VERSO TECHNOLOGIES INC - 10-Q Quarterly Report

400 Galleria Parkway, Suite 300, Atlanta, GA 30339
(Address of Principal Executive Offices)

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 [ ].

Indicated by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X].

Shares of the registrant’s common stock, par value $.01 per share, outstanding as of May 14, 2003: 89,691,755.


		Page No.

Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2003 and
	December 31, 2002		2
	Condensed Consolidated Statements of Operations for the three months
	ended March 31, 2003 and 2002		3
	Condensed Consolidated Statements of Cash Flows for the three months
	ended March 31, 2003 and 2002		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		28
Item 4.	Controls and Procedures		28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		29
Item 2.	Changes in Securities and Use of Proceeds		30
Item 6.	Exhibits and Reports on Form 8-K		30
Signature Page			33
Certifications			34
Exhibit Index			36


				March 31,			December 31,
				2003			2002

ASSETS:
Current assets:
	Cash and cash equivalents			$	269		$	1,294
	Restricted cash				419			300
	Accounts receivable, net				14,825			10,909
	Inventories				10,136			4,733
	Other current assets				1,639			681

		Total current assets			27,288			17,917
Property and equipment, net					6,126			4,962
Investment in Shanghai BeTrue Infotech Co. Ltd., at equity					567			600
Other intangibles, net					3,619			3,671
Goodwill					12,685			12,685

			Total assets	$	50,285		$	39,835

LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
	Line of credit			$	2,200		$	800
	Current portion of notes payable				6,800			—
	Accounts payable				2,340			1,993
	Accrued compensation				1,662			1,586
	Accrued expenses				3,790			4,473
	Unearned revenue and customer deposits				5,959			5,387
	Current portion of liabilities of discontinued operations				1,283			1,829

		Total current liabilities			24,034			16,068
Liabilities of discontinued operations, net of current portion					1,255			1,302
Other long-term liabilities					962			1,128
Notes payable, net of current portion					3,000			—
Convertible subordinated debentures, net of discount					3,772			3,703

		Total liabilities			33,023			22,201

Shareholders’ equity:
	Common stock, $.01 par value, 200,000,000 shares authorized; 89,691,755 and 89,077,846 shares issued and outstanding				897			891
	Additional paid-in capital				275,488			275,040
	Notes receivable from shareholders				(1,578	)		(1,623	)
	Accumulated deficit				(255,982	)		(254,857	)
	Deferred compensation				(1,594	)		(1,797	)
	Accumulated other comprehensive income (loss) — foreign currency translation				31			(20	)

		Total shareholders’ equity			17,262			17,634

			Total liabilities and shareholders’ equity	$	50,285		$	39,835

The accompanying notes are an integral part of these condensed consolidated financial statements.


				For the three months ended March 31,

				2003			2002

Revenue:
	Products			$	7,268		$	6,604
	Services				5,729			5,390

		Total revenue			12,997			11,994
Cost of revenue:
	Products				2,761			2,331
	Services				2,664			2,618

		Total cost of revenue			5,425			4,949
Gross profit:
	Products				4,507			4,273
	Services				3,065			2,772

			Total gross profit		7,572			7,045
Operating expenses:
	General and administrative				3,321			3,112
	Sales and marketing				1,891			1,765
	Research and development				1,896			1,675
	Depreciation and amortization of property and equipment				653			762
	Amortization of intangibles				212			142
	Amortization of deferred compensation, related to sales, general and administrative				199			324
	Reorganization costs				194			—

		Total operating expenses			8,366			7,780

			Operating loss from continuing operations		(794	)		(735	)
Other income					9			86
Equity in loss of Shanghai BeTrue Infotech Co. Ltd					(33	)		—
Interest expense, net, including $92 and $95 of amortization of loan fees and discount on convertible subordinated debentures in 2003 and 2002, respectively					(307	)		(210	)

Loss from continuing operations before income taxes					(1,125	)		(859	)
Income tax benefit (expense)					—			—

Loss from continuing operations					(1,125	)		(859	)
Loss from discontinued operations, net of income taxes					—			(331	)

Net loss				$	(1,125	)	$	(1,190	)

Net loss per common share — basic and diluted:
	Loss from continuing operations			$	(0.01	)	$	(0.01	)
	Loss from discontinued operations				—			(0.01	)

Net loss per common share — basic and diluted				$	(0.01	)	$	(0.02	)

Weighted average shares outstanding — basic and diluted					89,437,720			77,882,051

The accompanying notes are an integral part of these condensed consolidated financial statements.


