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U.S. 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 September 30, 2002
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 0-22190
---------------------------------------
VERSO TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1484525
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 Galleria Parkway, Suite 300, Atlanta, GA 30339
(Address of principal executive offices)
(678) 589-3500
(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 | |.
Shares of the registrant's common stock, par value $.01 per share, outstanding
as of November 13, 2002: 80,657,544.
VERSO TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2002.......................................................... 2
Condensed Consolidated Statements of Operations for the three months
and the nine months ended September 30, 2002 and 2001...................... 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001.......................................... 4
Notes to the Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk................... 32
Item 4. Controls and Procedures...................................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 33
Item 2. Changes in Securities and Use of Proceeds.................................... 33
Item 6. Exhibits and Reports on Form 8-K............................................. 33
Signature Page........................................................................ 34
Certifications........................................................................ 35
Exhibit Index......................................................................... 37
PART I-ITEM 1: FINANCIAL STATEMENTS
VERSO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $ 1,442 $ 7,745
Accounts receivable, net 11,513 9,047
Inventories, net 4,487 3,995
Other current assets 1,332 1,104
Assets of discontinued operations -- 582
--------- ---------
Total current assets 18,774 22,473
Property and equipment, net 5,184 6,737
Intangibles, net 14,274 15,949
--------- ---------
Total assets $ 38,232 $ 45,159
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Note payable for the purchase of NACT $ 2,250 $ 5,340
Accounts payable 2,136 1,624
Accrued compensation 1,442 3,130
Accrued expenses 5,504 6,127
Unearned revenue and customer deposits 5,912 5,904
Current portion of liabilities of discontinued operations 1,563 2,528
--------- ---------
Total current liabilities 18,807 24,653
Liabilities of discontinued operations, net of current portion 1,640 1,772
Convertible subordinated debentures, net of discount 3,635 3,428
--------- ---------
Total liabilities 24,082 29,853
--------- ---------
Shareholders' equity:
Common stock, $.01 par value, 200,000,000 shares authorized;
78,959,313 and 77,619,654 shares issued and outstanding 790 776
Additional paid-in capital 272,011 271,462
Notes receivable from shareholders (1,623) (1,620)
Accumulated deficit (254,939) (252,131)
Deferred compensation (2,072) (3,166)
Accumulated other comprehensive loss - foreign currency translation (17) (15)
--------- ---------
Total shareholders' equity 14,150 15,306
--------- ---------
Total liabilities and shareholders' equity $ 38,232 $ 45,159
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
VERSO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
For the three months ended For the nine months ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue:
Products $ 5,156 $ 4,633 $ 17,846 $ 7,460
Services 5,256 3,689 16,231 10,519
------------ ------------ ------------ ------------
Total revenue 10,412 8,322 34,077 17,979
Cost of revenue:
Products 1,936 1,766 6,541 3,838
Services 2,624 2,193 7,761 6,550
------------ ------------ ------------ ------------
Total cost of revenue 4,560 3,959 14,302 10,388
Gross profit:
Products 3,220 2,867 11,305 3,622
Services 2,632 1,496 8,470 3,969
------------ ------------ ------------ ------------
Gross profit 5,852 4,363 19,775 7,591
Operating expenses:
General and administrative 2,316 2,926 8,424 7,773
Sales and marketing 1,631 888 5,262 1,721
Research and development 1,455 904 4,593 1,396
Depreciation 607 649 2,086 1,438
Amortization of intangibles 159 470 448 1,219
Amortization of deferred compensation 272 483 920 1,450
Reorganization costs 131 -- 131 --
------------ ------------ ------------ ------------
Total operating expenses 6,571 6,320 21,864 14,997
------------ ------------ ------------ ------------
Operating loss from continuing operations (719) (1,957) (2,089) (7,406)
Other income 22 -- 453 --
Interest expense, net, including $187, $91, $452 and $444 of
amortization of loan fees and discount on convertible
subordinated debentures in the three months and the nine
months ended September 30, 2002 and 2001 (322) (486) (841) (892)
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes
and extraordinary item (1,019) (2,443) (2,477) (8,298)
Income taxes -- -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations before extraordinary item (1,019) (2,443) (2,477) (8,298)
------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations, net of income taxes -- (9,962) (331) (126,176)
Loss on disposal of discontinued operations, net of income taxes -- (500) -- (500)
------------ ------------ ------------ ------------
Total discontinued operations, net of income taxes -- (10,462) (331) (126,676)
------------ ------------ ------------ ------------
Loss before extraordinary item (1,019) (12,905) (2,808) (134,974)
Extraordinary item - loss from debt conversion -- -- -- 1,640
------------ ------------ ------------ ------------
Net loss $ (1,019) $ (12,905) $ (2,808) $ (136,614)
============ ============ ============ ============
Net loss per common share - basic and diluted:
Loss before discontinued operations and extraordinary item $ (0.01) $ (0.05) $ (0.03) $ (0.16)
Loss from discontinued operations -- (0.19) (0.01) (2.47)
Loss on disposal of discontinued operations -- (0.01) -- (0.01)
------------ ------------ ------------ ------------
Loss before extraordinary item (0.01) (0.25) (0.04) (2.64)
Extraordinary item - loss from debt conversion -- -- -- (0.03)
------------ ------------ ------------ ------------
Net loss per common share- basic and diluted $ (0.01) $ (0.25) $ (0.04) $ (2.67)
============ ============ ============ ============
Weighted average shares outstanding - basic and diluted 78,970,101 51,633,654 78,373,925 51,100,782
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
VERSO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
For the nine months ended
September 30,
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Continuing operations:
Net loss from continuing operations $ (2,477) $ (9,938)
Adjustments to reconcile net loss from continuing operations to net
cash used in continuing operating activities:
Extraordinary item - loss on debt conversion -- 1,640
Amortization of intangibles 448 1,219
Depreciation 2,086 1,438
Amortization of deferred compensation 920 1,450
Provision for doubtful accounts 1,150 554
Inventory valuation reserve 134 377
Amortization of loan fees and discount on convertible subordinated debentures 452 444
Other 86 (16)
Changes in current operating items:
Accounts receivable (3,397) (1,569)
Inventories (626) 457
Other current assets (262) (313)
Accounts payable 512 (1,576)
Accrued compensation (1,684) (607)
Accrued expenses (154) (1,454)
Unearned revenue and customer deposits 8 (591)
--------- ---------
Net cash used in continuing operating activities (2,804) (8,485)
--------- ---------
Discontinued operations:
Loss from discontinued operations (331) (126,676)
Adjustment to reconcile loss from discontinued operations
to net cash (used in) provided by discontinued operating activities (566) 121,135
--------- ---------
Net cash used in discontinued operating activities (897) (5,541)
--------- ---------
Net cash used in operating activities (3,701) (14,026)
--------- ---------
INVESTING ACTIVITIES:
Continuing operations:
Purchased software development (267) --
Purchase of NACT Telecommunications, Inc. -- (14,274)
Purchases of property and equipment, net (648) (1,172)
--------- ---------
Net cash used in investing activities for continuing operations (915) (15,446)
Discontinued operations -
Net proceeds from sale of discontinued operations -- 8,025
--------- ---------
Net cash used in investing activities (915) (7,421)
--------- ---------
Net cash used in operating and investing activities, carried forward (4,616) (21,447)
--------- ---------
4
VERSO TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
For the nine months ended
September 30,
2002 2001
-------- --------
NET CASH USED IN OPERATING AND INVESTING ACTIVITIES, CARRIED FORWARD (4,616) (21,447)
-------- --------
FINANCING ACTIVITIES:
Payments of note payable for the purchase of NACT (2,000) --
Payments on convertible subordinated debentures -- (4,500)
Payments of notes receivable from shareholders 24 --
Proceeds from issuance of convertible subordinated debentures, net -- 15,000
Proceeds from issuances of common stock, net 289 157
-------- --------
Net cash (used in) provided by financing activities (1,687) 10,657
-------- --------
Decrease in cash and cash equivalents (6,303) (10,790)
CASH AND CASH EQUIVALENTS:
Beginning of period 7,745 11,155
Cash acquired in purchase of NACT Telecommunications, Inc. -- 2,538
-------- --------
End of period $ 1,442 $ 2,903
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAYMENTS DURING THE PERIOD FOR:
Interest $ 244 $ 133
======== ========
Income taxes $ 45 $ 101
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of 1,395,089 stock options for the acquisition of
NACT Telecommunications, Inc. $ -- $ 625
======== ========
Common stock and compensatory
options issued in reorganization $ -- $ 150
======== ========
Issuance of warrants in exchange for services $ 211 $ 92
======== ========
Issuance of common stock in exchange for services $ -- $ 19
======== ========
Conversion of subordinated debentures to common stock - issuance
of 1,918,729 shares of common stock and 945,378 common stock warrants $ -- $ 3,360
======== ========
Issuance of common stock in arbitration settlement $ 403 $ --
======== ========
Assets acquired and liabilities assumed in conjunction with business
acquisitions:
Fair value of assets acquired, excluding cash $ -- $ 28,193
Consideration paid -- 14,274
-------- --------
Liabilities assumed $ -- $ 13,919
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
1. BASIS OF PRESENTATION
Verso Technologies, Inc. and subsidiaries (the "Company"), is a
communications technology and solutions provider for communications
service providers and enterprises seeking to implement application-based
telephony services, Internet usage management tools and outsourced
customer support services. The Company's continuing operations consist of
two separate business segments, Gateway Solutions, which includes the
Company's subsidiary NACT Telecommunications, Inc. ("NACT"), and
Applications and Services, which includes the Company's customer response
center operations and the Company's subsidiary Telemate.Net Software, Inc.
("Telemate.Net"). The Gateway Solutions segment includes domestic and
international sales of hardware and software, integration, applications
and technical training and support. The Applications and Services segment
offers primarily domestic network management, support and maintenance,
customer response center services and application services. The Company
acquired NACT in July 2001 and Telemate.Net in November 2001. The
Company's discontinued operations include its value-added reseller ("VAR")
business and associated consulting practice ("legacy VAR business") and
its hospitality services group, which developed and marketed proprietary
software and related integration and maintenance services ("HSG").
