<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, 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 NO. 0-10966
NATIONAL TRANSACTION NETWORK, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1535237
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
117 Flanders Road
Westborough, Massachusetts 01581
- -------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 870-3200
--------------
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
----------------------------
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 8, 1999: $167,728 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 8, 1999: 3,325,468.
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.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
The Company and its Markets
- ---------------------------
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 the
Company which was at that time a wholly-owned subsidiary of the predecessor
company. As a result of the merger, the Company 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. In June 1998,
International Verifact Inc., the Company's parent company, and Checkmate
Electronics, Inc. merged to form IVI Checkmate Corp. ("IVI Checkmate"). Due to
the percentage ownership of NTN acquired as a result of this transaction, NTN
has become a subsidiary of IVI Checkmate and the financial position and results
of operations of NTN are included in IVI Checkmate's consolidated financial
position and results of operations from the date of acquisition. See below and
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 was based on
75% of the revenues derived by the Company from certain software maintenance
contracts acquired for the twelve-month period following the date of purchase.
Revenues from such software maintenance contracts was approximately $400,000. As
a consequence, the purchase price for the BancTec software products was
approximately $302,000 and has substantially been paid.
IVI Checkmate acquired Plourde Computing Services, Inc. ("Plourde"),
and independent software vendor on September 29, 1998. Plourde has a Windows/NT
based payments application which has reached market acceptance. Development on
the Company's PINnacle NT platform product was made redundant by the acquisition
of Plourde by IVI Checkmate and has been discontinued. See discussion below.
-2-
<PAGE> 3
Electronic Payment Systems
- --------------------------
Electronic Payment Systems ("EPS") automate the acceptance of non-cash
payment media at a retail location. This automation process speeds the
retailer's customer service, reduces retail operating expenses and attracts new
customers for the retailer 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.
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 incentivizing 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.
o Retailer Host Payment Systems. Retailers can control their electronic payments
and their customer relationships through the use of a real time transaction
switch rather than outsourcing their payments processing. Owning a local host
switch offers control over the payment process--debit, credit, check
authorization, ACH, EBT--at a lower cost per transaction than is possible with
third party processors.
-3-
<PAGE> 4
Product Strategy
NTN seeks to design host-based electronic payment systems together with
the products of IVI Checkmate as a part of an end-to-end solution for certain
niches in the retail industry. Components of an end-to-end 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.
The Mainsail Retail Host Switch accepts those transactions from the store system
and either authorizes them locally (in the case of Checks and gift certificates)
or routes them to a third party processor, bank, or card association for
approval. IVI Checkmate provides the payment peripherals and through its
acquisition of Plourde, provides the in-store payment software.
The Company's Mainsail(TM) Software product ("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 electronic payments by reducing their reliance
on costly third party processors. By delivering both store and corporate level
products, the Company together with IVI Checkmate 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.
Intellectual Property
- ---------------------
NTN relies on a combination of trade secrets, copyrights, and
trademarks to protect its intellectual property.
Strategic Alliances
- -------------------
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 (and now IVI Checkmate, as a result of the
merger) under an informal extension of the non-exclusive distribution agreement.
IVI Checkmate's product line includes point of sale terminals, signature capture
devices 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.
-4-
<PAGE> 5
Marketing
- ---------
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.
During 1998, NTN primarily marketed 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 focused its efforts on
supermarket retailers primarily, with additional efforts targeted at retailers
in other industry segments and the field sales force of strategic partners of
the Company. The direct sales force was supported by promotional plans including
trade show exhibits, regional seminars, direct mail campaigns, and press
coverage.
In 1999, NTN is primarily marketing its products in cooperation with
its parent company, IVI Checkmate. NTN in house specialists are brought in to
sell its Mainsail software product and its project management services by IVI
Checkmate's direct sales force.
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 dealers as well as other software developers.
The combination of IVI and Checkmate into IVI-Checkmate has made
available to NTN the financial resources of IVI Checkmate to help the Company
expand its products and markets. The Company believes that additional benefits
from its parent company's investment are being achieved by (i) creating a
competitive advantage through combining complementary product offerings in
providing an end-to-end solution; (ii) leveraging combined software development
organizations and technologies; and (iii) economies of scale in sales, product
support, and marketing initiatives.
Products
- --------
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.
NTN PINnacle(TM) Payment Systems are a family of standardized
DOS based 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 and may choose to
control their payments in house using a retail host system. The Company had
developed a PINnacle(TM) NT product which was made redundant by IVI Checkmate's
purchase of Plourde. The Company's PINnacle(TM) NT product was installed at one
Beta site and development has been discontinued since IVI Checkmate's
acquisition of Plourde. This resulted in the write-off of approximately $670,000
of capitalized development expense on the NT platform.
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 systems integration,
installation, training, and hardware and software maintenance, project
management, procurement and preparation of hardware components, custom software
design and development and new product evaluation for specific customers.
-5-
<PAGE> 6
Customers
- ---------
NTN's customer base consists of large retail companies, principally in
the supermarket industry, located throughout the United States. In 1998,
Albertsons, Inc. accounted for 59% of the Company's total revenue.
Competition
- -----------
. The multi-lane retail 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
- -----------
During the years ended December 31, 1996, 1997, and 1998, the Company
incurred $947,087, $922,117 and $1,087,807 respectively, in research and
development expenses for software development in connection with its existing
and proposed products. Additionally in 1998, approximately $670,000 of software
development costs were written off in September 1998 in connection with the
acquisition of Plourde by IVI Checkmate. During 1998, an additional $133,717 of
costs incurred were capitalized for Mainsail development 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 1996, there were no research and development expenses incurred that
required capitalization.
