SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-17384
Boston Technology, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3073385
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
100 Quannapowitt Parkway
Wakefield, Massachusetts 01880
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (617) 246-9000
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 at least the past 90 days.
Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares Outstanding
Class of Securities (as of August 19 , 1997)
Common Stock, $.001 par value per share 27,301,781
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BOSTON TECHNOLOGY, INC.
FORM 10-Q/A
Index
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of July 31, 1997 (Unaudited) and January 31, 1997............. 3
Consolidated Statements of Operations
For the three and six months ended July 31, 1997 and 1996........ 4
Consolidated Statements of Cash Flows
For the six months ended July 31, 1997 and 1996.................. 5
Notes to the Consolidated Financial Statements................... 6
ITEM 2. Management's Discussion and Analysis of Financial
. Conditions and Results of Operations ................. 9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................... 13
ITEM 2. Changes in Securities.................................. 13
ITEM 3. Defaults upon Senior Securities........................ 13
ITEM 4. Submission of Matters to a Vote of Security Holders... 14
ITEM 5. Other Information...................................... 14
ITEM 6. Exhibits and Reports on Form 8-K....................... 14
Signatures....................................................... 15
Exhibit Index.................................................... 16
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
. BOSTON TECHNOLOGY, INC.
. CONSOLIDATED BALANCE SHEETS
. (dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
July 31, January 31,
. 1997 1997
. -------- ---------
Assets (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $38,146 $14,032
Accounts receivable, less allowances of $9,415 and $3,656 61,125 54,405
Notes receivable 3,618 ---
Net investment in sales type leases 611 645
Inventories, net 24,762 19,046
Prepaid expenses and other current assets 9,276 2,771
Prepaid taxes 4,184 ---
. ------- -------
Total current assets 141,722 90,899
Property and equipment, net 35,429 25,568
Deferred taxes 4,284 4,284
Other assets 4,267 7,422
. -------- --------
. TOTAL ASSETS $185,702 $128,173
. ======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long term debt $1,563 $1,000
Accounts payable 14,152 15,235
Accrued expenses 31,007 21,556
Income taxes payable --- 2,618
Deferred customer funding 1,788 1,140
Deferred revenues 17,690 8,939
. ------ ------
Total current liabilities 66,200 50,488
Long term debt and other long term liabilities 13,602 1,193
Stockholders' Equity:
Common stock, $.001 par value, 60,000,000 shares authorized
27,295,561 and 25,501,691 shares issued 27 25
Additional paid in capital 72,779 60,557
Retained earnings 32,651 15,516
Cumulative translation adjustment 443 394
Total stockholders' equity 105,900 76,492
. -------- --------
TOTAL LIABILITES AND STOCKHOLDERS' EQUITY $185,702 $128,173
. ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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. BOSTON TECHNOLOGY, INC.
. CONSOLIDATED STATEMENTS OF OPERATIONS
. (dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
. Three months ended July 31, Six months ended July 31,
. 1997 1996 1997 1996
. -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $66,361 $41,455 $129,736 $77,206
Cost and expenses:
Cost of revenues 26,449 19,192 54,143 37,168
Research and development 14,121 8,185 28,097 15,278
Marketing, general and administrative 15,695 9,148 27,719 17,026
. ------ ------ ------- ------
. 56,265 36,525 109,959 69,472
Income from operations 10,096 4,930 19,777 7,734
Interest expense, net (84) (167) (340) (102)
Other income (expense), net 126 (470) (210) (523)
. ------ ----- ------ -----
Income before income taxes 10,138 4,293 19,227 7,109
Provision (benefit) for income taxes (429) 1,502 2,753 2,488
. ------- ------ ------- ------
Net income $10,567 $2,791 $16,474 $4,621
. ======= ====== ======= ======
Net income per share $.37 $.10 $.58 $.17
. ======= ====== ======= ======
Weighted average common and common
equivalent shares outstanding 28,792 28,005 28,415 27,835
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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. BOSTON TECHNOLOGY, INC.
