SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 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 executiv (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 November 20, 1997)
------------------------------------ ---------------------------
Common Stock, $.001 par value per share 27,411,836
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BOSTON TECHNOLOGY, INC.
FORM 10-Q
Index
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets
As of October 31, 1997 (Unaudited) and January 31, 1997...... 3
Consolidated Statements of Operations
For the three and nine months ended October 31, 1997 and
1996.......................................................... 4
Consolidated Statements of Cash Flows
For the nine months ended October 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 ....................... 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................... 19
ITEM 2. Changes in Securities................................. 20
ITEM 3. Defaults upon Senior Securities....................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders.. 20
ITEM 5. Other Information..................................... 20
ITEM 6. Exhibits and Reports on Form 8-K...................... 20
Signatures................................................... 21
Exhibit Index................................................ 22
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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>
October 31, January 31,
1997 1997
-------------- -------------
Assets (unaudited)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 15,934 $ 14,032
Accounts receivable, less
allowances of $11,023
and $3,656 89,386 54,405
Notes receivable 3,693 ---
Net investment in sales
type leases 573 645
Inventories, net 26,893 19,046
Prepaid expenses and other
current assets 4,623 2,771
Prepaid taxes 2,434 ---
------------- ------------
Total current assets 143,536 90,899
Property and equipment, net 36,999 25,568
Deferred taxes 4,223 4,284
Other assets 3,921 7,422
------------- ------------
TOTAL ASSETS $188,679 $128,173
============= ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of long
term debt $ 2,644 $ 1,000
Accounts payable 12,847 15,235
Accrued expenses 25,869 21,556
Income taxes payable --- 2,618
Deferred customer funding 1,087 1,140
Deferred revenues 15,651 8,939
------------ ----------
Total current liabilities 58,098 50,488
Long term debt and other
long term liabilities 15,507 1,193
Stockholders' Equity:
Common stock, $.001 par
value, 60,000,000 shares
authorized 27,411,736 and
25,501,691 shares issued 27 25
Additional paid in capital 74,909 60,557
Retained earnings 39,650 15,516
Cumulative translation
adjustment 488 394
------------ -----------
Total stockholders'
equity 115,074 76,492
------------ ------------
TOTAL LIABILITES AND
STOCKHOLDERS' EQUITY $188,679 $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 October 31, Nine months ended October 31,
1997 1996 1997 1996
------------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Revenues $68,606 $52,818 $198,342 $130,024
Cost and expenses:
Cost of revenues 26,243 25,721 80,386 62,889
Research and development 17,173 10,067 45,270 25,345
Marketing, general and
administrative 13,536 10,107 41,255 27,133
--------- ---------- ---------- ---------
56,952 45,895 166,911 115,367
Income from operations 11,654 6,923 31,431 14,657
Interest expense, net (332) (213) (676) (315)
Other expense, net (102) (293) (308) (816)
--------- ---------- ---------- ----------
Income before income taxes 11,220 6,417 30,447 13,526
Provision for income taxes 3,929 2,246 6,682 4,734
--------- ---------- ----------- ----------
Net income $ 7,291 $ 4,171 $ 23,765 $ 8,792
========= ========== =========== ===========
Net income per share $ .25 $ .15 $ .84 $ .32
========= ========== =========== ===========
Weighted average common
and common equivalent
shares outstanding 29,603 28,144 28,373 27,823
</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>
Nine months ended October 31,
1997 1996
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $23,765 $ 8,792
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization and other 10,641 5,720
Payments made in excess of rent expense (136) (144)
Loss on disposal of fixed assets --- 127
Provision for sales allowances 7,367 149
Changes in assets and liabilities:
Accounts receivable (41,893) (33,934)
Net investment in sales type leases 72 1,037
Inventories (7,847) 495
Prepaid expenses and other current assets (1,843) (328)
Accounts payable (3,365) 1,858
Accrued expenses 4,295 7,975
Deferred revenue 5,383 3,197
Income taxes (3,105) 3,896
Deferred customer funding (53) (2,081)
Other liabilities 4,456 (33)
----------- ----------
Net cash used in operating activities (2,263) (3,274)
Cash Flows From Investing Activities
Purchase of property and equipment (18,535) (15,157)
Purchase of license agreements
and other assets 275 (1,118)
----------- -----------
Net cash used in investing activities (18,260) (16,275)
Cash Flows From Financing Activities
Exercise of stock options 10,867 2,641
Purchase of stock through Employee
Stock Purchase Plan 1,306 781
Principal payments under financing
obligations (1,000) (275)
Borrowings under revolving credit agreements 35,000 18,600
Repayments under revolving credit agreements (25,500) (10,600)
----------- ------------
Net cash provided by financing activities 20,673 11,147
Effect of exchange rate on cash and
cash equivalents 94 17
Net increase (decrease) in cash and
cash equivalents 244 (8,385)
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 $15,934 $ 5,544
=========== ==============
</TABLE>
<TABLE>
<CAPTION>
Supplemental Disclosure of Cash Flow Information:
<S> <C> <C>
Income taxes paid $ 7,986 $ 2,021
Interest paid 1,362 712
Non cash transactions:
Tax benefit of disqualifying dispositions
of incentive stock options $ 1,886 $ 530
Sale of Joint Venture for a note receivable 3,693 ---
Purchase of license agreements --- 2,000
</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 nine months ended October 31, 1997 and 1996, the unaudited consolidated
