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 quarterly period ended March 31, 1998 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: 33-59598
DIALOGIC CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2476114
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 Route 10
Parsippany, New Jersey 07054
(Address of principal executive office, including zip code)
973-993-3000
(Registrant's telephone number, including area code)
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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[ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At March 31, 1998, there were 16,167,332 shares of Common Stock, par value
$0.01, outstanding.
<PAGE>
DIALOGIC CORPORATION
INDEX
Page Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the Months 5
Ended March 31, 1998 and 1997(unaudited)
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
<TABLE>
PART I. Financial Information
Item 1. Financial Statements
DIALOGIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<CAPTION>
March 31, December 31,
1998 1997
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 45,889 $ 18,764
Marketable securities 48,430 43,774
Accounts receivable (net of allowance for doubtful
accounts of $1,605 and $1,280, respectively) 47,065 45,186
Inventory:
Raw materials 7,058 8,827
Work in process 9,645 6,724
Finished goods 15,495 14,941
----------- ---------
32,198 30,492
Deferred income tax 6,513 7,190
Other current assets 9,389 6,842
----------- ---------
Total current assets 189,484 152,248
Property and equipment, net 20,760 22,615
Other assets 3,894 7,541
----------- ---------
TOTAL ASSETS $ 214,138 $ 182,404
=========== ==========
LIABILITITES
Current liabilities:
Accounts payable $ 9,786 $ 14,361
Accrued salaries and benefits 8,099 6,390
Accrued royalties 965 1,825
Accrued expenses 10,622 7,986
Income taxes payable 15,253 1,237
Current maturities of long term liabilities 522 529
----------- ----------
Total current liabilities 45,247 32,328
Long term liabilities 2,376 2,481
Deferred income tax 2,538 2,730
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01-10,000,000 shares authorized:
none issued - -
Common stock, par value $0.01-60,000,000 shares authorized:
16,167,332 and 16,100,862 shares outstanding, respectively 208 207
Additional paid-in capital 53,354 51,948
Treasury stock, at cost 98,000 and 50,000 shares, respectively (3,617) (1,912)
Retained earnings 109,596 94,023
Accumulated other comprehensive income 4,436 599
----------- -------
Total shareholders' equity 163,977 144,865
----------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 214,138 $ 182,404
========== ==========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
DIALOGIC CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
1998 1997
---- ----
Revenues $ 66,388 $ 57,089
Cost of goods sold 24,657 21,769
------ ------
Gross profit 41,731 35,320
Research and development 13,759 12,254
Selling, general and administrative expenses 18,975 18,374
Asset impairment 5,297 -
------ ------
Operating income 3,700 4,692
Interest expense 48 32
Interest income 679 386
Net realized gains (losses) on available
for sale securities 16 (4)
Gain on sale of subsidiary 23,384 -
------ -----
Income before provision for income taxes 27,731 5,042
Provision for income taxes 12,158 1,815
------ -----
Net income $ 15,573 $ 3,227
========= ==========
Net income per share:
Basic $ 0.97 $ 0.20
Diluted $ 0.93 $ 0.20
Weighted average number of common shares:
Basic 16,061 15,802
Diluted 16,825 16,512
See Notes to Unaudited Consolidated Financial Statements.