. CONSOLIDATED STATEMENTS OF CASH FLOWS
. (dollars in thousands)
. (unaudited)
<TABLE>
<CAPTION>
. Six months ended July 31,
. 1997 1996
. -------- -------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $16,474 $4,621
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization and other 6,752 3,464
Payments made in excess of rent expense (100) (96)
Provision for sales allowances 5,759 (16)
Changes in assets and liabilities:
Accounts receivable (12,024) (23,000)
Net investment in sales type leases 34 (1,242)
Inventories (5,716) (4,453)
Prepaid expenses and other current assets (6,496) (221)
Accounts payable (2,060) 573
Accrued expenses 9,433 4,327
Deferred revenue 7,497 1,584
Income taxes (5,243) (2,081)
Deferred customer funding 648 17
Other liabilities 434 3,689
. ------ -------
Net cash provided by (used in) operating activities 15,392 (12,834)
Cash Flows From Investing Activities
Purchase of property and equipment (13,428) (9,575)
Purchase of license agreements and other assets 281 (560)
. ------ ------
Net cash used in investing activities (13,147) (10,135)
Cash Flows From Financing Activities
Exercise of stock options 10,126 1,685
Purchase of stock through Employee Stock Purchase Plan 536 374
Principal payments under financing obligations (500) (275)
Borrowings under revolving credit agreements 25,000 18,600
Repayments under revolving credit agreements (15,000) (5,000)
. ------ ------
Net cash provided by financing activities 20,162 15,384
Effect of exchange rate on cash and cash equivalents 49 (5)
. ------ ------
Net increase (decrease) in cash and cash equivalents 22,456 (7,590)
Cash acquired in pooling of
Enhanced Communications Corporation 1,658 ---
Cash and cash equivalents, beginning of period 14,032 13,929
. ------- ------
Cash and cash equivalents, end of period $38,146 $6,339
. ======= ======
</TABLE>
<TABLE>
<CAPTION>
Supplemental Disclosure of Cash Flow Information:
<S> <C> <C>
Income taxes paid $7,481 $10
Interest paid 738 344
Non cash transactions:
Tax benefit of disqualifying dispositions
of incentive stock options $1,559 $290
Sale of Joint Venture for a note receivable 3,618 ---
Purchase of license agreements --- 2,530
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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BOSTON TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Boston
Technology, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles for the interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these consolidated financial statements do not include all of the
information and footnote disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) necessary for a fair
representation of the unaudited consolidated statements of income for the three
and six months ended July 31, 1997 and 1996, the unaudited consolidated
statements of cash flows for the six months ended July 31, 1997 and 1996, and
the unaudited consolidated balance sheet at July 31, 1997 have been made.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates
included in these financial statements include the reserve for sales
allowances, reserve for warranty, inventory valuation reserve, estimates to
complete and certain accrued liabilities.
It is suggested that the financial statements contained herein be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
January 31, 1997. The results of the interim periods are not necessarily
indicative of the results for the full fiscal year.
Certain amounts in the fiscal 1997 (year ended January 31, 1997) financial
statements have been reclassified to conform to the fiscal 1998 (year ending
January 31, 1998) presentation.
2. INVENTORIES
Inventories consisted of: July 31, 1997 January 31, 1997
. ------------- ----------------
Materials and purchased parts $10,784 $7,735
Work in process 5,035 9,585
Finished goods 8,943 1,726
. ------- -------
Total $24,762 $19,046
. ======= =======
3. FINANCING ARRANGEMENTS
The Company maintains a revolving credit facility with two banks totaling $60
million. Borrowings are collateralized by the Company's accounts receivable and
inventories and bear interest at the prime rate (8.5% at July 31, 1997) or the
LIBOR rate plus 175 basis points. The credit facility is scheduled to expire
on November 19, 1998. As of July 31, 1997, the Company had $10 million
outstanding under the credit facility.
From time to time, the Company grants its customers extended payment terms and,
upon occasion, sells those accounts receivable without recourse. During the
quarter ended July 31, 1997, the Company sold $18 million of receivables.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued Statement No. 128
("SFAS 128"), "Earnings per Share", which modifies the way in which earnings
per share (EPS) is calculated and disclosed. Upon adoption of this standard
for the fiscal period ending January 31, 1998, the Company will disclose basic
and diluted EPS and will restate all prior period EPS data presented. Basic
EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted EPS, similar to fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Management
believes the adoption of SFAS 128 will not have a material impact on reported
earnings per share.
