction processing
organizations. It is the Company's objective to successfully compete against its
competitors by focusing on the multi-lane retail market and providing the most
appropriate and complete electronic payment system available. NTN distinguishes
itself from its competitors through its system integration capabilities and its
wide array of professional services available to its customers. NTN's success
will depend in large part on its ability to increase its market share of its
targeted market segments and to sell additional products and services to
existing customers. Competition expected to be encountered by the Company could
result in pricing pressures and reduced margins which could have a material
effect on the Company's financial condition and results of operations in the
future.
DEVELOPMENT
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During the years ended December 31, 1995, 1996, and 1997, the Company
incurred $1,016,521, $947,087 and $922,117 respectively, in research and
development expenses for software development in connection with its existing
and proposed products. During 1997, an additional $286,228 of costs incurred
were capitalized and accounted for in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed." During 1995 and 1996, there were no
research and development expenses incurred that required capitalization.
REGULATION
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In some applications, users of EFT terminals may be subject to federal
or state regulation under statutes and regulations relating to electronic funds
transfer systems, credit cards and debit cards. Such laws may limit the
transactions capable of being performed, limit the locations where terminals may
be placed, limit card customer liability for fraudulent transfers and require
certain written documents to be produced at the time of transfer, among other
matters. There can be no assurance that compliance with such regulations will
not be burdensome and costly.
EMPLOYEES
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As of December 31, 1997, the Company had thirty four employees. As of
March 13, 1998, the Company had thirty six employees: Milton A. Alpern, its
Chief Financial Officer, Vice President of Finance and Treasurer, Sheila C.
Birney, its Vice President of Product Development and Professional Services,
Jeffrey A. Wakefield, its National Sales Manager, fourteen software engineers,
eight marketing and sales employees, eight customer service employees and three
finance and administrative employees.
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ITEM 2. PROPERTIES.
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The Company's principal executive offices, located at 117 Flanders
Road, Westborough, Massachusetts, are leased pursuant to a five-year lease
executed in November 1996. The Company's occupancy under the lease began on
February 1, 1997. The lease expires on January 31, 2002. The total rental is
approximately $9,081 per month during the first two years of the lease,
approximately $9,445 per month during the next two years of the lease, and
approximately $9,808 per month during the last year of the lease. The Company
believes that the space, consisting of approximately 17,400 square feet, is
sufficient for the Company's needs for 1998. One sales office, located at 12200
East Briarwood Avenue, Englewood, Colorado, has a monthly rental of $460. Other
employees of the Company, not located at the Company's executive offices, work
out of home offices for which the Company incurs no rental expense.
ITEM 3. LEGAL PROCEEDINGS.
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The Company has no material legal proceedings at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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There were no matters submitted to a vote of the security holders in
the quarter ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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From January 10, 1991 through the present, the Company's common stock
has been listed on the pink sheets of the National Quotations Bureau, Inc., and
certain broker-dealers have held themselves out as market makers in the common
stock. Additionally, the Company's common stock is included on the OTC Bulletin
Board. The quotations below reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
1996 HIGH LOW
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<S> <C> <C>
First quarter (1/1 - 3/31)............................................. $0.31 $0.25
Second quarter (4/1 - 6/30)............................................ $0.41 $0.25
Third quarter (7/1 - 9/30)............................................. $0.52 $0.19
Fourth quarter (10/1 - 12/31).......................................... $0.50 $0.25
1997 HIGH LOW
---- ---- ---
First quarter (1/1 - 3/31)............................................. $0.28 $0.25
Second quarter (4/1 - 6/30)............................................ $0.84 $0.25
Third quarter (7/1 - 9/30)............................................. $0.80 $0.75
Fourth quarter (10/1 - 12/31).......................................... $0.78 $0.56
</TABLE>
As of March 6, 1998, there were 569 holders of record of the Company's
common stock. The Company has not paid dividends on its common stock and does
not anticipate paying dividends in the foreseeable future. The Company
anticipates that all earnings will be retained for development of the Company's
business.
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ITEM 6. SELECTED FINANCIAL DATA.
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STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Revenue................................. $5,318,371 $5,013,023 $8,006,417 $7,968,148 $9,509,907
Cost of Revenue......................... 3,039,907 2,609,901 4,593,041 4,948,350 5,903,732
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Gross Margin............................ 2,278,464 2,403,122 3,413,376 3,019,798 3,606,175
Total Operating
Expenses............................... 2,689,930 3,038,245 3,518,522 4,272,107 3,418,972
--------- --------- --------- --------- ---------
Income (Loss) from Operations........... (411,466) (635,123) (105,146) (1,252,309) 187,203
Other Income (Expense).................. (37,297) 20,128 16,445 15,879 (177,682)
--------- --------- --------- --------- ---------
Income (Loss) before Income
Taxes.................................. (448,763) (614,995) (88,701) (1,236,430) 9,521
Provision for Income Taxes..............
--------- --------- --------- --------- ---------
Net Income (Loss)....................... $(448,763) $(614,995) $(88,701) $(1,236,430) $9,521
Income (Loss) per Common
Share:
Basic and Diluted Net
Income (Loss)...................... $(.14) $(.19) $(.03) $(.38) $.00
Weighted Average Number of
Common Shares Outstanding.............. 3,254,055 3,248,606 3,248,606 3,248,606 2,471,161
BALANCE SHEET DATA
AS OF DECEMBER 31,
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1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working Capital........................ $1,155,167 $427,353 $997,032 $993,108 $1,873,150
Total Assets........................... 2,638,768 2,161,092 2,344,698 2,877,998 4,207,735
Long Term Liabilities.................. 1,548,592 12,053 0 0 0
Stockholders' Equity................... 196,488 634,250 1,249,245 1,337,946 2,574,376
</TABLE>
NOTES:
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All share and per share information has been restated to reflect the
one-for-fifteen reverse stock split of the Company's common stock, effected on
October 22, 1993.
In 1997, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," and has restated all periods presented
to conform to the new presentation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS.
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OVERVIEW
The Company's business strategy focuses on the development and
marketing of software products and professional services designed to address the
electronic payment system needs of multi-lane retailers. Turn-key system
solutions including customer-activated payment terminals, in-store controllers,
point of sale system integration and transaction processing network interfaces
are also provided to customers. These solutions enable retailers to automate
payment transactions involving consumer debit (ATM) cards, bank and retailer
issued credit cards, paper check authorization, electronic government benefits
and electronic checks.
In January 1998, the Company purchased the rights to certain software
products from BancTec USA, Inc. ("BancTec"). Also included in the purchase were
certain customer software maintenance contracts and tangible assets used to
support such contracts. The software products acquired by the Company complement
NTN's existing software products and services. The Mainsail software product
acquired from BancTec enables retailers to centralize their check and EFT
transaction authorizing and processing at their corporate office thereby
significantly reducing the retailer's costs of handling electronic payments by
reducing their reliance on costly third party transaction processors.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenue for the year ended December 31, 1997 increased by 6.1% to
$5,318,371 compared to $5,013,023 for the year ended December 31, 1996. The
increase in revenue was primarily due to a significant customer's decision to
upgrade a large number of its currently installed systems during 1997. The
revenue derived from this customer accounted for approximately 57% of the
Company's total revenue for the year ended December 31, 1997 compared to
approximately 48% of total revenue for the year ended December 31, 1996.
Gross margins as a percent of revenue were 42.8% for the year ended
December 31, 1997 compared to 47.9% for the year ended December 31, 1996. The
decrease in gross margin percentage was primarily due to increases in certain
categories of expenses resulting from the assignment of certain personnel to
costs of goods sold in 1997 who had been previously assigned to sales and
marketing expenses in 1996. The resulting decrease in gross margin percentage
was partially offset by a shift in mix between hardware, software, and
professional services revenue. Higher margin software and professional services
revenue accounted for approximately 46.8% of total revenue for the year ended
December 31, 1997 compared to approximately 43.7% for the year ended December
31, 1996.
Total operating expenses for the year ended December 31, 1997 decreased
by 11.5% to $2,689,930 compared to $3,038,245 for the year ended December 31,
1996. Sales and marketing expenses decreased by 10.3% in 1997 to $997,710
compared to $1,111,665 in 1996. Sales and marketing expenses include the costs
of distribution, product marketing, and account management. As noted above, a
change in the assignment of certain personnel to costs of goods sold in 1997 who
had been previously assigned to sales and marketing expenses in 1996 contributed
to the decrease in sales and marketing expenses.
Research and development expenses decreased by 2.6% to $922,117 for the
year ended December 31, 1997 compared to $947,087 for the year ended December
31, 1996. Increases in compensation and fringe benefit expenses, recruiting
expenses, travel and entertainment expenses, and other expenses associated with
an increase in the number of research and development personnel were generally
offset by the capitalization of certain software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed", resulting
in the small decrease in research and development expenses for 1997 compared to
1996. For the year ended December
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31, 1997, capitalized software development costs totaled $286,228. For the year
ended December 31, 1996, there were no costs incurred that required
capitalization.
General and administrative expenses decreased by 21.4% to $770,103 for
the year ended December 31, 1997 compared to $979,493 for the year ended
December 31, 1996. The decrease was primarily due to the accrual, in September
1996, of severance expenses associated with the termination of the Company's
former president and recruiting expenses related to the hiring of a new general
manager of the Company totaling approximately $181,000. In addition, bad debt
expense related to write-offs of uncollectible customer account balances
decreased by approximately $32,000 for the year ended December 31, 1997 compared
to the year ended December 31, 1996.
Other expense for the year ended December 31, 1997 totaled $37,297 and
consisted primarily of interest expense on convertible subordinated notes
payable to IVI ($24,208) and interest expense incurred on capitalized lease
obligations and borrowings made during the year under the Company's
bank-financed working capital line of credit. Other income for the year ended
December 31, 1996 totaled $20,128 and consisted primarily of interest earned on
invested cash balances.
No tax provision was required in 1997 due to the loss incurred.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenue for the year ended December 31, 1996 decreased by 37.4%
to $5,013,023 compared to $8,006,417 for the year ended December 31, 1995. The
decrease in revenue was primarily due to the inability of the Company to acquire
the necessary capital to properly invest in appropriate research and
development, marketing, and sales activities. In addition, primarily due to
resource constraints, the Company has been delayed in its ability to deliver new
payment system products to meet the new technology demands of several customers
and prospects. Lastly, revenues for 1996 were impacted by several customers of
the Company having completed large roll-outs of the Company's systems in 1995.
For the year ended December 31, 1996, gross margins as a percent of
revenue increased to 47.9% from 42.6% for the year ended December 31, 1995. The
increase in gross margin percentage relates to higher margin software and
professional services revenue comprising a larger percentage of the Company's
total revenue. For the year ended December 31, 1996, software and professional
services accounted for approximately 44% of total revenue compared to
approximately 36% of total revenue for the year ended December 31, 1995.
Total operating expenses for the year ended December 31, 1996 decreased
by 13.6% to $3,038,245 compared to $3,518,522 for the year ended December 31,
1995. Sales and marketing expenses decreased by 37.3% in 1996 to $1,111,665
compared to $1,771,800 in 1995. A significant portion of the decrease in sales
and marketing expenses was due to a reduction of staff in the sales and
marketing organization in the fourth quarter of 1995. The reduction of staff
resulted in a decrease in compensation and fringe benefits expenses of
approximately $359,000 for the year ended December 31, 1996 compared to the year
ended December 31, 1995. The reduction of staff was also primarily responsible
for a decrease in travel and entertainment expenses between the two years
totaling approximately $174,000. Additionally, sales commission expense
decreased by approximately $178,000 due to the decrease in revenue experienced
in 1996. These decreases in sales and marketing expenses were partially offset
by increases in outside consulting expenses ($69,000) resulting from the
utilization in 1996 of outside contractors to assist the Company in managing a
specific project to enable a customer to automate their acceptance of certain
proprietary payment transactions and in coordinating the Company's trade show
participation.
Research and development expenses decreased by 6.8% to $947,087 for the
year ended December 31, 1996 compared to $1,016,521 for the year ended December
31, 1995. The decrease in 1996 was primarily due to a reduction in the
utilization of independent, outside programming contractors.
-11-
<PAGE> 12
General and administrative expenses increased by 34.1% to $979,493 for
the year ended December 31, 1996 compared to $730,201 for the year ended
December 31, 1995. The increase in these expenses for 1996 was primarily due to
severance and recruitment costs totaling approximately $181,000 incurred in
connection with certain management personnel changes made immediately following
the acquisition in September 1996 of approximately 84% of NTN's outstanding
common stock by IVI. In addition, bad debt expense of $44,000 relating to
certain uncollectible customer balances and moving expenses of $25,000 relating
to the relocation of the Company's executive offices contributed to the increase
in general and administrative expenses for the year ended December 31, 1996.
Other income and expense, consisting primarily of interest earned on
invested cash balances, totaled $20,128 in 1996 compared to $16,445 in 1995. The
increase in interest income resulted from an increase in the amount of funds
available for investment in 1996.
No tax provision was required in 1996 due to the loss incurred.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances at December 31, 1997 were $457,857 compared to $266,045
at December 31, 1996. Net cash used for operating activities was $855,714 for
the year ended December 31, 1997 compared to net cash used for operating
activities of $86,577 for the year ended December 31, 1996 and net cash provided
by operating activities of $357,870 for the year ended December 31, 1995. The
net loss for the year ended December 31, 1997 coupled with an increase in
inventory ($521,329) and a decrease in deferred revenue ($514,856) and offset by
an increase in accounts receivable ($620,516) accounted for the majority of cash
used by operations during 1997. The increase in inventory was in preparation for
a large volume of shipments to one customer scheduled for the first quarter of
1998, a significant portion of which occurred in January 1998. The decrease in
deferred revenue was the result of billings on 1998 customer maintenance
contracts being delayed until the first quarter of 1998. The net loss for the
year ended December 31, 1996 offset by an increase in deferred revenue
($517,846) accounted for the majority of cash used by operations during 1996.
The increase in deferred revenue resulted from billings on 1997 customer
maintenance contracts having been made at the end of 1996. Cash provided by
operations for the year ended December 31, 1995 primarily resulted from a
decrease in inventory of $854,960 offset by a decreases in accounts payable and
accrued liabilities ($485,622). The decrease in inventory was due to
management's programs to reduce the Company's investment in hardware inventory
held for resale while improving purchasing and expediting methods necessary to
continue to meet customer delivery requirements.
Net cash used in investing activities totaled $428,177, $47,512, and
$24,645 for the years ended December 31, 1997, 1996, and 1995, respectively.
