<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
COMMISSION FILE NUMBER 0-10966
NATIONAL TRANSACTION NETWORK, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware No. 75-1535237
-------- --------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
117 Flanders Road
Westborough, Massachusetts 01581
-------------------------- -----
(Address of principal executive offices) (Zip Code)
(508) 870-3200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, $.15
par value per share, outstanding as of May 8, 1998: 3,310,662 shares.
<PAGE> 2
NATIONAL TRANSACTION NETWORK, INC.
PAGE
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets
March 31, 1998 and December 31, 1997 3
Statements of Operations
Three months ended March 31, 1998 and 1997 5
Statements of Cash Flows
Three months ended March 31, 1998 and 1997 6
Notes to Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION 12
SIGNATURES 13
2
<PAGE> 3
PART I - FINANCIAL STATEMENTS
ITEM I. FINANCIAL STATEMENTS
- ---------------------------------------------------
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
ASSETS
----------------------
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $588,267 $457,857
Accounts receivable
(Net of allowance for doubtful accounts
of $40,000 at March 31, 1998
and December 31, 1997) 829,630 785,597
Accounts receivable-stockholder 65,006
Inventory 313,550 754,919
Prepaid expenses 44,245 50,482
---------- ----------
TOTAL CURRENT ASSETS 1,840,698 2,048,855
---------- ----------
PROPERTY AND EQUIPMENT 891,218 1,002,003
Less accumulated depreciation
and amortization (719,312) (712,981)
---------- ----------
PROPERTY AND
EQUIPMENT - NET 171,906 289,022
---------- ----------
OTHER ASSETS
Capitalized software development costs 428,325 286,228
Purchased technology, net 303,303 -
Deposits and other 14,663 14,663
---------- ----------
Total other assets 746,291 300,891
TOTAL $2,758,895 $2,638,768
========== ==========
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 4
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $249,534 $265,708
Accounts payable-stockholder 54,313 318,858
Accrued liabilities 544,760 223,457
Deferred revenue 274,390 49,067
Short term portion of capital lease 9,478 36,598
---------- ----------
TOTAL CURRENT LIABILITIES 1,132,475 893,688
---------- ----------
LONG TERM LIABILITIES:
Long term portion of capital lease - 24,384
Convertible notes payable to stockholder 1,563,583 1,524,208
---------- ----------
TOTAL LONG TERM LIABILITIES 1,563,583 1,548,592
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value;
authorized, 5,000,000 shares;
none issued and outstanding
Common stock, $.15 par value;
authorized, 20,000,000 shares;
issued and outstanding, 3,310,662
and 3,273,162 shares at March 31, 1998
and December 31, 1997,respectively 496,606 490,974
Additional paid-in capital 12,605,366 12,596,573
Accumulated Deficit (13,039,135) (12,891,059)
---------- ----------
TOTAL STOCKHOLDERS'
EQUITY 62,837 196,488
---------- ----------
TOTAL $2,758,895 $2,638,768
========== ==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 5
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUE:
Systems and equipment $791,582 $576,265
Software and services 759,163 645,888
--------- ---------
Total 1,550,745 1,222,153
--------- ---------
COST AND EXPENSES:
Cost of revenue 876,560 611,581
Research and development 239,787 247,983
Selling, general and administrative 541,429 502,938
--------- ---------
Total 1,657,776 1,362,502
--------- ---------
LOSS FROM OPERATIONS (107,031) (140,349)
--------- ---------
OTHER INCOME (EXPENSE) :
Interest income (expense) (41,045) 1,746
--------- ---------
Total (41,045) 1,746
--------- ---------
NET LOSS ($148,076) ($138,603)
========= =========
BASIC AND DILUTED
LOSS PER COMMON SHARE ($0.05) ($0.04)
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,281,439 3,248,606
========= =========
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 6
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($148,076) ($138,603)
--------- ---------
Adjustments to reconcile net income (loss) to
net cash provided by (used for)
operating activities:
Depreciation and amortization 40,409 29,939
Interest on conv. subordinated note payable to
stockholder 39,375 -
Loss on sale of property and equipment 13,905 -
Increase (decrease) in cash from:
Accounts receivable (44,033) 177,503
Accounts receivable-stockholder (65,006) (156,050)
Inventory 441,369 (38,989)
Prepaid expenses 6,237 (6,352)
Other Assets (3,670)
Accounts payable-stockholder (264,545) 55,999
Accounts payable and accrued
liabilities 347,629 14,568
Deferred revenue 225,323 (25,612)
--------- ---------
Total adjustments 740,663 47,336
--------- ---------
Net cash provided by (used for) operating
activities 592,587 (91,267)
--------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment (26,188) (22,778)
Proceeds from the sale of equipment 11,898 -
Acquisition of purchased technology (313,555) -
Capitalization of software development costs (142,097) -
--------- ---------
Net cash used for investing activities (469,942) (22,778)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from stock issued under stock
option plan 14,425 -
Proceeds from bank line of credit 100,000 -
Repayment to bank line of credit (100,000) -
Repayment of Capital Lease (6,660) -
--------- ---------
Net cash provided by financing
activities 7,765 0
--------- ---------
Net increase (decrease) in cash and
equivalents 130,410 (114,045)
Cash and Equivalents, Beginning of Period 457,857 266,045
--------- ---------
Cash and Equivalents, End of Period $588,267 $152,000
========= =========
Noncash Trasactions:
Transfer of Capital Lease in conjunction
with the sale of software license $44,844 -
========= =========
Return of purchased software $42,500 -
========= =========
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 7
NATIONAL TRANSACTION NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. The accompanying financial statements and notes do not include all of
the disclosures made in the Company's Form 10-K for the year ended
December 31, 1997 which should be read in conjunction with these
statements. In the opinion of the Company, the financial statements
include all adjustments necessary for a fair presentation of the
quarterly results.