Regulation
- ----------
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
- ---------
As of December 31, 1998, the Company had thirty four employees. As of
March 8, 1999, the Company had twenty eight employees: Jeffrey A. Wakefield, its
General Manager, and twelve software engineers, two marketing and sales
employees, ten customer service employees and three finance and administrative
employees.
-6-
<PAGE> 7
ITEM 2. PROPERTIES.
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 $9,445 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 1999. The company also leases space for
software development from BancTec at 888 Executive Center Drive West, Suite 200,
St. Petersburg, Florida at a cost of approximately $2,000 a month. The lease
expires on June 30, 1999 and there appears to be adequate space available in the
area for a similar cost. One sales office, located at 12200 East Briarwood
Avenue, Englewood, Colorado, at a monthly rental of $460, was closed in February
1999. 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.
The Company has no material legal proceedings at this time.
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 December 31, 1998.
-7-
<PAGE> 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
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>
1997 High Low
---- ---- ---
<S> <C> <C>
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
1998 High Low
---- ---- ---
First quarter (1/1 - 3/31)............................................. $0.59 $0.48
Second quarter (4/1 - 6/30)............................................ $0.69 $0.41
Third quarter (7/1 - 9/30)............................................. $0.50 $0.28
Fourth quarter (10/1 - 12/31).......................................... $0.42 $0.28
</TABLE>
As of March 8, 1999, there were 449 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.
-8-
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue................................. $5,051,077 $5,318,371 $5,013,023 $8,006,417 $7,968,148
Cost of Revenue......................... 3,035,295 3,039,907 2,609,901 4,593,041 4,948,350
--------- --------- --------- --------- ---------
Gross Margin............................ 2,015,782 2,278,464 2,403,122 3,413,376 3,019,798
Total Operating
Expenses............................... 3,655,912 2,689,930 3,038,245 3,518,522 4,272,107
--------- --------- --------- --------- ---------
Loss from Operations.................... (1,640,130) (411,466) (635,123) (105,146) (1,252,309)
Other Income (Expense).................. (165,599) (37,297) 20,128 16,445 15,879
--------- -------- ------ ------ ------
Net Loss................................ $(1,805,729) $(448,763) $(614,995) $(88,701) $(1,236,430)
Loss per Common Share:
(Basic and Diluted) ................ $(.55) $(.14) $(.19) $(.03) $(.38)
Weighted Average Number of
Common Shares Outstanding.............. 3,312,494 3,254,055 3,248,606 3,248,606 3,248,606
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of December 31,
------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working Capital........................ $110,401 $1,155,167 $427,353 $997,032 $993,108
Total Assets........................... 2,017,859 2,638,768 2,161,092 2,344,698 2,877,998
Long Term Liabilities.................. 2,256,257 1,548,592 12,053 0 0
Stockholders' Equity(Deficiency)....... (1,588,745) 196,488 634,250 1,249,245 1,337,946
</TABLE>
Notes:
- ------
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.
-9-
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenue for the year ended December 31, 1998 decreased by 5% to
$5,051,077 compared to $5,318,371 for the year ended December 31, 1997. The
decrease in revenue was primarily due to a significant customer's decision to
use another vendor's software while continuing to purchase hardware from NTN in
1998. The revenue derived from this customer accounted for approximately 59% of
the Company's total revenue for the year ended December 31, 1998 compared to
approximately 57% of total revenue for the year ended December 31, 1997. This
decrease in revenue was partially offset by the maintenance revenue derived from
the acquisition of the Mainsail software product.
Gross margins as a percent of revenue were 40% for the year ended
December 31, 1998 compared to 42.8% for the year ended December 31, 1997. The
decrease in gross margin percentage was primarily due to a shift in mix between
hardware, software, and professional services revenue. Higher margin software
and professional services revenue accounted for approximately 44.7% of total
revenue for the year ended December 31, 1998 compared to approximately 46.8% for
the year ended December 31, 1997.
Total operating expenses for the year ended December 31, 1998 increased
by 35.9% to $3,655,912 compared to $2,689,930 for the year ended December 31,
1997 The significant increase in research and development expense was the
write-off of the capitalized software development costs of the PINnacle NT
product. Management determined that the costs capitalized for the PINnacle NT
product, totaling approximately $670,000, were not recoverable as the software
was made redundant by the acquisition of Plourde by IVI Checkmate. Accordingly,
the Company has redirected its marketing and development resources toward the NT
platform product, developed by Plourde mentioned above, as part of its complete
payment solution with the Mainsail switch. The Company is continuing to
capitalize software development costs for Mainsail development and those costs
totaled $133,717 at December 31, 1998 in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed.
Research and development expenses increased by 18% to $1,087,807 for
the year ended December 31, 1998 compared to $922,117 for the year ended
December 31, 1997. The increase was the result of the use of an outside
contractor needed to support the Mainsail switch product development and the
additional salary and benefit expenses for development and quality assurance
engineers added in the fourth quarter of 1998. These increases, which were
partially capitalized as mentioned above, were partially offset by lower
recruiting expenses than in the year ended December 31, 1997.
Selling, general and administrative expenses increased by 7.4% to
$1,898,186 in 1998 compared to $1,767,813 in 1997. The increase was primarily
the result of the addition of staff positions necessitated by the acquisition of
the Mainsail product from BancTec and increased travel by the Company's sales
force.
-10-
<PAGE> 11
Other expense for the year ended December 31, 1998 totaled $165,599 as
compared to $37,297 and consisted primarily of interest expense on convertible
subordinated notes payable to IVI Checkmate. See discussion below.