The consolidated financial statements include the accounts of Verso
Technologies, Inc. and its wholly-owned subsidiaries, including
Telemate.Net, NACT and MessageClick, Inc. ("MessageClick"), which was
acquired by the Company in November 2000. The Company acquired
Telemate.Net, NACT and MessageClick each in transactions accounted for as
purchases (see Note 2).
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation. These
reclassifications had no effect on previously reported net loss.
The condensed consolidated quarterly financial statements are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) considered necessary by management to present a fair statement
of the results of operations, financial position and cash flows. The
results reported in these condensed consolidated financial statements
should not be regarded as necessarily indicative of results that may be
expected for the entire year.
The year-end condensed consolidated balance sheet was derived from audited
consolidated financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States
of America. For further information, refer to the audited consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
2. MERGERS AND ACQUISITIONS
Telemate.Net Software, Inc.
On November 16, 2001, to increase capital and add patented communications
billing and reporting for next-generation converged Internet protocol and
public switched telephone networks to the Company's product offering, the
Company acquired all of the outstanding capital stock of Telemate.Net by
means of a subsidiary merger. The merger consideration was approximately
$4.1 million, consisting of 24,758,070 shares of the Company's common
stock with a fair value of $16.6 million, based on a $0.67 average of the
Company's common stock price for the ten days prior to the date of
acquisition, assumed options to acquire 5,420,206 shares of the Company's
common stock with exercise prices ranging from $.20 to $5.42 per share
(estimated fair value of $1.8 million, using the Black-Scholes option
pricing model based on the following weighted-average assumptions:
expected volatility - 128%; expected life - one year; risk-free interest
rate - 3.3%; and expected dividend yield - 0%), deferred compensation of
$131,000 and acquisition costs of approximately $2.0 million, reduced by
retirement of the Company's Series B redeemable preferred stock ("Series B
Preferred Stock") of $15.0 million and $438,000 of accrued interest
thereon and notes receivable from shareholders assumed of $947,000.
6
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
2. MERGERS AND ACQUISITIONS, Continued
Telemate.Net Software, Inc., Continued
The acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded at their fair value
at the date of the acquisition. The excess of the purchase price over the
estimated fair value of net assets acquired totaled approximately $1.3
million and was allocated to goodwill. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets'' ("SFAS 142"), the Company is not amortizing this
goodwill. Based on the Company's analysis, there has been no impairment of
goodwill as of September 30, 2002.
The Company has prepared an initial allocation of the purchase price based
on the estimated fair values of certain intangible assets, receivables and
estimated liabilities. The Company is continuing to obtain information as
to ultimate valuation, recoverability and realization with respect to the
fair values of certain contingent liabilities and anticipates the
allocation of purchase price to be finalized prior to the end of the
fourth quarter of 2002.
NACT Telecommunications, Inc.
On July 27, 2001, the Company acquired all of the outstanding capital
stock of NACT to enter the next-generation networking and technology
market. The purchase consideration was approximately $20.6 million,
consisting of a cash payment of $14.2 million made at closing and funded
primarily by the Company's sale of $15.0 million of the Company's Series B
Preferred Stock to Telemate.Net, an additional amount payable on March 31,
2002 of up to $5.3 million plus interest at prime, a grant to NACT
employees of in-the-money non-qualified options with a value of $625,000
and acquisition costs of approximately $500,000.
On March 29, 2002, the Company entered into a Settlement Agreement and
General Release (the "WATP Settlement Agreement") with WA Telcom Products
Co., Inc. ("WATP") which provided for a restructuring of the $5.3 million
deferred payment due by the Company to WATP pursuant to that certain Stock
Purchase Agreement, dated as of June 4, 2001, as amended (the "Purchase
Agreement"), between the Company and WATP, whereby the Company purchased
from WATP all of the issued and outstanding capital stock of NACT, and
NACT became a wholly-owned subsidiary of the Company. Pursuant to the WATP
Settlement Agreement, the Company's obligation to pay to WATP the deferred
payment (the "Deferred Amount") on the date the Company filed its Annual
Report on Form 10-K for the year ended December 31, 2001, was restructured
pursuant to the terms and conditions of a Convertible Secured Promissory
Note dated April 25, 2002, made by the Company in favor of WATP, in the
aggregate principal amount of $4.25 million, together with interest
accrued thereon (the "Note"). Pursuant to the WATP Settlement Agreement,
the Company paid to WATP $1.5 million on April 1, 2002, which payment was
applied to the $1.5 million payment due on April 25, 2002, by the Company
to WATP pursuant to the Note. Pursuant to the Note, the Company also paid
$500,000 on July 1, 2002. The remainder of the amount due under the Note
is payable by the Company to WATP as follows: (i) $500,000 on each of
October 1, 2002; and January 1, 2003; and (ii) $1.25 million plus all
interest accrued under the Note since April 1, 2002, on April 1, 2003. The
WATP Settlement Agreement has been approved by the United States
Bankruptcy Court for the Northern District of Illinois, Eastern Division,
which has jurisdiction over WATP's pending bankruptcy proceeding.
Furthermore, pursuant to the WATP Settlement Agreement, the Company and
WATP released each other from claims against each other arising out of or
related to the Purchase Agreement. Management's estimate of the claims
against WATP totaled approximately $1.3 million, which equaled the
reduction of the deferred payment and previously accrued interest expense
on the deferred payment.
7
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
2. MERGERS AND ACQUISITIONS, Continued
NACT Telecommunications, Inc., Continued
At WATP's option, WATP may, at any time within the thirty-day period
before a payment under the Note is due, convert some or all of the amount
due on such payment date into shares of the Company's common stock at a
conversion price of $1.36 per share. The Company's obligation to pay
amounts due under the Note is (i) secured by all the assets of the
Company, NACT and Telemate.Net and a pledge by the Company of all the
issued and outstanding common stock of NACT and Telemate.Net, and (ii)
guaranteed by NACT and Telemate.Net. The Note and security interests are
subordinate to the rights of Silicon Valley bank (the "Bank") arising
under that certain $5.0 million revolving credit agreement entered into
between the Company and the Bank in December 2001 (the "Credit Agreement")
and other documents executed in connection therewith.
In November 2002, the Company negotiated the early retirement of the
remaining balance plus accrued interest due on the Note (see Note 15).
According to the terms of the definitive stock purchase agreement with
Telemate.Net, on July 27, 2001, Telemate.Net purchased $15.0 million of
Series B Preferred Stock to fund the Company's acquisition of NACT.
The acquisition was treated as a purchase for accounting purposes, and
accordingly, the assets and liabilities were recorded at their fair value
at the date of acquisition. The excess of the purchase price over the
estimated fair value of net assets acquired (including identified
intangible assets of $1.7 million, which are being amortized over a three
year life) totaled approximately $10.2 million, as adjusted, and was
allocated to goodwill. In accordance with SFAS 142, the Company is not
amortizing this goodwill. Based on the Company's analysis, there has been
no impairment of goodwill as of September 30, 2002.
The Company prepared an initial allocation of the purchase price based on
the estimated fair values of certain intangible assets, receivables and
estimated liabilities, including the deferred payment. Management has
subsequently reviewed the liabilities assumed at the time of the purchase
of NACT and the liabilities assumed in the WATP Settlement Agreement and
adjusted its estimate of these liabilities. Management finalized its
determination of fair values and reduced its liabilities and goodwill by
$1.3 million in the previously allocated purchase consideration.
The allocation of the purchase price for Telemate.Net and NACT, as
adjusted, are as follows:
Telemate.Net NACT
------------ ------------
Cash $ 4,810 $ 2,538
Other current assets 1,361 10,547
Property and equipment 563 2,505
Intangibles 1,320 11,871
Current liabilities (4,079) (1,544)
Deferred payment on purchase of NACT -- (5,340)
Convertible subordinated debentures -- --
Deferred compensation 131 --
-------- --------
Purchase consideration $ 4,106 $ 20,577
======== ========
8
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
2. MERGERS AND ACQUISITIONS, Continued
Prior to the acquisition of NACT, the Company became an NACT reseller in
the first quarter of 2001. The Company resold NACT soft switching systems
with product revenues for the nine months prior to acquisition totaling
$2.8 million and cost of product sales of $2.2 million.
Pro Forma Effect of Telemate.Net and NACT Transactions
The following unaudited pro forma information presents the results of
continuing operations of the Company for the nine months ended September
30, 2001, as if the acquisitions of Telemate.Net and NACT had taken place
on January 1, 2001, (in thousands, except per share amounts):
SEPTEMBER 30,
2001
-------------
Revenues $ 33,344
Loss from continuing operations $ (14,945)
Loss from continuing operations
per common share - basic and diluted $ (.20)
Loss before extraordinary item
per common share - basic and diluted $ (1.87)
Net loss per common share - basic and diluted $ (1.89)
Weighted average shares outstanding
- basic and diluted 75,858
3. DISCONTINUED OPERATIONS
Following the acquisition of NACT in July 2001, the Company determined
that its legacy VAR business was not strategic to the Company's ongoing
objectives and discontinued capital and human resource investment in its
legacy VAR business. Accordingly, the Company elected to report its legacy
VAR business as discontinued operations by early adoption of SFAS No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets" ("SFAS
144"), effective for the fourth quarter of 2001. The legacy VAR business
is included with HSG (which was reported as discontinued operations in
2001) for a combined presentation of discontinued operations. The
consolidated financial statements have been reclassified to segregate the
net assets and operating results of these combined discontinued operations
for all periods presented.
During 2000, the Company's Board of Directors decided to dispose of HSG.
In December 2000, the Company completed the sale of its domestic lodging
business and international hospitality business for aggregate proceeds of
$10.0 million. The Company sold its restaurant solutions business for
aggregate proceeds of $8.5 million in January 2001.
The loss on the sale of HSG totaled $11.5 million. A loss of $11.0 million
was recorded in the third and fourth quarters of 2000 and an additional
$500,000 was recorded in the third quarter of 2001, the latter related to
winding up the Company's international hospitality operations, the assets
of which were sold in the fourth quarter of 2000.