Capital equipment expenditures, principally for computer, test and sales
demonstration equipment, accounted for $141,949, 47,512, and $24,645 of these
amounts in 1997, 1996, and 1995, respectively. The capitalization of software
development costs accounted for the balance of net cash used in investing
activities in 1997. Capital equipment expenditures in 1998 are expected to be
approximately $168,000. Net capitalized software development costs in 1998 are
expected to be approximately $667,500.
Net cash provided by financing activities totaled $1,475,703 in 1997
primarily resulting from the issuance of convertible subordinated notes payable
to IVI. See discussion below.
On March 11, 1997, the Company entered into an agreement with its bank
to amend and restate the terms of its working capital line of credit. The
agreement, which expires on January 4, 1999, provides for borrowings up to a
maximum amount of the lessor of $750,000 or certain levels of eligible accounts
receivable. Borrowings under the line are subject to monthly and quarterly
financial performance covenants, bear interest at a rate per annum equal to the
bank's prime rate plus 1.5%, are collateralized by the Company's assets, and are
guaranteed by IVI. At December 31, 1997, there were no borrowings outstanding
under the credit line. Borrowing availability under the credit line at December
31, 1997 approximated $229,000.
-12-
<PAGE> 13
On August 18, 1997, the Company entered into a Convertible Subordinated
Note Purchase Agreement (the "Note Agreement") with IVI whereby the Company may
from time to time issue and sell to IVI, and IVI agrees to purchase, the
Company's Convertible Subordinated Notes (the "Notes"), up to an aggregate
principal amount of $1,000,000. On October 31, 1997, the aggregate principal
amount of Notes which can be issued by the Company under the Note Agreement was
increased to $2,000,000 in order to cover additional anticipated working capital
needs of the Company. The Notes have a five year term, bear interest at a rate
per annum equal to the prime rate plus 2%, are secured by the Company's assets,
and are subordinate to the Company's working capital line of credit. The Notes
are convertible into the Company's common stock, $.15 par value, at any time in
accordance with the terms of the Note Agreement, however the conversion price
per share shall be equal to no less than the fair market value as determined in
the Note Agreement. Additionally, the Notes are subject to certain registration
rights in the event that the Company determines to register additional shares of
common stock, $.15 par value, under the Securities Act. Interest payments on the
Notes are deferred until maturity.
On September 19, 1997 and November 24, 1997, the Company issued Notes
to IVI in the principal amounts of $400,000 and $1,100,000, respectively.
Interest payable on the Notes totaled $24,208 at December 31, 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 and the Note Agreement with IVI.
ACQUISITION OF COMPANY'S COMMON STOCK
In September 1996, 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. Due to the percentage
ownership of NTN acquired as a result of this transaction, NTN has become a
subsidiary of IVI and the financial position and results of operations of NTN
are included in IVI's consolidated financial position and results of operations
from the date of acquisition.
IVI is engaged in the design, development, and sale of electronic
payment solutions for retailers, financial institutions, governments, and other
businesses in Canada, 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.
NTN software products support complementary IVI hardware devices and
the Company has marketed IVI products in the United States under a non-exclusive
distribution agreement since 1990. At the same time, NTN has also supported
other EPS providers' hardware products and operating environments with its
software products. The investment by IVI has provided a renewed business
relationship between the companies and has made available to NTN the financial
resources of IVI to help the Company expand its products, services, and markets.
NTN believes that IVI's investment has helped the Company increase its market
penetration by gaining access to the IVI customer base and has allowed NTN to
create a competitive advantage by leveraging combined products, technologies,
and other resources. Both companies, however, support the importance of NTN's
independence with regard to the hardware environments which its software
products support and the underlying relationships the Company has or establishes
with other parties who influence the EPS market. These parties include other
point of sale hardware vendors, electronic payment system resellers, cash
register vendors, transaction processing networks, and other software
developers. Accordingly, NTN continues to market its products and services on
multiple hardware platforms and operating environments necessary to achieve its
business objectives. Management believes that IVI's investment in NTN has not
adversely affected the Company's business or its relationships with its
customers or the aforementioned parties influencing the EPS market.
-13-
<PAGE> 14
YEAR 2000 COMPLIANCE
The latest versions of the Company's software products are designed to
be "Year 2000 Compliant." The Company defines "Year 2000 Compliant" as the
software product's ability to accurately process date and time data (including
calculating, comparing, and sequencing) from, into, and between the years 1999
and 2000 and later, including correctly calculating date and time data for leap
years. In addition, the software product, when used in combination with other
software, will accurately process date and time data if such other software
properly exchanges date and time data with it. There can be no assurance,
however, that the Company's software products that are designed to be Year 2000
Compliant contain all necessary code changes and modifications to be compliant
with all possible Year 2000 issues.
The Company also uses certain computer software programs in its
internal operations, including applications used in product development,
financial and business systems, and various administrative functions. The
Company is reviewing the areas within its business and operations which could be
adversely affected by Year 2000 issues and evaluating the costs which may be
associated with modifying and testing its systems for Year 2000 compliance.
Although the Company is not yet able to estimate any incremental cost for Year
2000 issues, based on its preliminary review to date, the Company does not
believe that any Year 2000 issues relating to internal systems will have a
material adverse effect on its business, financial condition, or results of
operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" (the "SOP"). The SOP
provides guidance on when revenue should be recognized and in what amounts for
licensing, selling, leasing, or otherwise marketing computer software. The SOP
supersedes Statement of Position 91-1, "Software Revenue Recognition", and will
be required to be adopted by the Company for transactions entered into after
December 31, 1997. Adoption of the SOP is not anticipated to change the way the
Company recognizes revenue.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Both
Standards will be adopted by the Company during 1998 and are not expected to
have material effects on its financial position or results of operations.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of the future financial
performance of the Company. The forward-looking statements in this Form 10-K
including, without limitation, statements regarding management's plans and
objectives for future operations, and product plans and performance are made
under the safe harbor provisions of Section 21E of the Securities Exchange Act
of 1934, as amended. The Company's actual results of operations and financial
condition have varied and may in the future differ materially from those
contained in forward-looking statements contained herein. The Company's future
results remain difficult to predict and depend on factors including, without
limitation, fluctuations in quarterly results, dependence on large customers,
dependence on principal products, dependence on third parties for hardware and
equipment, rapid technological changes, potential for new product delays and
defects, competition and competitive pricing pressures, 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.
-14-
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
Please refer to pages F-1 through F-13 and S-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
-----------------------------------
None.
-15-
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required under this item is incorporated by reference
from the Company's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the close of the fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information required under this item is incorporated by reference
from the Company's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the close of the fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT.
----------
The information required under this item is incorporated by reference
from the Company's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the close of the fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information required under this item is incorporated by reference
from the Company's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the close of the fiscal
year.
-16-
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON 8-K.
------
(a) THE FOLLOWING FINANCIAL STATEMENTS, NOTES THERETO AND INDEPENDENT
AUDITORS' REPORT ARE FILED AS PART OF THIS REPORT:
(1) Financial Statements:
Independent Auditors' Report
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules:
The following financial statement schedule is included in Item 8:
Schedule II - Valuation and Qualifying Accounts
(3) Listing of Exhibits:
The following exhibits, required by Item 601 of
Regulation S-K, are filed as part of this Annual
Report on Form 10-K. (Exhibit numbers, where
applicable, in the left column correspond to those of
Item 601 of Regulation S-K).
Form 10-K
Exhibit consecutive
NUMBER EXHIBIT PAGE NUMBER
- ------ ------- -----------
2 Asset Purchase Agreement between
the Company and BancTec USA, Inc.
dated January 10, 1998
3(a) Amended and restated Certificate of
Incorporation filed October 22, 1993 see note (9)
3(b) Certificate of Amendment dated June 30,
1997 to the Amended and Restated
Certificate of Incorporation filed
October 22, 1993 see note (13)
3(c) Bylaws, as amended see note (4)
4(a) National Transaction Network, Inc.
1993 Director Stock Option Plan see note (8)
4(b) National Transaction Network, Inc.
1995 Director Stock Option Plan see note (11)
-17-
<PAGE> 18
4(c) Convertible Subordinated Note Purchase
Agreement between the Company and
International Verifact Inc. dated
August 18, 1997 see note (13)
4(d) Amendment to Convertible Subordinated
Note Purchase Agreement between the
Company and International Verifact Inc.
dated October 31, 1997 see note (13)
4(e) Convertible Subordinated Note of the
Company dated September 19, 1997 see note (13)
4(f) Security Agreement between the Company
and International Verifact Inc. dated
September 19, 1997 see note (13)
4(g) Amendment to Security Agreement between
the Company and International Verifact Inc.
dated October 31, 1997 see note (13)
4(h) Convertible Subordinated Note of the
Company dated November 24, 1997
10(a) 1983 Incentive Stock Option Plan,
as amended see note (1)
10(b) Form of Stock Option Grant and
Exercise Notice for 1983 Incentive
Stock Option Plan see note (3)
10(c) 1988 Stock Plan, as amended see note (3)
10(d) Form of Incentive Stock Option
Agreement for 1988 Stock Plan see note (3)
10(e) Form of Non-Qualified Stock Option
Agreement for 1988 Stock Plan
(Consultants) see note (3)
10(f) Form of Non-Qualified Stock Option
Agreement for 1988 Stock Plan
(Directors) see note (3)
10(g) Agreement for IBM Licensed Program
Stand-Beside Electronic Payment
System Debit Application between the
Company and International Business
Machines Corporation dated as of
March 18, 1988 see note (2)
-18-
<PAGE> 19
10(h) Lease between the Company and
Alden H. Kane and Shirley M. Kane,
Trustees of the Kane Industrial
Trust, dated December 27, 1988 see note (3)
10(i) Distribution Agreement between the
Company and International Verifact
Inc. dated December 31, 1990 see note (5)
10(j) Lease between the Company and Alden H.
Kane and Roger K. Kane, Trustees of the
Kane Industrial Trust, dated November 1, 1992 see note (6)
10(k) Severance Agreement between the Company and
Paul Siegenthaler dated January 30, 1993 see note (6)
10(l) National Transaction Network, Inc. Retirement
Savings 401(k) Plan see note (7)
10(m) Value-Added Reseller Agreement between the
Company and Inacom Corporation dated
January 11, 1993 see note (9)
10(n) Promissory Note and Security Agreement
between the Company and Silicon Valley Bank
dated June 11, 1993 see note (9)
10(o) Master Purchase Agreement between the Company
and VeriFone, Inc. dated September 22, 1993 see note (9)
10(p) Joint Marketing Agreement between the Company
and Card Establishment Services, Inc. dated
December 7, 1993 see note (9)
10(q) Severance Agreement between the Company and
Milton Alpern dated March 17, 1994 see note (9)
10(r) Form of the Director Stock Option Agreement
for the 1993 Director Stock Option Plan see note (10)
10(s) Form of the Director Stock Option Agreement
for the 1995 Director Stock Option Plan see note (11)
10(t) Industry Remarketer Agreement between the
Company and International Business Machines
Corporation dated June 3, 1996 see note (12)
10(u) Lease Agreement between the Company and
Aetna Real Estate Associates, L.P. dated
November 8, 1996 see note (12)
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- ------------------------------
-19-
<PAGE> 20
(1) Exhibit is incorporated by reference to the Exhibits to the Form S-1
Registration Statement No. 2-91030.
(2) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1987.
(3) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1988.
(4) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1989.
(5) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1990.
(6) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1992.
(7) Exhibit is incorporated by reference to the Exhibits to the Form 8 dated May
4, 1993.
(8) Exhibit is incorporated by reference to the Exhibits to the Form S-8
Registration Statement No. 33-66732 dated July 29, 1993.
(9) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1993.
(10) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1994.
(11) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1995.
(12) Exhibit is incorporated by reference to the Exhibits to the Form 10-K for
the fiscal year ended December 31, 1996.
(13) Exhibit is incorporated by reference to the Exhibits to the Form 10-Q for
the fiscal quarter ended September 30, 1997.
- ---------------------------------
(b) REPORTS ON FORM 8-K:
-------------------
No report on Form 8-K was filed during the last quarter of the fiscal
year ended December 31, 1997.
(c) EXHIBITS:
--------
The Company hereby files as part of this Form 10-K the exhibits
listed in Item 14(a) (3) above.
(d) FINANCIAL STATEMENT SCHEDULES:
-----------------------------
The Company hereby files as part of this Form 10-K in Item 14 (a)
(2) above.
-20-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
March 18, 1998 By: /S/ L. BARRY THOMSON
----------------------
L. Barry Thomson, Chief Executive Officer,
President and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 18, 1998 /S/ L. BARRY THOMSON
----------------------
L. Barry Thomson, Chief Executive Officer,
President and Chairman of the Board
(Principal Executive Officer)
March 18, 1998 /S/ MILTON A. ALPERN
----------------------
Milton A. Alpern, Vice President of Finance
and Administration (Principal Financial and
Accounting Officer)
March 18, 1998 /S/ CHRISTOPHER F. SCHELLHORN
-------------------------------
Christopher F. Schellhorn, Director
March 18, 1998 /S/ GEORGE C. WHITTON
-----------------------
George C. Whitton, Director
-21-
<PAGE> 22
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Independent Auditors' Report F-1
Balance Sheets as of December 31, 1997 and 1996 F-2
Statements of Operations for the Years Ended F-3
December 31, 1997, 1996, and 1995
Statements of Stockholders' Equity for the Years F-4
Ended December 31, 1997, 1996, and 1995
Statements of Cash Flows for the Years Ended F-5
December 31, 1997, 1996 and 1995
Notes to Financial Statements F-6-13
Schedule II - Valuation and Qualifying Accounts S-1
-22-
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
National Transaction Network, Inc.:
We have audited the accompanying balance sheets of National Transaction Network,
Inc. (the "Company") as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in Item 14(a)(2). These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 17, 1998
F-1
<PAGE> 24
<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1997 1996
CURRENT ASSETS:
Cash and equivalents $ 457,857 $ 266,045
Accounts receivable (less allowance for
doubtful accounts of $40,000 and $100,000
in 1997 and 1996, respectively) 785,597 1,406,113
Inventory 754,919 233,590
Prepaid expenses 50,482 36,394
---------- ----------
Total current assets 2,048,855 1,942,142
---------- ----------
PROPERTY AND EQUIPMENT:
Furniture and fixtures 130,401 114,657
Machinery and equipment 871,602 670,394
---------- ----------
Total 1,002,003 785,051
Less accumulated depreciation and amortization (712,981) (578,032)
---------- ----------
Property and equipment - net 289,022 207,019
---------- ----------
OTHER ASSETS:
Capitalized software development costs 286,228 -
Deposits and other 14,663 11,931
---------- ----------
Total other assets 300,891 11,931
---------- ----------
TOTAL $ 2,638,768 $ 2,161,092
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Accounts payable $ 265,708 $ 497,569
Accounts payable to stockholder 318,858 95,287
Customer deposits 11,709 2,166
Accrued liabilities 211,748 346,620
Deferred revenue 49,067 563,923
Short-term portion of capital lease 36,598 9,224
---------- ----------
Total current liabilities 893,688 1,514,789
---------- ----------
LONG-TERM LIABILITIES:
Long-term portion of capital lease 24,384 12,053
Convertible subordinated notes payable
to stockholder 1,524,208 -
---------- ----------
Total long-term liabilities 1,548,592 12,053
---------- ----------
Total liabilities 2,442,280 1,526,842
---------- ----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value - authorized,
5,000,000 shares; none outstanding - -
Common stock, $.15 par value - authorized,
20,000,000 and 6,666,667 shares; issued and
outstanding 3,273,162 and 3,248,606 shares
in 1997 and 1996, respectively 490,974 487,291
Additional paid-in capital 12,596,573 12,589,255
Accumulated deficit (12,891,059) (12,442,296)
---------- ----------
Total stockholders' equity 196,488 634,250
---------- ----------
TOTAL $ 2,638,768 $ 2,161,092
========== ==========
</TABLE>
See notes to financial statements.
