UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
o 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.
| 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 þ No o.
Indicated by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act)
Yes þ No o.
Shares of the registrant’s common stock, par value $.01 per share, outstanding as of May 9, 2005: 134,472,641.
VERSO TECHNOLOGIES, INC.
FORM 10-Q
INDEX
| Page No. | ||||||||
Part I. FINANCIAL INFORMATION |
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Item 1. Financial Statements (Unaudited) |
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| 3 | ||||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 21 | ||||||||
| 31 | ||||||||
| 32 | ||||||||
| 33 | ||||||||
| 33 | ||||||||
| 33 | ||||||||
| 34 | ||||||||
| 35 | ||||||||
| EX-10.32 ASSUMPTION AGREEMENT DATED APRIL 14, 2005 | ||||||||
| EX-10.33 BORROWER AGREEMENT DATED APRIL 14, 2005 | ||||||||
| EX-10.34 AMENDED & RESTATED SECURED PROMISSORY NOTE | ||||||||
| EX-31.1 SECTION 302, CERTIFICATION OF THE CEO | ||||||||
| EX-31.2 SECTION 302, CERTIFICATION OF THE CFO | ||||||||
| EX-32.1 SECTION 906, CERTIFICATION OF THE CEO | ||||||||
| EX-32.2 SECTION 906, CERTIFICATION OF THE CFO | ||||||||
VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
ASSETS: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 14,700 | $ | 4,234 | ||||
Restricted cash |
1,620 | — | ||||||
Accounts receivable, net of allowance for doubtful accounts of $325
and $255, respectively |
3,412 | 3,961 | ||||||
Inventories |
4,843 | 5,362 | ||||||
Other current assets |
2,710 | 1,451 | ||||||
Current portion of note receivable |
300 | — | ||||||
Assets held for sale |
— | 8,995 | ||||||
Total current assets |
27,585 | 24,003 | ||||||
Property and equipment, net of accumulated depreciation and amortization
of $6,508 and $7,047, respectively |
3,646 | 3,879 | ||||||
Investment |
700 | 729 | ||||||
Note receivable, net of current portion |
3,200 | — | ||||||
Other intangibles, net of accumulated amortization of $1,049 and $921,
respectively |
3,081 | 2,304 | ||||||
Goodwill |
2,514 | 2,514 | ||||||
Total assets |
$ | 40,726 | $ | 33,429 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 1,643 | $ | 2,095 | ||||
Accrued compensation |
1,050 | 1,356 | ||||||
Accrued expenses |
2,111 | 1,973 | ||||||
Current portion of liabilities of discontinued operations |
2,300 | 1,552 | ||||||
Liabilities held for sale |
— | 2,001 | ||||||
Convertible subordinated debentures |
4,322 | 4,254 | ||||||
Unearned revenue and customer deposits |
3,614 | 3,157 | ||||||
Total current liabilities |
15,040 | 16,388 | ||||||
Liabilities of discontinued operations, net of current portion |
1,204 | 1,461 | ||||||
Other long-term liabilities |
179 | 229 | ||||||
Notes payable, net of current portion |
2,728 | 2,711 | ||||||
Convertible debentures |
9,171 | — | ||||||
Total liabilities |
28,322 | 20,789 | ||||||
Shareholders’ equity: |
||||||||
Preferred
stock, no par value, 1,000,000 shares authorized;
780,000 shares issued and none outstanding |
— | — | ||||||
Common stock, $.01 par value, 200,000,000 shares authorized;
13?,415,338 and 133,243,205 shares issued and outstanding |
1,344 | 1,332 | ||||||
Additional paid-in capital |
328,507 | 322,971 | ||||||
Stock payable |
28 | 128 | ||||||
Accumulated deficit |
(317,431 | ) | (311,931 | ) | ||||
Deferred compensation |
— | (7 | ) | |||||
Accumulated
other comprehensive income (loss) - foreign currency translation |
(44 | ) | 147 | |||||
Total shareholders’ equity |
12,404 | 12,640 | ||||||
Total liabilities and shareholders’ equity |
$ | 40,726 | $ | 33,429 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
VERSO TECHNOLOGIES, INC.