No tax provision was required in 1998 due to the net loss which
amounted to $1,805,729.
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 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.
-11-
<PAGE> 12
No tax provision was required in 1997 due to the net loss which
amounted to $448,763.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances at December 31, 1998 were $224,646 compared to $457,857
at December 31, 1997. Working capital amounted to $110,401 at December 31, 1998
compared to $1,155,167 for the year ended December 31, 1997. Net cash provided
by operating activities was $11,481 for the year ended December 31, 1998 while
cash used for operating activities was $855,714, and $86,577 for the years ended
December 31, 1997 and 1996, respectively. The adjustment resulting from the
write-off of capitalized software development costs ($669,919) coupled with an
increase in accounts receivable ($242,412) and a decrease in accounts payable to
stockholder ($252,355) was partially offset by a decrease in inventory
($595,803), an increase in deferred revenue ($476,568) and a decrease in
accounts payable and accrued liabilities ($308,116) accounted for the majority
of cash used by operations during 1998. The decrease in inventory as compared to
December 1997 was due to the preparation for a large volume of shipments to one
customer scheduled for the first quarter of 1998. The increase in deferred
revenue was the result of delays in billings in 1997 related to 1998 customer
maintenance contracts being delayed until the first quarter of 1998. The net
loss for the year ended December 31, 1997 coupled with an increase in inventory
and a decrease in deferred revenue and offset by an increase in accounts
receivable accounted for the majority of cash used in 1997. 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.
Net cash used in investing activities totaled $900,229, $428,177, and
$47,512 for the years ended December 31, 1998, 1997, and 1996, respectively.
Capital equipment expenditures, principally for computer, test and sales
demonstration equipment, accounted for $81,164, $141,949, and $47,512, of these
amounts in 1998, 1997, and 1996, respectively. The capitalization of software
development costs accounted for the balance of net cash used in investing
activities in 1998 and 1997. Capital equipment expenditures in 1999 are expected
to be approximately $251,500. Net capitalized software development costs in 1999
are expected to be approximately $578,500.
Net cash provided by financing activities totaled $655,540, and
$1,475,703 in 1998 and 1997, respectively, primarily resulting from the issuance
of convertible subordinated notes payable to IVI Checkmate. See discussion
below.
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 and December 31, 1998, the
aggregate principal amount of Notes which can be issued by the Company under the
Note Agreement was increased to $2,000,000 and $2,500,000, respectively, 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. During
1998, the Company was advanced additional funding under the Note Agreement from
IVI Checkmate in the amount of $650,000. Interest payable on the Notes totaled
$106,257 at December 31, 1998.
The Company's working capital line of credit with its bank which was to
expire on January 4, 1999 has been terminated without penalty. However, the
company will not be able to depend on the funds of $224,646 to
-12-
<PAGE> 13
meet its obligations during 1999. The Company may seek additional financing from
its significant stockholders or a third party. It is not possible to predict the
outcome of the Company's efforts and there is no assurance that the Company will
be successful in increasing revenues, obtaining financing and continuing
operations.
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. In June 1998, International Verifact Inc., the
Company's parent company, and Checkmate Electronics, Inc. merged to form IVI
Checkmate Corp.
IVI Checkmate is engaged in the design, development, and sale of
electronic payment solutions for retailers, financial institutions, governments,
and other businesses in the United States, Canada and internationally. IVI
Checkmate hardware and software products include point of sale
debit/credit/EFT/EBT terminals, check readers, signature capture devices, smart
card readers, check encoders, and secure PIN (personal identification number)
entry devices.
NTN software products support complementary IVI Checkmate's 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 Checkmate has provided a renewed
business relationship between the companies and has made available to NTN the
financial resources of IVI Checkmate to help the Company expand its products,
services, and markets. NTN believes that IVI Checkmate'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 Checkmate'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.
YEAR 2000 COMPLIANCE
NTN'S READINESS STATUS AND ANTICIPATED COSTS
The latest versions of the Company' PINnacle software products were
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, a software product that is Year 2000 Compliant, when used in
combination with other software, hardware or firmware, will accurately process
date and time data if such other software, hardware or firmware properly
exchanges date and time data with it. While the software has been tested, 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.
While the Company's Mainsail product was designed to be Year 2000
Compliant, the operating systems that are used to compile the product in several
customer locations are not compliant. The Company is currently
-13-
<PAGE> 14
working to port the product onto several Year 2000 Compliant operating system
platforms. This entire project is expected to be completed no later than the
second quarter of 1999.
The Company has undertaken various initiatives to ensure that its
computer hardware and certain computer software programs in its internal
operations, including applications used in product development, services,
financial, administrative and business systems will function into and beyond the
Year 2000. The Company has received responses from the majority of its vendors
representing Year 2000 Compliance and is continuing to assess 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. Based on its review to date,
Management believes that all material systems will be compliant by the Year 2000
and that the cost to address the issues will not be material, and consists
mainly of internal labor. The Company believes that any Year 2000 issues
relating to internal systems will not have a material adverse effect on its
business, financial condition or results of operations. The Company, however,
cannot currently assess the costs of remedying problems which may result from
the Year 2000 issues of others.
As part of the Year 2000 assessment, the Company is reviewing its
relationships with certain key outside vendors and others with whom it has
significant business relationships. Although the analysis is ongoing, the
Company is not presently aware of any exposure which would have a material
adverse effect arising from potential third party failures. However, there can
be no assurances that the failure of any such material third party to be Year
2000 compliant would not have a material adverse effect on the Company's results
of operation.