9
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
3. DISCONTINUED OPERATIONS, Continued
Summary operating results of the discontinued operations for the three
months and nine months ended September 30, 2002 and 2001 (in thousands)
were as follows:
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
Revenue $ -- $ 1,711 $ 223 $ 11,791
======== ========= ========= =========
Gross (loss) profit $ -- $ (409) $ (331) $ 424
======== ========= ========= =========
Operating loss $ -- $ (9,962) $ (331) $(126,176)
======== ========= ========= =========
Loss from discontinued operations $ -- $ (10,462) $ (331) $(126,676)
======== ========= ========= =========
The loss from discontinued operations in the three months ended September
30, 2001 includes amortization of intangibles of $1.3 million,
reorganization costs of $6.5 million and amortization of deferred
compensation of $18,000. The loss from discontinued operations in the nine
months ended September 30, 2001 includes depreciation of $546,000,
amortization of intangibles of $22.7 million, write-down of goodwill of
$85.0 million, reorganization costs of $10.3 million and amortization of
deferred compensation of $267,000.
Assets and liabilities of discontinued operations (in thousands) are as
follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Accounts receivable, net $ -- $ 501
Other current assets -- 81
------ ------
Assets of discontinued operations $ -- $ 582
====== ======
Accrued restructuring costs $2,187 $2,730
Accrued compensation -- 210
Other current liabilities 1,016 1,360
------ ------
Liabilities of discontinued operations $3,203 $4,300
====== ======
The restructuring accrual relates to several leases for buildings and
equipment that are no longer being utilized in continuing operations. The
accrual is for all remaining payments due on these leases, less amounts to
be paid by any sublessors. The accrual for one lease with total payments
remaining of $3.1 million assumes that the building will be sub-leased for
approximately 50% of the total lease liability over the term of the lease.
Activity in the restructuring accruals was as follows:
Balance December 31, 2001 $ 2,730
Lease payments (718)
Additional restructuring accrual 175
-------
Balance September 30, 2002 $ 2,187
=======
10
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
4. INVENTORIES
Inventories consist primarily of purchased electronic components for the
Company's Gateway Solutions segment, and are stated at the lower of cost
or market. Cost is determined by using the first-in, first-out method.
Inventories as of September 30, 2002 and December 31, 2001, are comprised
of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Raw materials $ 1,476 $ 1,677
Work in process 2,147 1,376
Finished goods 1,346 1,361
------- -------
Total inventories 4,969 4,414
Inventory reserve (482) (419)
------- -------
Inventories, net $ 4,487 $ 3,995
======= =======
5. INTANGIBLES
Intangible assets represent the excess of cost over the fair value of net
tangible assets acquired and identified other intangible assets, primarily
purchased software development costs. The purchased software development
costs are amortized on a straight-line basis over estimated useful lives
of three years once the projects are placed in service. Intangibles are
evaluated for potential impairment of value whenever events or changes in
circumstances indicate that full asset recoverability is questionable.
Such evaluations consider current as well as anticipated operating results
measured on the basis of undiscounted cash flows of the operation relative
to the asset. Goodwill associated with the acquisitions of NACT and
Telemate.Net (see Note 2) is not being amortized in accordance with SFAS
142.
Intangible assets consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Intangibles subject to amortization:
Purchased software development $ 2,015 $ 1,748
Accumulated amortization (684) (236)
-------- --------
1,331 1,512
Intangibles not subject to amortization:
Goodwill $ 12,943 $ 14,437
-------- --------
Total intangibles $ 14,274 $ 15,949
======== ========
11
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
5. INTANGIBLES, Continued
Estimated annual amortization expense is as follows (in thousands):
ANNUAL
AMORTIZATION
------------
2002 $ 607
2003 680
2004 463
2005 29
---------
$ 1,779
=========
The Company adopted SFAS 142 in the first quarter of 2002. Under the
provisions of SFAS 142, goodwill is no longer subject to amortization. In
the three and nine months ended September 30, 2001, goodwill amortization
expense was $208,000 and $623,000, respectively. The impact of goodwill
amortization on basic and diluted loss per share is as follows (in
thousands, except per share amounts):
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2002 2001 2002 2001
---------------- ----------------- ---------------- -----------------
Reported net loss $ (1,019) $ (12,905) $ (2,808) $ (136,614)
Add: Goodwill amortization -- 208 -- 623
----------- ----------- ----------- -----------
Adjusted net loss $ (1,019) $ (12,697) $ (2,808) $ (135,991)
=========== =========== =========== ===========
Basic and diluted earnings per share:
Reported net loss $ (0.01) $ (0.25) $ (0.04) $ (2.67)
Goodwill amortization -- -- -- 0.01
----------- ----------- ----------- -----------
Adjusted net loss $ (0.01) $ (0.25) $ (0.04) $ (2.66)
=========== =========== =========== ===========
12
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
6. LOAN FACILITY WITH SILICON VALLEY BANK
In December 2001, the Company entered into the Credit Agreement with the
Bank. The Credit Agreement is secured by substantially all of the assets
of the Company. The interest rate (6.75% at September 30, 2002) is
computed at 2% above the Bank's Base Rate. The Credit Agreement provides
for up to $500,000 in letters of credit. Available borrowing under the
Credit Agreement is determined by a formula based on eligible receivables,
inventory, certain cash balances, outstanding letters of credit and
certain subjective limitations. Interest payments are due monthly, and the
Credit Agreement expires December 2002. The Company is working with the
Bank on the renewal. The Credit Agreement includes a loan fee of $50,000
and a fee of .25% on unused available borrowings. The Company paid certain
loan fees and attorney's fees totaling approximately $109,000 in
connection with the Credit Agreement. Pursuant to the loan commitment
letter with the Bank, the Company agreed to issue to the Bank a warrant to
purchase shares of the Company's common stock if the Company did not raise
additional equity of $10.0 million by April 15, 2002. The Company did not
raise such additional equity and, as a result, on May 15, 2002, the
Company issued to the Bank a warrant to purchase 308,641 shares of the
Company's common stock at an exercise price of $.81 per share. The fair
value of the warrants issued, totaled approximately $211,000, using the
Black-Scholes option pricing method based on the following
weighted-average assumptions: expected volatility - 128%; expected life -
five years; risk-free interest rate - 3.3%; and expected dividend yield -
0%. The loan fees, attorney's fees and fair value of the warrants are
being amortized to interest expense over the term of the Credit Agreement.
The Company had no borrowings under the Credit Agreement as of September
30, 2002. The availability under the Credit Agreement at September 30,
2002 was $4.1 million. Under the terms of the Credit Agreement, the
Company is required to maintain a minimum tangible net worth, computed
quarterly, and cannot declare dividends or incur any additional
indebtedness without the consent of the Bank, and must maintain other
financial covenants, as defined. The Company was in compliance with these
covenants as of September 30, 2002.
7. CONVERTIBLE SUBORDINATED DEBENTURES
In connection with the acquisition of MessageClick, certain investors of
MessageClick purchased $4.5 million of the Company's 7.5% convertible
subordinated debentures and warrants to purchase an aggregate of 1,026,820
shares of the Company's common stock at an exercise price of $7.30 per
share. The debentures are convertible into the Company's common stock at a
conversion price of $4.41. The convertible subordinated debentures are due
November 22, 2005. The debentures have been discounted to reflect the fair
value of the warrants issued, totaling approximately $1.4 million, using
the Black-Scholes option pricing method based on the following
weighted-average assumptions: expected volatility - 88%; expected life -
five years; risk-free interest rate - 5.5%; and expected dividend yield -
0%. The unamortized discount totaled approximately $865,000 at September
30, 2002. In addition, the Company paid certain private placement fees and
attorney's fees in connection with the sale of the debentures totaling
$50,000. The fees are being amortized to interest expense over the term of
the debentures.
The Company issued $7.0 million of its 5% convertible subordinated
debentures during the year ended December 31, 2000. The convertible
subordinated debentures were issued with warrants to purchase 368,322
shares of the Company's common stock at an exercise price of $4.98 per
share. The debentures were discounted to reflect the fair value of the
warrants issued, totaling approximately $1.0 million, using the
Black-Scholes option pricing method based on the following
weighted-average assumptions: expected volatility - 88%; expected life -
five years; risk-free interest rate - 5.5%; and expected dividend yield -
0%. In addition, the Company paid certain private placement fees
(including 88,712 shares of the Company's common stock with a fair value
at the date of issuance totaling $350,000) and attorney's fees in
connection with the sale of the debentures totaling $454,000. The fees
were amortized to interest expense over the term of the debentures until
the debentures were retired or converted into the Company's common stock.
13
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
7. CONVERTIBLE SUBORDINATED DEBENTURES, Continued
In January 2001, the Company modified the terms of its 5% convertible
subordinated debentures. According to the modified terms of the agreement,
the Company repurchased $4.5 million of the outstanding $7.0 million of
its 5% convertible subordinated debentures. Of the remaining $2.5 million
in outstanding 5% convertible subordinated debentures, $1.5 million were
converted by the investors into the Company's common stock at a price of
$1.40 per share. The remaining $1.0 million of 5% convertible subordinated
debentures was converted at $1.19 per share. In connection with this
modification, the Company issued warrants to purchase 954,455 shares of
the Company's common stock at an exercise price of $1.98 per share. The
fair value of the warrants issued, totaled approximately $977,000, using
the Black-Scholes option pricing method based on the following
weighted-average assumptions: expected volatility - 91%; expected life -
five years; risk-free interest rate - 5.5%; and expected dividend yield -
0%. The cost of conversion, including the warrants issued, totaled $1.6
million in the quarter ended March 31, 2001.
The cost of conversion is reflected as an extraordinary item in the
consolidated statement of operations for the nine months ended September
30, 2001 and consisted of the following (in thousands):
Fair value of warrants issued $ 977
Write off of related discount 365
Write off of related loan fees 165
Beneficial conversion 107
Legal and other costs 26
------
$1,640
======
8. OTHER COMPREHENSIVE LOSS
Comprehensive loss for the three and nine months ended September 30, 2002
and 2001 is shown in the following table (in thousands):
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- ------------
Net loss $ (1,019) $ (12,905) $ (2,808) $(136,614)
Other comprehensive loss:
Foreign currency translation 1 -- (2) --
--------- --------- --------- ---------
Comprehensive loss $ (1,018) $ (12,905) $ (2,810) $(136,614)
========= ========= ========= =========
14
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
9. SEGMENT INFORMATION
The Company reports information for two segments, Gateway Solutions and
Applications and Services (which the Company formerly referred to as its
Technology Services Group).