F-2
<PAGE> 25
<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
REVENUE:
Systems and equipment $ 2,828,153 $ 2,823,236 $ 5,136,778
Software and services 2,490,218 2,189,787 2,869,639
---------- ---------- ----------
Total revenue 5,318,371 5,013,023 8,006,417
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of revenue 3,039,907 2,609,901 4,593,041
Sales and marketing 997,710 1,111,665 1,771,800
Research and development 922,117 947,087 1,016,521
General and administrative 770,103 979,493 730,201
---------- ---------- ----------
Total costs and expenses 5,729,837 5,648,146 8,111,563
---------- ---------- ----------
LOSS FROM OPERATIONS (411,466) (635,123) (105,146)
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (39,143) (4,168) -
Interest income 1,846 24,296 16,445
---------- ---------- ----------
Total other income (expense) (37,297) 20,128 16,445
---------- ---------- ----------
NET LOSS $ (448,763) $ (614,995) $ (88,701)
========== ========== ==========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.14) $ (0.19) $ (0.03)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,254,055 3,248,606 3,248,606
========== ========== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 26
<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
------------ ADDITIONAL TOTAL
SHARES PAID-IN ACCUMULATED STOCKHOLDERS'
ISSUED AMOUNT CAPITAL DEFICIT EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 3,248,606 $ 487,291 $ 12,589,255 $ (11,738,600) $ 1,337,946
Net loss - - - (88,701) (88,701)
---------- --------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1995 3,248,606 487,291 12,589,255 (11,827,301) 1,249,245
Net loss - - - (614,995) (614,995)
---------- --------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1996 3,248,606 487,291 12,589,255 (12,442,296) 634,250
Net loss - - - (448,763) (448,763)
Stock issued under stock
option plans 24,556 3,683 7,318 - 11,001
---------- --------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 3,273,162 $ 490,974 $ 12,596,573 $ (12,891,059) $ 196,488
========== ========= ========== ========== ==========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 27
<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (448,763) $ (614,995) $ (88,701)
Adjustments to reconcile net loss to net cash (used for) provided by
operating activities:
Depreciation and amortization 134,949 117,427 116,470
Interest converted to convertible subordinated notes payable to stockholder 24,208 - -
Increase (decrease) in cash from:
Accounts receivable 620,516 (21,891) (119,305)
Inventory (521,329) 40,569 854,960
Prepaid expenses (14,088) (9,547) 38,245
Deposits and other (2,732) (8,252) 800
Accounts payable to stockholder 223,571 (152,115) 84,732
Customer deposits 9,543 (23,099) 638
Accounts payable and accrued liabilities (366,733) 67,480 (485,622)
Deferred revenue (514,856) 517,846 (44,347)
---------- ---------- ----------
Net cash (used for) provided by operating activities (855,714) (86,577) 357,870
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (141,949) (47,512) (24,645)
Capitalization of software development costs (286,228) - -
---------- ---------- ----------
Net cash used in investing activities (428,177) (47,512) (24,645)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease (35,298) (7,123) -
Proceeds from issuance of convertible subordinated notes payable to stockholder 1,500,000 - -
Proceeds from stock issued under stock option plans 11,001 - -
Proceeds from bank line of credit 700,000 - -
Repayments to bank line of credit (700,000) - -
---------- ---------- ----------
Net cash provided by (used in) financing activities 1,475,703 (7,123) -
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 191,812 (141,212) 333,225
CASH AND EQUIVALENTS, BEGINNING OF YEAR 266,045 407,257 74,032
---------- ---------- ----------
CASH AND EQUIVALENTS, END OF YEAR $ 457,857 $ 266,045 $ 407,257
========== ========== ==========
SUPPLEMENTAL INFORMATION - Cash paid for interest $ 14,740 $ 4,168 $ -
========== ========== ==========
NONCASH TRANSACTIONS:
Capital lease additions $ 75,000 $ 28,400 $ -
========== ========== ==========
Accrued interest due to stockholder converted to convertible subordinated notes
payable to stockholder $ 24,208 $ - $ -
========== ========== ==========
See notes to financial statements.
</TABLE>
F-5
<PAGE> 28
NATIONAL TRANSACTION NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - National Transaction Network, Inc. (the "Company")
designs, integrates and markets point-of-sale electronic payment systems
and software, principally to the retail industry.
On September 13, 1996, International Verifact, Inc. ("IVI") acquired
beneficial ownership of approximately 84% of the outstanding common stock
of the Company. The Company relies on IVI to finance its operations as
needed. To the extent necessary, IVI has committed to continue to
guarantee the Company's line of credit (Note 2) and to provide financial
support to meet the Company's cash requirements through December 31, 1998.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS - The carrying values of cash and equivalents,
accounts receivable, and accounts payable approximate fair value due to
the short-term nature of these instruments.
REVENUE RECOGNITION - Revenue from product sales is generally recognized
upon shipment. Revenue from maintenance agreements is recognized ratably
over the term of the agreements. Consulting services revenue is recognized
as services are performed.
CASH AND EQUIVALENTS - The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
INVENTORY - Inventory is recorded at the lower of cost (first-in,
first-out basis) or market and consists primarily of electronic payment
terminals and related peripherals.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets which range from three to
five years. Repairs and maintenance are expensed as incurred, while
betterments are capitalized. Depreciation expense was approximately
$135,000, $117,000 and $116,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
CAPITALIZED SOFTWARE COSTS - Costs of software products developed for
resale are capitalized once technological feasibility is achieved.
Capitalization ceases when the product is available for release, and the
accumulated costs are amortized, based on the greater of revenue over
projected revenue or on a straight-line basis, over the related product's
estimated economic life. Capitalization of software development costs
amounted to $286,228 during 1997. Research and development costs are
expensed as incurred.
F-6
<PAGE> 29
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS - Upon occurrence of certain events or changes in
circumstances, the Company reviews its long-lived assets to determine if
the carrying value of its assets have been impaired.
STOCK-BASED COMPENSATION - Compensation expense associated with awards of
stock or options to employees is measured using the intrinsic value
method. Compensation expense associated with awards to nonemployees is
measured using the fair value method.
LOSS PER COMMON SHARE - In 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," and has restated all periods presented to conform to the new
presentation. SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share.
Basic net loss per common share is computed using the weighted-average
number of shares of common stock outstanding. In determining the
denominator for dilutive loss per common share, no shares resulting from
the assumed exercise of options using the treasury stock method or
resulting from the conversion of the convertible subordinated notes
payable to stockholder are added to the denominator because the inclusion
of such shares would be antidilutive due to the net loss for each of the
years presented. Accordingly, diluted loss per common share is equal to
basic loss per common share and is not separately disclosed.
INCOME TAXES - The Company follows the asset and liability method of
accounting for income taxes, under which deferred income taxes are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date.
RECENTLY ISSUED ACCOUNTING STANDARDS - In October 1997, the Accounting
Standards Executive Committee issued Statement of Position ("SOP") 97-2,
"Software Revenue Recognition." SOP 97-2 provides guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing,
or otherwise marketing computer software. SOP 97-2 supersedes SOP 91-1,
"Software Revenue Recognition," and will be required to be adopted by the
Company for transactions entered into after December 31, 1997. Adoption of
SOP 97-2 is not anticipated to change the way the Company recognizes
revenue.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Both standards will be adopted by
the Company during 1998 and are not expected to have material effects on
its financial position and results of operations.
F-7
<PAGE> 30
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECLASSIFICATION - Certain items in the 1996 and 1995 financial statements
have been reclassified to conform to the 1997 presentation.
2. LINE OF CREDIT
On March 11, 1997, the Company entered into an agreement with the bank to
amend and restate the terms of its working capital line of credit (the
"agreement"). The agreement, which expires on January 4, 1999, provides
for borrowings up to a maximum of the lessor of $750,000 or certain levels
of eligible accounts receivable. Borrowings under the line are subject to
monthly and quarterly financial performance covenants, bear interest at
the bank's prime rate plus 1.5% and are collateralized by the Company's
assets. The agreement prohibits the Company from participating in a merger
or consolidation, pay dividends, dispose of any material assets, or incur
certain indebtedness without prior written consent from the bank. At
December 31, 1997, there were no borrowings outstanding under the line and
availability under the line approximated $229,000.
3. CONVERTIBLE SUBORDINATED NOTES PAYABLE TO STOCKHOLDER
On August 18, 1997, the Company entered into a Convertible Subordinated
Note Purchase Agreement (the "Note Agreement") with IVI whereby the
Company may from time to time issue and sell to IVI the Company's
Convertible Subordinated Notes (the "Notes") up to an aggregate amount of
$2,000,000, as stated in the October 31, 1997 amendment to the Note
Agreement. The Notes have a five-year term, bear interest at a rate per
annum equal to the prime rate plus 2% (10.5% at December 31, 1997), are
secured by the Company's assets, and are subordinate to the Company's line
of credit. Interest on the Notes is deferred until maturity.
The Notes are convertible into the Company's common stock at any time, at
the option of the holder, in accordance with the terms of the Note
Agreement. The conversion price shall be equal to no less than the fair
market value. The Notes are also subject to certain registration rights in
the event that the Company determines to register additional shares of
common stock.
On September 19, 1997 and November 24, 1997, the Company issued Notes in
the amounts of $400,000 and $1,100,000, respectively. Both Notes mature in
2002. Accrued interest under the Notes aggregated $24,208 at December 31,
1997.
F-8
<PAGE> 31
4. STOCK OPTIONS
STOCK OPTION PLANS - Under the Company's 1988 and 1983 Stock Option Plans
(the "Plans"), incentive stock options to purchase up to a maximum of
933,333 shares of common stock may be granted to certain employees,
officers, consultants and directors at exercise prices not less than fair
market value at the date of the grant. Options become exercisable in
varying annual installments. The period within which any option may be
exercised cannot exceed ten years from the date of grant. At December 31,
1997, 392,372 shares were available for grant under the Plans.
DIRECTOR STOCK OPTION PLANS - Under the Company's 1995 and 1993 Director
Stock Option Plans (the "Director Plans"), nonqualified options to
purchase up to a maximum of 320,000 shares of common stock may be granted
to members of the Board of Directors (the "Board"). The exercise price of
the options may not be less than fair market value on the date of grant.
Options under the Director Plans become exercisable upon grant and
continue for the period determined by the Board but may not exceed ten
years. As of December 31, 1997, 230,000 shares were available for grant
under the Director Plans.
The following is a summary of option activity under the Plans and the
Director Plans:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE
OF EXERCISE FAIR
SHARES PRICE VALUE
<S> <C> <C> <C>
Outstanding at January 1, 1995 298,125 $ 3.29
Granted 437,545 0.41 $ 0.41
Expired or Canceled (143,685) 2.40
--------
Outstanding at December 31, 1995 591,985 0.67
Granted 251,000 0.42 0.42
Expired or Canceled (220,605) 0.88
--------
Outstanding at December 31, 1996 622,380 0.50
Exercised (24,556) 0.45
Granted 63,000 0.64 0.62
Expired or Canceled (13,195) 0.55
--------
Outstanding at December 31, 1997 647,629 0.51
========
</TABLE>
Options exercisable under all stock option plans at December 31, 1997 and
1996 were 393,258 and 270,601, respectively.
F-9
<PAGE> 32
4. STOCK OPTIONS (CONTINUED)
The fair value of options on their grant date was measured using the
Black/Scholes options pricing model. Key assumptions used to apply this
pricing model are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Average risk-free interest rate 6.4 % 6.4 % 5.9 %
Expected life of option grants 7.5 years 7.5 years 7.5 years
Expected volatility of underlying stock 148% 174% 174%
Expected dividend payment rate, as a percentage of the stock
price on the date of grant - - -
</TABLE>
It should be noted that the option pricing model used was designated to
value readily tradable stock options with relatively short useful lives.
The options granted to employees are not tradable and have contractual
lives of up to ten years. However, management believes that the
assumptions used to value the options and the model applied yield a
reasonable estimate of the fair value of the grants made under the
circumstances.
The following table sets forth information regarding options at December
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE WEIGHTED OUTSTANDING WEIGHTED
AT RANGE OF REMAINING AVERAGE AT AVERAGE
DECEMBER 31, EXERCISE LIFE EXERCISE DECEMBER 31, EXERCISE
1997 PRICES (IN YEARS) PRICE 1997 PRICE
572,962 $0.22 - 0.46 6.92 $ 0.42 376,591 $0.41
58,000 0.66 - 0.83 9.59 0.67 - -
16,667 3.00 4.67 3.00 16,667 3.00
</TABLE>
As described in Note 1, the Company uses the intrinsic value method to
measure compensation expense associated with grants of stock options to
employees. Had the Company used the fair value method to measure
compensation, reported net loss and loss per share, net of estimated
forfeitures before vesting of 25% would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net loss as reported $ (448,763) $ (614,995) $ (88,701)
Pro forma net loss (501,220) (653,876) (110,942)
Basic and diluted loss per common share (0.14) (0.19) (0.03)
Pro forma basic and diluted loss per common share (0.15) (0.20) (0.03)
</TABLE>
F-10
<PAGE> 33
5. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax liabilities - Property and equipment $ (3,000) $ (12,000)
----------- -----------
Deferred tax assets:
Compensated absences 16,000 27,000
Accounts receivable 31,000 40,000
Inventory 23,000 20,000
Net operating loss carryforwards 4,816,000 4,857,000
----------- -----------
4,886,000 4,944,000
----------- -----------
Valuation allowance (4,883,000) (4,932,000)
----------- -----------
Deferred taxes, net $ - $ -
=========== ===========
</TABLE>
For the years ended December 31, 1997 and 1996, the net changes in the
valuation allowance are primarily related to the change in net deferred
tax assets as such assets are fully reserved in each year.