RISKS
The Company's customer operations are heavily dependent on the constant
availability of telecommunications equipment and other utilities. As a result,
the Company currently believes that the most reasonable likelihood worst case
Year 2000 scenario would involve the temporary interruption of electric power,
telephone, or other utility supplies to the Company's offices or our support
operations facilities due to a failure of a utility supplier to be Year 2000
Compliant. In addition, despite assurances and testing, it is also possible that
our internal systems or those of the Company's customers and suppliers may not
be Year 2000 Compliant.
In addition, "business interruption" litigation may arise out of the
Year 2000 issue. The Company is not currently aware of any possible claim
against us arising from instances of business interruption. Management currently
believes that its software products are Year 2000 Compliant, but cannot ensure
such compliance for products which were designed exactly to customer
specifications for their internal systems. Consequently, the Company cannot
ensure that all of these customers are aware of the Year 2000 issue or that they
have adopted appropriate corrective solutions, and will therefore not bring Year
2000 related claims against the Company which, with or without merit, could be
time consuming and expensive for the Company to defend or resolve.
CONTINGENCY PLANS
The Company will establish a contingency plan to address the most
reasonably likely worst case scenario, if, in management's assessment, it
identifies a material business function that is substantially at risk.
Management's assessments to date have not identified such a risk. However, the
Company has not completed the testing of those internal systems which we can
test feasibly and practically, and have not received all responses from those
suppliers in which the Company relies, to fully assess the potential Year 2000
exposures.
CAUTIONARY STATEMENTS
The continued assessment, progress and timing of our Year 2000
readiness efforts and potential exposures as described above depend upon the
cooperation and responsiveness of third parties, the accuracy and reliability of
responses provided and testing procedures, and the availability of skilled
resources, both internal and external, to address Year 2000 issues that exist or
may arise. There can be no assurance that assessments to date
-14-
<PAGE> 15
will prove to be accurate. Serious deficiencies which are not currently
identified or fully understood may arise in the future and may have a material
adverse impact on our business, financial condition, and 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 has
been adopted by the Company for transactions entered into after December 31,
1997. Adoption of the SOP has not significantly changed the way the Company
recognizes revenue.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("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 were adopted by the Company during 1998 and did not have material
effects on its financial position or results of operations.
In March 1998, the American Standards Executive Committee issued
Statement of Position 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" (SOP 98-1). This statement provides guidance on
accounting for the cost of computer software developed or obtained for internal
use. The Company will adopt this SOP on January 1, 1999. The Company is
currently in the process of evaluating its impact.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and the Accounting Standards Executive
Committee issued Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" were released. The Company
believes that the adoption of these statements, which are not required for
fiscal year 1998, will not have a significant effect on its financial
statements.
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.
-15-
<PAGE> 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
When possible, the Company invests cash balances in excess of operating
requirements in short term securities with maturities of less than 90 days. In
addition, the Company's Convertible Subordinated Note Agreement provides for
borrowings which bear interest at variable rates based on the prime rate. The
Company had $2,150,000 of borrowing outstanding pursuant to the Note Agreement
as of December 31, 1998. The Company believes that the effect, if any, of
reasonably possible near-term changes in interest rates on the Company's
financial position, results of operations and cash flows should not be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please refer to pages F-1 through F-17 and S-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
The disclosure called for by this item has been previously reported in
the Company's 8-K filed on November 25, 1998 as that term is defined in Rule
12b-2 under the Securities Exchange Act of 1934, as amended.
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-Ernst & Young LLP
Independent Auditors' Report-Deloitte & Touche LLP
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity (Deficit)
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
All other schedules for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not required
under the related instructions or are inapplicable
and therefore have been omitted.
(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).
<TABLE>
<CAPTION>
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 see note (14)
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)
</TABLE>
-17-
<PAGE> 18
<TABLE>
<S> <C> <C>
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 see note (14)
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)
</TABLE>
-18-
<PAGE> 19
<TABLE>
<S> <C> <C>
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)
</TABLE>
-19-
<PAGE> 20
<TABLE>
<S> <C> <C>
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Ernst & Young 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.
(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.
(14) Exhibit is incorporated by reference to the Exhibits to the form 10-K
for the fiscal year ended December 31, 1997.
- ---------------------------------
-20-
<PAGE> 21
(b) Reports on Form 8-K:
A report on Form 8-K was filed November 25, 1998, regarding
the change in the Company's auditors, and is incorporated by
reference.
A report on Form 8-K was filed on October 30, 1998, regarding
the Company's results for the third quarter and is
incorporated by reference.
(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.
-21-
<PAGE> 22
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 29, 1999 By: /s/ L. Barry Thomson
----------------------
L. Barry Thomson, Chief Executive
Officer, 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 29, 1999 /s/ Gregory A. Lewis
-------------------------------
Gregory A. Lewis, Chief Operating Officer,
President
(Principal Executive Officer)
March 29, 1999 /s/ L. Barry Thomson
-------------------------------
L. Barry Thomson, Chief Executive Officer,
and Chairman of the Board
(Principal Executive Officer)
March 29, 1999 /s/ John Neubert
-------------------------------
John Neubert, Executive Vice President and
Chief Financial Officer (Principal Financial
and Accounting Officer)
March 29, 1999 /s/ Christopher F. Schellhorn
-------------------------------
Christopher F. Schellhorn, Director
March 29, 1999 /s/ George C. Whitton
-------------------------------
George C. Whitton, Director
-22-
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditors' Report F-1
Balance Sheets as of December 31, 1998 and 1997 F-3
Statements of Operations for the Years Ended F-4
December 31, 1998, 1997, and 1996
Statements of Stockholders' Equity (Deficit) for the Years F-5
Ended December 31, 1998, 1997, and 1996
Statements of Cash Flows for the Years Ended F-6
December 31, 1998, 1997, and 1996
Notes to Financial Statements F-7-17
Schedule II - Valuation and Qualifying Accounts S-1
-23-
<PAGE> 24
Report of Independent Auditors
Board of Directors
National Transaction Network, Inc.
