UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 No. 75-1535237
-------- --------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
117 Flanders Road
Westborough, Massachusetts 01581
-------------------------- -----
(Address of principal executive offices) (Zip Code)
(508) 870-3200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, $.15
par value per share, outstanding as of April 30, 1999: 3,325,468 shares.
<PAGE>
NATIONAL TRANSACTION NETWORK, INC.
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets
March 31, 1999 and December 31, 1998 3
Statements of Operations
Three months ended March 31, 1999 and 1998 5
Statements of Cash Flows
Three months ended March 31, 1999 and 1998 6
Notes to Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 11
SIGNATURES 12
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<PAGE>
PART I - FINANCIAL STATEMENTS
ITEM I. FINANCIAL STATEMENTS
- ----------------------------
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
ASSETS
----------------
(Unaudited)
March 31, December 31,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash and equivalents $180,579 $224,646
Accounts receivable
(Net of allowance for doubtful accounts
of $40,000 at March 31, 1999
and December 31, 1998) 737,920 1,028,009
Accounts receivable-stockholder 12,120 -
Inventory 90,275 159,116
Prepaid expenses 52,049 48,977
------------ ------------
TOTAL CURRENT ASSETS 1,072,943 1,460,748
------------ ------------
PROPERTY AND EQUIPMENT 959,274 946,193
Less accumulated depreciation
and amortization (812,767) (791,915)
------------ ------------
PROPERTY AND
EQUIPMENT - NET 146,507 154,278
------------ ------------
OTHER ASSETS
Capitalized software development costs 298,743 133,717
Purchased technology, net 240,103 255,853
Deposits and other 24,156 13,263
------------ ------------
Total other assets 563,002 402,833
------------ ------------
TOTAL $1,782,452 $2,017,859
============ ============
See Notes to Financial Statements.
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<PAGE>
NATIONAL TRANSACTION NETWORK, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
(Unaudited)
March 31, December 31,
1999 1998
------------ ------------
CURRENT LIABILITIES:
Accounts payable $185,691 $322,269
Accounts payable-stockholder 33,013 66,503
Accrued liabilities 477,676 434,758
Deferred revenue 448,521 525,635
Short term portion of capital lease - 1,182
------------ ------------
TOTAL CURRENT LIABILITIES 1,144,901 1,350,347
------------ ------------
LONG TERM LIABILITIES:
Convertible notes payable to stockholder 2,308,664 2,256,257
------------ ------------
TOTAL LONG TERM LIABILITIES 2,308,664 2,256,257
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.10 par value;
authorized, 5,000,000 shares;
none issued and outstanding - -
Common stock, $.15 par value;
authorized, 20,000,000 shares;
issued and outstanding, 3,325,468
shares at March 31, 1999 and
December 31, 1998 498,827 498,827
Additional paid-in capital 12,609,216 12,609,216
Accumulated deficit (14,779,156) (14,696,788)
------------ ------------
TOTAL STOCKHOLDERS'
EQUITY (1,671,113) (1,588,745)
------------ ------------
TOTAL $1,782,452 $2,017,859
============ ============
See Notes to Financial Statements.
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<PAGE>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
1999 1998
------------ ------------
REVENUE $1,005,014 $1,550,745
------------ ------------
COST AND EXPENSES
Cost of revenue 588,505 876,560
Research and development 178,449 239,787
Selling, general and administrative 268,055 541,429
------------ ------------
Total 1,035,009 1,657,776
------------ ------------
LOSS FROM OPERATIONS (29,995) (107,031)
------------ ------------
OTHER INCOME:
Interest expense (52,373) (41,045)
------------ ------------
Total (52,373) (41,045)
------------ ------------
NET LOSS ($82,368) ($148,076)
============ ============
BASIC AND DILUTED
LOSS PER COMMON SHARE ($0.02) ($0.05)
============ ============
BASIC AND DILUTED
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,325,468 3,281,439
============ ============
See Notes to Financial Statements.