| For the three months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Revenue: |
||||||||
Products |
$ | 2,738 | $ | 6,614 | ||||
Services |
3,868 | 4,485 | ||||||
Total revenue |
6,606 | 11,099 | ||||||
Cost of revenue: |
||||||||
Products: |
||||||||
Product costs |
1,340 | 2,524 | ||||||
Amortization of intangibles |
68 | 69 | ||||||
Total cost of product |
1,408 | 2,593 | ||||||
Services |
2,335 | 2,593 | ||||||
Total cost of revenue |
3,743 | 5,186 | ||||||
Gross profit: |
||||||||
Products |
1,330 | 4,021 | ||||||
Services |
1,533 | 1,892 | ||||||
Total gross profit |
2,863 | 5,913 | ||||||
Operating expenses: |
||||||||
General and administrative |
2,586 | 2,836 | ||||||
Sales and marketing |
2,146 | 1,956 | ||||||
Research and development |
1,684 | 1,581 | ||||||
Depreciation and amortization |
660 | 769 | ||||||
Reorganization costs |
124 | 584 | ||||||
Reorganization
costs - stock related |
— | 570 | ||||||
Total operating expenses |
7,200 | 8,296 | ||||||
Operating loss from continuing operations |
(4,337 | ) | (2,383 | ) | ||||
Other income (expense), net: |
||||||||
Other income |
6 | 21 | ||||||
Equity in loss of investment |
(29 | ) | (18 | ) | ||||
Interest expense, net |
(574 | ) | (265 | ) | ||||
| (597 | ) | (262 | ) | |||||
Loss from continuing operations before income taxes |
(4,934 | ) | (2,645 | ) | ||||
Income taxes |
— | — | ||||||
Loss from continuing operations |
(4,934 | ) | (2,645 | ) | ||||
Loss from discontinued operations |
(566 | ) | (1,091 | ) | ||||
Net loss |
$ | (5,500 | ) | $ | (3,736 | ) | ||
Net loss per
common share - basic and diluted: |
||||||||
Loss from continuing operations |
$ | (0.04 | ) | $ | (0.02 | ) | ||
Loss from discontinued operations |
(0.00 | ) | (0.01 | ) | ||||
| $ | (0.04 | ) | $ | (0.03 | ) | |||
Weighted
average shares outstanding - basic and diluted |
133,418,567 | 126,783,895 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES
| For the three months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Operating Activities: |
||||||||
Continuing operations: |
||||||||
Net loss from continuing operations |
$ | (4,934 | ) | $ | (2,645 | ) | ||
Adjustments to reconcile net loss from continuing operations to net
cash (used in) provided by continuing operating activities: |
||||||||
Equity in loss of investment |
29 | 18 | ||||||
Depreciation and amortization |
728 | 838 | ||||||
Provision for doubtful accounts |
59 | 141 | ||||||
Amortization of loan fees and discount on convertible subordinated debentures |
349 | 139 | ||||||
Reorganization costs - stock related |
— | 570 | ||||||
Other |
(14 | ) | (34 | ) | ||||
Changes in current operating assets and liabilities, net of effects of acquisitions: |
||||||||
Accounts receivable |
583 | 1,507 | ||||||
Inventories |
519 | (162 | ) | |||||
Other current assets |
(249 | ) | (77 | ) | ||||
Accounts payable |
(452 | ) | 42 | |||||
Accrued compensation |
(306 | ) | 804 | |||||
Accrued expenses |
(197 | ) | 92 | |||||
Unearned revenue and customer deposits |
457 | (297 | ) | |||||
Net cash (used in) provided by continuing operating activities |
(3,428 | ) | 936 | |||||
Discontinued operations: |
||||||||
(Loss) income from discontinued operations |
(566 | ) | (1,091 | ) | ||||
Adjustment to reconcile loss from discontinued operations
to net cash used in discontinued operating activities |
(142 | ) | 2,071 | |||||
Net cash provided by discontinued operating activities |
(708 | ) | 980 | |||||
Net cash (used in) provided by operating activities |
(4,136 | ) | 1,916 | |||||
Investing Activities: |
||||||||
Continuing operations: |
||||||||
Net cash (used in) provided by investing activities for continuing operations -
|
||||||||
Purchases of property and equipment |
(299 | ) | (339 | ) | ||||
Purchase of WSECI |
(244 | ) | — | |||||
(Increase) decrease in restricted cash |
(1,620 | ) | 2,062 | |||||
Net cash provided by (used in) investing activities for continuing operations |
(2,163 | ) | 1,723 | |||||
Discontinued operations: |
||||||||
Purchases of property and equipment |
— | (86 | ) | |||||
Proceeds from sale of discontinued operations |
4,015 | — | ||||||
Acquisition of MCK Communications, Inc., net of cash acquired |
— | (3,000 | ) | |||||
Net cash provided by (used in) investing activities for discontinued operations |
4,015 | (3,086 | ) | |||||
Net cash used in by investing activities |