2. The results of operations for the three month period ended March 31,
1998 are not necessarily indicative of the results to be expected for
the full year.
3. 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 other marketing computer
software. SOP 97-2 supersedes SOP 91-1, "Software Revenue Recognition,"
and was adopted by the Company for transactions entered into after
December 31, 1997. Adoption of SOP 97-2 did not have a material effect
on the Company's revenue recognition.
4. The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earning per Share," and has restated all periods
presented to conform with the new preseentation. Basic net loss per
common share is computed using the weighted average number of common
shares outstanding during each period. 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 periods presented. Accordingly, diluted loss per common
share is equal to basic loss per common share and is not separately
disclosed.
5. For the quarters ended March 31, 1998 and 1997, the Company made
inventory purchases from International Verifact, Inc. ("IVI") totaling
approximately $77,000 and $146,000 respectively. Accrued interest for
the Company's Convertible Subordinated Notes Payable to IVI totaled
$39,375 for the quarter ended March 31, 1998.
6. In January 1998, the Company purchased certain intellectual property,
related software maintenance contracts and tangible assets used to
support such contracts. The purchase price was based on 75% of the
revenues derived from the software maintenance contracts for a twelve
month period following the date of purchase, which is estimated to
approximate $316,000, and is payable 30 days from the receipt of such
revenue. The final allocation of the purchase price is contingent on
7
<PAGE> 8
this revenue and the purchase price will be adjusted when the
underlying revenues are known.
7. The Company has a working capital line of credit with its bank which
expires on January 4, 1999. Maximum available borrowings under the line
are the lesser of $750,000 or certain levels of eligible accounts
receivable and are subject to monthly and quarterly financial
performance covenants. Borrowings bear interest at a rate per annum
equal to the bank's prime rate plus 1.5%, are secured by the Company's
assets, and are guaranteed by IVI. At March 31, 1998, there were no
borrowings outstanding under the credit line. Borrowing availability
under the credit line was approximately $383,000 at March 31, 1998.
8. The Company accounts for certain software development costs in
accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed." It is the Company's policy to capitalize costs
relating to the development of its products once technological
feasibility has been achieved until the products are available for
general release to customers, provided that the recoverability of such
costs is reasonably assured through expected sales revenue less related
selling expenses. Upon availability of products for general release to
customers, all related capitalized development costs are amortized over
a suitable period based on the products' estimated economic life.
During the quarter ended March 31, 1998, the Company capitalized
software development costs of approximately $142,000 and total
capitalized software development cost aggregated $428,000 at March 31,
1998.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's business strategy focuses on development and marketing of
software products and professional services designed to address the electronic
payment system needs of multi-lane retailers. In keeping with this strategy, the
Company has purchased and sold technology in a effort to maximize its
opportunities in the market place.
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
transactions reducing the retailers costs of handling electronic payments by
reducing their reliance on costly third party transaction processors.
In March, 1998, the Company sold certain software licenses and equipment
relating to its transaction processing business. The purchaser has also assumed
the capital lease obligation and the lessor has released the Company from its
liability.
RESULTS OF OPERATIONS
Revenue for the quarter ended March 31, 1998 increased by 26.9% to
$1,550,745 compared to $1,222,153 for the quarter ended March 31, 1997. The
increase in revenue was primarily due to a significant customer's decision to
convert and upgrade a large number of its systems in the quarter ended March 31,
1998. This customer accounted for approximately 66% of the Company's revenue in
first quarter of 1998 as compared to approximately 27% for the same period in
the prior year. Management believes that with the additional resources provided
by International Verifact ("IVI"), the Company will continue to expand the
development and marketing of its products and services.