A reconciliation between the U.S. statutory tax rate and the effective tax
rate for the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory tax rate (34)% (34)% (34)%
State rate, net of federal benefit (6) (6) (7)
Change in valuation allowance due to the uncertainty
of future realization of currently generated net
operating loss carryforwards 38 39 34
Nondeductible expenses 2 1 7
---- ---- ----
Effective tax rate - % - % - %
==== ==== ====
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards for
tax purposes of approximately $19,400,000, which expire in varying amounts
through 2012. Due to changes in ownership in 1989 and in 1996, the
Company's ability to utilize these carryforwards is likely to be limited
to approximately $1,800,000 in the aggregate.
F-11
<PAGE> 34
6. COMMITMENTS
OFFICE LEASE - In November of 1996, the Company signed a noncancelable
lease for new office space, which commenced in February 1997. The lease
requires reimbursement of certain tenant improvements and operating costs
throughout the term of the lease. The lease has a five-year term with one
five-year renewal option to extend the lease through January 2007.
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $119,000, $87,000 and $109,000, respectively. Future minimum
lease payments, as of December 31, 1997, under this noncancelable
operating lease approximate the following:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 122,000
1999 126,000
2000 126,000
2001 130,000
2002 13,000
---------
Total $ 517,000
=========
</TABLE>
7. CAPITAL LEASE
In 1997 and 1996, the Company entered into capital leases for certain
software and equipment, respectively. The agreements have been capitalized
at the present value of the future minimum rental payments and are
included in machinery and equipment at December 31, 1997 and 1996 at a
value of $103,400 and $28,400, respectively, less accumulated amortization
of $22,813 and $7,123, respectively. Future minimum payments, by year and
in the aggregate, under capitalized lease obligations at December 31,
1997, consist of the following:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 41,657
1999 25,476
--------
Total minimum lease payment 67,133
Less amount representing interest at a weighted average
interest rate of 13% per annum (6,151)
--------
Present value of net minimum lease payments 60,982
Less current portion (36,598)
--------
Long-term portion of net minimum lease payments $ 24,384
========
</TABLE>
F-12
<PAGE> 35
8. CUSTOMERS
The Company's customer base consists of large retail companies,
principally in the supermarket industry, located throughout the United States.
Major customers accounted for the following percentages of revenue:
<TABLE>
<CAPTION>
Customers 1997 1996 1995
<S> <C> <C> <C>
A 57 % 48 % 34 %
B - 13 13
C - 10 11
</TABLE>
9. RELATED-PARTY TRANSACTIONS
PRODUCT DISTRIBUTION AGREEMENT - The Company sold certain products under
the terms of a product distribution agreement (the "Agreement") with IVI.
The Agreement granted the Company the nonexclusive right to market,
distribute or sell IVI's products in the United States. The Agreement
expired on December 31, 1992, and the Company and IVI have continued to
transact business under an informal extension of the Agreement. Total
purchases from IVI were approximately $1,870,000, $453,000 and $1,190,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Sales
to IVI were approximately $168,000 for the year ended December 31, 1997.
At December 31, 1997 and 1996 accounts payable to IVI were $318,858 and
$95,287, respectively.
10. 401(K) RETIREMENT SAVINGS PLAN
The Company has a 401(k) Retirement Savings Plan (the "401(k) plan")
covering substantially all employees. Under the 401(k) plan, participants
are allowed to contribute an amount not to exceed 20% of compensation,
subject to certain limitations. The Company may make matching
contributions at its discretion. No contributions were made by the Company
during 1997, 1996, or 1995.
11. SUBSEQUENT EVENTS
In January 1998, the Company purchased certain intellectual property,
related software maintenance contracts and tangible assets used to support
such contracts. The purchase price is based on 75% of the revenues derived
from the software maintenance contracts for the twelve-month period
following the date of purchase, which is estimated to approximate
$300,000, and is payable 30 days from the receipt of such revenue.
* * * * * *
F-13
<PAGE> 36
NATIONAL TRANSACTION NETWORK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS ADDITIONS BALANCE AT
BEGINNING CHARGED TO CHARGED TO DEDUCTIONS END OF
OF PERIOD EXPENSES OTHER ACCTS. (DESCRIBE) PERIOD
---------- ---------- ----------- ---------- ----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995 $100,000 $0 $0 $0 $100,000
Year Ended December 31, 1996 $100,000 $0 $0 $0 $100,000
Year Ended December 31, 1997 $100,000 $0 $0 $60,000(a) $40,000
- -------------------
</TABLE>
(a) Write-off of uncollectible accounts ($15,000); Relief of allowance for
doubtful accounts balance ($45,000) based on review of accounts receivable
totals.
S-1
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT INDEX
Form 10-K
Exhibit consecutive
Number Exhibit page number
- ------- --------------------------------- ------------
<S> <C> <C>
2 Asset Purchase Agreement between
the Company and BancTec USA, Inc.
dated January 10, 1998
3(a) Amended and restated Certificate of
Incorporation filed October 22, 1993 see note (9)
3(b) Certificate of Amendment dated June 30,
1997 to the Amended and Restated
Certificate of Incorporation filed
October 22, 1993 see note (13)
3(c) Bylaws, as amended see note (4)
4(a) National Transaction Network, Inc.
1993 Director Stock Option Plan see note (8)
4(b) National Transaction Network, Inc.
1995 Director Stock Option Plan see note (11)
4(c) Convertible Subordinated Note Purchase
Agreement between the Company and
International Verifact Inc. dated
August 18, 1997 see note (13)
4(d) Amendment to Convertible Subordinated
Note Purchase Agreement between the
Company and International Verifact Inc.
dated October 31, 1997 see note (13)
4(e) Convertible Subordinated Note of the
Company dated September 19, 1997 see note (13)
4(f) Security Agreement between the Company
and International Verifact Inc. dated
September 19, 1997 see note (13)
4(g) Amendment to Security Agreement between
the Company and International Verifact Inc.
dated October 31, 1997 see note (13)
4(h) Convertible Subordinated Note of the
Company dated November 24, 1997
10(a) 1983 Incentive Stock Option Plan,
as amended see note (1)
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C> <C>
10(b) Form of Stock Option Grant and
Exercise Notice for 1983 Incentive
Stock Option Plan see note (3)
10(c) 1988 Stock Plan, as amended see note (3)
10(d) Form of Incentive Stock Option
Agreement for 1988 Stock Plan see note (3)
10(e) Form of Non-Qualified Stock Option
Agreement for 1988 Stock Plan
(Consultants) see note (3)
10(f) Form of Non-Qualified Stock Option
Agreement for 1988 Stock Plan
(Directors) see note (3)
10(g) Agreement for IBM Licensed Program
Stand-Beside Electronic Payment
System Debit Application between the
Company and International Business
Machines Corporation dated as of
March 18, 1988 see note (2)
10(h) Lease between the Company and
Alden H. Kane and Shirley M. Kane,
Trustees of the Kane Industrial
Trust, dated December 27, 1988 see note (3)
10(i) Distribution Agreement between the
Company and International Verifact
Inc. dated December 31, 1990 see note (5)
10(j) Lease between the Company and Alden H.
Kane and Roger K. Kane, Trustees of the
Kane Industrial Trust, dated November 1, 1992 see note (6)
10(k) Severance Agreement between the Company and
Paul Siegenthaler dated January 30, 1993 see note (6)
10(l) National Transaction Network, Inc. Retirement
Savings 401(k) Plan see note (7)
10(m) Value-Added Reseller Agreement between the
Company and Inacom Corporation dated
January 11, 1993 see note (9)
10(n) Promissory Note and Security Agreement
between the Company and Silicon Valley Bank
dated June 11, 1993 see note (9)
10(o) Master Purchase Agreement between the Company
and VeriFone, Inc. dated September 22, 1993 see note (9)
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
<S> <C> <C>
10(p) Joint Marketing Agreement between the Company
and Card Establishment Services, Inc. dated
December 7, 1993 see note (9)
10(q) Severance Agreement between the Company and
Milton Alpern dated March 17, 1994 see note (9)
10(r) Form of the Director Stock Option Agreement
for the 1993 Director Stock Option Plan see note (10)
10(s) Form of the Director Stock Option Agreement
for the 1995 Director Stock Option Plan see note (11)
10(t) Industry Remarketer Agreement between the
Company and International Business Machines
Corporation dated June 3, 1996 see note (12)
10(u) Lease Agreement between the Company and
Aetna Real Estate Associates, L.P. dated
November 8, 1996 see note (12)
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- ----------------------------------
</TABLE>
(1) Exhibit is incorporated by reference to the Exhibits to the Form S-1
Registration Statement No. 2-91030.
(2) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1987.
(3) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1988.
(4) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1989.
(5) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1990.
(6) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1992.
(7) Exhibit is incorporated by reference to the Exhibits to the Form 8
dated May 4, 1993.
(8) Exhibit is incorporated by reference to the Exhibits to the Form S-8
Registration Statement No. 33-66732 dated July 29, 1993.
(9) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1993.
(10) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1994.
<PAGE> 40
(11) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1995.
(12) Exhibit is incorporated by reference to the Exhibits to the Form 10-K
for the fiscal year ended December 31, 1996.
(13) Exhibit is incorporated by reference to the Exhibits to the Form 10-Q
for the fiscal quarter ended September 30, 1997.
SCHEDULES OMITTED IN ACCORDANCE
WITH ITEM 601(b)(2) OF REGULATION S-K
Pursuant to the Asset Purchase Agreement (the "Agreement") dated
January 10, 1998 by and between BancTec USA, Inc. ("BancTec") and the Company,
BancTec and the Company executed various disclosure schedules which formed part
of the Agreement but are not required to be, and are not, filed as part of this
Annual Report of Form 10-K. Such omitted disclosure schedules include the
following items: (a) a list of the source control inventory listings identifying
the software application program/module content of the product lines transferred
from BancTec to the Company; (b) diminimis personal property transferred from
BancTec to the Company; (c) copies of various license agreements entered into by
and between BancTec and various third parties; and (d) BancTec's current form of
licensing agreement. The Company will furnish supplementally a copy of any
omitted schedule to the Securities and Exchange Commission (the "Commission")
upon the Commission's request; provided, however that the Company may request
confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act, as
amended, for any schedule so furnished.
<PAGE> 1
EXHIBIT 2
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement dated as of January 10, 1998 (the "AGREEMENT")
by and between BancTec USA, Inc., a Delaware corporation ("SELLER"), and
National Transaction Network, Inc., a Delaware corporation ("BUYER").
W I T N E S S E T H :
WHEREAS, Seller designs, manufactures, markets and services certain
software known as Mainsail and Semaphore software (the "PRODUCT LINES");
WHEREAS, Buyer desires to acquire from Seller, and Seller desires to
sell to Buyer, substantially all of the assets related to the Product Lines of
Seller, upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements contained herein, the
Seller and the Buyer hereby agree as follows:
ARTICLE I
DEFINITIONS
1.01. DEFINITIONS. The following terms, as used herein, have the
following meanings:
"AFFILIATE" means, with respect to any Person, any Person directly or
indirectly controlling, controlled by, or under common control with such other
Person.
"ANCILLARY AGREEMENTS" means the Bill of Sale and Instrument of
Assignment and Assumption substantially in the form set forth on Exhibit A, the
Assignments of Trademarks in substantially the form set forth in Exhibit B, and
the Service Agreement to be negotiated by the parties in good faith.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
"MAINTENANCE CONTRACTS" means the Mainsail and Semaphore software
maintenance contracts listed in SCHEDULE 2.01(A) attached hereto.
"MATERIAL ADVERSE CHANGE" means a material adverse change in the
business, assets, operations, financial condition or results of operations or
prospects related to the Product Lines.
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"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, assets, operations, financial condition or results of operations or
prospects of a Person taken as a whole.
"PERSON" means an individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"PROPRIETARY RIGHTS" means all (A) United States and foreign patents,
patent applications, patent disclosures and all related continuation,
continuation-in-part, divisional, reissue, re-examination, utility, model,
certificate of invention and design patents, patent applications, registrations
and applications for registrations, (B) trademarks, service marks, trade dress,
logos, tradenames, service names and corporate names and registrations and
applications for registration thereof, (C) copyrights and registrations and
applications for registration thereof, (D) mask works and registrations and
applications for registration thereof, (E) computer software, programs, data and
documentation, (F) trade secrets and confidential business information, whether
patentable or nonpatentable and whether or not reduced to practice, know-how,
manufacturing and product processes and techniques, designs, prototypes,
enhancements, improvements, works-in-progress, research and development
information and (G) other proprietary rights relating to any of the foregoing
(including without limitation associated goodwill and remedies against
infringements thereof and rights of protection of an interest therein under the
laws of all jurisdictions) and (H) copies and tangible embodiments thereof.
"SELLER'S SOFTWARE" means Seller's "Mainsail" and "Semaphore" software
programs in source code and object code form and including any and all
programmer's notes or other documentation, BancTec owned tools and/or utilities
and all related user documentation.
ARTICLE II
PURCHASE AND SALE
2.01. PURCHASE AND SALE. Upon the terms and subject to the conditions
of this Agreement, Buyer agrees to purchase from Seller and Seller agrees to
sell, transfer, assign and deliver, or cause to be sold, transferred, assigned
and delivered, to Buyer at the Closing (as hereinafter defined), free and clear
of all Liens, all right, title and interests of Seller in and to the Product
Lines and the assets used in or relating to the Product Lines, tangible and
intangible, as set forth below (the "PURCHASED ASSETS"):
(a) All Maintenance Contracts, and Seller's other
written contracts, agreements and licenses set forth in SCHEDULE
2.01(A) attached hereto (the "CONTRACTS");
(b) Seller's Software, all of Seller's Proprietary
Rights in Seller's Software (except as set forth in Section 6.03
hereof), including the items as set forth in SCHEDULE 2.01(B) attached
hereto (the "INTELLECTUAL PROPERTY");
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(c) All of Seller's right, title and interest in and
to the personal property set forth on SCHEDULE 2.01(C) attached hereto
(the "PERSONAL PROPERTY"); and
(d) All of Seller's rights (including common law
trademark rights) to use the names "Mainsail" and "Semaphore" and logos
thereof, provided, however, that Seller shall have the right to use
such trademarks as set forth in Section 6.03 hereof.