1,852 | (1,363 | ) | |||||
Financing Activities: |
||||||||
Proceeds from convertible debentures, net |
12,757 | — | ||||||
Payments of notes payable |
— | (350 | ) | |||||
Proceeds from private placement, net |
— | 16,601 | ||||||
Proceeds from issuances of common stock in connection with the
exercise of options and warrants, net |
— | 91 | ||||||
Net cash provided by financing activities |
12,757 | 16,342 | ||||||
Effect of exchange rate changes on cash |
(7 | ) | 3 | |||||
(Decrease) increase in cash and cash equivalents |
10,466 | 16,898 | ||||||
Cash and cash equivalents at beginning of period |
4,234 | 7,654 | ||||||
Cash and cash equivalents at end of period |
$ | 14,700 | $ | 24,552 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash payments during the periods for: |
||||||||
Interest |
$ | 177 | $ | 90 | ||||
Income taxes |
$ | (70 | ) | $ | (1 | ) | ||
Non-cash investing and financing activities |
||||||||
Common stock consideration for acquisitions: |
||||||||
WSECI - issuance of 950,000 shares of common stock |
$ | 331 | $ | — | ||||
Issuance of note receivable in disposition of MCK |
3,500 | |||||||
Common stock and compensatory options issued in reorganization |
— | 570 | ||||||
Issuance of warrants in conjunction with convertible debentures |
5,084 | — | ||||||
Issuance of common stock in exchange for services |
694 | 133 | ||||||
Assets acquired and liablities assumed in conjunction with business acquisitions: |
||||||||
Fair value of assets acquired, excluding cash and restricted cash |
1,084 | — | ||||||
Liabilities assumed |
$ | — | $ | — | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
VERSO TECHNOLOGIES, INC AND SUBSIDIARIES.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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 include two separate business segments (i) the Packet-based Technologies Group, which includes the Company’s softswitching division and Netperformer divisions, the Company’s subsidiary Telemate.Net Software, Inc. (“Telemate.Net”) and the Company’s I-Master division; and (ii) the Advanced Applications Services Group, which includes the Company’s technical applications support group. The Packet-based Technologies Group includes domestic and international sales of hardware and software, integration, applications and technical training and support. The Packet-based Technologies Group offers hardware and software based for companies seeking to build private, packet-based voice and data networks. Additionally, the Packet-based Technologies Group offers software-based solutions for Internet access and usage management that include call accounting and usage reporting for Internet protocol network devices. The Advanced Applications Services Group includes outsourced technical application services and application installation and training services to outside customers, as well as customers of the Packet-based Technologies Group.
In January 2005, the Company sold substantially all of the operating assets of its NACT Telecommunications, Inc., now known as Provo Pre-Paid (Delaware) Corp. (“NACT”) and MCK Communications, Inc., now known as Needham (Delaware) Corp. (“MCK”) businesses to better focus the Company’s capital and management resources on areas which the Company believes have greater potential given its strategy to focus on next-generation network and solutions to improve cash utilization. In addition, the Company disposed of its NACT business because the Company wanted to move toward an open-standards, pre-paid next-generation solution that could better address growing market opportunities and enable the Company to offer a competitive product for Tier 1 and Tier 2 carriers. The Company believes that the I-Master platform which the Company acquired from WSECI, Inc., a Delaware corporation formerly known as Jacksonville Technology Associates, Inc. (“WSECI”), in March 2005 after forming a strategic partnership with WSECI in the latter half of 2004 permits the Company to offer a better solution. Further the Company disposed of its MCK business because the Company intends to focus on next-generation solutions for service providers and the products of the MCK business did not fit that profile. The operations of NACT and MCK businesses have been reclassified as discontinued operations in the Company’s consolidated financial statements.