We have audited the accompanying balance sheet of National Transaction Network,
Inc. as of December 31, 1998, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the year ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Transaction Network,
Inc. at December 31, 1998, and the results of its operations and its cash flows
the year ended December 31, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that National
Transaction Network, Inc. will continue as a going concern. As more fully
described in Note 1, the Company is dependent on IVI Checkmate Corp. to provide
financial support. IVI Checkmate Corp. is not obligated to provide this support
through 1999. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Atlanta, Georgia
February 12, 1999
F-1
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of National Transaction Network, Inc.
We have audited the accompanying balance sheet of National Transaction Network,
Inc. (the "Company") as of December 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in Item 14(a)(2) as it relates to each of the two
years in the period ended December 31, 1997. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility 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 the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule as it
relates to each of the two years in the period ended December 31, 1997, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therin.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 17, 1998
F-2
<PAGE> 26
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash & Equivalents $ 224,646 $ 457,857
Accounts Receivable (less allowance for
doubtful accounts of $40,000 in 1998
and 1997 ) 1,028,009 785,597
Inventory 159,116 754,919
Prepaid expenses 48,977 50,482
------------ ------------
Total Current Assets 1,460,748 2,048,855
------------ ------------
PROPERTY, PLANT & EQUIPMENT:
Furniture and fixtures 144,377 130,401
Machinery and equipment 801,816 871,602
------------ ------------
Total 946,193 1,002,003
Less accumulated depreciation and amortization (791,915) (712,981)
------------ ------------
Property and equipment - net 154,278 289,022
------------ ------------
OTHER ASSETS:
Capitalized software development costs 133,717 286,228
Purchased Technology 255,853 -
Deposits and other 13,263 14,663
------------ ------------
Total other assets 402,833 300,891
------------ ------------
TOTAL $ 2,017,859 $ 2,638,768
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1998 1997
CURRENT LIABILITIES:
Accounts payable $ 322,269 $ 265,708
Accounts payable to stockholder 66,503 318,858
Customer deposits 13,955 11,709
Accrued liabilities 420,803 211,748
Deferred revenue 525,635 49,067
Short-term portion of capital lease 1,182 36,598
------------ -------------
Total current liabilities 1,350,347 893,688
------------ -------------
LONG-TERM LIABILITIES:
Long-term portion of capital lease 24,384
Convertible subordinated notes payable to
stockholder 2,256,257 1,524,208
------------ -------------
Total long-term liabilities 2,256,257 1,548,592
------------ -------------
Total liabilities 3,606,604 2,442,280
------------ -------------
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
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 3,325,468 and 3,273,162
shares in 1998 and 1997, respectively 498,827 490,974
Additional paid-in capital 12,609,216 12,596,573
Accumulated deficit (14,696,788) (12,891,059)
------------ -------------
Total stockholders' equity(deficit) (1,588,745) 196,488
------------ -------------
TOTAL $ 2,017,859 $ 2,638,768
============ =============
See notes to financial statements
F-3
<PAGE> 27
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
REVENUE:
Systems and equipment $ 2,793,917 $ 2,828,153 $ 2,823,236
Software and services 2,257,160 2,490,218 2,189,787
--------------- ---------------- ---------------
Total revenue 5,051,077 5,318,371 5,013,023
--------------- ---------------- ---------------
COSTS AND EXPENSES:
Cost of revenue 3,035,295 3,039,907 2,609,901
Sales, general and administrative 1,898,186 1,767,813 2,091,158
Research and development 1,087,807 922,117 947,087
Impairment of capitalized software asset 669,919 - -
--------------- ---------------- ---------------
Total costs and expenses 6,691,207 5,729,837 5,648,146
--------------- ---------------- ---------------
LOSS FROM OPERATIONS (1,640,130) (411,466) (635,123)
--------------- ---------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (165,734) (39,143) (4,168)
Interest income 135 1,846 24,296
--------------- ---------------- ---------------
Total other income (expense) (165,599) (37,297) 20,128
--------------- ---------------- ---------------
NET LOSS $ (1,805,729) $ (448,763) $ (614,995)
=============== ================ ===============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.55) $ (0.14) $ (0.19)
=============== ================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,312,494 3,254,055 3,248,606
=============== ================ ===============
</TABLE>
See notes to financial statments.
F-4
<PAGE> 28
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------ Additional Total
Shares Paid-in Accumulated Stockholders'
Issued Amount Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C>
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 options plan 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
Net loss ($1,805,729) ($1,805,729)
Stock issued under stock option plan 52,306 $7,853 $12,643 - $20,496
-------------- -------------- --------------- ----------------- ------------------
BALANCE, DECEMBER 31, 1998 3,325,468 $498,827 $12,609,216 ($14,696,788) ($1,588,745)
============== ============== =============== ================= ==================
</TABLE>
See notes to the financial statements.