Gateway
Solutions: The Company's Gateway Solutions segment consists of the
operations of the Company's switching subsidiary, NACT.
The Company's Gateway Solutions segment includes
hardware and software, integration, applications and
technical training and support. Prior to the Company's
acquisition of NACT, the Company became an NACT reseller
in the first quarter of 2001.
Applications
and Services: The Company's Applications and Services segment consists
of the operations of the Company's customer response
center services as well as the operations of the
Company's Telemate.Net subsidiary. The Applications and
Services segment offers network management, support and
maintenance, customer response center services and
application services.
Management evaluates the business segment performance based on
contributions before unallocated items. Inter-segment sales and transfers
are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
GATEWAY APPLICATIONS
SOLUTIONS(a) AND SERVICES(a) TOTAL
--------------------------------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002
Revenue $ 5,665 $ 4,747 $10,412
Contribution before unallocated items 180 1,841 2,021
Goodwill and other intangibles 11,501 2,773 14,274
Total assets 27,877 4,138 32,015
Capital expenditures 160 -- 160
2001
Revenue $ 5,117 $ 3,205 $ 8,322
Contribution before unallocated items 963 765 1,728
Goodwill and other intangibles 16,355 1,661 18,016
Total assets 28,298 2,549 30,847
Capital expenditures 151 -- 151
(a) Beginning in August 2001,Gateway Solutions includes costs associated
with certain corporate and administrative functions to support this
business unit, which functions are located in Utah. Applications and
Services includes no allocation of corporate overhead costs or
capital expenditures. See also (b) description.
15
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
9. SEGMENT INFORMATION, Continued
The following table reconciles the total contribution before unallocated
items to the loss from continuing operations before extraordinary item (in
thousands):
Three Months Ended
September 30,
---------------------
2002 2001
------- -------
Contribution before unallocated items, per above $ 2,021 $ 1,728
Corporate and administrative expenses (b) (1,571) (2,083)
Depreciation (607) (649)
Amortization of intangibles (159) (470)
Amortization of deferred compensation (272) (483)
Reorganization costs (131) --
Other income 22 --
Interest expense, net (322) (486)
------- -------
Loss from continuing operations before
taxes and extraordinary item $(1,019) $(2,443)
======= =======
(b) All rent, utilities and other corporate office expenses, corporate
marketing expenses, corporate development costs and corporate human
resources, accounting and information technology functions that
support corporate, as well as, the Applications and Services segment
are reflected in unallocated corporate, sales, general and
administrative expenses. Office expenses, human resources,
accounting and information technology costs specifically related to
the Gateway Solutions segment are reflected in its contribution
before unallocated items.
GATEWAY APPLICATIONS
SOLUTIONS(a) AND SERVICES(a) TOTAL
-------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2002
Revenue $20,270 $13,807 $34,077
Contribution before unallocated items 2,449 5,008 7,457
Goodwill and other intangibles 11,501 2,773 14,274
Total assets 27,877 4,138 32,015
Capital expenditures 563 -- 563
2001
Revenue $ 7,942 $10,037 $17,979
Contribution before unallocated items 1,716 1,313 3,029
Goodwill and other intangibles 16,355 1,661 18,016
Total assets 28,298 2,549 30,847
Capital expenditures 151 -- 151
(a) Beginning in August 2001, Gateway Solutions includes costs
associated with certain corporate and administrative functions to
support this business unit, which functions are located in Utah.
Prior to the acquisition of NACT on July 27, 2001, the Company
became an NACT reseller in the first quarter of 2001. The Company
resold NACT gateway solutions totaling $2.8 million with cost of
product sales of $2.1 million during the nine months ended September
30, 2001. Applications and Services includes no allocation of
corporate overhead costs, assets or capital expenditures. See also
(b) description.
16
VERSO TECHNOLOGIES, INC. NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
9. SEGMENT INFORMATION, Continued
The following table reconciles the total contribution before unallocated
items to the loss from continuing operations before extraordinary item (in
thousands):
Nine Months Ended
September 30,
---------------------
2002 2001
------- -------
Contribution before unallocated items, per above $ 7,457 $ 3,029
Corporate and administrative expenses (b) (5,961) (6,328)
Depreciation (2,086) (1,438)
Amortization of intangibles (448) (1,219)
Amortization of deferred compensation (920) (1,450)
Reorganization costs (131)
Other income 453 --
Interest expense, net (841) (892)
------- -------
Loss from continuing operations before
taxes and extraordinary item $(2,477) $(8,298)
======= =======
(b) All rent, utilities and other corporate office expenses, corporate
marketing expenses, corporate development costs and corporate human
resources, accounting and information technology functions that
support corporate, as well as, the Applications and Services segment
are reflected in unallocated corporate, sales, general and
administrative expenses. Office expenses, human resources,
accounting and information technology costs specifically related to
the Gateway Solutions segment are reflected in its contribution
before unallocated items.
10. REORGANIZATION COSTS
In the third quarter of 2002, the Company initiated a reorganization as a
part of its effort to improve operational efficiencies and financial
performance and eliminated 19 positions held by employees. As a result of
these actions, the Company recorded reorganization costs of $131,000
during the three months ended September 30, 2002. The reorganization costs
consist of severance costs and the balance of the accrued severance costs
as of September 30, 2002 is $108,000. Annualized savings beginning in the
fourth quarter of 2002 are expected to be approximately $1.1 million.
17
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
11. STOCK OPTIONS AND WARRANTS
The Company has a stock option plan for employees, consultants, and other
individual contributors to the Company. In addition, in connection with
various financing and acquisition transactions, and for services provided
to the Company, the Company has issued warrants to purchase the Company's
common stock. A summary of stock options and warrants outstanding at
September 30, 2002, is as follows:
Options and warrants issued to employees
OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE
--------------------------------------- ------------------------------------------
RANGE OF EXERCISE OUTSTANDING AT WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
PRICES SEPTEMBER 30, 2002 EXERCISE PRICE AT SEPTEMBER 30, 2002 EXERCISE PRICE
----------------- ------------------ ---------------- --------------------- ----------------
$0.01-$0.33 2,010,199 $0.21 1,795,709 $0.21
$0.37-$0.52 1,164,819 $0.40 677,436 $0.42
$0.53-$0.66 1,137,500 $0.58 817,490 $0.60
$0.68-$1.00 353,840 $0.98 239,441 $0.99
$1.00-$1.50 2,341,145 $1.25 566,661 $1.20
$1.51-$2.55 5,419,015 $2.16 4,260,638 $2.16
$2.56-$5.25 2,809,766 $3.91 1,671,842 $4.01
$5.31-$18.00 524,059 $8.04 388,729 $7.97
---------- ----- ---------- -----
Total 15,760,343 $2.01 10,417,946 $2.02
========== ===== ========== =====
Options and warrants issued to employees generally terminate ten years
from the date of grant. Termination dates on the options and warrants
listed above range from December 6, 2002 to August 2, 2012.
Warrants issued primarily in connection with financing
NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING WARRANTS EXERCISE PRICE EXPIRATION DATE
-------------- -------------------- ----------------- ---------------------------
$0.01-$0.50 37,532 $0.01 September 2005-October 2006
$0.80-$1.00 558,641 $0.90 November 2004-May 2007
$1.50-$2.00 1,046,732 $1.94 August 2005-January 2006
$2.01-$2.25 140,723 $2.25 February 2003-February 2010
$3.00-$4.00 484,229 $3.09 February 1, 2003
$4.01-$5.00 619,691 $4.67 February 2003-July 2010
$5.01-$5.62 8,086,791 $5.61 February 2003-October 2006
$5.65-$7.30 5,924,006 $5.96 February 2003-November 2010
---------- -----
Total 16,898,345 $5.20
========== =====
Most warrants are vested when issued.
Options and warrants outstanding as of September 30, 2002 totaled
32,658,688.
The exercise price and number of outstanding warrants for certain warrants
previously issued have been adjusted according to their antidilution
provisions.
18
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
12. OTHER EVENTS
Settlement with RSL Communications, Ltd. and Affiliates
On or about July 6, 2000, RSL Communications, Ltd. (together with certain
of its affiliates (collectively, "RSL")) filed with the American
Arbitration Association a demand for arbitration against NACT, which
became a wholly-owned subsidiary of the Company on July 27, 2001. In the
arbitration, RSL claimed that, pursuant to a Sales Agreement between RSL
and NACT, NACT breached its obligation to indemnify and defend RSL against
patent infringement claims made against RSL by Aerotel, Ltd. in an action
pending in the United States District Court for the Southern District of
New York. RSL sought to recover from NACT amounts paid by RSL to defend
itself in such patent infringement action, which RSL claimed was
approximately $2.0 million, together with other unspecified damages
resulting from NACT's alleged breach. On March 13, 2002, the Company
entered into a Settlement Agreement and General Release (the "RSL
Settlement Agreement") with RSL, which provided that the Company issue to
RSL 523,430 shares of the Company's common stock (the "Settlement Shares")
and deposit $200,000 in escrow. Pursuant to the terms of the RSL
Settlement Agreement, the Company filed with the Securities and Exchange
Commission (the "SEC") a Registration Statement on Form S-3 covering the
resale of the Settlement Shares (the "Registration Statement"). On June
17, 2002, the Company issued 523,430 shares of the Company's common stock
with a market value on the effective date of the Registration Statement of
approximately $403,000 and the $200,000 plus accrued interest held in
escrow was released to RSL at that time.
13. LITIGATION
Except as previously disclosed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 or the Company's Quarterly Reports on
Form 10-Q for the quarters ended March 31, and June 30, 2002, the Company
is not a party to any material legal proceedings other than ordinary
routine claims and proceedings incidental to its business, and the Company
does not expect these claims and proceedings, either individually or in
the aggregate, to have a material adverse effect on the Company.
14. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," ("SFAS 145") which
eliminates the requirement to report gains and losses related to
extinguishments of debt as extraordinary items. The statement also
included other amendments and technical corrections, which will not have a
material impact on the Company. The provisions of the statement related to
the treatment of debt extinguishments are required to be applied in fiscal
years beginning after May 15, 2002
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." ("SFAS 146"). SFAS 146
addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for costs associated
with an exit or disposal activity be recognized when the liability is
incurred rather than when a company commits to such an activity and also
establishes fair value as the objective for initial measurement of the
liability. The Company will adopt SFAS 146 for exit or disposal activities
that are initiated after December 31, 2002.
19
VERSO TECHNOLOGIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2002
(Unaudited)
15. SUBSEQUENT EVENTS
Shanghai BeTrue Infotech Co., Ltd.
On October 1, 2002, the Company completed its acquisition of the 51%
interest in Shanghai BeTrue Infotech Co., Ltd. ("BeTrue"). The remaining
49% interest in BeTrue is owned by Shanghai Tangsheng Investments &
Development Co. Ltd ("Shanghai Tangsheng"). The joint venture will provide
the Company with an immediate distribution channel into the China and
Asia-Pacific region for the Company's application-based VoIP gateway
solutions, billing systems, value-added applications and web filtering
solutions.
The Company purchased the 51% interest in BeTrue for $100,000 from NeTrue
Communications, Inc., Shanghai Tangsheng's former joint venture partner.
At closing, the Company paid $50,000 to NeTrue Communications and will pay
an additional $25,000 to the joint venture on December 30, 2002 and
$25,000 on March 30, 2003. Upon closing the transaction, the Company
contributed to the joint venture certain next-generation communication
equipment and software valued at approximately $236,000 and $50,000 cash.
The Company will contribute an additional $25,000 to the joint venture on
December 30, 2002 and $25,000 on March 30, 2003.
Private Placement
On October 17, 2002, the Company signed subscription agreements to issue
9,646,302 units of the Company's securities ("Units"), with each Unit
consisting of one share of common stock and a warrant to purchase one
share of common stock, at a purchase price of $0.311 per Unit, resulting
in expected gross proceeds to the Company of $3.0 million (the "Private
Placement"). The Units will be issued upon the closing of the Private
Placement, which is scheduled to occur within thirty days of October 17,
2002. Each warrant entitles the holder to purchase one share of restricted
common stock at an exercise price of $0.311 per share. The warrants are
immediately exercisable for a five-year period and are callable at any
time following the date of issuance if the closing price of the Company's
common stock equals or exceeds $1.20 for ten consecutive trading days.
Discounted Payment of Certain Current Obligations
In November 2002, the Company negotiated the early retirement of the
remaining $1.75 million plus accrued interest due on the Note made by the
Company in connection with the purchase of NACT. The Company will satisfy
this and other current obligations using the 3.0 million proceeds expected
to be raised from the above Private Placement. The Company estimates that
it will save approximately $700,000 through this early retirement of these
obligations, which will be reflected in the financial statements in the
fourth quarter of 2002.
Reorganization
On November 6, 2002, the Company eliminated approximately 21 full-time
positions and effective, November 1, 2002, executive salaries were reduced
by 10%. In connection with this reorganization, the Company will record a
restructuring charge of $188,000 related to severance costs. Annualized
savings are expected to be approximately $1.7 million.
20
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Quarterly Report on Form 10-Q and in future filings
by the Company with the SEC and in the Company's written and oral statements
that are not statements of historical facts are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words "believe," "expect," "anticipate," "intend," "will" and similar
expressions are examples of words that identify forward-looking statements.
Forward-looking statements include, without limitation, statements regarding our
future financial position, business strategy and expected cost savings. These
forward-looking statements are based on our current beliefs, as well as
assumptions we have made based upon information currently available to us.
Each forward-looking statement reflects our current view of future events and is
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from any results expressed or implied by our
forward-looking statements. Important factors that could cause actual results to
differ materially from the results expressed or implied by any forward-looking
statements include:
- - our ability to grow and manage the business and continue to have positive
operating cash flow and our ability to fund cash needed for working
capital including acquisition-related liabilities and capital expenditures
until the business is generating cash;
- - our ability to successfully access the capital markets to fund the growth
of our business and continuous development of our proprietary products;
- - our ability to integrate our business with other entities we may
subsequently acquire;
- - trends for the continued growth of our business;
- - the effects of our accounting policies and general changes in generally
accepted accounting practices;
- - our ability to successfully market existing products and services, which
may be adversely impacted by competition and the general economy;
- - our ability to successfully develop and market new products and services;
and
- - other factors disclosed in our Form 10-K for the year ended December 31,
2001 and in our other filings with the SEC.
All subsequent forward-looking statements relating to the matters described in
this document and attributable to us or to persons acting on our behalf are
expressly qualified in their entirety by such factors. We have no obligation to
publicly update or revise these forward-looking statements to reflect new
information, future events, or otherwise, except as required by applicable
Federal securities laws, and we caution you not to place undue reliance on these
forward-looking statements.
21
GENERAL
The Company is a communications technology solutions provider for communications
service providers and enterprises seeking to implement application-based
telephony services, Internet usage management tools and outsourced customer
support services. The Company's continuing operations include two separate
business segments, Gateway Solutions, which includes the Company's subsidiary
NACT and Applications and Services, which includes its customer response center
operations and its subsidiary Telemate.Net. The Company acquired NACT in July
2001 and Telemate.Net in November 2001. The Company's discontinued operations
include its legacy VAR business and HSG.
The consolidated financial statements include the accounts of Verso
Technologies, Inc. and its wholly-owned subsidiaries, including Telemate.Net,
NACT and MessageClick, which the Company acquired in November 2000. The Company
acquired Telemate.Net, NACT and MessageClick each in transactions accounted for
as purchases.
The Company believes that the foregoing events significantly affect the
comparability of the Company's results of operations from year to year. You
should read the following discussion of the Company's results of operations and
financial condition in conjunction with the Company's consolidated financial
statements and related notes thereto included in Item 14 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
For the three months ended September 30, 2002, the Company's net loss totaled
$1.0 million, or $.01 per share, compared with net loss of $12.9 million, or
$.25 per share, for the same period in 2001. The 2001 results included a loss
from discontinued operations of $10.5 million or $.19 per share.
Continuing Operations
For the three months ended September 30, 2002, the Company's net loss from
continuing operations totaled $1.0 million, or $.01 per share, compared with a
net loss of $2.4 million, or $.05 per share, for the same period in 2001.
Total revenue was $10.4 million in the three months ended September 30, 2002,
reflecting a 25% increase from the same period in 2001. Products revenue was
$5.2 million in the three months ended September 30, 2002, and was primarily
related to the sale of NACT products. Services revenue was $5.2 million in the
three months ended September 30, 2002, reflecting a 42% increase from the same
period in 2001. Gross profit increased by $1.5 million in the three months ended
September 30, 2002, and was 56% of revenue in 2002, compared with 52% of revenue
in the same period of 2001. The increase in revenue, gross profit percentage and
gross profit dollars resulted primarily from the acquisitions of NACT and
Telemate.Net on July 27, 2001 and November 16, 2001, respectively, which sell
higher margin proprietary products.
Total operating expenses incurred in continuing operations for the three months
ended September 30, 2002, were $6.6 million, an increase of $251,000 compared to
the same period of 2001. The increase is primarily attributable to the following
items: reorganization costs of $131,000, increases in sales and marketing
expenses of $743,000 and research and development of $551,000 offset by
decreases in general and administrative expenses of $610,000, depreciation
expense of $42,000, intangible amortization of $311,000 and amortization of
deferred compensation of $211,000.
The decrease in general and administrative expenses resulted primarily from the
restructuring of most bonuses from a cash incentive based plan to an option
incentive based plan and on-going cost reduction initiatives resulting in
reduced personnel, telecom and other general and administrative expenses. The
restructuring of the bonus plan resulted in a reversal of previous compensation
of $420,000. In addition, the Company has experienced improved collections and
reduced its bad debt expense related to its customer response center operations
by $200,000.
The increase in sales and marketing expenses resulted from the addition of
personnel and related costs related to the acquisitions of NACT and Telemate.Net
in July 2001 and November 2001, respectively.
The increase in research and development is primarily related to the acquisition
of NACT in July 2001.
The decrease in depreciation expense is primarily related to fully depreciated
assets net of increases related to the purchase of furniture and equipment of
approximately $648,000 and $247,000 during the first nine months of 2002 and for
the last three months of 2001, respectively, as well as depreciation related to
assets acquired in the NACT and Telemate.Net acquisitions. Capital expenditures
are primarily depreciated on a straight-line basis over their estimated useful
lives of three years.
22
The $311,000 decrease in intangible amortization is primarily related to the
adoption of SFAS 142, which eliminated amortization of goodwill beginning
January 1, 2002.
The $211,000 decrease in amortization of deferred compensation primarily related
to the termination of certain options and full vesting of other options
outstanding since the Company's acquisitions of Telemate.Net in November 2001
and Cereus Technology Partners, Inc. ("Cereus") in September 2000. The deferred
compensation represents the intrinsic value of the Telemate.Net and Cereus
unvested options outstanding at the date of the acquisitions of Telemate.Net and
Cereus and is amortized over the remaining vesting period of the options.
In the third quarter of 2002, the Company announced a reorganization as a part
of its effort to improve operational efficiencies and financial performance and
eliminated approximately 19 positions held by employees. As a result of these
actions, the Company recorded reorganization costs of $131,000 during the three
months ended September 30, 2002. Annualized savings beginning in the third
quarter of 2002 are expected to be approximately $1.1 million.
As a percent of revenue, operating expenses from continuing operations,
excluding the amortization of intangibles and deferred compensation and
reorganization costs, were 58% during the three months ended September 30, 2002
down from 64% for the same period in 2001.
Other income was $22,000 during the three months ended September 30, 2002
compared with zero for the same period in 2001.
