<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 June 30, 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 August 3, 1998: 3,325,468 shares.
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NATIONAL TRANSACTION NETWORK, INC.
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets
June 30, 1998 and December 31, 1997 3
Statements of Operations
Three months ended June 30, 1998 and 1997 5
Six months ended June 30, 1998 and 1997 6
Statements of Cash Flows
Six months ended June 30, 1998 and 1997 7
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations10
PART II OTHER INFORMATION 13
SIGNATURES 15
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2
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PART I - FINANCIAL STATEMENTS
ITEM I. FINANCIAL STATEMENTS
- ----------------------------
<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
ASSETS
----------------------
(Unaudited)
June 30, December 31,
1998 1997
---------------- -----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $513,693 $457,857
Accounts receivable
(Net of allowance for doubtful accounts
of $40,000 at June 30, 1998
and December 31, 1997) 735,961 785,597
Accounts receivable-stockholder 40,006
Inventory 464,856 754,919
Prepaid expenses 39,828 50,482
---------------- -----------------
TOTAL CURRENT ASSETS 1,794,344 2,048,855
---------------- -----------------
PROPERTY AND EQUIPMENT 893,109 1,002,003
Less accumulated depreciation
and amortization (744,546) (712,981)
---------------- -----------------
PROPERTY AND
EQUIPMENT - NET 148,563 289,022
---------------- -----------------
OTHER ASSETS
Capitalized software development costs 586,244 286,228
Purchased technology, net 287,353 -
Deposits and other 16,363 14,663
---------------- -----------------
Total other assets 889,960 300,891
TOTAL $2,832,867 $2,638,768
---------------- -----------------
---------------- -----------------
</TABLE>
See Notes to Financial Statements.
3
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<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-----------------------------------------------
(Unaudited)
June 30, December 31,
1998 1997
--------------- -----------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $211,832 $265,708
Accounts payable-stockholder 456,782 318,858
Accrued liabilities 528,110 223,457
Deferred revenue 309,440 49,067
Short term portion of capital lease 6,799 36,598
--------------- -----------------
TOTAL CURRENT LIABILITIES 1,512,963 893,688
--------------- -----------------
LONG TERM LIABILITIES:
Long term portion of capital lease - 24,384
Convertible notes payable to stockholder 1,603,396 1,524,208
--------------- -----------------
TOTAL LONG TERM LIABILITIES 1,603,396 1,548,592
--------------- -----------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
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,
3,325,438 and 3,248,606 shares at June
30, 1998 and December 31, 1997,
respectively 498,827 490,974
Additional paid-in capital 12,609,215 12,596,573
Accumulated Deficit (13,391,534) (12,891,059)
--------------- -----------------
TOTAL STOCKHOLDERS'
EQUITY (DEFICIENCY) (283,492) 196,488
--------------- -----------------
TOTAL $2,832,867 $2,638,768
--------------- -----------------
--------------- -----------------
</TABLE>
See Notes to Financial Statements.
4
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<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
1998 1997
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<S> <C> <C>
REVENUE:
Systems and equipment $563,895 $388,075
Software and services 554,843 552,338
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Total 1,118,738 940,413
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COST AND EXPENSES:
Cost of revenue 685,160 474,898
Research and development 273,253 272,900
Selling, general and administrative 472,934 424,015
------------- --------------
Total 1,431,347 1,171,813
------------- --------------
LOSS FROM OPERATIONS (312,609) (231,400)
------------- --------------
OTHER INCOME (EXPENSE):
Interest income 33 32
Interest expense (39,817) (4,595)
------------- --------------
Total (39,784) (4,563)
------------- --------------
NET LOSS ($352,393) ($235,963)
------------- --------------
------------- --------------
BASIC AND DILUTED NET
LOSS PER COMMON SHARE ($0.11) ($0.07)
------------- --------------
------------- --------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,316,961 3,248,606
------------- --------------
------------- --------------
</TABLE>
See Notes to Financial Statements.
5
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<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
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<S> <C> <C>
REVENUE:
Systems and equipment $1,355,477 $964,341
Software and services 1,314,006 1,198,225
-------------- ---------------
Total 2,669,483 2,162,566
-------------- ---------------
COST AND EXPENSES:
Cost of revenue 1,551,220 1,086,479
Research and development 513,040 520,883
Selling, general and administrative 1,024,863 926,952
-------------- ---------------
Total 3,089,123 2,534,314
-------------- ---------------
LOSS FROM OPERATIONS (419,640) (371,748)
-------------- ---------------
OTHER INCOME (EXPENSE):
Interest income 65 1,779
Interest expense (80,894) (4,595)
-------------- ---------------
Total (80,829) (2,816)
-------------- ---------------
NET LOSS ($500,469) ($374,564)
-------------- ---------------
-------------- ---------------
BASIC AND DILUTED NET
LOSS PER COMMON SHARE ($0.15) ($0.12)
-------------- ---------------
-------------- ---------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,299,298 3,248,606
-------------- ---------------
-------------- ---------------
</TABLE>
See Notes to Financial Statements.
