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 April 30, 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 June 1, 1994 was 12,488,188
shares.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
INTELOGIC TRACE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30, July 31,
1994 1993
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 312 $ 1,626
Accounts receivable, net 5,822 8,728
Net assets of discontinued operations 832 320
Prepaid expenses and other current assets 2,143 2,070
TOTAL CURRENT ASSETS 9,109 12,744
Leasehold Improvements and Equipment, net 1,505 2,076
Field Support Spares, net 22,281 26,788
Intangible Assets, net 1,878 2,213
Other Assets 468 640
$ 35,241 $ 44,461
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,851 $ 3,689
Accrued expenses 4,095 5,651
Accrued interest 1,746 249
Short-term borrowings 7,312 4,377
Deferred revenue 10,114 12,170
Other current liabilities 10 254
TOTAL CURRENT LIABILITIES 27,128 26,390
11.99% Subordinated Debentures Due 1996 49,924 49,924
Deferred Income Taxes and Other Liabilities 589 1,632
Deferred Pension Liability 1,703 1,861
$10.00 Redeemable Preferred Stock; 65,000
Shares Authorized, 46,299 Shares Issued and
Outstanding; $100 Mandatory Redemption 4,488 3,903
Value
Shareholders' Equity (Deficit) (48,591) (39,249)
$ 35,241 $ 44,461
</TABLE>
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
INTELOGIC TRACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
April 30, April 30,
1994 1993
Revenue:
<S> <C> <C>
Service $16,743 $20,408
Sales 241 330
TOTAL REVENUE 16,984 20,738
Cost of Revenue:
Service 16,376 15,332
Sales 247 102
TOTAL COST OF REVENUE 16,623 15,434
GROSS PROFIT 361 5,304
Selling, General and Administrative Expenses 4,513 3,977
EARNINGS (LOSS) FROM OPERATIONS (4,152) 1,327
Other Income (Expense):
Interest expense (1,757) (1,581)
Investment income (loss) - 15
Other, net (121) ( 208)
LOSS FROM CONTINUING OPERATIONS BEFORE (6,030) ( 447)
Income Tax - -
NET LOSS (6,030) (447)
Net Loss, Less Preferred Stock Dividends $(6,244) $ (611)
Earnings (Loss) Per Common Share:
Loss from continuing operations $ (.50) $ (.04)
Preferred stock dividends (.02)
NET LOSS PER COMMON SHARE $ (.52)
Weighted Average Common Shares Outstanding 12,074 12,062
</TABLE>
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
INTELOGIC TRACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
April 30, April 30,
1994 1993
Revenue:
<S> <C> <C>
Service $55,074 $65,954
Sales 810 1,010
TOTAL REVENUE 55,884 66,964
Cost of Revenue:
Service 47,515 50,148
Sales 447 491
TOTAL COST OF REVENUE 47,962 50,639
GROSS PROFIT 7,922 16,325
Operating Expenses:
Selling, general and administrative expenses 13,571 13,652
EARNINGS (LOSS) FROM OPERATIONS (5,649) 2,673
Other Income (Expense):
Interest expense (5,076) (5,194)
Investment income 54 60
Equity in loss of affiliate - -
Other, net (438) (446)
LOSS FROM CONTINUING OPERATIONS BEFORE
TAXES (11,109) (2,907)
Income Taxes (Benefit) (1,193) 141
LOSS FROM CONTINUING OPERATIONS (9,916) (3,048)
Earnings From Discontinued Operations 828 -
LOSS BEFORE EXTRAORDINARY ITEMS (9,088) (3,048)
Extraordinary gains from purchases of subordinated
debentures, net of taxes - 2,547
Extraordinary gain from net operating
loss carry forward - 141
NET LOSS $(9,088) $ (360)
Net Loss, Less Preferred Stock Dividends $(9,673) $ (832)
Earnings (Loss) Per Common Share:
Loss from continuing operations $ (.82) $ (.24)
Earnings from discontinued operations .07 -
Extraordinary items - .21
Preferred stock dividends (.05) (.04)
NET LOSS PER COMMON SHARE $ (.80) $ (.07)
Weighted Average Common Shares Outstanding 12,074 11,983
</TABLE>
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
INTELOGIC TRACE,. INC.