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The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income". This Statement
requires that changes in comprehensive income be shown in a financial statement
that is displayed with the same prominence as other financial statements. The
Statement will become effective for fiscal years beginning after December 15,
1997. The Company will adopt the new standard beginning in the first quarter of
the fiscal year ending January 31, 1999.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosure about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 specifies
new guidelines for determining a company's operating segments and related
requirements for disclosure. The Company is in the process of evaluating the
impact of the new standard on the presentation of its financial statements and
the disclosures therein. The Statement will become effective for fiscal years
beginning after December 15, 1997. The Company will adopt the new standard for
the fiscal year ending January 31, 1999.
5. ACQUISITION OF ENHANCED COMMUNICATION CORPORATION
On February 20, 1997, the Company acquired all of the outstanding stock of
Enhanced Communications Corporation ("ECC"), a company providing outsourcing of
voice messaging for Bell South Telecommunications, Inc. and Bell South Personal
Communications, Inc. for 250,000 shares of the Company's Common Stock. The
combination has been accounted for as a pooling of interests in accordance with
APB 16. The Company did not restate prior period financial statements for this
acquisition due to immateriality, and recorded the book value of the net assets
of ECC in the period ended April 30, 1997 amounting to $661,000.
Change in stockholders' equity:
Balance at January 31, 1997 $ 76,492
Net income for current period 16,474
Net book value of assets acquired in pooling of interest 661
Stock issued for options and warrants, related tax
benefits and other 12,273
. -------
Balance at July 31, 1997 $ 105,900
=======
6. REVENUE RECOGNITION
Most of the Company's products are standard hardware and software configurations
which are developed according to internally generated product specifications.
Generally, product revenues are recognized at the time the standard hardware
and/or software is shipped, collection is probable and no significant post
shipment obligations remain. Products shipped for customer trials are carried in
finished goods inventory until customer acceptance is obtained, at which time
revenue is recognized. Installation fees are recognized when products are
installed. Revenue from sales- type leases and the associated cost of revenue
is recognized upon shipment of the equipment to customers. Interest income is
recognized over the life of the sales-type lease. Rental income on equipment
under operating leases is recognized ratably over the lease term, and the
related equipment is depreciated over its estimated useful life. Maintenance
revenue is recognized ratably over the term of the maintenance contract.
Development work is frequently required for new customers in order to adapt
otherwise standard products to specific languages, user interfaces and network
interfaces. From time to time, customers may contract for custom modifications
and enhancements to standard product configurations. The proceeds from the sale
of such modifications and enhancements as well as the excess of customer funding
received over and above associated costs are included in revenues upon shipment
of the related hardware and/or software. For large contracts containing
significant customization efforts spanning two or more quarters, revenue is
recognized on a percent of completion basis.
7. SALE OF JOINT VENTURE
As of May 31, 1997, the Company sold its 30% share in the Brazil joint venture
it had established in fiscal 1996 to its joint venture partner. Upon
completion of the sale, the Company recorded the purchase price, net of imputed
interest, as a note receivable. No gain has been recognized on this
transaction.
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8. CUSTOMER DISPUTE
The Company is engaged in a dispute with one of its customers, Sprint PCS
("Sprint"), regarding product and software deliverables and performance under
agreements against which approximately $26 million has been invoiced. Sprint
has purported to terminate its agreements with the Company and refused to pay
the balance due of approximately $19 million. Of this outstanding balance, a
significant portion has not been recognized as revenue and, as a result, is not
included in the Company's accounts receivable balance. The Company
believes it has established adequate reserves to cover any exposure associated
with this dispute. The Company believes that Sprint's assertions are without
merit and that the unpaid amounts are due and owing. The Company has discussed
the dispute with Sprint but no resolution has yet been reached. The agreements
between the Company and Sprint require that disputes be submitted to binding
arbitration if not resolved by mutual agreement. Although the Company believes
that its position has merit, there can be no assurances the outcome will not
have a material adverse effect on the Company.