Interest expense was $322,000 during the three months ended September 30, 2002,
a decrease of $164,000 compared to the same period of 2001. The decrease was
attributable to interest on the Series B Preferred Stock issued for the purchase
of NACT offset by the amortization of the fair value of warrants issued to the
Bank.
Business Unit Performance
APPLICATIONS
Dollars in thousands GATEWAY SOLUTIONS AND SERVICES CONSOLIDATED
------------------- ------------------- --------------------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002 2001 2002 2001 2002 2001
- ------------------------------------------ -------- -------- -------- -------- -------- --------
Revenue $ 5,665 $ 5,117 $ 4,747 $ 3,205 $ 10,412 $ 8,322
======== ======== ======== ======== ======== ========
Gross profit 3,312 2,963 2,540 1,400 5,852 4,363
Gross margin 58% 58% 54% 44% 56% 52%
General and administrative 870 736 47 386 917 1,122
Sales and marketing 908 529 551 80 1,459 609
Research and development 1,354 735 101 169 1,455 904
-------- -------- -------- -------- -------- --------
Contribution before unallocated items(a) $ 180 $ 963 $ 1,841 $ 765 2,021 1,728
======== ======== ======== ========
Unallocated items:
Corporate, sales, general and
administrative expenses(b) 1,571 2,083
Depreciation 607 649
Amortization of intangibles 159 470
Amortization of deferred compensation 272 483
Reorganization costs 131 --
-------- --------
Operating loss (719) (1,957)
Other income 22 --
Interest expense, net (322) (486)
-------- --------
Loss from continuing operations
before extraordinary item $ (1,019) $ (2,443)
======== ========
(a) Beginning in August 2001, Gateway Solutions includes costs associated with
certain corporate and administrative functions to support this business
unit, which functions are located in Utah. Applications and Services
includes no allocation of corporate overhead costs. See also (b)
description
23
(b) All rent, utilities and other corporate office expenses, corporate
marketing expenses, corporate development costs and corporate human
resources, accounting and information technology functions that support
corporate, as well as, the Applications and Services segment are reflected
in unallocated corporate, sales, general and administrative expenses.
Office expenses, human resources, accounting and information technology
costs specifically related to the Gateway Solutions segment are reflected
in its contribution before unallocated items.
GATEWAY SOLUTIONS
Total Gateway Solutions revenue was $5.7 million in the three months ended
September 30, 2002, an 11% increase from the same period in 2001. The increase
in revenue reflects the operations of NACT for a full quarter in 2002 versus two
months in 2001.
Gross profit increased by $349,000 in the three months ended September 30, 2002,
and was 58% percent of revenue, the same percentage as the same period in 2001.
The increase in gross profit dollars reflects the operations of NACT for a full
quarter in 2002 versus two months in 2001.
Allocated operating expenses incurred in Gateway Solutions for the three months
ended September 30, 2002, were $3.1 million, an increase of $1.1 million
compared to the same period in 2001. The increases in general and administrative
expenses, sales and marketing expenses and research and development expenses
reflect the operations of NACT for a full quarter in 2002 versus two months in
2001, as well as, increased levels of spending on both sales and marketing and
research and development. As a percent of revenue, operating expenses for
Gateway Solutions were 55% during the three months ended September 30, 2002 up
from 39% during the same period in 2001.
APPLICATIONS AND SERVICES
Total applications and services revenue was $4.8 million in the three months
ended September 30, 2002, a 48% increase from the same period in 2001. The
increase in revenue is primarily related to the Company's acquisition of
Telemate.Net in November 2001.
Gross profit increased by $1.1 million in the three months ended September 30,
2002, and was 54% percent of revenue, compared with 44% of revenue in the same
period in 2001. The improvement in gross profit dollars and margin was
attributable to the Company's addition of its Telemate.Net operations.
Allocated operating expenses incurred in Applications and Services for the three
months ended September 30, 2002, were $699,000, an increase of $64,000 compared
to the same period in 2001. The decrease in general and administrative expenses
relates to a decrease in bad debt expense related to the Company's customer
response center operations, reduced bonus expense and eliminated administrative
positions in the customer response center. The increase in sales and marketing
expenses relates to Telemate.Net, which was acquired in November 2001. The
decrease in research and development expenses relates to the elimination of the
research and development activity related to MessageClick's ASP operations in
2001 offset by the addition of the research and development activities of
Telemate.Net, which was acquired in November 2001. As a percent of revenue,
allocated operating expenses for Applications and Services were 15% during the
three months ended September 30, 2002 down from 20% during the same period in
2001.
Discontinued Operations
Following the acquisition of NACT in July of 2001, the Company determined that
its legacy VAR business was not strategic to the Company's ongoing objectives
and discontinued capital and human resource investment in its legacy VAR
business. Accordingly, the Company elected to report its legacy VAR business as
discontinued operations by early adoption of SFAS 144. The legacy VAR business
was added to HSG (which was reported as discontinued operations in 2000) for a
combined presentation of discontinued operations, and the condensed consolidated
financial statements have been reclassified to segregate the net assets and
operating results of these business segments.
24
There were no results of discontinued operations for the three months ended
September 30, 2002. Summary operating results of the discontinued operations for
the three months ended September 30, 2001 (in thousands) were as follows:
Revenue $ 1,711
========
Gross loss $ (409)
========
Operating loss $ (9,962)
========
Loss from discontinued operations $(10,462)
========
The loss from discontinued operations in the three months ended September 30,
2001 includes amortization of intangibles of $1.3 million, reorganization costs
of $6.5 million and amortization of deferred compensation of $18,000.
NINE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
For the nine months ended September 30, 2002, the Company's net loss totaled
$2.8 million, or $.04 per share, compared with net loss of $136.6 million, or
$2.67 per share, for the same period in 2001. The 2002 results include a loss
from discontinued operations of $331,000. The 2001 results included a loss from
discontinued operations of $126.7 million and an extraordinary item - loss from
debt conversion totaling $1.6 million.
Continuing Operations
For the nine months ended September 30, 2002, the Company's net loss from
continuing operations totaled $2.5 million, or $.03 per share, compared with a
net loss of $8.3 million, or $.16 per share, for the same period in 2001.
Total revenue was $34.1 million in the nine months ended September 30, 2002,
reflecting a 90% increase from the same period in 2001. Products revenue was
$17.9 million in the nine months ended September 30, 2002, and was primarily
related to the sale of NACT products. Services revenue was $16.2 million in the
nine months ended September 30, 2002, reflecting a 54% increase from the same
period in 2001. Gross profit increased by $12.2 million in the nine months ended
September 30, 2002, and was 58% of revenue in 2002, compared with 42% of revenue
in the same period of 2001. The increase in revenue, gross profit percentage and
gross profit dollars resulted primarily from the acquisition of NACT in July
2001 and Telemate.Net in November 2001, both of which sell higher margin
proprietary products. NACT accounted for $8.6 million and Telemate.Net accounted
for $3.2 million of the increase.
Total operating expenses incurred in continuing operations for the nine months
ended September 30, 2002, were $21.9 million, an increase of $6.9 million
compared to the same period of 2001. The increase is primarily attributable to
the following items: $651,000 increase in general and administrative expenses,
$3.5 million increase in sales and marketing expenses, $3.2 million increase in
research and development, $648,000 increase in depreciation expense and
reorganization costs of $131,000 offset by decreases in intangible amortization
of $771,000 and amortization of deferred compensation of $530,000.
The increase in general and administrative expenses resulted from the addition
of personnel and related costs related to the acquisition of NACT offset by the
reduction of corporate and customer response center operations general and
administrative expenses. The decrease in corporate and customer response center
operations general and administrative expenses resulted primarily from on-going
cost reduction initiatives resulting in reduced personnel, telecom and other
general and administrative expenses.
The increase in sales and marketing expenses resulted from the addition of
personnel and related costs related to the acquisitions of NACT and Telemate.Net
in July 2001 and November 2001, respectively.
The increase in research and development is primarily related to the
acquisitions of NACT and Telemate.Net in July 2001 and November 2001,
respectively.
The increase in depreciation expense is primarily related to the purchase of
furniture and equipment of approximately $648,000 and $257,000 during the first
nine months of 2002 and for the last three months of 2001, respectively, as well
as the increased depreciation related to the assets acquired in the NACT and
Telemate.Net acquisitions. Capital expenditures are primarily depreciated on a
straight-line basis over their estimated useful lives of three years.
The $771,000 decrease in intangible amortization is primarily related to the
adoption of SFAS 142, which eliminated amortization of goodwill beginning
January 1, 2002.
25
The $530,000 decrease in amortization of deferred compensation primarily related
to the termination of certain options and full vesting of other options
outstanding since the Company's acquisition of Telemate.Net in November 2001 and
Cereus in September 2000. The deferred compensation represents the intrinsic
value of the Telemate.Net and Cereus unvested options outstanding at the date of
the acquisitions of Telemate.Net and Cereus and is amortized over the remaining
vesting period of the options.
In the third quarter of 2002, the Company announced a reorganization as a part
of its effort to improve operational efficiencies and financial performance and
eliminated approximately 19 positions held by employees. As a result of these
actions, the Company recorded reorganization costs of $131,000 during the three
months ended September 30, 2002. Annualized savings beginning in the third
quarter of 2002 are expected to be approximately $1.1 million.
As a percent of revenue, operating expenses from continuing operations,
excluding the amortization of intangibles, reorganization costs and deferred
compensation, were 60% during the nine months ended September 30, 2002, down
from 69% for the same period in 2001.
Other income was $453,000 during the nine months ended September 30, 2002
compared with zero for the same period in 2001. Included in other income during
the nine months ended September 30, 2002 was $254,000 of non-recurring
transactions related to insurance proceeds and sale of non-operating assets.
Interest expense was $841,000 during the nine months ended September 30, 2002, a
decrease of $51,000 compared to the same period of 2001. The decrease was
attributable to the reduction of interest on the Company's 5% convertible
subordinated debentures, which were paid or converted to common stock in 2001
and interest on the Series B Preferred Stock issued for the purchase of NACT
offset by the interest on the Note made by the Company in connection with the
purchase of NACT and the amortization of the fair value of warrants issued to
the Bank.