statements of cash flows for the nine months ended October 31, 1997 and 1996,
and the unaudited consolidated balance sheet at October 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:
<TABLE>
<CAPTION>
October 31, 1997 January 31, 1997
<S> <C> <C>
Materials and purchased parts $ 11,695 $ 7,735
Work in process 5,955 9,585
Finished goods 9,243 1,726
---------------- -----------------
Total $ 26,893 $19,046
================ =================
</TABLE>
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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 October 31, 1997) or
the LIBOR rate plus 175 basis points. The credit facility is scheduled to
expire on July 17, 1999. As of October 31, 1997, the Company had $9.5 million
outstanding in cash borrowings 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 accounts
receivable.
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.
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
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 Enter-
prise and Related Information" (SFAS No. 131). SFAS No. 131 specifies new
guidelines for determining a company's operating segments and related require-
ments 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 Company will adopt the new standard for the fiscal
year ending January 31, 1999.
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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 23,765
Net book value of assets acquired
in pooling of interest 661
Stock issued for options and warrants,
related tax benefits and other 14,156
-------------------
Balance at October 31, 1997 $ 115,074
====================
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.
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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 or loss has been recognized on this transaction.
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 account 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.
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9. INCOME TAXES
The effective tax rate for the three months ended October 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 and recognized a one time tax
benefit of $3,976,000 associated with the July 30, 1997 exercise of 981,760
warrants by AT&T based upon management's determination that the realization of
this tax benefit was more likely than not. 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. MERGER WITH COMVERSE TECHNOLOGY, INC.
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
shares of Common Stock of Comverse. The merger is subject to approval by the
stockholders of the Company and Comverse and various other conditions, and is
expected to be completed in early 1998. 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 October 31, 1997 versus Three Months Ended October 31, 1996
Net Sales
Revenues for the third quarter of fiscal year 1998 were $68,606,000 versus
$52,818,000 for the prior year period, an increase of $15,788,000, or 30%.
North American revenues, generated by sales to Regional Bell Operating Com-
panies, long distance carriers, and other network operators, were approximate-
ly $18,111,000, a decrease of $24,190,000, or 57%, compared to the prior year
period. North American revenues decreased to 26% of total revenues versus 80%
in the prior year due primarily to changes in customers buying patterns relating
to their deployment of services. International revenues for the third quarter
were $50,495,000, an increase of $39,978,000, or 380%, over the prior year
period. International revenues increased primarily due to higher volume from
the Company's existing Pacific Rim, Australian and Brazilian customers.
International revenues comprised 74% of total third quarter fiscal 1998 revenues
versus 20% in the prior year period.
Gross Profit
Gross profit for the third quarter of fiscal 1998 increased over the correspond-
ing prior year period by $15,266,000, or 56%, to $42,363,000. As a percentage
of revenues, gross profit was approximately 62% for the three months ended
October 31, 1997 compared to approximately 51% for the comparable prior year
period. The increase in gross profit as a percentage of revenues was due
primarily to the shipment of larger systems, a substantial volume of capacity
upgrades, which traditionally have higher margins, and the completion of a
significant software development project. 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.
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Research and Development Expenses
Research and development expenses were $17,173,000 for the third quarter of
fiscal 1998 versus $10,067,000 for the prior year period. As a percentage of
revenues, research and development expenses increased to 25% for the third
quarter versus 19% for the prior year period. Excluding the effect of customer
funding and certain reclassifications, gross research and development spending
in the third quarter of fiscal 1998 increased $8,342,000, or 69%, 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 third quarter of fiscal 1998 and 1997
were $1,236,000 and $1,123,000, respectively. In addition to customer funding
offsets, the Company periodically defers expenditures incurred under long term
custom modification contracts. Expenditures associated with long term custom
modification contracts that were deferred and /or classified as cost of revenues
for the third quarter 1998 and 1997 amounted to $1,958,000 and $835,000,
respectively. Deferred expenditures of $1,032,000 at October 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.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses for the third quarter were
$13,536,000 versus $10,107,000 for the prior period. As a percentage of
revenues, these expenses increased from 19% in the prior year period to 20%
in the third quarter of fiscal 1998 due primarily to a significant increase
to the reserve for sales allowances as a result of a higher level of gross
accounts receivable, as well as increased staffing to support the overall
growth of the Company's business.