F-5
<PAGE> 29
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,805,729) $ (448,763) $ (614,995)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization 160,465 134,949 117,427
Interest on converted subordinated notes payable to stockholder 82,049 24,208 -
Loss on sale of property and equipment 13,905 - -
Write-off of capitalized software development costs 669,919 - -
Increase (decrease) in cash from:
Accounts receivable (242,412) 620,516 (21,891)
Inventory 595,803 (521,329) 40,569
Prepaid expenses 1,505 (14,088) (9,547)
Deposits and other assets 1,400 (2,732) (8,252)
Accounts payable to stockholder (252,355) 223,571 (152,115)
Customer deposits 2,246 9,543 (23,099)
Accounts payable and accrued liabilities 308,117 (366,733) 67,480
Deferred revenue 476,568 (514,856) 517,846
----------- ---------- -----------
Net cash (used for) provided by operating activities 11,481 (855,714) (86,577)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (81,164) (141,949) (47,512)
Proceeds from the sale of equipment 11,898 - -
Acquisition of purchased technology (313,555) - -
Capitalization of software development costs (517,408) (286,228) -
----------- ---------- -----------
Net cash used in investing activities (900,229) (428,177) (47,512)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease (14,956) (35,298) (7,123)
Proceeds from issuance of convertible subordinated debt 650,000 1,500,000 -
Proceeds from stock issued under stock option plans 20,496 11,001 -
Proceeds from bank line of credit 100,000 700,000 -
Repayments to bank line of credit (100,000) (700,000) -
----------- ---------- -----------
Net cash provided by (used in) financing activities 655,540 1,475,703 (7,123)
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (233,208) 191,812 (141,212)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 457,854 266,045 407,257
----------- ---------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 224,646 $ 457,857 $ 266,045
----------- ---------- -----------
SUPPLEMENTAL INFORMATION - Cash paid for interest $ 2,249 $ 14,740 $ 4,168
=========== ========== ===========
NON CASH TRANSACTIONS:
Capital lease additions $ - $ 75,000 $ 28,400
Transfer of capital lease in conjunction with sale of
software license 44,844
Return of purchased software 42,500
Accrued interest due to stockholder converted to convertible
subordinated notes payable to stockholder 59,839 24,208 -
</TABLE>
See notes to financial statements.
F-6
<PAGE> 30
NATIONAL TRANSACTION NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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.
In June 1998, International Verifact Inc. and Checkmate Electronics, Inc. merged
to form IVI Checkmate Corp. ("IVI Checkmate"), one of the largest electronic
payment solutions providers in North America. In the past, the Company had
relied on IVI Checkmate to finance its operations.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. However, because of the Company's
recurring losses and declining revenues, such realization of assets and
liquidation of liabilities is subject to significant uncertainty. The Company's
ability to continue as a going concern is dependent upon its ability to generate
revenue and cash flows from operations, and/or obtain financing or additional
capital.
As shown in the financial statements, the Company incurred a net loss of
$1,805,729 in 1998, and an accumulated deficit of $14,696,788. The Company
experienced minimal cash flows from operations of $11,481. The Company maintains
a cash balance of $224,646 as of December 31, 1998. The funds result from the
proceeds of borrowings under its Convertible Note Agreement with IVI Checkmate
and have enabled the Company to meet its obligations during 1998 despite a
reduction in positive cash flows. However, as the Company will not be able to
depend solely on funds of $224,646 to meet its obligations during 1999, these
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The Company may seek additional financing from its significant
stockholders or a third party. It is not possible to predict the outcome of the
Company's efforts and there is no assurance that the Company will be successful
in increasing revenues, obtaining financing and continuing operations.
On September 29,1998, IVI Checkmate acquired Plourde Computing Services. Inc.
("Plourde"). This independent software company has a Windows/NT based payments
application which has made the Company's PINnacle NT platform product
redundant.)
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 to support such
contracts. The Mainsail software product, acquired from BancTec, allows the
retailer to control their electronic payments through owning a local host
payment switch thereby reducing their costs of accepting electronic payments.
The Mainsail product, in conjunction with its relationship with IVI Checkmate,
allows NTN to offer to retailers complete end-to-end payment solutions.
F-7
<PAGE> 31
National Transaction Network, Inc.
Notes to Financial Statements (continued)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The carrying value of the Convertible Notes Payable
to Stockholder approximates fair value because the notes carry interest rates
that are variable and reflect current market trends.
REVENUE RECOGNITION - Revenue from hardware and software sales is generally
recognized upon shipment. Revenue from maintenance agreements is deferred and
recognized ratably over the term of the related service agreements. The Company
enters into fixed price software development contracts and recognizes revenue
under these contracts using the percentage of completion method.
Consulting services revenue is recognized as services are performed.
CASH AND CASH 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 or market using the
first-in, first out method 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.
Depreciation expense was approximately $106,428, $135,000, and $117,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
CAPITALIZED SOFTWARE COSTS - Costs incurred to establish the technological
feasibility of software products are research and development expense and are
charged to expense as incurred. The Company capitalizes costs incurred between
the point of establishing technological feasibility and general release when
such costs are material. At December 31, 1998, the Company has capitalized
software costs of $133,717.
LONG-LIVED ASSETS - The Company reviews its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company believes that no material impairment existed at
December 31, 1998.
F-8
<PAGE> 32
National Transaction Network, Inc.
Notes to Financial Statements (continued)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION - In October 1995, the FASB issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, the
Company can elect to follow previously existing accounting rules or adopt a new
fair value method of valuing stock-based awards to employees. The Company has
elected to continue following existing accounting rules under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations in accounting for employee stock
options. The pro forma effect on the accompanying statements of operations for
reporting under SFAS 123 is presented in Note 4. Compensation expense associated
with awards of stock or options to employees is measured using the intrinsic
value method. Compensation expense associated with awards to non employees is
measured using the fair value method.
LOSS PER COMMON SHARE - In 1997, the Company adopted the provision 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 rate 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 was adopted by the Company for transactions entered into after December 31,
1997. Adoption of SOP 97-2 did not significantly change the way the Company
recognized revenue.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income (SFAS
130). SFAS 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. Comprehensive income consists of net
income and foreign currency translation adjustments and is presented in the
Statements of Stockholder's Equity. The adoption of SFAS 130 had no impact on
total stockholder's equity.