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
(Unaudited)
Foreign Retire-
Addl. Retained Currency ment
Common Paid-in Earnings Translat Treas. Valuation
Stock Capital (Deficit) Adjust Stock Reserve Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, $199 $55,003 $(35,024) $54 $(56,919) $(2,562) $(39,249)
1993
Redeemable preferred
stock dividends (585) (585)
(in kind)
Foreign currency
translation 59 59
adjustment
Shares issued -
401(k) Plan (17) 105 88
Employee Stock 184 184
Option Plan
Net loss (9,088) (9,088)
Balance at April 30, $199 $55,170 $(44,697) $113 $(56,814) $(2,562) $(48,591)
1994
</TABLE>
See accompanying notes to consolidated financial statements
<TABLE>
<CAPTION>
INTELOGIC TRACE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Nine Months Ended
April 30, April 30,
1994 1993
<S> <C> <C>
Operating Activities:
Net earnings (loss) $(9,088) $ (360)
Adjustments to reconcile net earnings
(loss) to net cash
provided by operating activities:
Depreciation and amortization 9,504 10,720
Gain on repurchase of subordinated - (2,547)
debentures
Adjustments to net assets of discontinued (828) -
operations
Other 1,650 1,150
Changes in operating working capital, net (795) (2,322)
NET CASH PROVIDED BY OPERATING ACTIVITIES 443 6,641
Investing Activities:
Purchase of spares and other fixed assets (4,798) (6,298)
Proceeds from sale of discontinued - 5,857
NET CASH (USED) IN INVESTING ACTIVITIES (4,798) (441)
Financing Activities:
Short-term borrowings (repayments), net 2,935 (3,347)
Repurchase of subordinated debentures - (4,459)
Other - (19)
NET CASH PROVIDED BY (USED) IN FINANCING
ACTIVITIES 2,935 (7,825)
Effect of Exchange Rate Changes on Cash 106 (46)
NET DECREASE IN CASH AND TEMPORARY
INVESTMENTS $ (1,314) $ (1,671)
Interest Paid $ 3,521 $ 3,531
Income Taxes Paid, net $ 10 $ (21)
</TABLE>
See accompanying notes to consolidated financial statements
INTELOGIC TRACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 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 April 30, 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 third
quarter results for fiscal 1994 are shown for information
purposes only. The carrying value of the Company's
investment in Datapoint at April 30, 1994 remains at zero.
The Company's share of Datapoint's future earnings will
have to exceed $4,267 before the Company can reflect income
on this investment.
The Company's pro rata share of Datapoint's third quarter
results, applicable to common stockholders, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30, April 30, April 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Income (loss) before
extraordinary items $(1,478) $(762) $(1,667) $(410)
Extraordinary items - (116) 263 120
Net earnings (loss) $(1,478) $(878) $(1,667) $(290)
from affiliate
Datapoint's results of operations are summarized below:
Three Months Ended Nine Months Ended
April 30, April 30, April 30, April 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Total revenue $42,802 $48,584 $129,236 $163,423
Gross profit 14,618 19,055 50,961 70,684
Earnings (Loss) (7,961) $(4,311) (9,755) (3,455)
before
extraordinary
item
Net earnings (7,961) (4,904) (8,415) (2,853)
(loss)
</TABLE>
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 70% of eligible gross accounts receivable and 20% of net
field support spares. Commencing in November 1993, eligible
borrowings related to field spares began to be phased out
ratably over the following 5-month period. As of April 1994,
eligible borrowings are determined exclusive of net field
support spares. The borrowing base at April 30, 1994 was
approximately $8,321.
On May 25, 1994 the Company was granted an overadvance facility
in which the amount outstanding could exceed the eligible
borrowing base by $1,000. This facility is to be phased out
ratably over the following 8-week period. The Company has been
granted occasional overadvances in the past and has repaid
those overadvances within the guidelines established by the
lender.