6
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<TABLE>
<CAPTION>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
------------ ----- ------------
1998 1997
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<S> <C> <C>
Cash Flows From Operating Activities:
Net loss ($500,469) ($374,564)
------------ ------------
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Depreciation and amortization 81,594 63,193
Interest on conv. subordinated note payable
to stockhold 79,188 -
Loss on sale of property and equipment 13,905 -
Increase (decrease) in cash from:
Accounts receivable 49,636 796,031
Accounts receivable-stockholder (40,006) (14,079)
Inventory 290,063 73,065
Prepaid expenses 10,654 (2,997)
Other Assets (1,700) (2,732)
Accounts payable-stockholder 137,924 (84,474)
Accounts payable and accrued
liabilities 293,271 (415,889)
Deferred revenue 260,373 (165,203)
------------ ------------
Total adjustments 1,174,902 246,915
------------ ------------
Net cash provided by (used for) operating
activities 674,433 (127,649)
------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment (28,080) (73,413)
Proceeds from the sale of equipment 11,898 -
Acquisition of purchased technology (313,555) -
Capitalization of software development costs (300,016) (15,248)
------------ ------------
Net cash used for investing activities (629,753) (88,661)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from stock issued under stock
option plan 20,495 -
Proceeds from bank line of credit 100,000 100,000
Repayment to bank line of credit (100,000) (100,000)
Repayment of capital lease (9,339) -
------------ ------------
Net cash provided by financing
activities 11,156 0
------------ ------------
Net increase (decrease) in cash and
equivalents 55,836 (216,310)
Cash and Equivalents, Beginning of Period 457,857 266,045
------------ ------------
Cash and Equivalents, End of Period $513,693 $49,735
------------ ------------
------------ ------------
Noncash Trasactions:
Transfer of Capital Lease in conjunction
with the sale of software license $44,844 -
------------ ------------
------------ ------------
Return of purchased software $42,500 -
------------ ------------
------------ ------------
Capital lease additions - 63,389
------------ ------------
------------ ------------
See Notes to the Financial Statements
</TABLE>
7
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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 six month period ended June 30, 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 presentation. 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 June 30, 1998 and 1997, the Company made
inventory purchases from IVI totaling approximately $479,000 and
$33,000 respectively. Accrued interest for the Company's Convertible
Subordinated Notes Payable to IVI totaled $39,375 for the quarter ended
June 30, 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 is based on 75% of the
revenues derived from the software maintenance contracts for the twelve
month period following the date of purchase. This purchase price is
estimated to be approximately $316,000 and is payable 30 days from the
receipt of the applicable software maintenance revenue. The final
8
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allocation of the purchase price is contingent on 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. At June 30, 1998, the Company was not in
compliance with the net loss covenant and obtained a compliance waiver
from the bank. Currently, the Company does not expect to be in
compliance with the net loss covenant for the third quarter and is
working with the bank to modify or eliminate this covenant. Borrowings
bear interest at a rate per annum equal to the bank's prime rate plus
1.5%, are secured by the Company's assets, and are guaranteed by IVI.
At June 30, 1998, there were no borrowings outstanding under the credit
line. Borrowing availability under the credit line was approximately
$467,000 at June 30, 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 June 30, 1998, the Company capitalized
software development costs of approximately $158,000 and total
capitalized software development cost aggregated $586,000 at June 30,
1998.
9
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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.
RESULTS OF OPERATIONS
Revenue for the quarter ended June 30, 1998 increased by 19% to $1,118,738
compared to $940,413 for the quarter ended June 30, 1997. For the six months
ended June 30, 1998, revenue increased by 23.4% to $2,669,483 compared to
$2,162,566 for the six months ended June 30, 1997. The increases in revenue were
primarily due to one customer's decision to replace its lane equipment in
several divisions in the first two quarters of 1998. This customer accounted for
61.2 percent of revenue in the first six months of 1998 versus 34.9 percent
during the same period in 1997. In addition, maintenance revenue increased as a
result of the acquisition of the Mainsail product line.
Gross margins as a percent of revenue were 38.8% and 41.9%, respectively,
for the quarter and six months ended June 30, 1998 compared to 49.5% and 49.8%,
for the quarter and six months ended June 30, 1997. The decreases in gross
margin percentages were primarily due to a shift in mix between hardware,
software, and professional services revenue. Lower margin hardware revenue
accounted for approximately 51% and 50%, respectively, of total revenue for the
quarter and six months ended June 30, 1998 compared to approximately 41% and
45%, respectively, for the quarter and six months ended June 30, 1997.
Total operating expenses for the quarter and six months ended June 30, 1998
increased by 7.1% and 6.2%, respectively, compared to the quarter and six months
ended June 30, 1997.
