<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from ______ to ________
Commission File Number 0-10966
NATIONAL TRANSACTION NETWORK, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-1535237
(State of (I.R.S. Employer
Incorporation) Identification No.)
117 Flanders Road, Westborough, MA 01581
(Address of principal executive offices, including zip code)
(508) 870-3200
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 6, 1999
- -------------------------------- -----------------------------
Common Stock, $0.15 par value 3,325,468 shares
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NATIONAL TRANSACTION NETWORK, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1999
Table of Contents
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<TABLE>
<CAPTION>
Page
Number
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Balance Sheets -
June 30, 1999 and December 31, 1998 3
Statements of Operations -
Three and Six Months Ended June 30, 1999 and 1998 5
Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 6
Notes to Financial Statements - June 30, 1999 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 10
SIGNATURES 11
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 74,476 $ 224,646
Accounts receivable
(net of allowance for doubtful accounts of $40,000
at June 30, 1999 and December 31, 1998)
895,210 1,028,009
Accounts receivable - stockholder 16,386 --
Inventory 198,584 159,116
Prepaid expenses 57,253 48,977
---------- ----------
Total current assets 1,241,909 1,460,748
---------- ----------
Property and equipment 989,536 946,193
Less: accumulated depreciation and amortization (833,562) (791,915)
---------- ----------
Property and equipment - net 155,974 154,278
---------- ----------
Other assets:
Capitalized software development costs 450,296 133,717
Purchased technology, net 224,353 255,853
Deposits and other 29,956 13,263
---------- ----------
Total other assets 704,605 402,833
---------- ----------
Total assets $2,102,488 $2,017,859
========== ==========
</TABLE>
See Notes to Financial Statements
3
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NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
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(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 155,973 $ 322,269
Accounts payable - stockholder 154,332 66,503
Accrued liabilities 499,495 434,758
Deferred revenue 277,311 525,635
Note payable to stockholder 300,000 --
Current portion of capital lease -- 1,182
------------ ------------
Total current liabilities 1,387,111 1,350,347
Convertible notes payable to stockholder 2,344,184 2,256,257
------------ ------------
Total liabilities 3,731,295 3,606,604
------------ ------------
Stockholders' Equity (Deficit)
Preferred stock, $0.10 par value;
authorized, 5,000,000 shares;
none issued and outstanding -- --
Common stock, $0.15 par value;
authorized, 20,000,000 shares;
issued and outstanding, 3,325,468
shares at June 30, 1999 and
December 31, 1998 498,827 498,827
Additional paid-in capital 12,609,216 12,609,216
Accumulated deficit (14,736,850) (14,696,788)
------------ ------------
Total stockholders' equity (deficit) (1,628,807) (1,588,745)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 2,102,488 $ 2,017,859
============ ============
</TABLE>
See Notes to Financial Statements
4
<PAGE>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUE:
Systems and equipment $ 891,582 $ 563,895 $1,307,617 $1,355,477
Software and services 643,963 554,843 1,232,942 1,314,006
---------- ---------- ---------- ----------
Total 1,535,545 1,118,738 2,540,559 2,669,483
---------- ---------- ---------- ----------
COST AND EXPENSES:
Cost of revenue 965,378 685,160 1,553,883 1,551,220
Research and development 204,708 273,253 383,157 513,040
Selling, general and
administrative 284,503 472,934 552,558 1,024,863
---------- ---------- ---------- ----------
Total 1,454,589 1,431,347 2,489,598 3,089,123
---------- ---------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS 80,956 (312,609) 50,961 (419,640)
---------- ---------- ---------- ----------
OTHER EXPENSE:
Interest expense, net (38,650) (39,784) (91,023) (80,829)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 42,306 $ (352,393) $ (40,062) $ (500,469)
========== ========== ========== ==========
Basic and Diluted Earnings
(Loss) Per Common Share $ 0.01 $ (0.11) $ (0.01) $ (0.15)
========== ========== ========== ==========
Basic and Diluted Weighted Average
Number of Common Shares Outstanding 3,325,468 3,316,961 3,325,468 3,299,298
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1999 1998
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<S> <C> <C>
Operating activities:
Net loss $ (40,062) $(500,469)
Adjustment to net loss for non-cash items:
Depreciation and amortization 73,146 81,594
Interest on convertible subordinated note
payable to stockholder 87,927 79,188
Loss on sale of property -- 13,905
Increase (decrease) in cash from:
Accounts receivable 132,799 49,636
Accounts receivable - stockholder (16,386) (40,006)
Inventory (39,468) 290,063
Prepaid expenses (22,289) 10,654
Other assets (2,680) (1,700)
Accounts payable - stockholder 87,829 137,924
Accounts payable and accrued liabilities (101,558) 293,271
Deferred revenue (248,325) 260,373
--------- ---------
Net cash (used in) provided by operating activities (89,067) 674,433
--------- ---------
Investing activities:
Purchases of property and equipment (43,343) (28,080)
Proceeds from sale of equipment -- 11,898
Acquisition of purchased technology -- (313,555)
Capitalization of software development costs (316,578) (300,016)
--------- ---------
Net cash used in investing activities (359,921) (629,753)
--------- ---------
Financing activities:
Proceeds from stock issued under stock option plan -- 20,495
Proceeds from note payable to stockholder 300,000 --
Proceeds from bank line of credit -- 100,000
Repayment to bank line of credit -- (100,000)
Repayment of capital lease (1,182) (9,339)
--------- ---------
Net cash provided by financing activities 298,818 11,156
--------- ---------
Net (decrease) increase in cash and equivalents (150,170) 55,836
Cash and equivalents, beginning of period 224,646 457,857
--------- ---------
Cash and equivalents, end of period $ 74,476 $ 513,693
========= =========
</TABLE>
See Notes to Financial Statements
6
<PAGE>
NATIONAL TRANSACTION NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
1. The accompanying financial statements and notes do not include all of the
disclosures made in the Company's Form 10-K for the year ended December 31,
1998 which should be read in conjunction with these statements. In the
opinion of the Company, the financial statements include all adjustments
(consisting solely of normal recurring accruals) considered necessary for a
fair presentation of the quarterly results.