Business Unit Performance
APPLICATIONS
Dollars in thousands GATEWAY SOLUTIONS AND SERVICES CONSOLIDATED
------------------- ------------------- --------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 2001 2002 2001 2002 2001
- ------------------------------------------ -------- -------- -------- -------- -------- --------
Revenue $ 20,270 $ 7,942 $ 13,807 $ 10,037 $ 34,077 $ 17,979
======== ======== ======== ======== ======== ========
Gross profit 12,333 3,716 7,442 3,875 19,775 7,591
Gross margin 61% 47% 54% 39% 58% 42%
General and administrative 2,891 736 391 1,256 3,282 1,992
Sales and marketing 2,724 529 1,719 645 4,443 1,174
Research and development 4,269 735 324 661 4,593 1,396
-------- -------- -------- -------- -------- --------
Contribution before unallocated items(a) $ 2,449 $ 1,716 $ 5,008 $ 1,313 $ 7,457 $ 3,029
======== ======== ======== ========
Unallocated items:
Corporate, sales, general and
administrative expenses(b) 5,961 6,328
Depreciation expense 2,086 1,438
Amortization expense 448 1,219
Amortization of deferred compensation 920 1,450
Reorganization costs 131 --
-------- --------
Operating loss (2,089) (7,406)
Other income 453 --
Interest expense, net (841) (892)
-------- --------
Loss from continuing operations
before extraordinary item $ (2,477) $ (8,298)
======== ========
26
(a) Beginning in August 2001, Gateway Solutions includes costs associated with
certain corporate and administrative functions to support this business
unit, which functions are located in Utah. Prior to the acquisition of
NACT on July 27, 2001, the Company became an NACT reseller in the first
quarter of 2001. The Company resold NACT gateway solutions totaling $2.8
million with cost of product sales of $2.1 million during the nine months
ended September 30, 2001. Applications and Services includes no allocation
of corporate overhead costs. See also (b) description.
(b) All rent, utilities and other corporate office expenses, corporate
marketing expenses, corporate development costs and corporate human
resources, accounting and information technology functions that support
corporate, as well as, the Applications and Services segment are reflected
in unallocated corporate, sales, general and administrative expenses.
Office expenses, human resources, accounting and information technology
costs specifically related to the Gateway Solutions segment are reflected
in its contribution before unallocated items.
GATEWAY SOLUTIONS
Total Gateway Solutions revenue was $20.3 million in the nine months ended
September 30, 2002, a 155% increase from the same period in 2001. The increase
in revenue reflects nine months of activity in 2002 verus only two months of
activity in 2001 since the acquisition of NACT on July 27, 2001 plus the resale
activity in the first and second quarters of 2001. Prior to the acquisition of
NACT in July 2001, the Company became an NACT reseller in the first quarter of
2001. The Company resold NACT gateway solutions totaling $2.8 million with cost
of product sales of $2.1 million during the nine months ended September 30,
2001. Prior to the acquisition of NACT, there were no identifiable operating
expenses related to the Gateway Solutions segment.
Gross profit increased by $8.6 million in the nine months ended September 30,
2002, and was 61% percent of revenue, an increase from 47% during the same
period in 2001. The increase in gross profit dollars and margin reflects nine
months of activity in 2002 versus only two months of activity in 2001 plus the
lower margin resale activity in the first and second quarters of 2001.
Allocated operating expenses incurred in Gateway Solutions for the nine months
ended September 30, 2002, were $9.9 million, an increase of $7.9 million
compared to the same period in 2001. The increases in general and administrative
expenses, sales and marketing expenses and research and development expenses
reflect the operations of NACT for nine months of activity in 2002 versus only
two months of activity in 2001. As a percent of revenue, operating expenses for
Gateway Solutions were 49% during the nine months ended September 30, 2002 up
from 25% during the same period in 2001.
APPLICATIONS AND SERVICES
Total applications and services revenue was $13.8 million in the nine months
ended September 30, 2002, a 38% increase from the same period in 2001. The
increase in revenue is primarily related to the Company's acquisition of
Telemate.Net in November 2001.
Gross profit increased by $3.6 million in the nine months ended September 30,
2002, and was 54% percent of revenue, compared with 39% of revenue in the same
period in 2001. The improvement in gross profit dollars and margin was primarily
attributable to the addition of the Telemate.Net operations.
Allocated operating expenses incurred in Applications and Services for the nine
months ended September 30, 2002, were $2.4 million, a decrease of $128,000
compared to the same period in 2001. The decrease in general and administrative
expenses and research and development expenses relates to the operations of
MessageClick's ASP operations, which were substantially eliminated in the second
quarter of 2001. The increase in sales and marketing expenses relates to
Telemate.Net, which was acquired in November 2001. As a percent of revenue,
operating expenses for Applications and Services were 18% during the nine months
ended September 30, 2002, down from 26% during the same period in 2001.
Discontinued Operations
Following the acquisition of NACT in July of 2001, the Company determined that
its legacy VAR business was not strategic to the Company's ongoing objectives
and discontinued capital and human resource investment in its legacy VAR
business. Accordingly, the Company elected to report its legacy VAR business as
discontinued operations by early adoption of SFAS 144. The legacy VAR business
was added to HSG (which was reported as discontinued operations in 2000) for a
combined presentation of discontinued operations, and the condensed consolidated
financial statements have been reclassified to segregate the net assets and
operating results of these business segments.
27
Summary operating results of the discontinued operations for the nine months
ended September 30, 2002 and 2001 (in thousands) were as follows:
Nine months ended September 30,
--------------------------------
2002 2001
---------- ----------
Revenue $ 223 $ 10,080
========== ==========
Gross (loss) profit $ (331) $ 833
========== ==========
Operating loss $ (331) $ (126,176)
========== ==========
Loss from discontinued operations $ (331) $ (126,176)
========== ==========
Loss on disposal of discontinued operations $ -- $ (500)
========== ==========
The loss from discontinued operations in the nine months ended September 30,
2001 includes depreciation of $546,000, amortization of intangibles of $22.7
million, write-down of goodwill of $85.0 million, reorganization costs of $10.3
million and amortization of deferred compensation of $267,000.
Extraordinary Item
In January 2001, the Company modified the terms of the $7.0 million outstanding
balance of its 5% convertible subordinated debentures as follows: the Company
repurchased $4.5 million, converted $1.5 million into the Company's common stock
at a price of $1.40 per share, fixed the conversion rate at $1.19 per share for
the remaining $1.0 million and issued warrants to purchase 954,455 shares of the
Company's common stock at an exercise price of $1.98 per share. The cost of this
conversion and early retirement of debt totaled $1.6 million.
CRITICAL AND SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the condensed consolidated financial statements and
accompanying notes. Factors that could affect the Company's future operating
results and cause actual results to vary from expectations include, but are not
limited to, lower than anticipated growth from existing customers, an inability
to attract new customers, and inability to successfully integrate acquisitions,
technology changes, or a decline in the financial stability of the Company's
customers. Negative developments in these or other risk factors could have a
material adverse affect on the Company's financial position and results of
operations.
A summary of the Company's critical and significant accounting policies follows:
Allowance for Doubtful Accounts
The Company is required to estimate the collectibility of its trade receivables.
Considerable judgment is required in assessing the ultimate realization of these
receivables including the creditworthiness of each customer. Significant changes
in required reserves have been recorded in recent periods and may occur in the
future due to the current telecom and software environment.
Inventory Reserve
The Company is required to state its inventories at the lower of cost or market.
In assessing the ultimate realization of inventories, the Company is required to
make judgments as to future demand requirements and compare that with the
current or committed inventory levels. The Company has recorded changes in
required reserves in recent periods due to impact of current and future
technology trends and changes in strategic direction, such as discontinuances of
product lines, as well as, changes in market conditions due to changes in demand
requirements. It is possible that changes in required inventory reserves may
continue to occur in the future due to the current market conditions.
28
Restructuring Accruals
During the second and third quarters of 2001, the Company initiated certain
restructuring plans. In conjunction with these restructuring plans, the Company
established a restructuring reserve account for the estimated costs related to
the plans. These costs primarily related to facilities closings, severance costs
and MessageClick ASP service exiting costs. For the facilities closings cost, a
reserve was established for all remaining lease payments due on buildings and
equipment that were no longer being utilized in continuing operations, less
assumptions for sub-leases. The accrual for one lease with total payments
remaining of $3.1 million, assumes that the building will be sub-leased for 50%
of the total lease liability over the term of the lease. As of September 30,
2002, the Company had a remaining reserve balance of approximately $2.2 million,
which is included in liabilities of discontinued operations. The Company
currently believes that this remaining estimated balance is appropriate to cover
future obligations associated with the restructurings. Activity in the 2001
restructuring accruals was as follows:
Balance December 31, 2001 $ 2,730
Lease payments (718)
Additional restructuring accrual 175
-------
Balance September 30, 2002 $ 2,187
=======
During the third quarter of 2002, the Company initiated a restructuring plan. In
conjunction with this plan, the Company established a reserve account of
$131,000 for the estimated costs related to the plan. These costs primarily
relate to severance costs. The balance of the reserve related to the 2002
restructuring was $108,000 at September 30, 2002.
Deferred Tax Asset Valuation Allowance
The Company currently has significant deferred tax assets, which are subject to
periodic recoverability assessment. Realization of the Company's deferred tax
assets is principally dependant upon achievement of projected future taxable
income. The Company's judgments regarding future profitability may change due to
market conditions, its ability to continue to successfully execute its strategic
plan and other factors. These changes, if any, may require possible material
adjustments to these deferred tax asset balances. Due to the uncertainty of the
Company's ability to recognize the entire tax benefit, the Company established
an offsetting provision for the tax benefit recorded.
Litigation and Related Contingencies
The Company is subject to proceedings, lawsuits and other claims related to
labor, product and other matters. The Company is required to assess the
likelihood of any adverse judgments or outcomes to these matters, as well as,
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is made after careful analysis of each
individual issue based upon the then current facts and circumstances. The
required reserves may change in the future due to new developments in each
matter or changes in approach such as a change in settlement strategy in dealing
with these matters.
