SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
____________
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended January 31, 1994
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 number 1-8948
INTELOGIC TRACE, INC.
(Exact name of registrant as specified in its charter)
New York 74-2368260
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
Turtle Creek Tower I
P. 0. Box 400044, San Antonio, Tx. 78229-8415
(Address of principal executive offices) (Zip Code)
210-593-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
The number of shares outstanding of registrant's common stock,
par value $.01 per share, as of March 1, 1994 was 12,452,621
shares.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
INTELOGIC TRACE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31, July 31,
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and temporary investments $ 507 $ 1,626
Accounts receivable, net 9,818 8,728
Net assets of discontinued operations 858 320
Prepaid expenses and other current assets 1,878 2,070
TOTAL CURRENT ASSETS 13,061 12,744
Leasehold Improvements and Equipment, net 1,762 2,076
Field Support Spares, net 24,248 26,788
Intangible Assets, net 1,898 2,213
Other Assets 513 640
$ 41,482 $ 44,461
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,432 $ 3,689
Accrued expenses 4,933 5,900
Short-term borrowings 7,713 4,377
Deferred revenue 11,346 12,170
Other current liabilities 141 254
TOTAL CURRENT LIABILITIES 27,565 26,390
11.99% Subordinated Debentures Due 1996 49,924 49,924
Deferred Income Taxes and Other Liabilities 435 1,632
Deferred Pension Liability 1,703 1,861
$10.00 Redeemable Preferred Stock; 65,000
Shares Authorized, 44,305 Shares Issued and
Outstanding; $100 Mandatory Redemption 4,274 3,903
Value
Shareholders' Equity (Deficit) (42,419) (39,249)
$ 41,482 $ 44,461
</TABLE>
See accompanying notes to consolidated financial statements
2
<TABLE>
<CAPTION>
INTELOGIC TRACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months
January January
31, 31,
1994 1993
<S> <C> <C>
Revenue:
Service $18,655 $22,112
Sales 143 352
TOTAL REVENUE 18,798 22,464
Cost of Revenue:
Service 14,964 16,858
Sales 114 156
TOTAL COST OF REVENUE 15,078 17,014
GROSS PROFIT 3,720 5,450
Selling, General and Administrative Expenses 4,367 4,379
EARNINGS (LOSS) FROM OPERATIONS (647) 1,071
Other Income (Expense):
Interest expense (1,683) (1,751)
Investment income (loss) - (19)
Other, net (163) ( 76)
LOSS FROM CONTINUING OPERATIONS BEFORE (2,493) ( 775)
Income Tax - 141
LOSS FROM CONTINUING OPERATIONS (2,493) (916)
Extraordinary gain from purchases of
subordinated - 550
debentures, net of taxes
Extraordinary gain from net operating loss - 141
NET LOSS (2,493) (255)
Net Loss, Less Preferred Stock Dividends $ (2,685) $ (382)
Earnings (Loss) Per Common Share:
Loss from continuing operations $ (.21) $ (.08)
Extraordinary items - .05
Preferred stock dividends -
NET LOSS PER COMMON SHARE $ (.22)
Weighted Average Common Shares Outstanding 12,074 12,052
</TABLE>
See accompanying notes to consolidated financial statements
3
<TABLE>
<CAPTION>
INTELOGIC TRACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Six Months Ended
January 31, January 31,
1994 1993
<S> <C> <C> <C>
Revenue:
Service $38,331 $45,546
Sales 569 680
TOTAL REVENUE 38,900 46,226
Cost of Revenue:
Service 31,139 34,816
Sales 200 389
TOTAL COST OF REVENUE 31,339 35,205
GROSS PROFIT 7,561 11,021
Operating Expenses:
Selling, general and admin. expenses 9,058 9,675
EARNINGS (LOSS) FROM OPERATIONS (1,497) 1,346
Other Income (Expense):
Interest expense (3,319) (3,613)