2.02. ASSUMPTION OF LIABILITIES. Upon the sale of the Purchased Assets
by Seller to Buyer, Buyer shall assume and, subject to Article IX hereof, agree
to pay, perform and discharge, in a timely manner and in accordance with the
terms hereof, the following liabilities and obligations of Seller relating to
the Product Lines (the "ASSUMED LIABILITIES"):
(a) all liabilities and obligations of Seller which
arise after the Closing Date under the terms and provisions of the
Maintenance Contracts, but excluding any liability of Seller for breach
or nonperformance of any of the foregoing occurring on or prior to the
Closing Date;
(b) all liabilities and obligations resulting from
product liability claims for damage or injury to persons or property
arising from the ownership, possession or use of any Seller's Software
shipped by Buyer after the Closing Date;
(c) all liabilities and obligations resulting from
product warranty claims with respect to any product shipped by Buyer
after the Closing Date; and
(d) except to the extent the same constitutes an
Excluded Liability or arises from a breach of any representation,
warranty, covenant or agreement of Seller contained herein or the
Service Agreement, all liabilities and obligations arising from the
conduct of the business relating to the Product Lines by Buyer
subsequent to the Closing.
2.03. EXCLUDED LIABILITIES. Notwithstanding any provision in this
Agreement or any other writing to the contrary, Buyer is assuming only the
Assumed Liabilities and is not assuming any other liability or obligation of
Seller or any predecessor owner of all or part of its business and assets of
whatever nature whether presently in existence or arising or asserted hereafter.
All such other liabilities and obligations shall be retained by and remain
obligations and liabilities of Seller (all such liabilities and obligations not
being assumed being herein referred to as the "EXCLUDED LIABILITIES"). Without
limiting the foregoing, all of the following shall be Excluded Liabilities for
the purposes of this Agreement:
(a) all liabilities and any obligations under any
Contracts arising (i) on or before the Closing Date (ii) which are not
disclosed in Schedule 2.01 (a), or (iii) which are not properly
assigned to Buyer and the benefits of which have not been made
available to Buyer pursuant to Section 2.04;
(b) any obligation or liability for any tax,
assessment or public charges of any type or nature whatsoever, due or
payable to any Federal, state or local government or agency arising
from or with respect to the Purchased Assets that is incurred in or
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attributable to any tax period (or portion thereof) ending on or before
the Closing Date, including any taxes payable as a result of the
transactions contemplated by this Agreement;
(c) any and all liabilities and obligations arising
pursuant to agreements or understandings with consultants,
distributors, suppliers or customers and relating to products shipped
on or before the Closing Date;
(d) all liabilities and obligations resulting from
product liability claims for damage or injury to persons or property
arising from the ownership, possession or use of any product shipped by
Seller on or prior to the Closing Date;
(e) all liabilities and obligations resulting from
product warranty claims with respect to any Seller's Software shipped
by Seller on or prior to the Closing Date;
(f) all liabilities and obligations of Seller which
may arise by reason of or with respect to this Agreement or any of the
transactions contemplated hereby (including, without limitation, all
legal, accounting, brokerage, investment banking or finder's fees of
Seller);
(g) all liabilities and obligations arising out of
the employment, severance and termination liabilities with respect to
any director, officer, employee or consultant under any contract or
agreement which has been terminated on or prior to the Closing Date or
which arise under any contract or agreement as a result of the
transactions contemplated by this Agreement;
(h) all liabilities and obligations for infringement
or misappropriation arising from the use of the Intellectual Property
by Seller or any customers of Seller on or prior to the Closing Date;
and
(i) any and all other liabilities,
obligations, claims or causes of action relating to the Product Lines
or the Purchased Assets and resulting from or relating to any action,
failure to act, or facts and circumstances occurring or existing on or
prior to the Closing other than the Assumed Liabilities.
2.04. ASSIGNMENT OF CONTRACTS AND RIGHTS. Anything in this Agreement to
the contrary notwithstanding, this Agreement shall not constitute an agreement
to assign any Purchased Asset or any claim or right or any benefit arising
thereunder or resulting therefrom if an attempted assignment thereof, without
consent of a third party thereto, would constitute a breach or other
contravention thereof or in any way adversely affect the rights of Buyer or
Seller thereunder. Seller and Buyer will use commercially reasonable efforts
(but without any payment of money by Seller or Buyer) to obtain the consent of
the other parties to any such Purchased Asset or claim or right or any benefit
arising thereunder for the assignment thereof to Buyer as Buyer may reasonably
request. If such consent is not obtained, or if an attempted assignment thereof
would be ineffective or would adversely affect the rights of Seller thereunder
so that Buyer would not in fact receive all such rights, Seller and Buyer will
cooperate in a mutually agreeable arrangement under which Buyer would obtain the
benefits and assume the obligations thereunder in accordance
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with this Agreement, including subcontracting, sub-licensing, or subleasing to
Buyer, or under which Seller would enforce for the benefit of Buyer, with Buyer
assuming Seller's obligations, any and all rights of Seller against a third
party thereto.
2.05. PURCHASE PRICE AND METHOD OF PAYMENT. In full payment for the
Purchased Assets, (i) Buyer shall pay to Seller seventy-five percent (75%) of
the revenues Buyer receives pursuant to the Maintenance Contacts during the
period commencing on January 16, 1998 and ending on January 15, 1999 (the
"PAYMENT PERIOD") and (ii) if any Maintenance Contract terminates or expires
during the Payment Period through no fault of Buyer and Buyer enters into and
executes a new maintenance contract (the "NEW MAINTENANCE CONTRACT") with a
Person who was a party to a Maintenance Contract, then Buyer shall pay to Seller
seventy-five percent (75%) of the revenues Buyer receives pursuant to the New
Maintenance Contact during the Payment Period (collectively, the "PURCHASE
PRICE"). Buyer shall pay all such amounts to Seller within thirty (30) days from
the date of receipt of such amounts by Buyer from the parties to such
Maintenance Contracts and New Maintenance Contract, if any.
2.06. CLOSING. The closing (the "CLOSING") of the purchase and sale of
the Purchased Assets and the assumption of the Assumed Liabilities hereunder
shall take place at the offices of Testa, Hurwitz & Thibeault, LLP, High Street
Tower, 125 High Street, Boston, Massachusetts 02110 as of 12:01 a.m. on January
16, 1998, or at such other time or place as Buyer and Seller may agree. Such
time and date of Closing are herein referred to as the "CLOSING DATE". At the
Closing:
(a) The sale, conveyance, transfer, assignment and delivery of
the Purchased Assets shall be effected by delivery on the Closing Date
by Seller to Buyer of such deeds, bills of sale, endorsements,
consents, assignments and other good and sufficient instruments of
conveyance and assignment as the Buyer may request as necessary or
appropriate to vest in Buyer all right, title and interest in, to and
under the Purchased Assets, including, without limitation, (i) Bill of
Sale and Instrument of Assignment and Assumption in substantially the
form of EXHIBIT A attached hereto; and (ii) the Assignment of
Trademarks in substantially the form of EXHIBIT B attached hereto. The
assumption by Buyer of the Assumed Liabilities shall be effected by
delivery on the Closing Date by Buyer to Seller of the Bill of Sale and
Instrument of Assignment and Assumption.
(b) Seller and Buyer shall enter into a Service Agreement to
be negotiated by the parties in good faith.
(c) Seller and Buyer shall also execute and deliver all such
instruments, documents and certificates as may be reasonably requested
by the other party that are necessary, appropriate or desirable for the
consummation at the Closing of the transactions contemplated by this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
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Seller represents and warrants to Buyer that:
3.01. CORPORATE EXISTENCE AND POWER. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted. Seller is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
make such qualification necessary, except for those jurisdictions where failure
to be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on Seller.
3.02. AUTHORIZATION; EXECUTION AND DELIVERY; NO VIOLATION. The
execution, delivery and performance of this Agreement, the Ancillary Agreements
and the Service Agreement entered into in connection with the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of Seller. This Agreement and the Ancillary
Agreements entered into in connection with the transactions contemplated hereby
have been duly executed and delivered by Seller, constitute the valid and
binding obligations of Seller, and are enforceable in accordance with their
respective terms. The execution, delivery and performance of this Agreement and
the Ancillary Agreements entered into in connection with the transactions
contemplated hereby by Seller do not and will not violate, conflict with, result
in a breach of or constitute a default under or result in the creation of any
lien, security interest or other encumbrance under (a) the Certificate of
Incorporation or By-Laws of the Seller, as amended to date, (b) any material
agreement, contract, license, instrument, lease or other obligation to which the
Seller is a party or by which it is bound, and which affects the Purchased
Assets, (c) any judgment, order, decree, ruling or injunction or (d) any
statute, law, regulation or rule of any governmental agency or authority
applicable to Seller or by which any of its properties or assets or business may
be bound.
3.03. INTERESTS IN THE PURCHASED ASSETS. Seller is the true and lawful
owner of all of the Purchased Assets and has valid and marketable title to all
of the Purchased Assets, free and clear of all Liens and liabilities, except the
Assumed Liabilities, and has the absolute and unconditional right, power,
authority and capacity to sell, transfer, assign, convey and deliver the
Purchased Assets to the Buyer free and clear of all Liens, third-party claims,
third-party interests and liabilities.
3.04. INTELLECTUAL PROPERTY.
(a) SCHEDULE 3.04(A) sets forth a list of all Intellectual
Property used or held for use by Seller in connection with the Product
Lines, specifying as to each, as applicable: (i) the nature of such
Intellectual Property; (ii) the owner or owners of such Intellectual
Property; (iii) all persons other than Seller who have an ownership or
economic interest in such Intellectual Property; (iv) the jurisdictions
by or in which such Intellectual Property is recognized without regard
to registration or in which the Intellectual Property has been issued
or registered or in which an application for such issuance of
registration has been
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filed, including the respective registration or application numbers;
and (v) licenses, sublicenses and other agreements as to which Seller,
consultants, distributors or resellers is a party and pursuant to which
any person is authorized to use such Intellectual Property, including
the identity of all parties thereto, a description of the nature and
subject matter thereof, the applicable royalty and the term thereof.
(b) Seller owns all of the Intellectual Property. Seller is
the sole and exclusive owner with all right, title and interest in and
to (free and clear of any Liens or other interests) the Intellectual
Property. Seller has sole and exclusive rights (and is not
contractually obligated to pay any compensation to any third party in
respect thereof) to the use of the Intellectual Property. No claims
with respect to the Intellectual Property have been asserted or, to the
knowledge of Seller, are threatened by any person, including without
limitation (i) to the effect that the design, development, manufacture,
sale, licensing or use of the Intellectual Property or any product as
now used, sold or licensed or proposed for use, sale or license by the
Seller which includes any Intellectual Property infringes any
copyright, patent, trademark, service mark or trade secret of any third
party, (ii) against the use by Seller of any Intellectual Property as
currently used or as proposed to be used by Seller, (iii) challenging
the ownership, validity or effectiveness of any of the Intellectual
Property, or (iv) that any person other than the Seller has any
ownership or economic interest in any of the Intellectual Property. All
copyrights held by Seller are valid and subsisting in the jurisdictions
in which they are used or registered. To the best knowledge of Seller,
there is no unauthorized use, infringement or misappropriation of any
of the Intellectual Property by any third party, including any
employee, former employee, consultant, distributor or customer of
Seller. In connection with Seller's design, development, manufacture,
sale, licensing or use of any of the Intellectual Property, there is no
infringement liability (choate or inchoate) with respect to, or
infringement or violation by, Seller of any patent, trademark, service
mark, copyright, trade secret or other Intellectual Property right of
another person. No Intellectual Property is subject to any outstanding
order, judgment, decree, stipulation or agreement restricting in any
manner the sale or licensing thereof by Seller. There is no outstanding
order, judgment, decree or stipulation binding on Seller, and Seller is
not a party to or bound by any agreement restricting the transfer, sale
or license of any of the Intellectual Property. Seller has not entered
into any agreement to indemnify any other person against any charge of
infringement of any of the Intellectual Property.
(c) There is not, nor has there been at any time during the
past three years, pending or, to the knowledge of Seller, threatened
any action, suit, investigation or proceeding (or any basis therefor)
contesting the validity, ownership or right to use, sell, license,
transfer or otherwise dispose of any Intellectual Property or alleging
infringement arising therefrom, nor has Seller learned that any person
is or has been in the past asserting that any ownership, use, license,
production, development, manufacture, marketing, distribution, lease,
sale or other disposition of any of the Purchased Assets conflicts or
will conflict with the rights of any other person.
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(d) None of the former or present employees, consultants,
officers or directors of Seller or any distributor, reseller or
customer of Seller, owns, directly or indirectly, or has any other
right or interest in, or claim to, in whole or in part, any of the
Intellectual Property. Each current and former employee of or
consultant to Seller has signed a proprietary information and
inventions assignment agreement substantially in Seller's standard form
as certified by Seller and delivered to Buyer. Seller has obtained from
all consultants or independent contractors which have performed design,
development or other technical services relating to the Intellectual
Property a full, irrevocable and unconditional written assignment of
all rights of such third parties in any of the Intellectual Property in
respect of which they have performed services which assignment(s) are
assignable, and hereby assigned to the Buyer.
(e) Each customer to whom Seller has delivered a copy of the
Intellectual Property has executed and delivered to Seller a license
agreement for the use thereof. A copy of each such agreement is set
forth in SCHEDULE 3.04(E)(I), and a copy of Seller's current form of
license agreement is set forth in SCHEDULE 3.04(E)(II). Each such
license agreement is in full force and effect according to its terms
and, to the knowledge of Seller the licensee thereunder is not in
default under the terms of such license agreement nor has any event or
circumstance occurred that, with notice or a lapse of time or both,
would constitute an event of default thereunder with respect to such
licensee.
3.05. LITIGATION. There are no actions, suits, proceedings, unfair
labor practice charges, government citations, claims or investigations
instituted and pending, or to the best knowledge of the Seller, threatened
against or directly affecting the Seller and involving the Purchased Assets.
Seller knows of no unsatisfied judgment against Seller which is or could become
a Lien upon or affect the Purchased Assets. Seller has no knowledge of any
litigation presently pending in a court or other proceeding or governmental
action (including those of any taxing authorities) nor has Seller received any
service of process for any complaint, temporary restraining order or preliminary
or permanent injunction or other notice whatsoever with respect thereto, that
could prohibit or interfere with the conveyance by Seller to Buyer of the
Purchased Assets.
3.06. MATERIAL CONTRACTS. To the best of Seller's knowledge, each
Contract disclosed in SCHEDULE 2.01(A) or required to be disclosed pursuant to
this Section 3.08 is a valid and binding agreement of Seller and is in full
force and effect, and neither Seller nor, to the knowledge of Seller, any other
party thereto, is in default under the terms of any such Contract, nor has any
event or circumstance occurred that, with notice or lapse of time or both, would
constitute an event of default thereunder with respect to Seller or, to the
knowledge of Seller, any other party thereto. Except as set forth in SCHEDULE
2.01(A), Seller is not a party to or subject to:
(a) any partnership, joint venture or other similar contract
arrangement or agreement involving or relating to the Purchased Assets;
(b) any license, sublicense, royalty, development or
consulting agreement involving or relating to the Intellectual
Property;
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(c) any agency, dealer, distributor, sales or marketing
representative or other similar agreement relating to the Intellectual
Property;
(d) any agreement, contract or commitment that limits the
freedom of Seller to compete with the Product Lines with any person or
in any area or to own, operate, sell, transfer, pledge or otherwise
dispose of or create a Lien on any Purchased Assets or that would so
limit or purport to limit the freedom of Buyer after the Closing; or
(e) any other agreement, contract or commitment involving or
relating to the Purchased Assets.