F-9
<PAGE> 33
National Transaction Network, Inc.
Notes to Financial Statements (continued)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARD( CONTINUED)
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). 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 issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The SFAS was adopted by the Company during 1998 and did not have a
material effect on its financial position and results of operations.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) was released. The statement requires the recognition of
all derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. The Company is required to implement SFAS 133 in the
first quarter of fiscal 2000. The Company has not used derivatives instruments
and believes the impact of adoption will not have a significant effect on the
financial statements.
In March 1998, the American Standards Executive Committee issued Statement of
Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1). This statement provides guidance on accounting for
the cost of computer software developed or obtained for internal use. The
Company will adopt this SOP on January 1, 1999. The Company is currently in the
process of evaluating its impact.
RECLASSIFICATION - Certain items in the 1996 and 1997 financial statements have
been reclassified to conform to the 1998 presentation.
2. LINE OF CREDIT
The Company's working capital line of credit with its bank which was to expire
on January 4, 1999 has been terminated without penalty.
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% (9.75% at December
31, 1998), are secured by the Company's assets. Interest payments on the Notes
are deferred until maturity.
F-10
<PAGE> 34
National Transaction Network, Inc.
Notes to Financial Statements (continued)
3. CONVERTIBLE SUBORDINATED NOTES PAYABLE TO STOCKHOLDER(CONTINUED)
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.
During 1998, the Company was advanced additional funding under the Note
Agreement from IVI Checkmate in the amount of $650,000. Accrued interest under
the Notes aggregated $106,248 and $24,208 at December 31, 1998 and 1997.
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, officer, 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 exercised cannot exceed ten years from the date of
the grant. At December 31, 1998, 550,168 shares were available for grant under
the Plans.
Director Stock Option Plans - Under the company's 1995 and 1993 Directors Stock
Option Plans (the "Director Plans"), non-qualified 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, 1998, 193,333 shares were
available for grant under the Director Plans.
F-11
<PAGE> 35
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISABLE EXERCISE
GRANTED OPTIONS PRICE
--------------------------------------------------------
<S> <C> <C> <C>
Outstanding January 1, 1996 591,985 $0.67
Granted 251,000 0.42
Expired or Canceled (220,605) 0.88
-----------------
Outstanding December 31, 1996 622,380 270,601 0.50
Granted 63,000 0.64
Exercised (24,556) 0.45
Expired or Canceled (13,195) 0.55
-----------------
Outstanding at December 31, 1997 647,629 393,258 0.51
Granted 108,000 0.49
Exercised (52,306) 0.40
Expired or Canceled (193,491) 0.42
-----------------
Outstanding at December 31, 1998 509,832 336,430 $0.53
=================
</TABLE>
F-12
<PAGE> 36
National Transaction Network, Inc.
Notes to Financial Statements (continued)
4. STOCK OPTIONS (CONTINUED)
The following table summarizes options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OF EXERCISE CONTRACTUAL OF EXERCISE
RANGE OF EXERCISE PRICE OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.22 - 0.44 392,165 $0.40 6.92 283,433 $0.40
0.56 - 0.83 101,000 0.63 8.75 36,332 0.63
3.00 16,667 3.00 3.67 16,665 3.00
</TABLE>
The Company follows the requirements of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to employees" to account for its stock option
plan and, accordingly, compensation cost is recognized in the consolidated
statements of options for the stock plan to the extent the options are granted
at prices below fair market value. The Company adopted SFAS 123, which requires
certain disclosures about stock-based employee compensation arrangements. SFAS
123 requires pro forma disclosure of the impact on net income and earnings per
share if the fair market value method defined in SFAS 123 had been used. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing valuation model for options granted with the
following weighted-average assumptions: a weighted average risk-free interest
rate of 5.75%; a dividend yield of 0%;a volatility factor of the expected market
price of the common stock of .63 for options granted during 1998 and 1.2 and
1.48 for options granted during 1997 and 1996 respectively, and a weighted
average expected life of 7.67 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restriction and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because change in the subjective assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock options.
F-13
<PAGE> 37
National Transaction Network, Inc.
Notes to Financial Statements (continued)
4. STOCK OPTIONS (CONTINUED)
The weighted average grant date fair value of options granted in 1998,1997, and
1996, is $ $0.30, $0.62, and $0.42 per share, respectively. The options granted
during 1998, 1997, and 1996 had exercise prices at fair market value.
For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The SFAS 123
pro-forma information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------
<S> <C> <C> <C>
Pro-forma net loss $(1,826,746) $(501,220) $(653,876)
Pro-forma basic and diluted loss
per share $(0.56) $(0.15) $(0.20)
</TABLE>
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------
-----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable 32,000 31,000
Inventory reserve 23,498 23,000
Accrued liabilities 51,296 16,000
Commissions 11,206 ---
Deferred revenue 194,254 ---
Subordinated debt 42,503 ---
Net operating loss carryfwds 950,200 4,816,000
------- ---------
------------------------------------
1,304,957 4,886,000
Deferred tax liabilities, Depreciation (1,511) (3,000)
------------------------------------
1,303,442 4,883,000
Valuation allowance (1,303,442) (4,883,000)
Deferred taxes, net - -
=========== ===========
</TABLE>
F-14
<PAGE> 38
National Transaction Network, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
For the years ended December 31, 1998 and 1997, 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, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate (34)% (34)% (34)%
State rate, net of federal benefit (6)% (6)% (6)%
Change in valuation allowance due to the
of future realization of currently
generated net
Operating loss carryforwards 36% 38% 39%
Non deductible expenses 4% 2% 1%
Effective tax rate -% -% -%
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards for tax
purposes of approximately $950,000 which expire in varying amounts through 2013.