Interest Expense, net
Interest income for the quarter increased by $152,000 to $271,000 at October 31,
1997 due primarily to higher average cash balances. Interest expense for the
third quarter increased by $271,000 to $603,000 as a result of borrowings
against the Company's line of credit and interest associated with the sale of
$18.0 million of accounts receivable in the second quarter. 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
Other expense decreased $194,000 to $102,000 for the three months ended October
31, 1997 due primarily to the Company's share of a loss by the Joint Venture in
Brazil and a loss on the disposal of fixed assets that were incurred in the
three months ending October 31, 1996, but not incurred in the three months
ending October 31, 1997.
Provision for Income taxes
The effective tax rate for the three months ended October 31, 1997 and 1996
was 35%. The Company expects the tax rate to remain at approximately 35%
throughout the remainder of fiscal 1998.
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Results of Operations
Nine months Ended October 31, 1997 versus Nine Months Ended October 31, 1996
Net Sales
Revenues for the nine months ended October 31, 1997 were $198,342,000 versus
$130,024,000 for the prior year period, an increase of $68,318,000, or 53%.
North American revenues, generated by sales to Regional Bell Operating Com-
panies, long distance carriers, and other network operators, were approximate-
ly $91,905,000, an increase of $2,603,000, or 3%, over the prior year period.
North American revenues decreased to 46% of total revenues versus 69% in the
prior year due primarily to changes in customers buying patterns relating to
their deployment of services. International revenues for the first nine months
of fiscal 1998 were $106,437,000, an increase of $65,715,000, or 161%, over the
prior year period. International revenues increased primarily due to higher
volume from the Company's existing Pacific Rim, Australian and Brazilian
customers. International revenues comprised 54% of revenues for the first
nine months of fiscal 1998 revenues versus 31% in the prior period.
Gross Profit
Gross profit for the first nine months of fiscal 1998 increased over the
corresponding prior year period by $50,821,000, or 76%, to $117,956,000.
As a percentage of revenues, gross profit was approximately 59% for the nine
months ended October 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, and the completion of a significant software development project.
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 $45,270,000 for the nine month period
ended October 31, 1997 versus $25,345,000 for the prior period. As a percentage
of revenues, research and development expenses increased to 23% for the first
nine months of fiscal 1998 versus 19% for the prior year. Excluding the effect
of customer funding and certain reclassifications,gross research and development
spending in the first nine months of fiscal 1998 increased $24,404,000, or 78%,
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 nine months of fiscal 1998 and
1997 were $4,863,000 and $3,204,000, respectively. In addition to customer
funding offsets, the Company periodically defers expenditures incurred under
long term custom modification contracts. Expenditures associated with long term
custom modification contracts that were deferred and /or classified as cost of
revenues for the first nine months of fiscal 1998 and 1997 amounted to
$5,756,000 and $2,933,000, respectively. Deferred expenditures of $1,032,000
at October 31, 1997 are included in prepaid expenses and other assets and will
be recognized in cost of sales as the associated revenue is recognized.
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Marketing, General and Administrative Expenses
Marketing, general and administrative expenses for the nine month period ended
October 31, 1997 were $41,255,000 versus $27,133,000 for the prior period. As
a percentage of revenues, these expenses remained constant at 21% from the
comparable prior year period. Marketing, general and administrative expenses
increased $14,122,000 versus the prior year period due primarily to a
significant increase in the reserve for sales allowances as a result of a higher
level of gross accounts receivable, a customer dispute as referenced in Note 8
to the Consolidated Financial Statements, as well as increased staffing to
support the overall growth of the Company's business.
Interest Expense, Net
Interest income for the nine months ended October 31, 1997 increased by $216,000
to $686,000 due primarily to higher average cash balances. Interest expense
for the first nine months of fiscal 1998 increased by $577,000 to $1,362,000
as a result of borrowings against the Company's line of credit and the sale
of receivables without recourse during the quarter ended July 31, 1997. 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 $508,000 to $308,000 for the nine months ended
October 31, 1997 due primarily to the Company's share of a loss by the Joint
Venture in Brazil and a loss on the sale of fixed assets that were incurred
in the nine months ending October 31, 1996, but not incurred in the nine months
ending October 31, 1997.