3.07 ASSUMPTIONS OR GUARANTIES OF INDEBTEDNESS OF OTHER PERSONS. To the
best of Seller's knowledge, Seller has not assumed, guaranteed, endorsed or
otherwise become directly or contingently liable on (including, without
limitation, liability by way of agreement, contingent or otherwise, to purchase,
to provide funds for payment, to supply funds to or otherwise to invest in the
debtor or otherwise to assure the creditor against loss), any indebtedness of
any other person or entity which could adversely affect the transfer of the
Purchased Assets to Buyer.
3.08. COMPLIANCE WITH LAWS. The Seller has all requisite material
licenses, permits and certificates, including environmental, health and safety
permits, from federal, state and local authorities necessary to conduct its
business relating to the Product Lines and own and operate the Purchased Assets.
The Seller is not in violation of, and, to the knowledge of Seller, is not under
investigation with respect to, and has not been threatened to be charged with or
given notice of any violation of, any law, regulation or ordinance (including,
without limitation, laws, regulations or ordinances relating to environmental
laws, building, zoning, land use or similar matters) relating to the Purchased
Assets, the violation of which could have a Material Adverse Effect on Seller,
the Purchased Assets or which would substantially impair the continuation of
Seller's business related to the Product Lines as presently conducted.
3.09. CONSENTS. SCHEDULE 3.09 sets forth each agreement, contract or
other instrument binding upon Seller requiring a consent as a result of the
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby.
3.10. FINDER. The Seller has not retained the services of any person,
firm or entity as a finder or broker, or incurred any liability for any
brokerage or finder's fee or commissions, in connection with the transactions
contemplated hereby.
3.11. DISCLOSURE. Neither this Agreement nor any other agreement,
document, certificate or written or oral statement furnished to the Buyer or its
counsel by or on behalf of the Seller in connection with the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading. There is no fact within the knowledge of the Seller
or any of its executive officers which has not been disclosed herein or in
writing by them to the Buyer and which has a Materially Adversely Effect, or in
the future in their opinion may, insofar as they can now foresee, have a
Materially Adverse Effect on the Buyer and/or Purchased Assets.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warranties to Seller that:
4.01. ORGANIZATION AND EXISTENCE. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all corporate powers and all material governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted.
4.02. CORPORATE AUTHORIZATION. The execution, delivery and performance
of this Agreement; Bill of Sale and Instrument of Assignment and Assumption and
the Service Agreement entered into in connection with the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of Buyer. This Agreement Bill of Sale and
Instrument of Assignment and Assumption and the Service Agreement entered into
in connection with the transactions contemplated hereby have been duly executed
and delivered by Buyer, constitute the valid and binding obligations of Buyer,
and are enforceable in accordance with their respective terms. The execution,
delivery and performance of this Agreement Bill of Sale and Instrument of
Assignment and Assumption and the Service Agreement entered into in connection
with the transactions contemplated hereby by Buyer do not and will not violate,
conflict with, result in a breach of or constitute a default under or result in
the creation of any lien, security interest or other encumbrance under (a) the
Certificate of Incorporation or By-Laws of Buyer, as amended to date, (b) any
judgment, order, decree, ruling or injunction or (c) any statute, law,
regulation or rule of any governmental agency or authority applicable to Buyer
or by which any of its properties or assets or business may be bound.
ARTICLE V
COVENANTS OF SELLER
Seller covenants and agrees as follows:
5.01. CONDUCT OF SELLER. From the date hereof until the Closing Date,
Seller shall conduct its businesses related to the Product Lines in the ordinary
course consistent with past practices and use its best efforts to preserve
intact the business related to the Product Lines and relationships with third
parties. Without limiting the generality of the foregoing, from the date hereof
until the Closing Date, Seller will not:
(a) sell, lease, license or otherwise dispose of any of the
Purchased Assets or other property relating to the Product Lines except
(i) pursuant to existing contracts or commitments and (ii) in the
ordinary course consistent with past practices;
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(b) declare, set aside or pay any dividend or make any other
distribution of assets of any kind whatsoever with respect to any
Purchased Assets or other ownership interests in the Product Lines
other than in the ordinary course of business; or
(c) agree or commit to do any of the foregoing.
Seller will not (i) take or agree or commit to take any action that would make
any representation and warranty of Seller under this Agreement on the date of
its execution and delivery inaccurate in any respect at, or as of any time prior
to, the Closing Date or (ii) omit or agree or commit to omit to take any action
necessary to prevent any such representation or warranty from being inaccurate
in any respect at any such time.
5.02. ACCESS TO INFORMATION. From the date hereof until the Closing
Date, Seller (a) will give, Buyer, its counsel, financial advisors, financing
sources, auditors and other authorized representatives full access to the
offices, properties, books and records of Seller relating to the Product Lines,
(b) will furnish to Buyer, its counsel, financial advisors, auditors and other
authorized representatives such financial and operating data and other
information relating to the Product Lines of Seller as such Persons may
reasonably request, and (c) will instruct the employees, counsel and financial
advisors of Seller to cooperate with Buyer in its investigation of the Product
Lines of Seller; PROVIDED that no investigation pursuant to this Section shall
affect any representation or warranty given by Seller hereunder.
5.03. NOTICES OF CERTAIN EVENTS. Seller will promptly notify Buyer of:
(a) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and
(c) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge threatened against, relating to or
involving or otherwise affecting the Purchased Assets or that otherwise
relate to the consummation of the transactions contemplated by this
Agreement.
5.04. CONFIDENTIALITY. Seller will hold, and will use its best efforts
to cause its respective officers, directors, employees, accountants, counsel,
consultants, advisors and agents to hold, in confidence, unless compelled to
disclose by judicial or administrative process or by other requirements of law,
all confidential documents and information concerning Buyer furnished to Seller
in connection with the transactions contemplated by this Agreement, and (after
the Closing Date) all confidential documents and information concerning Seller,
except to the extent that such information can be shown by Seller to have been
(i) previously known on a nonconfidential basis
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by Seller, (ii) in the public domain through no fault of Seller, or (iii) later
lawfully acquired by Seller from sources other than Seller or Buyer; PROVIDED
that Seller may disclose such information to its respective officers, directors,
employees, accountants, counsel, consultants, advisors and agents in connection
with the transactions contemplated by this Agreement so long as such persons are
informed by Seller of the confidential nature of such information and are
directed by Seller to treat such information confidentially. The obligation of
Seller to hold any such information in confidence shall be satisfied if they
exercise the same care with respect to such information as they would take to
preserve the confidentiality of their own similar information but in no event
less than a reasonable degree of care. If this Agreement is terminated, Seller
will, and will use its best efforts to cause their respective officers,
directors, employees, accountants, counsel, consultants, advisors and agents to,
destroy or deliver to Buyer, upon request, all documents and other materials,
and all copies thereof, obtained by Seller, or on its behalf from Buyer in
connection with this Agreement that are subject to such confidence.
ARTICLE VI
COVENANTS OF BUYER
Buyer agrees that:
6.01. CONFIDENTIALITY. Prior to the Closing Date and after any
termination of this Agreement in the event the Closing does not occur, Buyer and
its Affiliates will hold, and will use their best efforts to cause their
respective officers, directors, employees, accountants, counsel, consultants,
advisors and agents to hold, in confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of law, all
confidential documents and information concerning the Product Lines or Seller
furnished to Buyer or its Affiliates in connection with the transactions
contemplated by this Agreement, except to the extent that such information can
be shown by Buyer to have been (i) previously known on a nonconfidential basis
by Buyer, (ii) in the public domain through no fault of Buyer or (iii) later
lawfully acquired by Buyer from sources other than Seller; PROVIDED that Buyer
may disclose such information to its officers, directors, employees,
accountants, counsel, consultants, advisors and agents in connection with the
transactions contemplated by this Agreement so long as such persons are informed
by Buyer of the confidential nature of such information and are directed by
Buyer to treat such information confidentially. The obligation of Buyer and its
Affiliates to hold any such information in confidence shall be satisfied if they
exercise the same care with respect to such information as they would take to
preserve the confidentiality of their own similar information but in no event
less than a reasonable degree of care. If this Agreement is terminated, Buyer
and its Affiliates will, and will use their best efforts to cause their
respective officers, directors, employees, accountants, counsel, consultants,
advisors and agents to, destroy or deliver to Seller, upon request, all
documents and other materials, and all copies thereof, obtained by Buyer or its
Affiliates or on their behalf from Seller in connection with this Agreement that
are subject to such confidence.
6.02. ACCESS. On and after the Closing Date, Buyer will afford promptly
to Seller and its agents reasonable access to its properties, books, records,
employees and auditors to the extent
<PAGE> 13
-13-
necessary to permit Seller to determine any matter relating to its rights and
obligations hereunder or to any period ending on or before the Closing Date;
PROVIDED, HOWEVER, that any such access by Seller shall not unreasonably
interfere with the conduct of the business of Buyer.
6.03 TRADEMARK LICENSE AND ACCESS TO SOURCE CODE.
(a) Buyer hereby grants to Seller beginning as of the Closing
Date and ending on June 30, 1998 a non-exclusive, revocable,
non-transferable, fully paid-up and personal license to reproduce and
use the trademarks and logos set forth on Schedule 3.04 (the
"Trademarks") solely in connection with certain maintenance service
obligations of Seller arising under the Maintenance Contracts. Seller
shall maintain the quality of the maintenance services using the
Trademarks at a level at least equal to the quality of the maintenance
services provided by Seller prior to the Closing Date. Notwithstanding
the foregoing, Seller shall not derogate Buyer's rights in the
Trademarks, and shall take no action that would interfere with or
diminish those rights. Seller acknowledges the great value of the good
will associated with the Trademarks and further acknowledges that Buyer
is as of the Closing Date the sole and exclusive owner of the
Trademarks and the goodwill associated therewith and that any use of
the Trademarks by Seller pursuant to this license shall inure to the
benefit of Buyer. Upon Buyer's reasonable request, Seller shall deliver
to Buyer examples of any such use of the Trademarks by Seller.
(b) Subject to Section 5.04 hereof, Buyer hereby grants to
Seller as of the Closing Date and ending on June 30, 1998 a
non-exclusive, revocable, non-transferable, fully paid-up and personal
license to (i) have access to the source code and related materials
with respect to the Product Lines and (ii) use such source code and
related materials, in both cases solely in connection with the
performance by Seller of certain maintenance service obligations
arising under the Maintenance Contracts.
ARTICLE VII
COVENANTS OF PARTIES
The parties hereto agree that:
7.01. BEST EFFORTS; FURTHER ASSURANCES.
(a) Subject to the terms and conditions of this Agreement,
each party will use its best efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary or
desirable under applicable laws and regulations to consummate the
transactions contemplated by this Agreement. Seller and Buyer each
agree to execute and deliver such other documents, certificates,
agreements and other writings and to take such other actions as may be
necessary or desirable in order to consummate or implement
expeditiously the transactions contemplated by this Agreement and to
vest in Buyer good and marketable title to the Purchased Assets.
<PAGE> 14
-14-
(b) Seller hereby constitutes and appoints, effective as of
the Closing Date, Buyer and its successors and assigns as the true and
lawful attorney of Seller with respect to the Product Lines with full
power of substitution in the name of Buyer or in the name of Seller,
but for the benefit of Buyer (i) to collect for the account of Buyer
any items of Purchased Assets and (ii) to institute and prosecute all
proceedings which Buyer may in its sole discretion deem proper in order
to assert or enforce any right, title or interest in, to or under the
Purchased Assets, and to defend or compromise any and all actions,
suits or proceedings in respect of the Purchased Assets. Buyer shall be
entitled to retain for its account any amounts collected pursuant to
the foregoing powers, including any amounts payable as interest in
respect thereof, other than the amounts due Seller as per this
Agreement.
7.02. CERTAIN FILINGS. Seller and Buyer shall cooperate with one
another (a) in determining whether any action by or in respect of, or filing
with, any governmental body, agency, official or authority is required, or any
actions, consents, approvals or waivers are required to be obtained from parties
to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (b) in taking such actions or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or waivers.
ARTICLE VIII
CONDITIONS TO CLOSING
8.01. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The obligations of
Buyer and Seller to consummate the Closing are subject to the satisfaction, or
waiver by each of Buyer and Seller respectively, of the following conditions:
(a) No proceeding challenging this Agreement or the
transactions contemplated hereby or seeking to prohibit, alter, prevent
or materially delay the Closing shall have been instituted by any
Person before any court, arbitrator or governmental body, agency or
official and be pending.
(b) Each other party shall have executed and delivered each of
the Ancillary Agreements to be entered into by it at Closing, in each
case substantially in the form attached as an exhibit to this
Agreement.
(c) No provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation
of the Closing.
(d) All actions by or in respect of or filings with any
governmental body, agency, official or authority required to permit the
consummation of the Closing shall have been obtained.
<PAGE> 15
-15-
8.02. CONDITIONS TO OBLIGATIONS OF BUYER. The obligation of Buyer to
consummate the Closing is subject to the satisfaction or waiver by Buyer of the
following further conditions:
(a)(i) Seller shall have performed in all material respects
all of its obligations hereunder required to be performed on or prior
to the Closing Date, (ii) the representations and warranties of Seller
contained in this Agreement at the time of its execution and delivery
and in any certificate or other writing delivered by Seller pursuant
hereto, disregarding all qualifications and exceptions contained
therein relating to materiality or Material Adverse Effect, shall be
true at and as of the Closing Date, as if made at and as of such date
with only such exceptions as would not in the aggregate reasonably be
expected to have a Material Adverse Effect and (iii) Buyer shall have
received a certificate signed by an officer of Seller to the foregoing
effect.
(b) No court, arbitrator or governmental body, agency or
official shall have issued any order, and there shall not be any
statute, rule or regulation, restraining the effective operation by
Buyer of the business of Seller after the Closing Date, and no
proceeding challenging this Agreement or the transactions contemplated
hereby or seeking to prohibit, alter, prevent or materially delay the
Closing shall have been instituted by any Person before any court,
arbitrator or governmental body, agency or official and be pending.