Investment income 54 45
Equity in loss of affiliate - -
Other, net (317) (239)
LOSS FROM CONTINUING OPERATIONS
BEFORE TAXES (5,079) (2,461)
Income Taxes (Benefit) (1,193) 141
LOSS FROM CONTINUING OPERATIONS (3,886) (2,602)
Earnings From Discontinued Operations 828 -
LOSS BEFORE EXTRAORDINARY ITEMS (3,058) (2,602)
Extraordinary gains from purchases of subordinated
debentures, net of taxes - 2,547
Extraordinary gain from net operating
loss carry forward - 141
NET LOSS $ (3,058) $ ( 86)
Net Loss, Less Preferred Stock
Dividends $ (3,429) $ (222)
Earnings (Loss) Per Common Share:
Loss from continuing operations $ (.32) $ (.23)
Earnings from discontinued operations .07 -
Extraordinary items - .21
Preferred stock dividends (.03) -
NET LOSS PER COMMON SHARE $ (.28) $ (.02)
Weighted Average Common Shares Outstanding 12,074 11,970
</TABLE>
See accompanying notes to consolidated financial statements
4
<TABLE>
<CAPTION>
INTELOGIC TRACE,. INC.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
(Unaudited)
Foreign Retire-
Add. Retained Currency ment
Common Paid-in Earn. Transl. Treas. Valuat.
Stock Capital (Deficit) Adj. Stock Reserve Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at $199 $55,003 $(35,024) $54 $(56,919) $(2,562) $(39,249)
July 31, 1993
Redeemable preferred
stock dividends (371) (371)
(in kind)
Foreign currency
translation 4 4
adjustment
Shares issued -
401(k) Plan (17) 105 88
Employee Stock 167 167
Option Plan
Net loss (3,058) (3,058)
Balance at $199 $55,153 $(38,453) $58 $(56,814) $(2,562) $(42,419)
January 31, 1994
</TABLE>
See accompanying notes to consolidated financial statements
5
<TABLE>
<CAPTION>
INTELOGIC TRACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Six Months Ended
January January
31, 31,
1994 1993
<S> <C> <C>
Operating Activities:
Net earnings (loss) $(3,058) $ 86
Adjustments to reconcile net earnings
(loss) to net cash
provided by operating activities:
Depreciation and amortization 6,442 7,268
Gain on repurchase of subordinated - (2,547)
debentures
Adjustments to net assets of discontinued (828) -
operations
Other 972 1,242
Changes in operating working capital, net (4,509) (5,351)
NET CASH PROVIDED (USED) BY OPERATING (981) 698
Investing Activities:
Purchase of spares and other fixed assets (3,525) (4,179)
Proceeds from sale of discontinued - 4,999
NET CASH PROVIDED (USED) IN INVESTING (3,525) 820
Financing Activities:
Short-term borrowings, net 3,336 2,817
Repurchase of subordinated debentures - (4,459)
Other - ( 19)
NET CASH PROVIDED BY (USED) IN FINANCING
ACTIVITIES 3,336 (1,661)
Effect of Exchange Rate Changes on Cash 51 (46)
NET DECREASE IN CASH AND TEMPORARY
INVESTMENTS $ (1,119) $ (189)
Interest Paid $ 3,286 $ 3,462
Income Taxes Paid, net $ 8 $ 59
</TABLE>
See accompanying notes to consolidated financial statements.
6
INTELOGIC TRACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1994
(Dollars in thousands, except share data)
1. BASIS OF PRESENTATION
The consolidated financial statements of Intelogic Trace,
Inc. (the "Company") include the financial statements of
the parent and its wholly-owned subsidiaries.
The interim consolidated financial statements and notes are
unaudited. Investments in affiliated companies owned 20%
or more are accounted for on the equity method. All
significant intercompany accounts and transactions have
been eliminated in consolidation. In the opinion of
management, all adjustments necessary for a fair
presentation of such financial statements have been
included and such adjustments consist only of normal
recurring items.