The Company is not currently in compliance with certain
financial covenants relating to the ratio of current assets to
current liabilities and net capital funds. The Company has
requested a waiver of such noncompliances and adjustments to
the covenants, but no assurance can be provided that the lender
will respond favorably to the request. In the event the
noncompliances are not waived, the lender may call an event of
default which could accelerate maturity of the loan, $7,312 at
April 30, 1994. It is possible that future events of
noncompliance could occur, in which case the Company will
request waivers of any such defaults.
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. See also the
discussion in Note 6, Contingencies.
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.
On May 13, 1994 the Company announced that although the
defendants expressly disclaim and deny any liability or
wrongdoing with respect to the allegations, a settlement had
been reached in order to avoid the additional expense, burden,
inconvenience and distraction of continued litigation.
Pursuant to the settlement agreement, which is subject to Court
approval, the Company will receive $2,400 less attorneys' fees
and expenses (not to exceed $800) awarded by the Court. The
cash portion of the settlement is fully covered by the
Company's director and officer liability insurance and will be
offset by future director and officer liability insurance
premium increases. The Company does not expect to receive any
net cash from this settlement. In addition, within six months
of the time that the settlement becomes final, the Company's
Board of Directors has agreed to (a) form a committee to
investigate all ways to maximize the value of the Company's
investment in Datapoint Corporation and (b) adopt a resolution
requiring approval of the Board of Directors for all
investments of the Company's funds in excess of $5,000.
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.
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 April 30, 1994 versus Three Months Ended April
30, 1993:
Revenue
Service revenue in the third quarter of 1994, $16,743, declined
$3,665 (18.0%) from the year-ago period as domestic revenue from
servicing Datapoint-manufactured products decreased $1,323 while
domestic revenue from servicing all other products decreased
$2,342. New sales activity exceeded cancellations and expirations
of service contracts to provide services in the third quarter by
$1,668. Revenue from a new service offering, the installation of
telephony devices, in the third quarter was $1,655, or 9.7% of
total revenue. Service revenue from Datapoint products totaled
$1,635 for the quarter, or 9.6% of total revenue. In the third
quarter of 1993, domestic revenue from servicing Datapoint products
totaled $2,958, or 14.3% of the revenue total. The decline in
Datapoint service can be principally attributed to customers who
are converting to new platforms.
Canadian service revenues also declined in 1994 as compared to
1993, decreasing $409 (49.4%) to a 1994 third quarter total of
$419. The Company previously announced a Canadian service alliance
with DataTech Systems, Ltd. ("DataTech"), effective March 1, 1994,
which provides for expanded service coverage and technical
resources. Provided that DataTech continues to fulfill its
obligations under the contract, a substantial portion of the
Company's Canadian business will be assumed by DataTech.
Gross Profit
Gross profit of $361 (2.1%) for the third quarter compared to
$5,304 (25.6%) for the same period one year ago. This decline is
due primarily to the revenue decrease as opposed to increases in
costs of service. Costs of service, exclusive of costs related to
the installation of telephony devices, have remained substantially
unchanged over the costs in the same quarter one year ago.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses of $4,513
for the third quarter increased $536 (13.5%) from the year-ago
period. Of that, approximately $503 is attributable to SG&A
expenses related to the new telephony offering. All other SG&A
costs have remained substantially unchanged.
Interest Expense
Third quarter interest expense increased $176 from the same
period in 1993 due to an increase of $3,746 from the April 30, 1994
balance to the April 30, 1993 balance in the outstanding
credit facility with Foothill Capital Corporation.
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.
Nine Months Ended April 30, 1994 versus Nine Months Ended April 30,
1993:
Revenue
Service revenue in the first nine months of 1994, $55,074,
declined $10,880 (16.5%) from the year-ago period. Domestic
revenue from servicing Datapoint-manufactured products decreased
$4,754 while domestic revenue from servicing all other products
decreased $6,126. Cancellations exceeded new sales activity for
the first nine months of 1994. Revenue from a new service
offering, the installation of telephony devices, in the first nine
months was $1,667, or 3.0% of total revenue. Service revenue from
Datapoint products totaled $5,569 for the first nine months, or
10.1% of total revenue. In the first nine months of 1993, domestic
revenue from servicing Datapoint products totaled $10,323, or 15.4%
of the revenue total. Datapoint products continue to be replaced
with new platforms.