9. INCOME TAXES
The effective tax rate for the three months ended July 31, 1997 (before the
effect of the AT&T warrant exercise) and 1996 was 35%. During the second
quarter of fiscal 1998, the Company realized a one time tax benefit of
$3,976,000 associated with the July 30, 1997 exercise of 981,760 warrants by
AT&T. The Company determined that the realization of this tax benefit became
more likely than not during the second quarter of fiscal 1998. No benefit has
been recognized for unexercised warrants. The tax benefit associated with
future exercises of warrants by AT&T is contingent upon the timing of the
exercise of the warrants and the stock value at that time. The Company expects
its normal tax rate to remain at approximately 35% throughout the remainder of
fiscal 1998.
10. SUBSEQUENT EVENT
On August 21, 1997, the Company announced that it had agreed to merge with
Comverse Technology, Inc. ("Comverse") in a stock merger in which each
outstanding share of Common Stock of the Company would be converted into .65
share of Common Stock of Comverse. The merger is subject to regulatory
approval, approval by the stockholders of the Company and Comverse, and various
other conditions, and is expected to be completed in late 1997. The merger of
the companies may result in duplicate facilities or distribution channels and
other relationships which could result in adjustments or write-offs upon the
completion of the merger to the carrying value of certain assets.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated in such forward looking
statements. These factors include, without limitation, those set forth below
the caption "Certain Factors That May Affect Future Operating Results."
Results of Operations
Three months Ended July 31, 1997 versus Three Months Ended July 31, 1996
Net Sales
Revenues for the second quarter of fiscal year 1998 were $66,361,000 versus
$41,455,000 for the prior period, an increase of $24,906,000, or 60%. North
American revenues, generated by sales to Regional Bell Operating Companies, long
distance carriers, and other network operators, were approximately $34,666,000,
an increase of $5,808,000, or 20%, over the prior year period. North American
revenues decreased to 52% of total revenues versus 70% in the prior year due
primarily to changes in customers buying patterns relating to their deployment
of services. International revenues for the second quarter were $31,695,000,
an increase of $19,098,000, or 152%, over the prior year period. International
revenues increased primarily due to higher volume from the Company's existing
Pacific Rim and Australian customers as well as several new customers in Brazil.
International revenues comprised 48% of total second quarter fiscal 1998
revenues verses 30% in the prior year period.
Gross Profit
Gross profit for the second quarter of fiscal 1998 increased over the
corresponding prior year period by $17,649,000, or 79%, to $39,912,000. As a
percentage of revenues, gross profit was approximately 60% for the three months
ended July 31, 1997 compared to approximately 54% for the comparable prior year
period. The increase in gross profit as a percentage of revenues was due
primarily to an increase in the number of larger systems shipped as well as a
higher volume of capacity upgrades, which traditionally have higher margins.
Assuming a stabilization of prices with increased revenues, the Company
anticipates that gross profit as a percentage of revenues will increase in
fiscal 1998 compared to fiscal 1997, however, quarter to quarter changes may
not be indicative of the trend for the year.
Research and Development Expenses
Research and development expenses were $14,121,000 for the second quarter of
fiscal 1998 verses $8,185,000 for the prior period. As a percentage of
revenues, research and development expenses increased to 21% for the second
quarter versus 20% for the prior year. Excluding the effect of customer funding
and certain reclassifications, gross research and development spending in the
second quarter of fiscal 1998 increased $8,225,000, or 80%, over the prior year
period primarily due to an increase in headcount required to support ongoing
development projects. The Company expects to continue to make significant
investments in research and development, including research and development
required under certain recent customer contracts. The Company is also involved
in research and development programs that are funded in whole or in part by its
customers. Customer funding is recognized as a reduction to research and
development expense as development activities occur. Customer funding offsets
against expense for the second quarter of fiscal 1998 and 1997 were $2,394,000
and $621,000, respectively. In addition to customer funding offsets, the
Company periodically defers expenditures incurred under long term custom
modification contracts. The deferred expenditures of $5,047,000 at July 31,
1997 are included in prepaid expenses and other current assets and will be
recognized in cost of sales as the associated revenue is recognized. These
deferred expenditures associated with long term custom modification contracts
for the second quarter 1998 and 1997 amounted to $2,026,000 and $1,510,000,
respectively.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses for the second quarter were
$15,695,000 versus $9,148,000 for the prior period. As a percentage of
revenues, these expenses increased from 22% in the prior year period to 24% in
the second quarter of fiscal 1998 due primarily to a significant increase to the
reserve for sales allowances resulting from the customer dispute described in
Note 8 to the Consolidated Financial Statements and the expansion of the world-
wide customer service and sales organizations, particularly in Mexico, the
United Kingdom and the Far East, as well as increased staffing to support the
overall growth of the Company's business.