					For the three months ended March 31,

					2003			2002

Operating Activities:
	Continuing operations:
		Net loss from continuing operations			$	(1,125	)	$	(859	)
		Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
				Equity in loss of Shanghai BeTrue Infotech Co. Ltd		33			—
				Depreciation		653			762
				Amortization of intangibles		212			142
				Amortization of deferred compensation		199			324
				Provision for doubtful accounts		644			351
				Amortization of loan fees and discount on convertible subordinated debentures		92			95
				Other		12			(30	)
				Changes in current operating assets and liabilities, net of effects of acquisition:
				Accounts receivable		(1,925	)		(1,430	)
				Inventories		652			126
				Other current assets		(375	)		222
				Accounts payable		244			(111	)
				Accrued compensation		3			(928	)
				Accrued expenses		(909	)		(244	)
				Unearned revenue and customer deposits		86			(110	)

				Net cash used in continuing operating activities		(1,504	)		(1,690	)

	Discontinued operations:
		Loss from discontinued operations				—			(331	)
		Adjustment to reconcile loss from discontinued operations to net cash used in discontinued operating activities				(329	)		118

				Net cash used in discontinued operating activities		(329	)		(213	)

				Net cash used in operating activities		(1,833	)		(1,903	)

Investing Activities:
	Net cash used in investing activities - Purchases of property and equipment, net					(167	)		(222	)
		Software development costs capitalized				(160	)		(82	)
		Purchase of Clarent Corporation, net of cash acquired				(295	)		—

			Net cash used in investing activities			(622	)		(304	)

Financing Activities:
	Borrowings on credit line, net					1,400			—
	Proceeds from issuances of common stock, net					—			183

		Net cash provided by financing activities				1,400			183

Effect of exchange rate changes on cash						30			—

			Decrease in cash and cash equivalents			(1,025	)		(2,024	)
Cash and cash equivalents at beginning of period						1,294			7,745

Cash and cash equivalents at end of period					$	269		$	5,721

Supplemental disclosure of cash flow information:
	Cash payments during the period for:
		Interest			$	153		$	55

		Income taxes			$	10		$	33

	Non-cash investing and financing activities
		Common stock and compensatory options issued in reorganization			$	125		$	65
		Issuance of common stock in litigation settlement				264			—
		Issuance of warrants in exchange for services				119			—
		Assets acquired and liabilities assumed in conjunction with business acquisitions:
			Fair value of assets acquired, excluding cash		$	11,081		$	—
			Consideration paid			295			—

				Liabilities assumed	$	10,786		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

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 include two separate business segments, the Carrier Solutions Group, which the Company formerly referred to as its Gateway Solutions business, which includes the Company’s subsidiary NACT Telecommunications, Inc. (“NACT”) and the Company’s Clarent softswitching division, and the Enterprise Solutions Group, which the Company formerly referred to as its Applications and Services business, which includes the Company’s subsidiary Telemate.Net Software, Inc. (“Telemate.Net”) and the Company’s Clarent Netperformer division as well as the Company’s customer response center operations. The Carrier Solutions Group includes domestic and international sales of hardware and software, integration, applications and technical training and support. The Enterprise Solutions Group offers 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 the Company’s value-added reseller business and associated consulting practice (“legacy VAR business”) and the Company’s hospitality services group (“HSG”), all of which were inactive by the end of the first quarter of 2002.

The condensed consolidated financial statements include the accounts of Verso Technologies, Inc. and its wholly-owned subsidiaries, including Telemate.Net, NACT, Clarent Canada Ltd. and MessageClick, Inc. (“MessageClick”).

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, 2002.

On February 12, 2003, to increase the Company’s holdings in the next-generation networking and technology market, the Company acquired substantially all the business assets along with certain related liabilities of Clarent Corporation (“Clarent”). The purchase consideration was approximately $10.6 million, consisting of $9.8 million in seller notes made by the Company and acquisition costs of approximately $750,000. At closing of the acquisition, the Company issued three promissory notes to Clarent: a $5.0 million secured note due February 13, 2004, which bears interest at 10% per annum, of which $500,000 is due May 13, 2003, and the remainder is due in monthly installments beginning in June, increasing in amount each month; a $1.8 million non-interest bearing unsecured note due February 13, 2004, of which $300,000 is due May 13, 2003 and the remainder is due in quarterly installments of $500,000; and a $3.0 million secured note due February 12, 2008, which bears interest at 5% per annum. The assets the Company purchased from Clarent are security for the secured notes.

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 Company has prepared an initial allocation of the purchase price based on the estimated fair values of certain 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 acquired assets being held for sale, intangible assets, and estimated liabilities. Upon resolution of the estimates and fair values, the Company anticipates the allocation of purchase price to be finalized prior to the end of the first quarter of 2004.

The preliminary allocation of the purchase price for the assets acquired from Clarent, is as follows:


MINNESOTA		41-1484525
(State or Other Jurisdiction		(I.R.S. Employer Identification No.)
of Incorporation or Organization)


CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
CERTIFICATIONS
EXHIBIT INDEX
EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
EX-99.2 SECTION 906 CERTIFICATION OF THE CFO

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	Clarent

Cash and cash equivalents	$	350
Restricted cash		115
Accounts receivabl