2. DISCONTINUED OPERATIONS
In 1992, the Company sold substantially all of the assets
of its computer hardware sales and leasing and application
software businesses. These businesses represented the
entire operations of Intelogic Trace Systems Group.
During the first quarter of fiscal 1994, the Company
received lease payments on certain lease receivables not
transferred to the buyer and reduced certain remaining
unclaimed liabilities which resulted in a combined $828
reduction to the previously recorded loss from discontinued
operations. The net amount due at January 31, 1994
includes a $750 note receivable due July 25, 1994 bearing
interest at 8%.
3. INVESTMENT IN AFFILIATE
For the fiscal year 1992, the Company's share of Datapoint
Corporation's ("Datapoint") losses exceeded its recorded
investment. No earnings were recorded for the 1993 fiscal
year. The Company's pro rata share of Datapoint's second
quarter results for fiscal 1994 are shown for information
purposes only. The carrying value of the Company's
investment in Datapoint at January 31, 1994 remains at
zero. The Company's share of Datapoint's future earnings
will have to exceed $2,789 before the Company can reflect
income on this investment.
7
The Company's pro rata share of Datapoint's second quarter
results, applicable to common stockholders, are as follows:
Three Months Ended Six Months Ended
January January January January
31, 31, 31, 31,
1994 1993 1994 1993
Income (loss) before
extraordinary items $ 185 $329 (189) $352
Extraordinary items - 142 263 236
Net earnings (loss) $ 185 $471 $ 74 $588
from affiliate
Datapoint's results of operations are summarized below:
Three Month Ended Six Months Ended
January January January January
31, 31, 31, 31,
1994 1993 1994 1993
Total revenue $44,786 $54,296 $86,434 $114,839
Gross profit 19,229 25,891 36,343 51,627
Earnings (Loss) 532 1,233 (1,794) 856
before extraordinary
item
Net earnings 532 1,955 (454) 2,051
(loss)
4. DEBT
During the third quarter of fiscal 1992 the amount of
borrowings available under the Company's revolving financing
agreement was increased to $12,000. Under a subsequent
amendment to the agreement, the Company's borrowings under this
facility are limited to the lesser of: (1) fifteen percent of
annualized service maintenance revenue, (2) cash collections
for the prior 50-day period, or (3) an amount equal to the sum
of 80% of eligible accounts receivable. Commencing in November
1993, eligible borrowings related to field spares began to be
phased out ratably over the following 5-month period. At
January 31, 1994 eligible borrowings were limited to 12.0% of
net field support spares.
5. TAXES
Based on further discussions with taxing authorities during the
first quarter of fiscal 1994, the Company has recorded a tax
benefit of $1,193 related to a tax refund received in a prior
year. Recognition was deferred previously based, in part, upon
ongoing Federal income tax examinations.
8
6. CONTINGENCIES
Two shareholders of the Company have filed lawsuits against the
Company and its Board of Directors demanding that the Company
seek damages from its Board of Directors with respect to the
Company's 1990 purchases of the stock of the Company and
Datapoint Corporation. A committee of the Board of Directors
was appointed to consider the demands raised in each case. The
committee retained independent counsel to review the matters
raised in the lawsuits. The committee determined that it was
not in the best interest of either the Company or its
shareholders to accept either demand and, accordingly,
instructed counsel to seek the dismissal of both lawsuits. In
January 1992 a motion for summary judgment on behalf of the
Company and its Board of directors was denied in the lawsuit
pending in the New York State Court and is currently on appeal.
A similar motion, involving only the Company's purchase of its
own stock, was denied, with leave to renew after the appeal in
the New York State Court action is decided. The second case is
pending in the United States District Court for the Southern
District of New York. This action charges a violation of the
proxy laws and breach of fiduciary duties with respect to
several actions by the Board, including the purchase of the
Company's own stock. In June 1993, another shareholder
commenced a derivative action against certain members of the
Company's Board of Directors and Datapoint Corporation.