Net Interest (Expense) Income
Interest income for the quarter increased by $252,000 to $328,000 at July 31,
1997 due primarily to higher average cash balances. Interest expense for the
second quarter increased by $169,000 to $412,000 as a result of borrowings
against the Company's line of credit. The Company expects to continue to
borrow against its line of credit in the future and incur interest expense that
is higher than past periods.
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Other Income, Net
Other income increased $596,000 to $126,000 for the three months ended July 31,
1997 due primarily to the Company's portion of the income generated by the
joint venture prior to the May 31, 1997 sale of the Company's share of the
joint venture, partially offset by a foreign exchange loss.
Provision for Income Taxes
The effective tax rate for the three months ended July 31, 1997 (before the
effect of the AT&T warrant exercise) and 1996 was 35%. During the second
quarter of fiscal 1998, the Company realized a one time tax benefit of
$3,976,000 associated with the July 30, 1997 exercise of 981,760 warrants by
AT&T. The Company determined that the realization of this tax benefit became
more likely than not during the second quarter of fiscal 1998. No benefit has
been recognized for unexercised warrants. The tax benefit associated with
future exercises of warrants by AT&T is contingent upon the timing of the
exercise of the warrants and the stock value at that time. The Company expects
its normal tax rate to remain at approximately 35% throughout the remainder of
fiscal 1998.
Results of Operations
Six months Ended July 31, 1997 versus Six Months Ended July 31, 1996
Net Sales
Revenues for the six months ended July 31, 1997 were $129,736,000 versus
$77,206,000 for the prior period, an increase of $52,530,000, or 68%. North
American revenues, generated by sales to Regional Bell Operating Companies,
long distance carriers, and other network operators, were approximately
$73,794,000, an increase of $26,793,000, or 57%, over the prior year period.
North American revenues decreased to 57% of total revenues versus 61% in the
prior year due primarily to changes in customers buying patterns relating to
their deployment of services. International revenues for the first six months
of fiscal 1998 were $55,942,000, an increase of $25,737,000, or 85%, over the
prior year period. International revenues increased primarily due to higher
volume from the Company's existing Pacific Rim and Australian customers.
International revenues comprised 43% of revenues for the first six months
of fiscal 1998 revenues verses 39% in the prior period.
Gross Profit
Gross profit for the first six months of fiscal 1998 increased over the
corresponding prior year period by $35,555,000, or 89%, to $75,593,000. As a
percentage of revenues, gross profit was approximately 58% for the six months
ended July 31, 1997 compared to approximately 52% for the comparable prior year
period. The increase in gross profit as a percentage of revenues was due
primarily to an increase in the number of larger systems shipped as well as a
higher volume of capacity upgrades, which traditionally have higher margins.
Assuming a stabilization of prices with increased revenues, the Company
anticipates that gross profit as a percentage of revenues will increase in
fiscal 1998 compared to fiscal 1997, however, quarter to quarter changes
may not be indicative of the trend for the year.
Research and Development Expenses
Research and development expenses were $28,097,000 for the six month period
ended July 31, 1997 verses $15,278,000 for the prior period. As a percentage
of revenues, research and development expenses increased to 22% for the first
six months of fiscal 1998 versus 20% for the prior year. Excluding the effect
of customer funding and certain reclassifications, gross research and
development spending in the first six months of fiscal 1998 increased
$16,065,000, or 83%, over the prior year period primarily due to an increase
in headcount required to support ongoing development projects. The Company
expects to continue to make significant investments in research and development,
including research and development required under certain recent customer
contracts. The Company is also involved in research and development programs
that are funded in whole or in part by its customers. Customer funding is
recognized as a reduction to research and development expense as development
activities occur. Customer funding offsets against expense for the first six
months of fiscal 1998 and 1997 were $3,627,000 and $2,081,000, respectively.