Gross Profit
Gross profit of $7,922 (14.2%) for the first nine months of
1994 compared to $16,325 (24.4%) for the same period one year ago.
This decline resulted directly from the decrease in revenue as
costs of service have declined $2,677 (5.3%) from the same period
one year ago.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses of $13,571
for the first nine months were substantially unchanged from the
year-ago period, despite a substantial increase in the Company's
sales force and the implementation of the new telephony offering
during this year.
Interest Expense
Interest expense for the first nine months of 1994 decreased
$118 from the same period in 1993 due to debenture repurchases
which took place during the first six months of 1993.
Federal and State Income Taxes
During the first nine 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 nine months.
During the first nine 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 nine months of 1994, cash and temporary
investments decreased $1,314, as compared to a decrease of $1,671
from the same period one year ago. Net cash provided by operating
activities was lower than in the prior year by $6,198; however,
investments in spares and other fixed assets decreased by $1,500 as
the Company continued to shorten the necessary parts pipeline.
Short-term borrowings under the Foothill facility were $2,935.
Financing activities in the first nine months of 1993 consisted
of $3,347 in repayments of short-term borrowings and disbursements
of $4,459 for subordinated debenture repurchases.
At April 30, 1994, the Company's current liabilities exceeded
current assets by $18,019 as compared to $13,680 at April 30, 1993.
Current liabilities include $7,312 of borrowings under the
Company's revolving financing agreement. The losses incurred to
date in 1994, and especially the losses incurred in the third
quarter of 1994, have increased the company's reliance on borrowed
funds to satisfy the Company's working capital requirements.
At April 30, 1994 the Company had $2,250 in trade payables in
excess of 45 days. The Company is actively working with its
principal vendors in seeking to avoid any adverse effect on
customer service resulting from delays in deliveries; however, no
assurance can be given that the current level of trade payables
will soon decrease or that the Company's purchasing ability will
not be limited in the future.
Under the terms of the applicable indenture, the Company is
required to make an interest payment at July 15, 1994 in the amount
of $2,993 related to its outstanding subordinated debentures. If
the interest payment is not made on, or within thirty days after,
the due date, an event of default could be declared which could
result in acceleration of the payment of the principal and accrued
interest which presently consists of $49,924 in principal and
$2,993 in interest due July 15, 1994. No assurance can be provided
that the interest payment will be made.
The Company has engaged Buccino & Associates, Inc., a
nationally-recognized company which specializes in consulting with
financially troubled businesses, to review cash flows, financial
needs, liquidity concerns and provide recommendations to establish
both immediate and long-term improvements in cash flow,
profitability, asset management and capital structure.
The Company has been in contact with its lender and is seeking
continued lender assistance; however, no assurance can be given
that the lender will continue to cooperate in a manner which will
provide the Company with sufficient cash resources to meet its
ongoing trade obligations, capital equipment investments and debt
servicing obligations.
To enhance the Company's cash resources for operations,
capital needs and debt servicing, the Company is undertaking
measures to strictly control costs, improve labor productivity and
implement effective revenue generation programs. The Company
reduced its workforce on June 4, 1994, which is anticipated to
reduce personnel expenses by approximately $3,000 annually; is
consolidating its facilities nationwide; is implementing
measures to increase productivity, for example, by revising work
schedules and has experienced success in booking new business which
is reflected by positive net bookings during the third quarter.
PART II - OTHER INFORMATION
Item 8. Exhibits and Reports on Form 8-K
B. Reports on Form 8-K:
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: June 14, 1994 By
Connie B. Moore
Corporate Treasurer and
Acting Chief Financial Officer
PART II - OTHER INFORMATION
Item 8. Exhibits and Reports on Form 8-K
B. Reports on Form 8-K:
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: June 14, 1994 By /Connie B. Moore
Connie B. Moore
Corporate Treasurer and
Acting Chief Financial Officer