Because this latest action is substantially similar to one of
the previously filed suits, the plaintiffs in the latest action
have filed a motion to dismiss their complaint without
prejudice. The Company believes that these issues will
ultimately be resolved in its favor; however, the ultimate
outcome cannot presently be determined.
The Internal Revenue Service ("IRS") has issued assessment
letters relating to the consolidated Federal Income Tax Returns
of the Company for the years 1986 through 1992. The IRS
letters propose assessments of approximately $31,000 in
additional taxes plus interest. The assessments primarily
involve the industry-wide issue of the appropriate method for
cost recovery of spare parts. A recent case on the same issue
was decided in the taxpayer's favor by the U. S. Tax Court, but
is being appealed by the IRS. If the decision was followed by
courts with jurisdiction over the Company, the remaining
proposed assessment would be approximately $2,500 in additional
taxes plus interest. The Company strongly disagrees with the
proposed adjustments and has filed a protest, appealing each of
the adjustments in the IRS report. The Company believes that
these issues will ultimately be resolved in its favor; however,
the ultimate outcome cannot presently be determined. No
provision has been made for any possible liability.
9
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition
(Years referred to are fiscal years) (In thousands)
Results of Operations
Three Months Ended January 31, 1994 versus Three Months Ended
January 31, 1993:
Revenue
Service revenue in the second quarter of 1994, $18,655,
declined $3,457 (15.6%) from the year-ago period as domestic
revenue from servicing Datapoint-manufactured products decreased
$1,755 while domestic revenue from servicing all other products
decreased $1,702. Cancellations and expirations continue to exceed
new sales activity, while revenue from installation of telephone
devices in the second quarter was not significant. Service revenue
from Datapoint products totaled $1,833 for the quarter, or 9.8% of
total revenue. In the second quarter of 1993, domestic revenue
from servicing Datapoint products totaled $3,588, or 16.0% of the
revenue total. This decline can be attributed to customers who are
converting to new platforms.
Canadian service revenues also declined in 1994 as compared to
1993, decreasing $327 (37.4%) to a 1994 second quarter total of
$547. Canada operations are currently in transition from providing
service solely to Datapoint system customers to a more balanced and
diversified customer equipment base. In an effort to improve
service delivery systems and enhance Canadian offerings, the
Company announced a new Canadian service alliance with DataTech
Systems, Ltd., effective March 1, 1994, which will provide for
expanded service coverage and technical resources.
10
Gross Profit
Gross profit of $3,720 (19.8%) for the second quarter compared
to $5,450 (24.3%) for the same period one year ago. This decline
resulted directly from the decrease in revenue as costs of service
have declined $1,936 (11.4%) quarter over quarter.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses of $4,367
for the second quarter were substantially unchanged from the year-
ago period, despite a substantial increase in the Company's sales
force during the first half of this year. Total selling costs were
$3,160 for the three months ended January 31, 1994, up $498 (18.7%)
from the second quarter of 1993.
Interest Expense
Second quarter interest expense decreased $68 from the same
period in 1993 due to a decrease of $2,017 in the outstanding
credit facility with Foothill Capital Corporation from the same
period in 1993.
Federal and State Income Taxes
Effective August 1, 1993, the Company changed its method of
accounting for income taxes in accordance with the provisions of
FASB Statement No. 109, "Accounting for Income Taxes" ("FAS 109").
As permitted under the new rules, prior years' financial statements
have not been restated. FAS 109 provides for recognition of
deferred tax assets when realization of the deferred tax assets is
more likely than not. Because of continued losses, no tax benefit
has been recorded in the period with respect to the loss carry
forwards.