(c) Seller shall have received all consents, authorizations or
approvals from the governmental agencies referred to in Section 3.11,
in each case in form and substance reasonably satisfactory to Buyer,
and no such consent, authorization or approval shall have been revoked.
(d) Buyer shall have completed a due diligence investigation
of Seller, the Product Lines, the Purchased Assets and, the Assumed
Liabilities, with results satisfactory to Buyer in its sole discretion.
(e) Seller shall execute and deliver to Buyer the Ancillary
Agreements.
(f) Seller shall have received all consents necessary to the
assignment of the Maintenance Contracts to Buyer, in each case in form
and substance reasonably satisfactory to Buyer, and no such consent
shall have been revoked.
(g) Buyer shall have received all other closing documents
specified in Section 2.06 of this Agreement and all other closing
documents that it may reasonably request, all in form and substance
reasonably satisfactory to Buyer.
8.03. CONDITIONS TO OBLIGATION OF SELLER. The obligation of Seller to
consummate the Closing is subject to the satisfaction or waiver by Seller of the
following further conditions:
(a)(i) Buyer shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or prior
to the Closing Date, (ii) the
<PAGE> 16
-16-
representations and warranties of Buyer contained in this Agreement at
the time of its execution and delivery and in any certificate or other
writing delivered by Buyer pursuant hereto shall be true in all
material respects at and as of the Closing Date, as if made at and as
of such date and (iii) Seller shall have received a certificate signed
by an officer of Buyer to the foregoing effect.
(b) No proceeding challenging this Agreement or the
transactions contemplated hereby or seeking to prohibit, alter, prevent
or materially delay the Closing shall have been instituted by any
Person before any court, arbitrator or governmental body, agency or
official and be pending.
(c) Seller shall have received all items specified in Section
2.06 of this Agreement and all other closing documents that they may
reasonably request, all in form and substance reasonably satisfactory
to Seller.
ARTICLE IX
TERMINATION
9.01. GROUNDS FOR TERMINATION. This Agreement may be terminated at any
time prior to the Closing:
(a) by mutual written consent duly authorized by Buyer and
Seller;
(b) by either Seller or Buyer, if the Agreement shall not have
been consummated by January 16, 1998; PROVIDED, HOWEVER, that the right
to terminate this Agreement under this Section 9.01(b) shall not be
available to any party whose action or failure to act has been a
principal cause of or resulted in the failure of the Closing to occur
on or before such date and such action or failure to act constitutes a
breach of this Agreement;
(c) by either Seller or Buyer, if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any
other action (an "ORDER"), in any case having the effect of permanently
restraining, enjoining or otherwise prohibiting the transaction
contemplated hereunder, which order, decree or ruling is final and
nonappealable;
(d) by Buyer, if there shall have occurred any Material
Adverse Change in the financial condition, results of operations,
business, properties, assets or operations of the Product Lines since
the date of this Agreement;
(e) by Buyer, upon breach of any representation, warranty,
covenant or agreement on the part of Seller set forth in this
Agreement, or if any representation or warranty of Seller shall have
become untrue, in either case such that the conditions set forth in
Section 8.02(a) would not be satisfied as of the time of such breach or
as of the
<PAGE> 17
-17-
time such representation or warranty shall have become untrue,
provided, that if such inaccuracy in representations and warranties of
Seller, or breach by Seller is curable by Seller through the exercise
of its commercially reasonable efforts within five (5) days of the time
such representation or warranty shall have become untrue or such
breach, then Buyer may not terminate this Agreement under Section
9.01(e) during such five-day period provided Seller continues to
exercise such commercially reasonable efforts;
(f) by Seller, upon a breach of any representation, warranty,
covenant or agreement on the part of Buyer set forth in this Agreement,
or if any representation or warranty of Buyer shall have become untrue,
in either case such that the conditions set forth in Section 8.03(a)
would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become untrue, provided,
that if such inaccuracy in Buyer's representations and warranties or
breach by Buyer is curable by Buyer through the exercise of its
commercially reasonable efforts within five (5) days of the time such
representation or warranty shall have become untrue or such breach,
then Seller may not terminate this Agreement under this Section 9.01(f)
during such five-day period provided Buyer continues to exercise such
commercially reasonable efforts.
9.02. NOTICE OF TERMINATION; EFFECT OF TERMINATION. Any termination of
this Agreement under Section 9.01 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties hereto.
In the event of the termination of this Agreement as provided in Section 9.01,
this Agreement shall be of no further force or effect, except (i) as set forth
in this Section 9.02, Section 9.03 and Article X (Miscellaneous), each of which
shall survive the termination of this Agreement, and (ii) nothing herein shall
relieve any party from liability for any willful breach of this Agreement.
9.03. PROCEDURE UPON TERMINATION. In the event of the termination of
this Agreement, Buyer or Seller so terminating may direct its or their officers
or representatives, respectively, not to consummate the transaction contemplated
by this Agreement. In the event this Agreement is terminated, the agreements of
Seller and Buyer contained in Sections 5.05 and 6.01 shall survive such
termination.
ARTICLE X
MISCELLANEOUS
10.01. NOTICES. All notices, requests and other communications to a
party hereunder shall be in writing and shall be sufficiently given if delivered
in person, sent by telecopy, facsimile, reputable express overnight courier
service or sent by registered or certified mail, postage prepaid, and shall be
given,
if to Buyer, to:
National Transaction Network, Inc.
117 Flanders Road
<PAGE> 18
-18-
Westborough, MA 01581
Telephone: (508) 870-3200
Telecopy: (508) 870-3201
Attn: Chief Financial Officer
with a copy to:
Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Telecopy: (617) 248-7100
Attn: David W. Tegeler, Esq.
if to Seller, to:
BancTec USA, Inc.
888 Executive Center Drive West
Suite 200
St. Petersburg, FL 33702
Telephone: (813) 579-9910
Telecopy: (813) 579-7600
Attn: Larry Schooler
with a copy to:
BancTec, Inc.
4851 LBJ Freeway
Dallas, TX 75244
Telephone: (972) 341-4925
Telecopy: (972) 341-4932
Attn: General Counsel
or at such other address for a party as shall be specified by like notice.
10.03. AMENDMENTS; NO WAIVERS.
(a) Any provisions of this Agreement may be amended
or waived prior to the Closing Date if, and only if, such amendment or
waiver is in writing and signed, in the case of an amendment, by Buyer
and Seller, or in the case of a waiver, by the party against whom the
waiver is to be effective.
(b) No failure or delay by either party in exercising
any right, power or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right,
<PAGE> 19
-19-
power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
10.04. EXPENSES. Except as otherwise provided herein, all costs and
expenses incurred in connection with this Agreement shall be paid by the party
incurring such cost or expense.
10.05. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that this Agreement,
including the representations and warranties herein, may not be assigned by any
party without the prior written consent of the other parties, except that either
party may assign this Agreement to a parent, subsidiary, or corporate purchaser
of substantially all of its assets.
10.06. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the laws of the Commonwealth of Massachusetts, without
regard to the conflicts of law rules of such state.
10.07. COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in two
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received a counterpart
hereof signed by the other party hereto.
10.08. ENTIRE AGREEMENT. This Agreement and the Service Agreement
constitute the entire agreement between the parties with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings and
negotiations, both written and oral, between the parties with respect to the
subject matter hereof and thereof. None of this Agreement and the Service
Agreement, nor any provision hereof or thereof, is intended to confer upon any
person other than the parties hereto any rights or remedies hereunder or
thereunder.
10.09. CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
<PAGE> 20
-20-
IN WITNESS WHEREOF, the parties hereto have set their hands, and duly
authorized this Agreement by their authorized officers as of the day and year
first above written.
NATIONAL TRANSACTION NETWORK, INC.
By: /S/ MILTON A. ALPERN
----------------------------
Title: VICE PRESIDENT OF FINANCE
BANCTEC USA, INC.
By: /S/ TOD V. MONGAN
---------------------------
Title: SENIOR VICE PRESIDENT
<PAGE> 21
EXHIBIT A
BILL OF SALE AND INSTRUMENT OF ASSIGNMENT AND ASSUMPTION
This Bill of Sale and Instrument of Assignment and Assumption (the
"INSTRUMENT") dated as of January 10, 1998 by and between National Transaction
Network, Inc., a Delaware corporation ("Buyer") and BancTec USA, Inc., a
Delaware corporation.
W I T N E S S E T H
WHEREAS, Buyer and the Seller have entered into an Asset Purchase
Agreement dated as of January 10, 1998 (the "PURCHASE AGREEMENT"), providing
for, among other things, the purchase and sale of the Purchased Assets;
WHEREAS, the Purchase Agreement provides, among other things, for
the Seller to sell, transfer, assign and deliver, and cause to be sold,
transferred, assigned and delivered, to Buyer the Purchased Assets for the
consideration described in the Purchase Agreement;
WHEREAS, the Purchase Agreement provides, among other things, for
the Buyer to assume and agree to pay, perform and discharge the Assumed
Liabilities; and
WHEREAS, Seller and Buyer now desire to carry out the intents and
purposes of the Purchase Agreement by the execution and delivery by Seller to
Buyer of this Instrument evidencing the sale, conveyance, transfer and
assignment to Buyer by Seller of the Purchased Assets and the assumption by
Buyer of the Assumed Liabilities.
NOW, THEREFORE, in consideration of the mutual covenants and other
good and valuable consideration set forth in the Purchase Agreement, the receipt
and sufficiency of which are hereby acknowledged, and upon the terms and subject
to the conditions set forth in the Purchase Agreement;
1. (a) Seller does hereby sell, convey, transfer, assign and deliver to
Buyer, its successors and assigns all of its right, title and interest in, to
and under the Purchased Assets; PROVIDED, that no sale, transfer, assignment or
delivery shall be made if an attempted sale, assignment, transfer or delivery,
without the consent of a third party, would constitute a breach or other
contravention thereof or in any way adversely affect the rights of Buyer or
Seller thereunder;
(b) To have and to hold the same unto the Buyer and its successors and
assigns forever.
2. Buyer does hereby accept all right title and interest of Seller in, to
and under all of the Purchased Assets (except as aforesaid) and Buyer assumes
and agrees to pay, perform and discharge promptly and fully when due all of the
Assumed Liabilities and to perform all of the obligations of Seller to be
performed under the Contracts.
<PAGE> 22
3. After the delivery of this Instrument, the Seller shall upon the
request of Buyer execute and deliver such additional documents and instruments,
and perform such additional acts, as may be reasonably required to perfect
Buyer's right, title and interest in and to the Purchased Assets.
4. If there is any conflict as to the terms of this Instrument and the
Purchase Agreement, then the terms of the Purchase Agreement shall prevail.
5. Capitalized terms used and not otherwise defined in this Instrument
shall have the respective meanings ascribed to such terms in the Purchase
Agreement.
6. This Bill of Sale shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts, without regard to the principles
of conflicts of laws thereof.
[Remainder of page intentionally left blank]
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have caused this Instrument
to be duly executed as of the day and year first above written.
NATIONAL TRANSACTION NETWORK, INC.
/S/ MILTON A. ALPERN
--------------------------------
Name: Milton A. Alpern
Title: Vice President of Finance
BANCTEC USA, INC.
By: /S/ TOD TOD V. MONGAN
----------------------------
Name:
Title:
<PAGE> 24
EXHIBIT B
ASSIGNMENT OF TRADEMARKS
WHEREAS, BancTec USA, Inc., a Delaware corporation having a principal
place of business at 4851 LBJ Freeway, Dallas, Texas ("Seller"), is the owner of
the entire right, title, and interest in and to certain U.S. and foreign
trademarks, servicemarks, logos and trademark registrations and applications
therefor as specified in SCHEDULE A attached hereto and made a part hereof (the
"Trademarks");
WHEREAS, National Transaction Network, Inc., a Delaware corporation
having a principal place of business at 117 Flanders Road, Westborough,
Massachusetts 01581 ("Buyer"), has agreed to acquire the entire right, title,
and interest in and to the Product Lines, as defined in a certain Asset Purchase
Agreement by and between the Buyer and Seller dated as of January 10, 1998 (the
"Purchase Agreement"), including the Trademarks; and
WHEREAS, pursuant to the Purchase Agreement, Seller has agreed to
execute such additional instruments as may be necessary or desirable to confirm
said acquisition of the Assets by Buyer.
NOW, THEREFORE, in consideration of the foregoing, as well as for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Seller hereby sells, assigns, transfers, and sets over to Buyer,
its successors and assigns, the entire right, title and interest of Seller in
and to the Trademarks, together with the goodwill of the business in which the
Trademarks are used and which goodwill is symbolized by the Trademarks, and
including the rights to recover damages, profits and other compensation for
infringement, including past infringement, of the Trademarks and to file and
obtain renewals thereof, said sale, assignment, transfer, and setting over being
effective as of the date hereof.
After the delivery of this Assignment, Seller shall, upon request of
Buyer, execute and deliver such additional documents and instruments, and
perform such additional acts, as may be necessary or desirable to perfect
Buyer's right, title, and interest in and to the Trademarks acquired by Buyer
hereunder.
IN WITNESS WHEREOF, Seller has caused this Assignment of Trademarks to
be executed by its duly authorized officer as of the 10th day of January, 1998.
BANCTEC USA, INC.
ATTEST: By: /S/ TOD V. MONGAN
----------------------------
Name:
/S/ MARTHA SHOULTZ Title:
- ----------------------------
Name:
<PAGE> 25
ACKNOWLEDGMENT
State of Texas
)
County of Dallas ) ss.
On 1/10, 1998 before me personally appeared Tod V. Mongan being duly
sworn and known by me to be the Senior Vice President of BancTec USA, Inc., and
the one who executed the foregoing instrument and subscribed the same in my
presence and acknowledged the same to be his free act and deed on behalf of and
as authorized by BancTec USA, Inc.
/S/ DEBRA JEAN HILL
---------------------------------
Notary Public
<PAGE> 26
SCHEDULE A
----------
MAINSAIL
- -----------------------
SEMAPHORE
- -----------------------
<PAGE> 27
SCHEDULE 2.01(a)
MAINTENANCE CONTRACTS AND SELLER'S OTHER WRITTEN
CONTRACTS, AGREEMENTS AND LICENSES
ASSOCIATED GROCERS:
1. Software License Document, 12/12/89, with LeRoux Pitts.
2. Supplement to License Document, 11/27/90, with LeRoux Pitts.
3. Product Supplement #1 to Master Agreement, 5/3/93, with LeRoux Pitts.
4. Change Memorandum #1 to Supplement #1 (513/93) to Master License Agreement,
2/24/94, with BancTec
5. Maintenance Agreement, 12/7/89, with LeRoux Pitts.
6. Master License Agreement, 3/4/96, with BancTec.
7. Supplement #1 to Master License Agreement, 3/15/96, with BancTec.
8. Supplement #3 to Master License Agreement, 3/4/96, with BancTec.
9. Change Memorandum #1 to Supplement #3 to Master License Agreement, 3/4/96,
with BancTec.