In addition to customer funding offsets, the Company periodically defers
expenditures incurred under long term custom modification contracts. These
deferred expenditures of $5,047,000 at July 31, 1997 are included in prepaid
expenses and other assets and will be recognized in cost of sales as the
associated revenue is recognized. The deferred expenditures associated with
long term custom modification contracts for the first six months of fiscal
1998 and 1997 amounted to $3,798,000 and $2,098,000, respectively.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses for the six month period ended
July 31, 1997 were $27,719,000 versus $17,026,000 for the prior period. As a
percentage of revenues, these expenses decreased from 22% in the prior year
period to 21% in the first six months of fiscal 1998 due primarily to higher
incremental revenue. Marketing, general and administrative expenses increased
$10,693,000 versus the prior period due primarily a significant increase in the
reserve for sales allowances resulting from the customer dispute described in
Note 8 to the Consolidated Financial Statements and the expansion of the world-
wide customer service and sales organizations, particularly in Mexico, the
United Kingdom and the Far East, as well as increased staffing to support the
overall growth of the Company's business.
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Net Interest (Expense) Income
Interest income for the six months ended July 31, 1997 increased by $64,000 to
$415,000 due primarily to higher average cash balances. Interest expense for
the first six months of fiscal 1998 increased by $302,000 to $755,000 as a
result of borrowings against the Company's line of credit. The Company expects
to continue to borrow against its line of credit in the future and incur
interest expense that is higher than past periods.
Other Expense, Net
Other expense decreased $313,000 to $210,000 for the six months ended July 31,
1997 due primarily to the Company's portion of the income generated by the
joint venture prior to the May 31, 1997 sale of the Company's share of the joint
venture, partially offset by a foreign exchange loss.
Provision for Income Taxes
The effective tax rate for the six months ended July 31, 1997 (before the
effect of the AT&T warrant exercise) and 1996 was 35%. During the second
quarter of fiscal 1998, the Company realized a one time tax benefit of
$3,976,000 associated with the July 30, 1997 exercise of 981,760 warrants by
AT&T. The Company determined that the realization of this tax benefit became
more likely than not during the second quarter of fiscal 1998. No benefit has
been recognized for unexercised warrants. The tax benefit associated with
future exercises of warrants by AT&T is contingent upon the timing of the
exercise of the warrants and the stock value at that time. The Company expects
its normal tax rate to remain at approximately 35% throughout the remainder of
fiscal 1998.
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash flow from
operations and its bank lines of credit. At July 31, 1997 and January 31, 1997,
the Company had available cash and cash equivalents of $38,146,000 and
$14,032,000, respectively, and working capital of $75,572,000 and $40,411,000,
respectively. The Company increased its revolving credit facility with two
banks from $35,000,000 to $60,000,000. Borrowings are collateralized by the
Company's accounts receivable and inventories and bear interest at the prime
rate (8.5% at July 31, 1997) or the LIBOR rate plus 175 basis points. The
credit facility is scheduled to expire on November 19, 1998. This revolving
credit facility also has a 1/2 of 1% annual commitment fee on the unused
portion. The facility contains quarterly covenants which, among other things,
require the Company to maintain certain financial ratios, specified levels of
equity and other restrictions. The Company had borrowings under its revolving
credit facilities of $10,000,000 outstanding at July 31, 1997. The Company
also has available uncollateralized lines of credit for forward foreign exchange
contracts with three banks. There was no outstanding balance on these lines of
credit at July 31, 1997. From time to time, the Company grants its customers
extended payment terms and, upon occasion, sells those accounts receivable
without recourse. During the quarter ended July 31, 1997, the Company sold
$18 million of receivables without recourse.
Net cash provided by operating activities for the six months ending July 31,
1997 was $15,392,000. In the six months ending July 31, 1997, net cash
provided by operating activities consisted primarily of net income of
$16,464,000, an increase in accrued expenses of $9,433,000 and an increase in
deferred revenue of $7,497,000, offset by an increase in accounts receivable
of $12,024,000 and an increase in prepaid expenses and other current assets of
$6,496,000.