Research and development expenses totaled $273,253 excluding $89,638 of
capitalized development costs for the quarter ended June 30, 1998 compared to
$272,900, excluding
10
<PAGE> 11
$15,248 of capitalized software development costs for the quarter ended June 30,
1997. For the six months ended June 30, 1998, research and development expenses
decreased by 1.5% to $513,040 excluding $300,016 of capitalized software
development costs compared to $520,883 excluding $15,248 of capitalized software
development costs for the six months ended June 30, 1997. Increases in outside
consulting expenses due to the utilization of contract programmers and quality
assurance engineers and compensation and fringe benefit expense related to
additional research and development staff were primarily responsible for the
increases in research and development expenses for the quarter and six months
ended June 30, 1998 compared to the quarter and six months ended June 30, 1997.
Selling, general and administrative expenses increased by 11.5% to $472,934 for
the quarter ended June 30, 1998 compared to $424,015 for the quarter ended June
30, 1997. For the six months ended June 30, 1998, selling, general and
administrative expenses increased by 10.6% to $1,024,863 compared to $926,952
for the six months ended June 30, 1997. For both the quarter and six months
ended June 30, 1998, the increases in selling, general and administrative
expenses was due primarily to the addition of staff positions necessitated by
acquisition of the Mainsail product from BancTec.
The decrease in interest income for the six months ended June 30, 1998
compared to the six months ended June 30, 1997 was due to a decreases in the
amount of funds available for investment. The increase in interest expense for
the quarter and six months ended June 30, 1998 was due to the issuance of
convertible notes payable to International Verifact Inc., now IVI Checkmate Corp
("IVI") during the third and fourth quarter of 1997 and on capitalized lease
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances at June 30, 1998 were $513,693 compared to $457,857 at
December 31, 1997. Net cash provided by operating activities was $1,174,902 for
the six months ended June 30, 1998. Decreases in inventory coupled with
increases in accounts payable and accrued liabilities and deferred revenue,
which offset the net loss from operations, accounted for the cash provided by
operations during the period. Net cash used in investing activities for the six
months ended June 30, 1998 totaled $629,753 and represented the purchase of
technology from BancTec coupled with the capitalization of certain software
development costs, partially offset by the proceeds of the sale of the
transaction processing 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. At June 30,
1998, the Company was not in compliance with the net loss covenant and obtained
a compliance waiver from the bank. Borrowings bear interest at a rate per annum
equal to the bank's prime rate plus 1.5%, are secured by the Company's assets,
and are guaranteed by IVI. At June 30, 1998, there were no
11
<PAGE> 12
borrowings outstanding under the credit line. Borrowing availability under the
credit line was $467,304 at June 30, 1998.
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.
12
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has no material legal proceedings at this time.
Item 2. Changes in Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its annual meeting of stockholders on June
2, 1998. The number of shares issued, outstanding and
eligible to vote as of the record date of April 10, 1998 was
3,310,662. For quorum, 2,887,548 shares of the eligible
voting shares tabulated.
(b) The following directors were elected at and continued in
office after the meeting: L. Barry Thomson, Christopher F.
Schellhorn, and George C. Whitton.
(c) The following matters were voted on at the annual stockholders
meeting:
1. To elect a Board of Directors for the ensuing year.
Director Number of Shares
Withhold
For Authority
L. Barry Thomson 2,875,283 2,265
Christopher F. Schellhorn 2,875,283 2,265
George C. Whitton 2,875,283 2,265
13
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2. To ratify the selection of the firm of Deloitte & Touche
LLP as auditors of the Company for the fiscal year ending
December 31, 1998.
Number of Shares
For 2,883,707
Against 22
Abstain 30
(d) Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL TRANSACTION NETWORK, INC.
DATE: August 10, 1998 By /s/ L. Barry Thomson
-----------------------------
L. Barry Thomson, Chief Executive
Officer, President and Chairman of the
Board (Principal Executive Officer)
DATE: August 10, 1998 By /s/ Judith A. Kellogg
----------------------------------
Judith A. Kellogg, Controller
(Principal Financial and
Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 513,693
<SECURITIES> 0
<RECEIVABLES> 815,967
<ALLOWANCES> 40,000
<INVENTORY> 464,856
<CURRENT-ASSETS> 1,794,344
<PP&E> 893,109
<DEPRECIATION> (744,546)
<TOTAL-ASSETS> 2,832,867
<CURRENT-LIABILITIES> 1,512,963
<BONDS> 1,603,396
0
0
<COMMON> 498,827
<OTHER-SE> (782,319)
<TOTAL-LIABILITY-AND-EQUITY> (283,492)
<SALES> 2,669,483
<TOTAL-REVENUES> 2,669,483
<CGS> 1,551,220
<TOTAL-COSTS> 1,551,220
<OTHER-EXPENSES> 1,537,903
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (80,829)
<INCOME-PRETAX> (500,469)
<INCOME-TAX> 0
<INCOME-CONTINUING> (500,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (500,469)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