Provision for Income Taxes
The effective tax rate for the nine months ended October 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.
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Liquidity and Capital Resources
The Company has funded its operations during fiscal 1998 primarily through the
sale of accounts receivable without recourse, its bank lines of credit, and
stock issuance activities. At October 31, 1997 and January 31, 1997, the
Company had available cash and cash equivalents of $15,934,000 and $14,032,000,
respectively, and working capital of $85,438,000 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 October 31, 1997) or the LIBOR rate plus
175 basis points. The credit facility is scheduled to expire on July 17, 1999.
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 cash
borrowings under its revolving credit facility of $9,500,000 outstanding at
October 31, 1997. The Company also has available uncollateralized lines of
credit for forward foreign exchange contracts with three banks. There were
no outstanding balances on these lines of credit at October 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 $18.0 million of receivables without
recourse.
Net cash used in operating activities for the nine months ending
October 31, 1997 was $2,263,000. In the nine months ending October 31, 1997,
net cash used in operating activities consisted primarily of an increase in
accounts receivable of $41,893,000 and an increase in inventories of $7,847,000,
offset by net income of $23,765,000 and depreciation and amortization of
$10,641,000. The increase in accounts receivable is due to the granting of
extended payment terms and a large amount of revenue recognized at the end
of the quarter. Inventory balances also increased at October 31, 1997 in
anticipation of meeting fourth quarter revenue demands.
Net cash used in investing activities for the nine months ending
October 31, 1997 was $18,260,000. This reflects primarily purchases of property
and equipment of $18,535,000, consisting primarily of computer workstations and
test equipment, as a result of increased headcount and growth of revenues.
-15-
<PAGE>
<PAGE>
Net cash provided by financing activities for the nine months ending
October 31, 1997 was $20,673,000. This includes net borrowings made under the
revolving credit agreements of $9,500,000, and proceeds from exercise of common
stock options of $10,867,000.
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
the next twelve months.
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.
-16-
<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 54% of
revenues for the first nine 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.
While most of the Company's international revenues have been denominated in U.S.
dollars, as a result of increased turbulence in the Asian currency markets, the
Company anticipates that there may be increased pressure to denominate revenues
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.
Historically, the Company has operated with minimal backlog. As a result,
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.
-17-
<PAGE>
<PAGE>
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.
-18-
<PAGE>
<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.
On March 10, 1997, Syntellect Technology Corp. ("Syntellect") filed suit
against the Company in District Court of Dallas County, Texas, Fourteenth
Judicial District alleging a breach of contract involving a patent licensing
agreement originally created by a predecessor of Syntellect. The suit by
Syntellect seeks damages in an unspecified amount for alleged past royalties
owed on the patent in question. Settlement negotioations are continuing and
both parties are currently engaged in the discovery process. The outcome of
this lawsuit is neither probable nor estimable; accordingly, no loss provision
has been made for this lawsuit.
-19-
<PAGE>
<PAGE>
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults upon Senior Securities
Not applicable.
ITEM 4. Submission of matters to Vote of Security Holders
Not applicable.
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
Form 8-K was filed on August 27, 1997 to announce the merger between
Comverse Technology, Inc. and Boston Technology, Inc.
-20-
<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: November 25, 1997
BOSTON TECHNOLOGY, INC.
By: /s/ Carol B. Langer
----------------------
Carol B. Langer
Senior Vice President of Finance,
Chief Financial Officer,
Treasurer and Secretary
-21-
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Title
*2 Agreement and Plan of Merger between Comverse
Technology, Inc. and the Company
4 Agreement No. 2 to the Rights Agreement
11 Statement Re: Weighted Shares used in Computation
of Earnings per Share
27 Financial Data Schedule
- --------------------------
* Incorporated by reference to the Company's Form 8-K filed August 27, 1997.
-22-
<PAGE>
Exhibit 4
AMENDMENT NO. 2
TO
RIGHTS AGREEMENT
This AMENDMENT NO. 2 TO RIGHTS AGREEMENT (the "Amendment") is entered into as
of the 20th day of August, 1997 between Boston Technology, Inc.,
a Delaware corporation (the "Company"), and State Street Bank & Trust Company,
a national banking association (the "Rights Agent"). Capitalized terms not
otherwise defined herein shall have the meanings given them in the Rights
Agreement by and between the parties hereto.