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<PAGE>
NATIONAL TRANSACTION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
1999 1998
------------ ------------
Cash Flows From Operating Activities:
Net loss ($82,368) ($148,076)
------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided by(used for)operating activities:
Depreciation and amortization 36,602 40,409
Interest on conv. subordinated note
payable to stockholder 52,407 39,375
Loss on sales of property and equipment - 13,905
Increase (decrease) in cash from:
Accounts receivable 290,089 (44,033)
Accounts receivable-stockholder (12,120) (65,006)
Inventory 68,841 441,369
Prepaid expenses (3,072) 6,237
Deposits (10,893) -
Accounts payable-stockholder (33,490) (264,545)
Accounts payable and accrued
liabilities (93,660) 347,629
Deferred revenue (77,114) 225,323
------------ ------------
Total adjustments 217,590 740,663
------------ ------------
Net cash provided by operating
activities 135,222 592,587
------------ ------------
Cash Flows From Investing Activities:
Purchases of property and equipment (13,081) (26,188)
Proceeds from the sale of equipment - 11,898
Acquisition of purchased technology - (313,555)
Capitalization of software development costs (165,025) (142,097)
------------ ------------
Net cash used for investing activities (178,106) (469,942)
Cash Flows From Financing Activities:
Proceeds from stock issued under stock option plan - 14,425
Proceeds from bank line of credit - 100,000
Repayment to bank line of credit - (100,000)
Repayment of Capital Lease (1,182) (6,660)
------------ ------------
Net cash provided by (used for)
financing activities (1,182) 7,765
------------ ------------
Net increase (decrease) in cash and
equivalents (44,066) 130,410
------------ ------------
Cash and Equivalents, Beginning of Period 224,645 457,857
------------ ------------
Cash and Equivalents, End of Period $180,579 $588,267
============ ============
See Notes to the Financial Statements.
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<PAGE>
NATIONAL TRANSACTION NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
1. The accompanying financial statements and notes do not include all of
the disclosures made in the Company's Form 10-K for the year ended
December 31, 1998 which should be read in conjunction with these
statements. In the opinion of the Company, the financial statements
include all adjustments necessary for a fair presentation of the
quarterly results.
2. The results of operations for the three month period ended March 31,
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, "Earning per Share," and has restated all periods
presented to conform with the new preseentation. Basic net loss per
common share is computed using the weighted average number of common
shares outstanding during each period. In determining the denominator
for dilutive loss per common share, no shares resulting from the
assumed exercise of options using the treasury stock method or
resulting from the conversion of the convertible subordinated notes
payable to stockholder are added to the denominator because the
inclusion of such shares would be antidilutive due to the net loss for
each of the periods presented. Accordingly, diluted loss per common
share is equal to basic loss per common share and is not separately
disclosed.
4. For the quarters ended March 31, 1998 and 1999, the Company made
inventory purchases from IVI Checkmate totaling approximately $77,000
and $80,000 respectively. Accrued interest for the Company's
Convertible Subordinated Notes Payable to IVI Checkmate totaled
$158,664 for the quarter ended March 31, 1999.
5. The Company accounts for certain software development costs in
accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed." It is the Company's policy to capitalize costs
relating to the development of its products once technological
feasibility has been achieved until the products are available for
general release to customers, provided that the recoverability of such
costs is reasonably assured through expected sales revenue less related
selling expenses. Upon availability of products for general release to
customers, all related capitalized development costs are amortized over
a suitable period based on the products' estimated economic life.
During the quarter ended March 31, 1999, the Company capitalized
software development costs of approximately $165,000 and total
capitalized software development cost aggregated $299,000 at March 31,
1998. In the third quarter of 1998, approximately $679,000 of the cost
capitalized for the PINnacle NT product were determined to be not
recoverable and therefore written off.
-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 condensed consolidated financial statements and notes thereto appearing
elsewhere herein. The discussion contains forward-looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. Words such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may,' "plan," "will," "would," and
similar expressions and variations thereof are intended to identify
forward-looking statements. The Company's actual results could differ materially
from those contemplated by the forward-looking statements contained herein.
Factors that may cause such a difference include but are not limited to those
discussed in the cautionary statements contained herein as well as those
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operation " contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 as filed with
the Commission. The cautionary statements made in this report should be read as
being applicable to all related forward-looking statements wherever they appear
in this report.
RESULTS OF OPERATIONS
- ---------------------
Revenue for the quarter ended March 31, 1999 decreased by 35.2% to
$1,005,014 compared to $1,550,745 for the quarter ended March 31, 1998. The
decrease in revenue was primarily due to a significant customer's decision to
convert and upgrade a large number of its systems in the quarter ended March 31,
1998. This customer accounted for approximately 42% of the Company's revenue in
first quarter of 1999 as compared to approximately 66% for the same period in
the prior year.