Due to changes in ownership in 1989 and in 1996, the Company's ability to
utilize these carryforwards is likely to be limited by the Internal Revenue
Service in the aggregate.
6. CAPITALIZED SOFTWARE
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. Due to IVI
Checkmate's acquisition of Plourde, management has determined that the costs
capitalized for the PINnacle NT product, totaling $669,919, are not recoverable
and therefore impaired. Accordingly, these costs were written off in the current
year. The Company is continuing to capitalize costs for its Mainsail product,
which totaled $133,717 at December 31, 1998.
7. 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.
F-15
<PAGE> 39
National Transaction Network, Inc.
Notes to Financial Statements (continued)
7. COMMITMENTS(CONTINUED)
Rent expense for the years ended December 31, 1998, 1997, and 1996 was
approximately $197,000, $119,000 and $87,000, respectively. Future minimum lease
payments, as of December 31, 1998, under this noncancelable operating lease
approximate the following:
1999 $126,000
2000 126,000
2001 130,000
2002 13,000
2003 -
-------------------
Total $395,000
===================
8. CAPITAL LEASE
In 1997 and 1996, the Company entered into capital leases for certain software
and equipment, respectively. The 1997 software capital lease was sold to and
lease payments assigned to a third party. The software capital lease had been
capitalized at the present value of the future minimum rental payments and is
included in machinery and equipment at December 31, 1997 at a value of $103,400,
less accumulated amortization of $12,500. The capital lease for equipment had
been capitalized at the present value of the future minimum rental payments and
is included in machinery and equipment at December 31, 1998, 1997 and 1996 at a
value $28,400, less accumulated amortization of $8,974, $10,313, and $7,123
respectively.
9. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CUSTOMERS
Financial instruments that potentially subject us to significant concentrations
of credit risk consist primarily of cash and cash equivalents and trade accounts
receivable.
The Company performs ongoing credit approvals of its customers. Trade
receivables are unsecured, and the Company is at risk to the extent such amounts
become uncollectible. However, losses on receivables have in the past been
within expectations.
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:
CUSTOMERS 1998 1997 1996
--------------------------------------------------
A) 59% 57% 48%
B) - - 13%
C) 8% - 10%
F-16
<PAGE> 40
National Transaction Network, Inc.
Notes to Financial Statements (continued)
10. RELATED PARTY TRANSACTIONS
PRODUCT DISTRIBUTION AGREEMENT - the Company sold certain products under the
terms of a product distribution agreement (the "Agreement") with IVI, now IVI
Checkmate. 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 Checkmate have continued to transact
business under an informal extension of the Agreement. Total purchases from IVI
Checkmate were approximately,$1,050,000, $1,870,000, and $453,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Sales to IVI were
approximately $65,000 and $168,000 for the years ended December 31, 1998 and
1997, respectively. At December 31, 1998, 1997 and 1996 accounts payable to IVI
Checkmate were $66,503, $318,858 and $95,287, respectively.
11. 401 (K) RETIREMENT SAVINGS PLAN
The Company has a 401(k) Retirement Saving 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 1998, 1997, or 1996.
F-17
<PAGE> 41
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, 1996 $100,000 $0 $0 $0 $100,000
Year ended December 31, 1997 $100,000 $0 $0 $60,000 (a) $40,000
Year ended December 31, 1998 $40,000 $0 $0 $0 $40,000
</TABLE>
a) Writeoff of uncollectible accounts ($15,000); Relief of allowance for
doubtful accounts balance ($45,000) based on review of accounts receivable
totals.
S-1
<PAGE> 1
EXHIBIT 23.1
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, 1998.
Deloitte & Touche LLP
Boston, Massachusetts
March 30, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Annual Report (Form 10-K) of National
Transaction Network, Inc. of our report dated February 12, 1999, included in the
1998 Annual Report to Stockholders of National Transaction Network, Inc.
Our audit also included the 1998 information in the financial statement schedule
of National Transaction Network, Inc. listed in Item 14(a). This schedule is the
responsibility of National Transaction Network, Inc.'s management. Our
responsibility is to express an opinion based on our audit. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the 1998 information set forth therein.
We also consent to the incorporation by reference in Registration Statement Nos.
33-66732 and 333-35893 on Form S-8 of National Transaction Network, Inc. of our
report dated February 12, 1999, with respect to the financial statements and
schedules of National Transaction Network, Inc. included in this Annual Report
(Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Atlanta, Georgia
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 224,646
<SECURITIES> 0
<RECEIVABLES> 1,068,009
<ALLOWANCES> 40,000
<INVENTORY> 159,116
<CURRENT-ASSETS> 1,460,748
<PP&E> 946,193
<DEPRECIATION> (791,915)
<TOTAL-ASSETS> 2,017,859
<CURRENT-LIABILITIES> 1,350,347
<BONDS> 2,256,257
0
0
<COMMON> 498,827
<OTHER-SE> (2,087,572)
<TOTAL-LIABILITY-AND-EQUITY> 2,017,859
<SALES> 5,051,077
<TOTAL-REVENUES> 5,051,077
<CGS> 3,035,295
<TOTAL-COSTS> 3,035,295
<OTHER-EXPENSES> 3,655,912
<LOSS-PROVISION> (1,640,130)
<INTEREST-EXPENSE> (165,599)
<INCOME-PRETAX> (1,805,729)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,805,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,805,729)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