Gross margins as a percent of revenue were 43.5% for the quarter ended
March 31, 1998 compared to 50.0% for the quarter ended March 31, 1997. The
decrease in gross margin percentages between the two quarterly periods was
primarily due to a shift in mix between hardware, software, and professional
services revenues as well as lower margins on certain hardware sales. For the
quarter ended March 31, 1998, lower margin hardware revenue accounted for
approximately 51% of total revenue compared to approximately 47% of total
revenue for the quarter ended March 31, 1997.
Total operating expenses for the quarter ended March 31, 1998 increased by
5.4% compared to the quarter ended March 31, 1997. Research and development
expenses decreased by 3.3% to $239,787 for the quarter ended March 31, 1998
compared to $247,983 for the quarter ended March 31, 1997. Increases in research
and development
9
<PAGE> 10
expenses between the two quarterly periods were a result of (i) outside
consulting expenses due to the utilization of contract programmers, and (ii)
salary and benefit expenses related to the hiring of additional research and
development staff. These increases were 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 change in research and
development expenses for the quarter ended March 31, 1998 compared to the three
months ended March 31, 1997. For the quarter ended March 31, 1998, capitalized
software development costs totaled $142,097 while there were no software
development costs capitalized in the quarter ended March 31, 1997.
Selling, general and administrative expenses increased by 7.7% to $541,429
for the quarter ended March 31, 1998 compared to $502,940 for the quarter ended
March 31, 1997. This increase was related primarily to increases in compensation
and fringe benefit expenses due to the addition of a business development
manager and a project consultant necessitated by the acquisition of the Mainsail
product from BancTec in January, 1998. The increase was partially offset by the
decrease in compensation related to the elimination of one staff administrative
position and the reduction in compensation and travel expenses related to the
resignation of the Executive Vice President/General Manager and Vice President
of Finance late in March 1998.
Other expense for the quarter ended March 31, 1998, totaled $41,045 which
consisted primarily of interest expense on convertible subordinated notes
payable to IVI ($39,375) and interest expense incurred on capitalized lease
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances at March 31, 1998 were $588,000 compared to $458,000 at
December 31, 1997. Net cash provided by operating activities was $592,587 for
the quarter ended March 31, 1998. The decrease in inventory coupled with the
increase in deferred revenue related to maintenance contracts for the quarter
ended March 31, 1998 primarily accounted for the cash generated by operations
during the quarter. Net cash used in investing activities for the quarter ended
March 31, 1998 totaled approximately $470,000 and represented the purchase of
technology from BancTec coupled with the capitalization of certain software
development costs partially offset by the sale of the transaction processing
software license.
The Company has a working capital line of credit with its bank, which
expires on January 4, 1999. Maximum available borrowings under the line are the
lesser of $750,000 or certain levels of eligible accounts receivable and are
subject to monthly and quarterly financial performance covenants. Borrowings
bear interest at a rate per annum equal to the bank's prime rate plus 1.5%, are
secured by the Company's assets, and are guaranteed by IVI. At March 31, 1998,
there were no borrowings outstanding under the credit line. Borrowing
availability under the credit line was $383,000 at March 31, 1998.
10
<PAGE> 11
Management believes that sources of liquidity for future needs can be
generated from existing cash balances, cash generated from operations,
borrowings available to the Company under its bank-financed working capital line
of credit, and its Convertible Subordinated Note Agreement with IVI.
YEAR 2000 COMPLIANCE
The latest versions of the Company' 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 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 the 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.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has no material legal proceedings at this time.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the security holders
in the quarter ended March 31, 1998.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
12
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL TRANSACTION NETWORK, INC.
DATE: May 13, 1998 By /s/ L. Barry Thomson
-----------------------------
L. Barry Thomson, Chief Executive
Officer, President and Chairman of the
Board (Principal Executive Officer)
DATE: May 13, 1998 By /s/ Judith A. Kellogg
----------------------------------
Judith A. Kellogg, Controller
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 588,267
<SECURITIES> 0
<RECEIVABLES> 934,636
<ALLOWANCES> 40,000
<INVENTORY> 313,550
<CURRENT-ASSETS> 1,840,698
<PP&E> 891,218
<DEPRECIATION> (719,312)
<TOTAL-ASSETS> 2,758,895
<CURRENT-LIABILITIES> 1,132,475
<BONDS> 1,563,583
0
0
<COMMON> 496,606
<OTHER-SE> (433,769)
<TOTAL-LIABILITY-AND-EQUITY> 62,837
<SALES> 1,550,745
<TOTAL-REVENUES> 1,550,745
<CGS> 876,560
<TOTAL-COSTS> 876,560
<OTHER-EXPENSES> 781,216
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (41,045)
<INCOME-PRETAX> (148,076)
<INCOME-TAX> 0
<INCOME-CONTINUING> (148,076)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (148,076)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