Net cash used in investing activities for the six months ending July 31, 1997
was $13,147,000. This reflects primarily purchases of property and equipment
of $13,428,000, consisting primarily of computer workstations and test
equipment, as a result of increased headcount and growth of revenues.
Net cash provided by financing activities for the six months ending July 31,
1997 was $20,162,000. This reflects net borrowings made under the revolving
credit agreements of $10,000,000, and proceeds from exercise of common
stock options of $10,126,000.
The Company believes that its cash and cash equivalents, along with cash
generated from operations and unused credit facilities will be sufficient to
meet the Company's cash requirements and to fund operations at least through
January 31, 1998.
Certain Factors That May Affect Future Operating Results
The reader should consider the following important factors, among others,
which in some cases have affected, and in the future could affect, the Company's
actual results and could cause the Company's results in future quarters and
fiscal years to differ materially from those expressed in forward-looking
statements made by, or on behalf of, the Company.
Historically, a substantial portion of the Company's revenues have been
attributed to a limited number of customers. The Company expects to continue
to rely on a limited number of customers for a significant portion of its
revenue. In addition, the Company also has a high average system revenue per
transaction; therefore, the loss of any one customer, or a significant decline
in their volume, could have a material adverse effect on the Company's business
and its results of operations. The Company's ability to increase future revenues
may depend on its ability to generate sufficient revenues to substitute for
reduced purchases by one or more major customers. In addition, the Company's
operating expenses are incurred ratably throughout each quarter and are
relatively fixed in the short term. As a result, if projected revenues are
not realized in the expected period, the Company's operating results for that
period could be adversely affected.
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<PAGE>
<PAGE>
The Company's industry is subject to rapid technological change. The Company's
revenue stream depends on its ability to enhance its existing software products
and to introduce new products on a timely and cost-effective basis. This
includes any customer-requested custom software enhancements required in the
normal course of product delivery. The Company's products involve
sophisticated hardware and software technology platforms that perform critical
functions to highly demanding standards. There can be no assurance the
Company's current or future products will not develop operational problems,
which could have a material adverse effect on the Company. In addition, if the
Company were to delay the introduction of new products, or to delay the
delivery of specific custom software enhancements, the Company's operating
results could be adversely affected.
The international portion of the Company's business, which represented 43% of
revenues for the first six months of fiscal 1998, is subject to a number of
inherent risks, including difficulties in building and managing international
operations and international reseller networks, international service and
support of the Company's products, difficulties or delays in translating
products into foreign languages, fluctuations in the value of foreign
currencies, import/export duties and quotas, and unexpected regulatory,
economic or political changes in international markets. Due to the competitive
environment in the international marketplace, certain international customers
may require longer payment terms resulting in greater difficulty in accounts
receivable collection. In addition, while the Company's products are designed
to meet the regulatory standards of foreign markets, any inability to obtain
foreign regulatory approvals or to meet other required standards on a timely
basis could have a material adverse effect on the Company's operating results.
As a result of the expected increase in international business, the Company's
revenues may increasingly be denominated in foreign currencies. To date,
foreign currency fluctuations have not had a material adverse effect on the
Company's operating results. While the Company has periodically engaged in
hedging transactions to cover its currency translation exposure, the expected
increase in international business may require the Company to engage in these
types of transactions more frequently to mitigate the effect of foreign
currency fluctuations.
Although backlog has increased compared to the prior year period, historically,
the Company has operated with minimal backlog. While the increased backlog has
provided greater visibility for near-term revenues, revenues earned in any
quarter will continue to be largely dependent on orders booked, built, and
shipped in that quarter. Other factors that may impact the Company's ability
to convert backlog into revenues for any given quarter are development efforts
that may span several quarters, the ability to secure hardware components from
single source suppliers and the fact that orders may be canceled or delivery
schedules modified. The Company has also experienced a pattern of recording
the majority of its quarterly revenues in the third month of the quarter.