Gross margins as a percent of revenue were 41.4% for the quarter ended
March 31, 1999 compared to 43.5% for the quarter ended March 31, 1998. The
decrease in gross margin percentages between the two quarterly periods was
primarily due to increases in certain categories of expenses resulting from the
assignment of certain expenses to the cost of goods sold in 1998 using
percentage of completion accounting that had previously been assigned to product
development expense. This was partially offset by a shift in mix between
hardware, software, and professional services revenues as well as lower margins
on certain hardware sales. For the quarter ended March 31, 1999, service revenue
accounted for approximately 56% of total revenue compared to approximately 45%
of total revenue for the quarter ended March 31, 1998. The increase in service
revenue was the result of professional services associated with the Company's
Mainsail software and Year 2000 testing and compliance on various operating
platforms.
Total operating expenses for the quarter ended March 31, 1999 decreased
by 42.8% to $446,504 compared to $781,216 for the quarter ended March 31, 1998.
Research and development expenses decreased by 25.6% to $178,449 for the quarter
ended March 31, 1999 compared to $239,787 for the quarter ended March 31, 1998.
Decreases in research and development expenses between the two quarterly periods
resulted from the reclassification of certain product development expenses to
the cost of goods sold and an increase in 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." For the quarter ended March 31, 1999, capitalized software
development costs totaled $165,026. This reclassification was offset by an
increase in outside consulting expenses due to the utilization of contract
programmers.
-8-
<PAGE>
Selling, general and administrative expenses decreased by 51% to
$268,055 for the quarter ended March 31, 1999 compared to $541,429 for the
quarter ended March 31, 1998. This decrease was related primarily due to
(i)decreases in compensation and fringe benefit expense due to fewer staff
positions and (ii) the reduction of travel and trade show expense resulting form
sales activities being facilitated by the Company's parent, IVI Checkmate.
Other expense for the quarter ended March 31, 1999, totaled $52,373
which consisted primarily of interest expense on convertible subordinated notes
payable to IVI Checkmate, Inc.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash balances at March 31, 1999 were $180,579 compared to $224,646 at
December 31, 1998. Net cash provided by operating activities was $135,222 for
the quarter ended March 31, 1999. The operating loss and increase in accrued
liabilities was offset by decreases in accounts receivable and inventory. Net
cash used in investing activities for the quarter ended March 31, 1999 totaled
approximately $178,000 and primarily represented the capitalization of certain
software development costs partially offset by the sale of the transaction
processing software license.
The Company does not have a working capital line of credit with its
bank. Sources of liquidity for future needs cannot be generated from existing
cash balances and cash generated from operations. Management will depend on
borrowings available to the Company under its Convertible Subordinated Note
Agreement with IVI Checkmate.
YEAR 2000 COMPLIANCE
- --------------------
The latest versions of the Company's software products are designed to
be "Year 2000 Compliant." The company defines "Year 2000 Compliant" as the
software product's ability to accurately process date and time data (including
calculating, comparing, and sequencing) from, into, and between the years 1999
and 2000 and later, including 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.
This entire project is expected to be completed by the end of the second
quarter of 1999.
-9-
<PAGE>
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 consists 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 the Company's Form 10-K
for the year ended December 31, 1998)
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company has no material legal proceedings at this time.
Item 2. Changes in Securities.
----------------------
Not applicable.
Item 3. Defaults upon Senior Securities.
--------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
There were no matters submitted to a vote of the security holders
in the quarter ended March 31, 1999.
Item 5. Other Information.
------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits.
---------
Exhibit EX-27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
None.
-11-
<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.
DATE: May 13, 1999 By /s/ L. Barry Thomson
-----------------------------
L. Barry Thomson, Chief Executive
Officer and Chairman of the
Board (Principal Executive Officer)
Date: May 13, 1999 By /s/ L. Barry Thomson
-----------------------------
L. Barry Thomson, Chief Executive
Officer and Chairman of the
Board (Principal Financial and
Accounting Officer)
-12-
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-30-1999
<CASH> 180,579
<SECURITIES> 0
<RECEIVABLES> 790,040
<ALLOWANCES> (40,000)
<INVENTORY> 90,275
<CURRENT-ASSETS> 1,072,943
<PP&E> 959,274
<DEPRECIATION> (812,767)
<TOTAL-ASSETS> 1,782,452
<CURRENT-LIABILITIES> 1,144,901
<BONDS> 2,308,664
0
0
<COMMON> 498,827
<OTHER-SE> (2,169,940)
<TOTAL-LIABILITY-AND-EQUITY> 1,782,452
<SALES> 1,005,014
<TOTAL-REVENUES> 1,005,014
<CGS> 588,505
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 446,504
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (52,373)
<INCOME-PRETAX> (82,368)
<INCOME-TAX> 0
<INCOME-CONTINUING> (82,368)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82,368)
<EPS-PRIMARY> (.02)
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