RECITALS
WHEREAS, the Board of Directors has determined that it is in the best
interests of the Company to amend the Rights Agreement as set forth herein
prior to and in connection with the execution of that certain Agreement and
Plan of Merger dated as of August 20, 1997, as the same may be amended from
time to time (the "Merger Agreement"), between Comverse Technology, Inc., a
New York corporation ("Comverse"), and the Company (pursuant to which Merger
Agreement, among other things, the Company shall merge with and into Comverse
(the "Merger")).
WHEREAS, the Company has requested that the Rights Agreement be amended
in accordance with Section 26 of the Rights Agreement, as set forth herein, and
the Rights Agent is willing to amend the Rights Agreement as set forth herein.
AGREEMENT
NOW, THEREFORE, the parties, intending to be legally bound, hereby
agree as follows:
I. Section 7(a) of the Rights Agreement is hereby amended to read in its
entirety as follows:
"(a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase
and the certificate on the reverse side thereof duly executed, to the Rights
Agent at the office of the Rights Agent designated for such purpose, together
with payment of the aggregate Purchase Price with respect to the total number
of shares of Common Stock (or other securities, cash or other assets, as the
case may be) as to which such surrendered Rights are then exercisable, at or
prior to the earlier of (i) the Final Expiration Date, (ii) the time at which
the Rights are redeemed as provided in Section 23 hereof, or (iii) immediately
prior to the Effective Time, as defined in the Agreement and Plan of Merger
dated as of August 20, 1997, as the same may be amended from time to time,
between Comverse Technology, Inc., a New York corporation ("Comverse"), and
the Company (the "Merger Agreement"), pursuant to which Merger Agreement, among
other things, the Company shall merge with and into Comverse (the "Merger")
(the earlier of (i), (ii) and (iii) being herein referred to as the "Expiration
Date")."
I. Section 34 of the Rights Agreement is hereby added as follows:
"Section 34. Comverse Transaction. Notwithstanding any provision of
this Rights Agreement to the contrary, no Distribution Date, Stock Acquisition
Date or Triggering Event shall be deemed to have occurred, neither Comverse
nor any Affiliate or Associate of Comverse shall be deemed to have become an
Acquiring Person and no holder of Rights shall be entitled to exercise such
Rights under or be entitled to any rights pursuant to Section 7(a), 11(a) or
13(a) of this Rights Agreement by reason of (x) the approval, execution,
delivery or effectiveness of the Merger Agreement or (y) the consummation of
the transactions contemplated under the Merger Agreement in accordance with
the terms thereof, (including, without limitation, the consummation of the
Merger)."
I. Except as amended hereby, the Rights Agreement shall remain
unchanged and shall remain in full force and effect.
I. This Amendment may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective duly authorized representatives as of the date
first above written.
BOSTON TECHNOLOGY, INC.
By: /s/ A. K. Wnorowski
--------------------------
Name: A. K. Wnorowski
Title: Senior Vice President
of Strategic Alliances
and General Counsel
STATE STREET BANK & TRUST COMPANY
By: /s/ Stephen Cesso
----------------------------
Name: Stephen Cesso
Title: Vice President
and Associate Counsel
<PAGE>
Exhibit 11
Boston Technology, Inc.
Statement of Weighted Shares used in Computation of Earnings Per Share
(in thousands)
<TABLE>
<CAPTION>
Three months ended October 31, Nine months ended October 31,
1997 1996 1997 1996
------------ ------------- -------------- -----------
<S> <C> <C> <C> <C>
Common stock outstanding,
beginning of period 27,296 25,033 25,502 24,732
Weighted average common
stock issued 69 56 1,135 193
Weighted average common
stock equivalents 6,309 8,145 6,582 7,991
Weighted average treasury
shares acquired using
the treasury stock method (4,071) (5,090) (4,846) (5,093)
----------- ------------- ------------ ------------
Weighted average shares of
common stock outstanding 29,603 28,144 28,373 27,823
=========== ============== ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 15934
<SECURITIES> 0
<RECEIVABLES> 89386
<ALLOWANCES> 11023
<INVENTORY> 26893
<CURRENT-ASSETS> 143536
<PP&E> 69991
<DEPRECIATION> 32992
<TOTAL-ASSETS> 188679
<CURRENT-LIABILITIES> 58098
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 115047
<TOTAL-LIABILITY-AND-EQUITY> 188679
<SALES> 198342
<TOTAL-REVENUES> 198342
<CGS> 80386
<TOTAL-COSTS> 166911
<OTHER-EXPENSES> 86525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1362
<INCOME-PRETAX> 30447
<INCOME-TAX> 6682
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23765
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
</TABLE>