2. The results of operations for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results to be expected for the
full year.
3. The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," and has restated all periods
presented to conform with the new presentation. Basic net income (loss) per
common share is computed using the weighted average number of common shares
outstanding during each period. In determining the denominator for dilutive
income (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 to the net income (loss) for each of the periods presented.
Accordingly, diluted income (loss) per common share is equal to basic income
(loss) per common share and is not separately disclosed.
4. For the quarters ended June 30, 1999 and 1998, the Company made inventory
purchases from IVI Checkmate Corp. ("IVI Checkmate"), its parent company,
totaling approximately $348,000 and $479,000, respectively. Accrued
interest for the Company's Convertible Subordinated Notes Payable to IVI
Checkmate totaled $194,184 at June 30, 1999.
5. The Company accounts for 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".
It is the Company's policy to capitalize costs relating to the development
of its products once technological feasibility has been achieved until the
products are available for general release to customers, provided that the
recoverability of such costs is reasonably assured through expected sales
revenue less related selling expenses. Upon availability of products for
general release to customers, all related capitalized development costs are
amortized over a suitable period based on the products' estimated economic
life. During the quarter ended June 30, 1999, the Company capitalized
software development costs of approximately $152,000 for Mainsail software
development, thereby increasing total software development costs, net of
amortization, to approximately $450,000 at June 30, 1999.
6. On July 20, 1999, the Company entered into an agreement with IVI Checkmate
Corp. that will potentially result in the acquisition by IVI Checkmate
Corp., through its wholly owned subsidiary IVI Checkmate Inc., of all of
the shares of the Company's common stock that IVI Checkmate Inc. does not
presently own. IVI Checkmate Inc. currently owns 2,726,440, or
approximately 82.0%, of the Company's 3,325,468 shares of common stock
outstanding. The agreement provides for the exchange of $0.30 worth of
common stock of IVI Checkmate Corp. for each share of the Company's common
stock. It is anticipated that this transaction should be completed in the
next one to three months, subject to approval by regulatory authorities and
the Company's stockholders. For additional information, see the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 21, 1999.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere herein. The
discussion contains forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. The words
"may," "would," "could," "will," "expect," "estimate," "anticipate," "believe,"
"intends," "plans" and similar expressions and variations thereof are intended
to identify forward-looking statements. We caution that these statements
represent projections and estimates of future performance and involve certain
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including, without limitation, dependence on limited suppliers of our products;
rapid and significant technological developments that could delay the
introduction of improvements in existing products or of new products; any
dependencies on any proprietary technologies (which may be independently
developed by competitors); dependence on a small number of customers; potential
fluctuation in financial results as a result of any inability to make sales to
our customers as well as the volume and timing of bookings received during a
quarter and variations in sales mix; competition from existing companies as well
as new market entrants; dependence on key personnel; and other risk factors that
are contained in documents that we file with the U.S. Securities and Exchange
Commission.
Results of Operations
Revenue for the quarter ended June 30, 1999 increased by 37% to $1,535,545
compared to $1,118,738 for the quarter ended June 30, 1998. Revenue for the six
months ended June 30, 1999 decreased by 5% to $2,540,559 compared to $2,669,483
for the six months ended June 30, 1998. The significant increase in revenue in
the quarter, but relatively flatness for the six months, was the result of the
timing of hardware and software sales in 1999 and 1998. In 1999, a significant
portion of these sales occurred in the second quarter, while the majority of
sales in 1998 was in the first quarter. The timing of sales in 1999 was affected
by a significant customer's decision to defer an upgrade to its systems from the
first quarter of 1999 to the second quarter of 1999.