The consolidated financial statements include the accounts of Verso Technologies, Inc. and its wholly-owned subsidiaries, including Telemate.Net Software, Inc. (“Telemate.Net”); and Clarent Canada Ltd., now known as Verso Technologies Canada Inc. (“Verso Canada”) and MCK and NACT which are reflected in discontinued operations. These subsidiaries were acquired and were all 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, including recurring adjustments, considered necessary by management to present a fair statement of the results of the Company’s 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. The accompanying condensed consolidated unaudited quarterly financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all disclosures normally 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, 2004 (the “Annual Report”).
6
VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(Unaudited)
| 2. | MERGERS AND ACQUISITIONS |
WSECI, Inc.
On March 31, 2005, the Company acquired substantially all of the operating assets of WSECI pursuant to the Asset Purchase Agreement (“Asset Purchase Agreement”) dated as of February 23, 2005 by and among the Company, WSECI and all of the shareholders of WSECI. WSECI is a provider of an internet protocol-based, revenue assurance platform which enables the deployment of multiple voice and next-generation services to the carrier market. The fair value of the acquisition cost was approximately $1.1 million, consisting of 950,000 shares of the Company’s common stock with a fair value of $331,000, $50,000 in cash, the payment of certain liabilities of approximately $613,000 and acquisition costs of approximately $106,000. The acquisition is accounted for as a purchase.
Pursuant to the Asset Purchase Agreement, the Company may become obligated to issue to WSECI additional contingent consideration of up to $5.0 million based on the sales of certain WSECI products and services. The initial $500,000 of such contingent consideration earned by WSECI is based upon specific customer transactions the Company completes with respect to the WSECI assets, and the remaining $4.5 million of the contingent consideration may be earned by WSECI based on the revenue generated from the WSECI assets during the 18-month period following the acquisition, which revenue must equal a minimum of $88.0 million during such period in order for all of such remaining contingent consideration to be earned. The contingent consideration is payable in cash or shares of the Company’s common stock at the election of the Company. It is not possible to estimate what, if any, payment would be due as additional contingent consideration at this time. When the additional contingent consideration is determined, it will increase the amount of the purchase price allocated to other intangible assets and will be amortized over the remaining useful life of the asset.
The preliminary allocation of the costs of the acquisition of WSECI are as follows (in thousands):
| WSECI | ||||
Property and equipment |
$ | 100 | ||
Deferred revenue |
100 | |||
Other intangibles |
900 | |||
Cost of acquisition |
$ | 1,100 | ||
Pro Forma Effect of WSECI, Inc.
The Company formed a strategic partnership with WSECI in the latter half of 2004, therefore the results of WSECI have been included in the Company’s consolidated results beginning January 1, 2005. The following unaudited pro forma information presents the results of continuing operations of the Company for the three months ended March 31, 2004, as if the acquisition of substantially all of the operating assets of WSECI had taken place on January 1, 2004 (in thousands, except per share amounts):
| March 31, 2004 | ||||
Revenues |
$ | 11,223 | ||
Net loss |
$ | (2,622 | ) | |
Net loss per
common share - basic and diluted |
$ | (0.02 | ) | |
Weighted
average shares outstanding - basic and diluted |
127,733,895 | |||
7
VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(Unaudited)
| 3. | EQUITY INVESTMENT |
On October 1, 2002, the Company acquired a 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 provides the Company with an immediate distribution channel into the China and Asia-Pacific region for the Company’s application-based Voice over Internet Protocol gateway solutions, billing systems, value-added applications and web filtering solutions. Due to the shared decision making between the Company and its equity partner, the results of BeTrue are treated as an equity investment rather than being consolidated. The Company determined that since BeTrue was a business, BeTrue did not fall under the scope of the Financial Accounting Standards Board Interpretation No. 46 “R”, “Consolidation of Variable Interest Entities” and there was no impact on the Company’s financial position or results of operations.