Intangible Assets
The Company has significant intangible assets related to goodwill and other
acquired intangibles. The determination of related estimated useful lives and
whether or not these assets are impaired involves significant judgments. Changes
in strategy and/or market conditions could significantly impact these judgments
and require adjustments to recorded asset balances. The Company assesses the
recoverability of its intangible assets by determining whether the value of
goodwill and other acquired intangible assets over their remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds. Effective January 1, 2002, the Company adopted
SFAS 142, which stipulates an impairment test is to be performed at each
reporting date that requires a comparison of the fair value of an intangible
asset with its carrying amount. If the carrying amount of an intangible asset
exceeds its fair value, then an impairment loss shall be recognized in an amount
equal to that excess. Based on the Company's analysis, there has been no
impairment of goodwill as of September 30, 2002.
29
LIQUIDITY AND CAPITAL RESOURCES
Summary
Liquidity is the measurement of the Company's ability to have adequate cash or
access to cash at all times in order to meet financial obligations when due, as
well as to fund corporate expansion and other activities. Historically, the
Company has met its liquidity requirements through a combination of cash
provided by debt from third party lenders, issuances of debt and equity
securities and sale of discontinued businesses.
At September 30, 2002, the Company had a negative working capital position
(excess of current liabilities over current assets) of $33,000 compared to a
negative working capital position of $2.2 million at December 31, 2001. The
Company's cash and cash equivalents totaled $1.4 million at September 30, 2002,
and $7.7 million at December 31, 2001. Total long-term debt, net of discount,
was $3.6 million at September 30, 2002 and $3.4 million at December 31, 2001. At
September 30, 2002, the Company had no borrowings under its $5.0 million Credit
Agreement with the Bank. The Credit Agreement is secured by substantially all of
the assets of the Company. The availability under the Credit Agreement at
September 30, 2002 was $4.1 million.
Cash Flow
Cash used in the Company's continuing operations in the nine months ended
September 30, 2002 totaled approximately $2.8 million compared with cash used in
continuing operations of $8.5 million in the same period in 2001. The Company's
use of cash in continuing operations during the nine months ended September 30,
2002 resulted primarily from cash used for changes in current operating items of
approximately $5.6 million and was offset by cash from continuing operations of
$2.8 million (net loss from continuing operations of $2.5 million reduced by
non-cash charges totaling $5.3 million, including depreciation and amortization
of $3.9 million, a provision for doubtful accounts of $1.2 million and an
inventory valuation reserve of $134,000).
Cash used in the Company's discontinued operations in the nine months ended
September 30, 2002 totaled $897,000 compared with cash used in discontinued
operations of $5.5 million in the same period in 2001.
The Company used cash in investing activities for continuing operations in the
nine months ended September 30, 2002 of approximately $915,000, compared to
$15.4 million in the same period of 2001. Of these amounts, the Company spent
$648,000 and $1.2 million on capital expenditures in the nine months ended
September 30, 2002 and 2001, respectively. The Company also invested $267,000 on
purchased software development costs in the nine months ended September 30,
2002. The Company used $14.3 million to purchase NACT in 2001.
During the nine months ended September 30, 2001, the Company received net
proceeds from sale of discontinued operations totaling $8.0 million for the sale
of its restaurant solutions business.
Cash used in financing activities from continuing operations totaled
approximately $1.7 million in the nine months ended September 30, 2002, compared
to $10.7 million provided by financing activities in the same period of 2001.
Payments of the Note made by the Company in connection with the purchase of NACT
totaled $2.0 million, payments of notes receivable from shareholders totaled
$24,000 and proceeds from the issuance of the Company's common stock totaled
$289,000 in the nine months ended September 30, 2002. Payments to repurchase
convertible subordinated debentures totaled $4.5 million, proceeds from issuance
of Series B Preferred Stock to Telemate.Net for the purchase of NACT totaled
$15.0 million and proceeds from the issuance of common stock totaled $157,000 in
the nine months ended September 30, 2001.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes the Company's future contractual obligations at
September 30, 2002 (in thousands):
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
--------------------------------------------- ----- --------- --------- --------- -------
Deferred payment due for the purchase of NACT $ 2,250 $ 2,250 $ -- $ -- $ --
Convertible subordinated debentures 4,500 -- -- 4,500 --
Operating leases:
Continuing operations 14,751 2,054 4,004 4,007 4,686
Discontinued operations 2,144 558 792 366 428
------- ------- ------- ------- -------
Total contractual cash obligations $23,645 $ 4,862 $ 4,796 $ 8,873 $ 5,114
======= ======= ======= ======= =======
30
SOURCES OF CASH
For 2002, the Company expects that its primary sources of cash will be from the
Private Placement with expected aggregate proceeds of $3.0 million, cash on
hand, working capital provided by operating activities, borrowings under the
Credit Agreement and other possible sources, including issuances of equity or
debt securities. The Company believes that, with its current operations, which
were cash flow positive for the last four quarters, it will have sufficient
liquidity from these sources to meet its current financial obligations through
2002. The Credit Agreement, however, contains certain financial covenants and
limitations on the Company's ability to access funds under the Credit Agreement.
If the Company is in violation of the Credit Agreement, or does not have
sufficient eligible accounts receivable and inventory to support the level of
borrowings it may need, the Company may be unable to draw on the Credit
Agreement to the extent necessary. To the extent the Company does not have
borrowing availability under the Credit Agreement, the Company may be required
to obtain additional sources of capital, sell assets, obtain an amendment to the
Credit Agreement or otherwise restructure its outstanding indebtedness. The
Credit Agreement expires December 2002 and the Company is working with the Bank
on the renewal.
If the Company is unable to obtain additional capital, sell assets, obtain an
amendment to the Credit Agreement or otherwise restructure its outstanding
indebtedness, the Company may not be able to meet its obligations.
The Company's short-term cash needs are to cover working capital needs,
including cash operating losses, if any, capital expenditures, the payments on
the early retirement of the secured note payable plus accrued interest related
to the acquisition of NACT and other current payables, payments related to
discontinued operations, and $150,000 related to the Company's acquisition of
51% of BeTrue. At September 30, 2002, included in accrued compensation and
liabilities of discontinued operations is $47,000 for Telemate.Net related
severance costs and $2.2 million in payments related to discontinued operations.
The Company expects to pay out approximately $289,000 related to Telemate.Net
severance costs and discontinued operations for the remainder of 2002. In
addition, on November 6, 2002, the Company entered into a Settlement Agreement
with WATP pursuant to which the Company will pay approximately $3.0 million to
satisfy the remaining balance of the secured note payable plus accrued interest
related to the acquisition of NACT and other current payables. The closing of
the transactions contemplated by such agreement is subject to the approval of
the Bankruptcy Court, which has jurisdiction over WATP's pending bankruptcy
proceedings. The payment of the secured note payable plus accrued interest
related to the acquisition of NACT and other current payables will be made using
the $3.0 million proceeds expected to be raised in the Private Placement in
November 2002.
The Company's long-term cash needs are related to the costs of growing its
current business as well as prospective businesses to be acquired, including
capital expenditures and working capital. The Company expects to meet these cash
needs through cash from operations, if any, cash on hand, borrowings under the
Credit Agreement or other debt facilities, if available, as well as through
possible issuances of equity or debt securities. If the Company is unable to
secure a working capital line of credit with sufficient borrowing availability
(or restructure its existing line of credit), obtain additional capital or sell
assets, then the Company may not be able to meet its obligations and growth
plans.
31
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is exposed to various market risks, including changes in interest
rates. Market risk is the potential loss arising from adverse changes in market
rates and prices, such as interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company has also not entered into financial instruments to manage and reduce
the impact of changes in interest rates. The Company may enter into such
transactions in the future.
Interest Rate Risks
The Company's debt at September 30, 2002, carries interest rates, which are
fixed.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings under the Exchange Act.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as previously disclosed in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 or the Company's Quarterly Reports on
Form 10-Q for the quarters ended March 31, and June 30, 2002, the Company
is not a party to any material legal proceedings other than ordinary
routine claims and proceedings incidental to its business, and the Company
does not expect these claims and proceedings, either individually or in
the aggregate, to have a material adverse effect on the Company.
Item 2. Changes in Securities
Pursuant to the Private Placement, on October 17, 2002, the Company
accepted subscription agreements from certain purchasers pursuant to which
the Company became obligated to sell, and such purchasers became obligated
to buy, Units for an aggregate purchase price of $3,000,000.00, with each
Unit consisting of one share of the Company's common stock, par value
$0.01 per share, and one warrant to purchase one share of the Company's
common stock for a purchase price per Unit of $0.311. The warrants are
immediately exercisable for a five-year period at a fixed exercise price
of $0.311 per share and do not provide for any anti-dilution adjustment
mechanisms.
Upon the closing of the Private Placement, which is scheduled to occur
within 30 days of October 17, 2002, the Company will issue 9,646,302
shares of common stock and warrants to purchase 9,646,302 shares of common
stock.
The common stock and warrants issuable pursuant to the Private Placement
will be issued without registration under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon the exemption in Rule 506
of Regulation D promulgated pursuant to Section 4(2) of the Securities Act
("Regulation D"). The Company based such reliance upon factual
representations made to the Company by each purchaser of a Unit as to such
purchaser's investment intent, sophistication, and status as an
"accredited investor," as that term is defined in Rule 501 of Regulation
D, among other things.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of the Company's Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Company's Chief Financial Office pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2002, the Company did not
file any Current Reports on Form 8-K during the quarter ended June
30, 2002.
33
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
VERSO TECHNOLOGIES, INC.
Date: November 13, 2002 /s/ Juliet M. Reising
-----------------
Executive Vice President and Chief
Financial Officer (duly authorized
signatory and Principal Financial
and Accounting Officer)
34
CERTIFICATIONS
I, Steven A. Odom, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Verso Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
/s/ Steven A. Odom
------------------
Steven A. Odom
Chairman of the Board and
Chief Executive Officer
35
I, Juliet M. Reising, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Verso Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002
/s/ Juliet M. Reising
---------------------
Juliet M. Reising
Executive Vice President and
Chief Financial Officer
36
EXHIBIT INDEX
99.1 Certification of the Company's Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Company's Chief Financial Office pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
37