The Company sells substantially all of its products to companies in the
telecommunication industry. This industry is undergoing significant change as
a result of deregulation and privatization worldwide, reducing restrictions on
competition in the industry. Unforeseen changes in the regulatory environment
may have an impact on the Company's revenues and/or costs in any given part of
the world. The worldwide enhanced services systems industry is already highly
competitive and the Company expects competition to intensify. The Company
believes that it will continue to encounter substantial competition from its
existing competitors, and that other companies, many with considerably greater
financial, technical, marketing and sales resources than the Company, may enter
the enhanced services systems markets.
Certain components of the Company's products are currently purchased from a
single source, and, although the Company believes that alternate sources are
available, any interruption or discontinuation in the supply of such components
could adversely affect the Company's operating results.
The Company's growth and success depend upon its ability to attract, motivate
and retain highly skilled employees, especially technical employees and key
executives. Qualified technical employees are in great demand and are
likely to remain a limited resource for the foreseeable future. There can be
no assurance the Company will be successful in hiring and retaining the
required personnel.
The growth of the Company has placed and is expected to continue to place
significant demands on the Company's operational, administrative and financial
resources. There can be no assurance the Company will be able to maintain its
historic growth rate or that any future growth will not have a material
adverse effect on the Company.
The Company's ability to compete effectively will depend to a significant extent
on its ability to protect its proprietary rights and operate without infringing
the proprietary rights of others, and there can be no assurance the Company will
be able to do so. In addition, any litigation involving such proprietary rights
could have a material adverse effect on the Company.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1997 for a description of certain legal
proceedings (Civil Action Nos. 95-CV-7236, 95-CV-7295 and 95-CV-7317) commenced
in the United States District Court for the Eastern District Court for Eastern
District of Pennsylvania against the Company and certain of its current and
former officers and directors alleging violations of Section 10(b) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. On
November 14, 1996, the United States District Court of the Eastern District of
Pennsylvania ordered the cases transferred to the United States District court
for the District of Massachusetts. On January 19, 1997, the defendants filed a
Motion to Dismiss on the grounds that the Amended Complaint fails to state a
claim under the relevant sections of the Securities Exchange Act of 1934, and
under the law as applied by the United States Court of Appeals for the First
Circuit. Oral argument was held on the Motion to Dismiss and the Plaintiffs
Reply to the Motion on March 20, 1997. At the time of the oral argument the
court indicated that it expected to render a decision by August, 1997, however,
it has not yet done so. Boston Technology and the defendants continue to deny
the allegations and will continue to contest these cases vigorously. The outcome
of this lawsuit is neither probable nor estimable; accordingly, no loss
provision has been made for this lawsuit.
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults upon Senior Securities
Not applicable.
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<PAGE>
<PAGE>
ITEM 4. Submission of matters to Vote of Security Holders
At the Annual Meeting of Stockholders on June 25, 1997, the Company's
stockholders adopted the following proposals by the votes specified below.
<TABLE>
<CAPTION>
. Against or Broker
Proposal For Withheld Abstain non-votes
1.To elect seven directors for the ensuing year:
<S> <C> <C> <C> <C>
Greg C. Carr 21,720,843 --- 345,965 ---
Richard J. Connaughton 21,718,905 --- 347,903 ---
Francis E. Girard 21,715,355 --- 351,453 ---
Herman B. Leonard 21,719,573 --- 347,235 ---
Joseph E. Norberg 21,718,793 --- 348,015 ---
Robert J. Slezak 21,715,473 --- 351,335 ---
Richard K. Snelling 21,716,213 --- 350,595 ---
2. To approve an Amendment to the Company's
1996 Stock Incentive Plan as described in the
Proxy Statement 11,171,494 3,756,925 60,047 7,078,342
3. To approve an Amendment to the Company's
1995 Employee Stock Purchase Plan as described
in the Proxy Statement. 14,522,187 406,792 59,487 7,078,342
4. To approve an Amendment to the Company's
1995 Director Stock Option Plan as described in
the Proxy Statement. 13,758,831 1,119,129 110,506 7,078,342
</TABLE>
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports
(a) Exhibits
The exhibits listed in the Exhibits Index are filed as part of or included in
this report.
(b) Reports on Form 8-K
None.
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<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 25, 1997
BOSTON TECHNOLOGY, INC.
By: /s/ Carol B. Langer
Carol B. Langer
Senior Vice President of Finance,
Chief Financial Officer,
Treasurer and Secretary
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