11
Six Months Ended January 31, 1994 versus Six Months Ended January
31, 1993:
Revenue
Service revenue in the first six months of 1994, $38,331,
declined $7,215 (15.8%) from the year-ago period. Domestic revenue
from servicing Datapoint-manufactured products decreased $3,397
while domestic revenue from servicing all other products decreased
$3,818. Cancellations exceeded new sales activity throughout the
first six months of 1994. Service revenue from Datapoint products
totaled $3,995 for the first six months, or 10.3% of total revenue.
In the first six months of 1993, domestic revenue from servicing
Datapoint products totaled $7,392, or 16.0% of the revenue total.
Datapoint products continue to be replaced with new platforms.
Gross Profit
Gross profit of $7,561 (19.4%) for the first six months of
1994 compared to $11,021 (23.8%) for the same period one year ago.
This decline resulted directly from the decrease in revenue as
costs of service have declined $3,866 (11.0%) from the same period
one year ago.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses of $9,058
for the first six months decreased $617 (6.4%) from the year-ago
period. Much of this reduction can be attributed to elimination of
marketing management layers in the first six months of 1993 to
achieve greater operational efficiencies.
Interest Expense
Interest expense for the first six months of 1994 decreased
$294 from the same period in 1993 due to a decrease in the
12
outstanding credit facility with Foothill Capital Corporation from
the year-ago period and debenture repurchases which took place
during the first six months of 1993.
Federal and State Income Taxes
During the first six months of 1994 tax benefits of $1,193
were recorded related to a tax refund received in 1993.
Recognition was deferred previously based in part upon ongoing
Federal income tax examinations. Although a final resolution has
not been reached with respect to the Company's Federal income tax
contingency, management believes its current estimate of tax
liabilities is appropriate, given continuing discussions with
taxing authorities which took place during the first six months.
During the first six months of 1993 the Company recorded $141 of
taxes related to book/tax timing differences. This tax was offset
by utilization of net operating loss carry forwards.
Capital Resources and Liquidity
Through the first six months of 1994, cash and temporary
investments decreased $1,119, as compared to a decrease of $189
from the same period one year ago. Net cash provided by operating
activities was lower than in the prior year by $1,679; however,
investments in spares and other fixed assets decreased by $654 as
the Company continued to shorten the necessary parts pipeline and
short-term borrowings under the Foothill facility increased.
Financing activities in the first six months of 1993 consisted of
$2,817 in short-term borrowings and disbursements of $4,459 for
subordinated debenture repurchases.
13
At January 31, 1994, the Company's current liabilities
exceeded current assets by $14,504. Current liabilities include
$7,713 of borrowings under the Company's revolving financing
agreement. No periodic principal payments are required under this
agreement as long as the Company is in compliance with the
financial covenants and the borrowing base exceeds the amount
outstanding.
Management believes that internally generated cash flow,
existing cash and temporary investments and borrowings available
under the Company's revolving financing agreement will be
sufficient to fund the Company's obligations and any capital
expenditures.
14
PART II - OTHER INFORMATION
Item 8. Exhibits and Reports on Form 8-K
B. Reports on Form 8-K:
On November 24, 1993, the Company announced an agreement in
principle with a major company to install and maintain certain
devices beginning in January 1994. The Company anticipates
revenue of approximately $8 million from the initial order.
The agreement will have an initial term of three years.
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.
INTELOGIC TRACE, INC.
(Registrant)
Date: March 16, 1994 By
Martin J. Landon
Vice President and
Chief Financial Officer
15
PART II - OTHER INFORMATION
Item 8. Exhibits and Reports on Form 8-K
B. Reports on Form 8-K:
On November 24, 1993, the Company announced an agreement in
principle with a major company to install and maintain certain
devices beginning in January 1994. The Company anticipates
revenue of approximately $8 million from the initial order.
The agreement will have an initial term of three years.
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.
INTELOGIC TRACE, INC.
(Registrant)
Date: March 16, 1994 By /Martin J. Landon
Martin J. Landon
Vice President and
Chief Financial Officer
16