The Company purchased the 51% interest in BeTrue for $100,000 from NeTrue Communications, Inc., Shanghai Tangsheng’s former joint venture partner. The Company also contributed to the joint venture certain next-generation communication equipment and software valued at approximately $236,000 and cash in the amount of $100,000.
Summarized financial information reported by this affiliate for the three months ended March 31, 2005 and 2004 (in thousands) are as follows:
| Three months ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
Operating results: |
||||||||
Revenues |
$ | 469 | $ | 403 | ||||
Operating loss |
$ | (56 | ) | $ | (35 | ) | ||
Net loss |
$ | (56 | ) | $ | (35 | ) | ||
8
VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(Unaudited)
| 4. | DISCONTINUED OPERATIONS |
In January 2005, the Company sold substantially all of the operating assets of its NACT and MCK businesses to better focus the Company’s capital and management resources on areas which the Company believes have greater potential given its strategy to focus on next-generation network and solutions to improve cash utilization. In addition, the Company disposed of its NACT business because the Company wanted to move toward an open-standards, pre-paid next-generation solution that could better address growing market opportunities and enable the Company to offer a competitive product for Tier 1 and Tier 2 carriers. The Company believes that the I-Master platform which the Company acquired from WSECI in March 2005 after forming a strategic partnership with WSECI in the latter half of 2004, permits the Company to offer a better solution. Further, the Company disposed of its MCK business because the Company intends to focus on next-generation solutions for service providers and the products of the MCK business did not fit that profile. The operations of NACT and MCK businesses have been reclassified as discontinued operations in the Company’s consolidated financial statements.
The loss on the sale of the NACT business totaled $11.4 million. The loss includes a reduction in net asset values of approximately $10.9 million and a provision for anticipated closing costs of approximately $500,000. The loss on the sale of the MCK business totaled $3.4 million. The loss includes a reduction in net asset values of approximately $2.9 million and a provision for anticipated closing costs of approximately $500,000.
Summary operating results of the discontinued operations (in thousands) are as follows:
| Three months ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Revenue |
$ | 212 | $ | 5,462 | ||||
Gross (loss) profit |
(27 | ) | 2,590 | |||||
Operating loss |
(566 | ) | (1,117 | ) | ||||
Loss from discontinued operations |
$ | (566 | ) | $ | (1,091 | ) | ||
The operating loss from discontinued operations in the three months ended March 31, 2005 includes general and administrative costs of $97,000, sales and marketing costs of $104,000, research and development costs of $275,000 and depreciation and amortization of $61,000.
The operating loss from discontinued operations in the three months ended March 31, 2004 includes general and administrative costs of $926,000, sales and marketing costs of $1.2 million, research and development costs of $1.2 million, depreciation and amortization of $337,000 and other income of $26,000.
9
VERSO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2005
(Unaudited)
| 4. | DISCONTINUED OPERATIONS, Continued |
The assets and liabilities of NACT and MCK were classified as assets held for sale at December 31, 2004 and the significant components (in thousands) were as follows:
Accounts receivable, net |
$ | 3,085 | ||
Inventory |
2,901 | |||
Other current assets |
419 | |||
Furniture and equipment, net |
977 | |||
Goodwill and other intangibles |
1,613 | |||
Assets held for sale |
$ | 8,995 | ||
Accounts payable |
$ | 163 | ||
Accrued compensation |
465 | |||
Unearned revenue and customer deposits |
1,127 | |||
Other current liabilities |
246 | |||
Liabilities held for sale |
$ | 2,001 | ||
Assets and liabilities of discontinued operations (in thousands) are as follows:
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
Assets of discontinued operations: |
||||||||
Notes receivable, including interest |
$ | 3,500 | $ | — | ||||
Liabilities of discontinued operations: |
||||||||
Accrued rent |
$ | 2,164 | $ | 2,384 | ||||
Other current liabilities |
1,340 | 629 | ||||||
Liabilities of discontinued operations |
$ | 3,504 | $ | 3,013 | ||||