Gross margins as a percentage of revenue were 37.1% and 38.8% for the
quarter and six months ended June 30, 1999, respectively, compared to 38.8% and
41.9% for the quarter and six months ended June 30, 1998, respectively. The
decreases in gross margin percentages for the quarter and six months were
primarily due to a shift in mix between hardware and software revenues. Lower
margin hardware revenue accounted for approximately 58% and 52% of total revenue
for the quarter and six months ended June 30, 1999, respectively, compared to
approximately 50% and 51% for the quarter and six months ended June 30, 1998,
respectively.
Research and development expenses, net of capitalized development costs,
decreased by approximately 25% in both the quarter and six months ended June
30, 1999 from expenditure levels in the same periods one year ago. This decrease
was primarily due to expenditures in 1998 for the development of a Windows NT
software platform, which was subsequently halted in the third quarter of 1998.
Selling, general and administrative expenses decreased by approximately 40%
and 46% in the quarter and six months ended June 30, 1999, respectively, from
similar expenses in the same periods one year ago. The decreases were primarily
due to (i) decreases in compensation and fringe benefit expenses due to fewer
staff positions, and (ii) the reduction of travel and trade show expenses that
resulted from sales activities as they were being facilitated in 1999 by the
Company's parent, IVI Checkmate Inc.
8
<PAGE>
Liquidity and Capital Resources
For the six months ended June 30, 1999, the Company consumed net cash of
approximately $450,000 of which approximately $360,000 was used for development
costs and purchases of property and equipment, with the remainder used in
operating activities. As the Company does not have a working capital line of
credit with its bank, these activities were financed through additional funds
borrowed from the Company's parent, IVI Checkmate Inc., and from existing cash
balances. During the first six months of 1999, a total of $300,000 was borrowed
from IVI Checkmate Inc., and the Company's cash balances decreased from $224,646
at December 31, 1998 to $74,476 at June 30, 1999.
The Company is uncertain at this time whether its cash and working capital
resources will be sufficient to fund operating requirements for the remainder of
the year, which may result in additional borrowings from external resources.
Year 2000
The latest versions of the Company's software products are designed to be
"Year 2000 Compliant." The Company defines "Year 2000 Compliant" as the software
product's ability to accurately process date and time data (including
calculating, comparing, and sequencing) from, into, and between the years 1999
and 2000 and later, including calculating date and time data for leap years. In
addition, the software product, when used in combination with other software,
will accurately process date and time data if such other software properly
exchanges date and time data with it. There can be no assurance, however, that
the Company's software products that are designed to be Year 2000 Compliant
contain all the necessary code changes and modifications to be compliant with
all possible Year 2000 issues.
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 currently are not compliant. The Company is currently working
to port the product onto several Year 2000 compliant operating system platforms
of customers. While the Company believes this project to be completed prior to
the end of the year, any potential delays in the completion of the project this
year may have a significant effect on future financial results.
The Company also uses certain computer software programs in its internal
operations, including applications used in product development, financial and
business systems, and various administrative functions. 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 will
consist primarily of internal labor. The Company does not believe that any Year
2000 issues relating to internal systems will have a material adverse effect on
its business, financial condition or results of operations. However, the Company
cannot currently assess the cost of remedying problems which may result from the
Year 2000 issues of others. Further, serious deficiencies which are not
currently identified or fully understood may arise in the future and may have a
material adverse impact on business, financial condition, and results of
operations. (Please refer to Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Form 10-K for
the year ended December 31, 1998)
9
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits. The following exhibits are filed as part of this report:
---------
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
None.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL TRANSACTION NETWORK, INC.
(Registrant)
Date: August 6, 1999 /s/ L. Barry Thomson
------------------------------------------
L. Barry Thomson
Chief Executive Officer and Chairman
of the Board (Principal Executive Officer)
Date: August 6, 1999 /s/ L. Barry Thomson
-------------------------------------------
L. Barry Thomson
Chief Executive Officer and Chairman
of the Board (Principal Financial and
Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 74,476
<SECURITIES> 0
<RECEIVABLES> 935,210
<ALLOWANCES> 40,000
<INVENTORY> 198,584
<CURRENT-ASSETS> 1,241,909
<PP&E> 989,536
<DEPRECIATION> 833,562
<TOTAL-ASSETS> 2,102,488
<CURRENT-LIABILITIES> 1,387,111
<BONDS> 0
0
0
<COMMON> 498,827
<OTHER-SE> (2,127,634)
<TOTAL-LIABILITY-AND-EQUITY> 2,102,488
<SALES> 1,307,617
<TOTAL-REVENUES> 1,307,617
<CGS> 1,232,942
<TOTAL-COSTS> 1,232,942
<OTHER-EXPENSES> 2,489,598
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,023
<INCOME-PRETAX> (40,062)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,062)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,062)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