10. Appendix A Professional Service Fees To Product Supplements 1, 2 & 3,
3/15/96, with BancTec.
11. Master Maintenance Agreement, 3/4/96, with BancTec.
12. Supplement #1 to Master Maintenance Agreement, 3/4/96, with BancTec.
13. Supplement #2 to Master Maintenance Agreement, 7/22/96, with BancTec.
14. Supplement #6 to Master Maintenance Agreement, 10/9/97, with BancTec.
15. Supplement #7 to Master Maintenance Agreement, 10/9/97, with BancTec.
BROOKSHIRE'S
1. Master License Agreement, 9/23/94, with BancTec.
2. Supplement #1 to Master License Agreement, 9/23/94, with BancTec.
3. Appendix A Project Plan to Supplement #1 to Master License Agreement,
9/28/94, with BancTec.
4. Supplement #2 to Master License Agreement, 11/16/95, with BancTec.
5. Supplement #3 to Master License Agreement, 12/14/95, with BancTec.
6. Supplement #5 to Master License Agreement, 1/6/97, with BancTec.
7. Supplement #6 to Master License Agreement, 12/12/96, with BancTec.
8. Master Maintenance Agreement, 9/23/94, with BancTec.
9. Supplement #1 to Master Maintenance Agreement, 9/28/94, with BancTec.
10. Supplement #2 to Master Maintenance Agreement, 11/16/95, with BancTec.
11. Supplement #3 to Master Maintenance Agreement, 12/14/95, with BancTec.
12. Supplement #5 to Master Maintenance Agreement, 7/8/96, with BancTec.
13. Supplement #5 to Master Maintenance Agreement, 1/6/97, with BancTec.
14. Supplement #6 to Master Maintenance Agreement, 12/12/96, with BancTec.
<PAGE> 28
H. E. BUTT
1. Master License Agreement, 11/29/93, with BancTec.
2. Supplement #1 to Master License Agreement, 11/29/93, with BancTec.
3. Change Memorandum #2 to Supplement #1 to Master License Agreement, 4/5/94,
with BancTec.
4. Supplement #2 to Master License Agreement, 9/1/94, with BancTec.
5. Supplement #3 to Master License Agreement, 4/11/95, with BancTec.
6. Supplement #4 to Master License Agreement, 2/2/96, with BancTec.
7. Supplement #6 to Master License Agreement, 7/24/97, with BancTec.
8. Master Maintenance Agreement, 11/29/93, with BancTec.
9. Supplement #1 to Master Maintenance Agreement, 11/29/93, with BancTec.
10. Supplement #2 to Master Maintenance Agreement, 3/7/95, with BancTec.
11. Supplement #3 to Master Maintenance Agreement, 3/7/95, with BancTec.
12. Supplement #4 to Master Maintenance Agreement, 4/11/95, with BancTec.
13. Supplement #6 to Master Maintenance Agreement, 2/2/96, with BancTec.
MENARD'S
1. Master License Agreement, 5/15/95, with BancTec.
2. Supplement #1 to Master License Agreement, 5/15/95, with BancTec.
3. Supplement #2 to Master License Agreement, 2/20/96, with BancTec.
4. Master Maintenance Agreement, 5/15/96, with BancTec.
5. Supplement #1 to Master Maintenance Agreement, 5/15/95, with BancTec.
6. Supplement #2 to Master Maintenance Agreement, 2/20/96, with BancTec.
SEAWAY
1. Master License Agreement, 12/22/93, with BancTec.
2. Modification Supplement #1 to Master License Agreement, 12/22/93, with
BancTec.
3. Product Supplement #1 to Master License Agreement, 12/23/93, with BancTec.
4. Addendum to Product Supplement #1 to Master License Agreement, 12/18/95,
with BancTec.
5. Product Supplement #2 to Master License Agreement, 12/22/93, with BancTec.
6. Addendum to Product Supplement #2 to Master License Agreement, 12/18/95,
with BancTec.
7. Product Supplement #3 to Master License Agreement, 12/22/93, with BancTec.
8. Addendum to Product Supplement #3 to Master License Agreement, 12/18/95,
with BancTec.
9. Sublicense Supplement #1 to Master License Agreement, 12/15/94, with
BancTec.
10. Master Maintenance Agreement, 12/22/93, with BancTec.
11. Supplement #1 to Master Maintenance Agreement, 12/22/93, with BancTec.
12. Addendum to Supplement #1 to Master Maintenance Agreement, 12/18/95, with
BancTec.
13. Supplement #2 to Master Maintenance Agreement, 12/22/93, with BancTec.
<PAGE> 29
14. Addendum to Supplement #2 to Master Maintenance Agreement, 12/18/95, with
BancTec.
15. Supplement #3 to Master Maintenance Agreement, 12/22/93, with BancTec.
16. Addendum to Supplement #3 to Master Maintenance Agreement, 12/18/95, with
BancTec.
17. Supplement #4 to Master Maintenance Agreement, 5/1/95, with BancTec.
18. Supplement #5 to Master Maintenance Agreement, 6/1/95, with BancTec.
SUPER DISCOUNT MARKETS
1. Master License Agreement, 6/13/95, with BancTec.
2. Product Supplement #1 to Master License Agreement, 6/13/95, with BancTec.
3. Amendment #1 Client Services, 6/13/95, with BancTec.
4. Master Maintenance Agreement, 6/13/95, with BancTec.
5. Supplement #1 to Master Maintenance Agreement, 6/13/95, with BancTec.
6. Supplement #2 to Master Maintenance Agreement, 6/4/97, with BancTec.
UKROP'S SUPER MARKETS
1. Master License Agreement, 12/21/92, with LeRoux Pitts.
2. Product Supplement #1 to Master License Agreement, 12/21/92, with LeRoux
Pitts.
3. Appendix A Project plan to Product Supplement #1, 12/20/93, with BancTec.
4. Appendix B Licensed Program Specifications to Product Supplement #1,
12/21/92, with LeRoux Pitts.
5. Change Memorandum #1 to Product Supplement #1 to Master License Agreement,
12/20/93, with BancTec.
6. Change Memorandum #2 to Product Supplement #1 to Master License Agreement,
12/20/93, with BancTec.
7. Change Memorandum #7 to Product Supplement #1 to Master License Agreement,
5124194, with BancTec.
8. Change Memorandum #1 to Appendix C Project Implementation Services to
Product Supplement #1 to Master License Agreement, 3/24/94, with BancTec.
9. Change Memorandum #1 to Appendix C Project Implementation Services to
Product Supplement #1 to Master License Agreement, 3/24/94, with BancTec.
10. Change Memorandum #2 to Appendix C Project Implementation Services to
Product Supplement #1 to Master License Agreement, 3/31/95, with BancTec.
11. Appendix D Special Terms to Product Supplement #1 to Master License
Agreement, 1/4/93, with LeRoux Pitts.
12. Product Supplement #2 to Master License Agreement, 3/24/94, with BancTec.
13. Appendix A Project Plan to Product Supplement #2 to Master License
Agreement, 3/24/94, with BancTec.
14. Appendix B Licensed Program Specifications to Product Supplement #2 to
Master License Agreement, 3/24/94, with BancTec.
15. Product Supplement #3 to Master License Agreement, 8/20/95, with BancTec.
16. Product Supplement #4 to Master License Agreement, 9/18/96, with BancTec.
17. Product Supplement #5 to Master License Agreement, 3/3/97, with BancTec.
<PAGE> 30
18. Customization Supplement #1 to Master License Agreement, 12/21/92, with
LeRoux Pitts.
19. Sublicense Supplement #1 to Master License Agreement, 12/21/92, with LeRoux
Pitts.
20. Master Maintenance Agreement, 12/21/92, with LeRoux Pitts.
21. Supplement #1 to Master Maintenance Agreement, 12/21/92, with LeRoux Pitts.
22. Supplement #2 to Master Maintenance Agreement, 12/21/92, with LeRoux Pitts.
23. Supplement #3 to Master Maintenance Agreement, 3/29/95, with BancTec.
24. Supplement #4 to Master Maintenance Agreement, 6/1/96, with BancTec.
25. Supplement #5 to Master Maintenance Agreement, 9/18/96, with BancTec.
UNITED GROCERS
1. Master License Agreement, 2/21/91, with LeRoux Pitts.
2. Supplement #1 to Master License Agreement, 2/21/91, with LeRoux Pitts.
3. Supplement #2 to Master License Agreement, 2/15/92, with LeRoux Pitts.
4. Supplement #3 to Master License Agreement, 6/19/95, with BancTec.
5. Supplement #4 to Master License Agreement, 9/20/97, with BancTec.
6. Master Maintenance Agreement, 2/21/91, with LeRoux Pitts.
7. Supplement #1 to Master Maintenance Agreement, 2/21/91, with LeRoux Pitts.
8. Supplement #3 to Master Maintenance Agreement, 6/19/95, with BancTec.
9. Supplement #4 to Master Maintenance Agreement, 6/1/96, with BancTec.
10. Supplement #5 to Master Maintenance Agreement, 9120197, with BancTec.
<PAGE> 31
SCHEDULE 3.04(A)
REPRESENTATION AND WARRANTIES OF SELLER - INTELLECTUAL PROPERTY
(i) the nature of such Intellectual Property: Software as identified in
SCHEDULE 2.01 (b)
(ii) the owner or owners of such Intellectual Property: BancTec USA, Inc.
(iii) all persons other than Seller who have an ownership or economic interest
in such Intellectual Property: None
(iv) the jurisdictions by or in which such Intellectual Property is recognized
without regard to registration or in which the Intellectual Property has
been issued or registered or in which an application for such issuance of
registration has been filed, including the respective registration or
application numbers: Product Lines are not registered
(v) licenses, sublicenses and other agreements as to which Seller,
consultants, distributors or resellers is a party and pursuant to which
any person is authorized to use such Intellectual Property, including the
identity of all parties thereto, a description of the nature and subject
matter thereof, the applicable royalty and the term thereof: Only the
parties identified in SCHEDULE 2.01(a) are authorized to use such
Intellectual Property and there is no applicable royalty rights assigned.
<PAGE> 32
SCHEDULE 3.9
REPRESENTATIONS AND WARRANTIES OF SELLER
CONSENTS
There are no consents binding upon Seller for the Intellectual Property.
<PAGE> 1
EXHIBIT 4(h)
NEITHER THIS NOTE NOR THE SECURITIES WHICH MAY BE ISSUED UPON CONVERSION OF THIS
NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS, BY REASON OF SPECIFIC EXEMPTIONS THEREUNDER
AND CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY PERSON OR ENTITY
UNLESS SUBSEQUENTLY REGISTERED THEREUNDER OR UNLESS APPLICABLE EXEMPTIONS
THEREFROM ARE AVAILABLE.
NATIONAL TRANSACTION NETWORK, INC.
CONVERTIBLE SUBORDINATED NOTE DUE 2002
$1,100,000 November 24, 1997
For value received, National Transaction Network, Inc., a Delaware
corporation (the "Company"), hereby promises to pay to International Verifact
Inc. or registered assigns (hereinafter referred to as the "Payee"), on or
before November 23, 2002 (the "Due Date") the principal sum of One Million One
Hundred Thousand dollars ($1,100,000) or such part thereof as then remains
unpaid and to pay accrued and unpaid interest from the date hereof on the whole
amount of said principal sum remaining at the end of each quarter unpaid at a
rate equal to The First National Bank of Boston's best prime rate, as announced
at the end of each calendar quarter, plus (i) 2% or (ii) 5% during any period
which the Company is in default of its covenants in respect of its working
capital line of credit with Silicon Valley Bank, in each case calculated and
compounded on the last day of each quarter, such interest to be payable together
with the payment of the principal of this Note. Principal and interest shall be
payable in lawful money of the United States of America at the principal office
of the Payee or at such other place as the legal holder may designate from time
to time in writing to the Company. Interest shall be computed on the basis of a
360-day year and a 90-day calendar quarter.
This Note is issued pursuant to and is entitled to the benefits of a
certain Convertible Subordinated Note Purchase Agreement, dated as of August 18,
1997 and amended as of October 31, 1997, between the Company and International
Verifact Inc. (as the same may be amended from time to time, hereinafter
referred to as the "Agreement"), and each holder of this Note, by his acceptance
hereof, agrees to be bound by the provisions of the Agreement, including,
without limitation, that: (i) the principal of and interest on this Note is
subordinated to Senior Debt, as defined in the Agreement, (ii) in case of an
Event of Default, as defined in the Agreement, the principal of this Note may
become or may be declared due and payable in the manner and with the effect
provided in the Agreement and (iii) this Note is convertible at the option of
the holder hereof into shares of Common Stock of the Company in the manner set
forth in this Agreement.
<PAGE> 2
This Note is secured by and entitled to the benefits of a certain Security
Agreement (as that term is defined in the Agreement), dated September 19, 1997
and amended on October 31, 1997, from the Company to International Verifact Inc.
In case any payment herein provided for shall not be paid when due, the
Company promises to pay all cost of collection, including all reasonable
attorney's fees.
This Note shall be governed by, and construed in accordance with, the laws
of the Commonwealth of Massachusetts.
The Company and all endorsers and guarantors of this Note herein waive
presentment, demand, notice of nonpayment, protest and all other demands and
notices in connection with the delivery, acceptance, performance or enforcement
of this Note.
NATIONAL TRANSACTION NETWORK, INC.
By: /s/ Milton A. Alpern
------------------------
Milton A. Alpern
Vice President, Finance & Administration
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-66732 and 333-35893 on Form S-8 of our report dated February 17, 1998
appearing in the Annual Report on Form 10-K of National Transaction Network,
Inc. for the year ended December 31, 1997.
Deloitte & Touche LLP
Boston, Massachusetts
March 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 457,857
<SECURITIES> 0
<RECEIVABLES> 825,597
<ALLOWANCES> 40,000
<INVENTORY> 754,919
<CURRENT-ASSETS> 2,048,855
<PP&E> 1,002,003
<DEPRECIATION> (712,981)
<TOTAL-ASSETS> 2,638,768
<CURRENT-LIABILITIES> 893,688
<BONDS> 1,524,208
0
0
<COMMON> 490,974
<OTHER-SE> 12,596,573
<TOTAL-LIABILITY-AND-EQUITY> 2,638,768
<SALES> 5,318,371
<TOTAL-REVENUES> 5,318,371
<CGS> 3,039,907
<TOTAL-COSTS> 2,689,930
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,297)
<INCOME-PRETAX> (448,763)
<INCOME-TAX> 0
<INCOME-CONTINUING> (448,763)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (448,763)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