<PAGE>
<TABLE>
DIALOGIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net Income $ 15,573 $ 3,227
Adjustments for non-cash items included in net income:
Depreciation and amortization 2,014 2,112
Asset impairment 5,297 -
Deferred income taxes (1,738) (113)
Gain on sale of subsidiary (23,384) -
Other 677 586
Changes in operating assets and liabilities 4,034 (2,460)
----------- -----------
Net cash provided by operating activities 2,473 3,352
----------- -----------
Investing Activities:
Capital expenditures (2,229) (4,036)
Purchase of short-term investments (3,446) (721)
Proceeds from sales of short-term investments 4,868 295
Proceeds from sale of subsidiary 26,000 -
Other (131) -
----------- ---------
Net cash flows provided by (used in) investing activities 25,062 (4,462)
----------- ----------
Financing Activities:
Exercise of stock options 352 186
Purchase of treasury stock (1,705) -
Issuance of common stock 479 445
Other (185) (280)
----------- ---------
Net cash provided by (used in) financing activities (1,059) 351
----------- ---------
Effect of exchange rate on cash 649 (340)
Increase (decrease) in cash and cash equivalents 27,125 (1,099)
Cash and cash equivalents, beginning of period 18,764 11,848
----------- ---------
Cash and cash equivalents, end of period 45,889 $ 10,749
=========== =========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 24 $ 28
Income taxes $ 192 $ 1,124
Supplemental disclosures of non-cash investing and
financing activities
Change in net unrealized gains on available for sale securities $ 3,881 $ (1,854)
See Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<PAGE>
DIALOGIC CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Unaudited Condensed Consolidated Financial Statements
In the opinion of management, the unaudited condensed consolidated
balance sheet at March 31, 1998, and the unaudited consolidated
statements of income and unaudited consolidated condensed statements of
cash flows for the interim periods ended March 31, 1998, and 1997 include
all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of results for the interim periods
presented.
In accordance with the rules of the Securities and Exchange Commission,
certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The year-end
balance sheet data was derived from audited financial statements, but
does not include disclosures required by generally accepted accounting
principles. It is suggested that these condensed statements be read in
conjunction with the Company's most recent Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
2. Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," which is effective for the Company for the year ending
December 31, 1998. This statement establishes standards for the way that
public business enterprises report information about operating segments
in annual financial statements and requires that these enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. The Company is currently evaluating the
impact that the adoption of SFAS No. 131 will have on its consolidated
financial statements.
3. Divestment
On February 17, 1998, Dialogic Corporation completed the sale of the
principal assets and operations of Spectron Microsystems, a wholly owned
subsidiary, to Texas Instruments for $26 million. The sale resulted in an
after tax gain of $14.0 million. The sale will not have a significant
effect on the sales or earnings or the Company in future periods.
<PAGE>
4. Available for Sale Securities
The following is a summary of the available for sale securities as of
March 31, 1998 and December 31, 1997 ($000's):
<TABLE>
March 31, 1998 Cost Gross Gross
Unrealized Unrealized Estimated
Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal bonds $ 38,456 $ 176 $ - $ 38,632
Equity investments 1,954 7,844 9,798
- ----------------------------------------------------------------------------------------------------------------
Total marketable securities $ 40,410 $ 8,020 $ - $ 48,430
- ----------------------------------------------------------------------------------------------------------------
December 31, 1997 Cost Gross Gross
Unrealized Unrealized Estimated
Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------
Municipal bonds $ 39,863 $ 149 $ - $ 40,012
Equity investments 1,954 1,808 - 3,762
- ----------------------------------------------------------------------------------------------------------------
Total marketable securities $ 41,817 $ 1,957 $ - $ 43,774
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Company owns 1,399,715 shares of capital stock in Voice Control Systems,
Inc. (VCS). The shares are classified as available for sale under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The fair
value of the Company's investment in VCS has been determined by reference to the
market price for VCS stock as quoted on publicly traded exchanges on the
representative valuation dates. The price per share of VCS stock had increased
to $7.00 at March 31, 1998, as compared to $2.69 at December 31, 1997.
Unrealized gains/losses are reported net of tax in the equity section (as a
component of accumulated other comprehensive income) of the Company's balance
sheet per SFAS No. 115.
5. Asset Impairment
During the first quarter of 1998, the Company undertook a strategic review of
its business lines and product offerings. At the conclusion of this review, the
Company determined it would no longer allocate resources to its Dianatel product
line. Activities to sell and upgrade Dianatel products were ceased and employees
working on Dianatel related products were diverted to other activities. As the
result of this decision, management has concluded that the carrying value of the
goodwill that arose on the purchase of Dianatel Corporation was no longer
justifiable, and the Company recorded a non-cash impairment loss of $3.5 million
related to the write-down of goodwill.
During the three months ended March 31, 1998, the Company upgraded certain
internal information technology systems. Accordingly, the Company took a $1.3
million after-tax charge to reduce the carrying value of the internal
information technology assets that will no longer be supported.
Management believes the recognition of these impairments were in accordance with
the provisions of Statement of Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
<PAGE>
6. Changes in Accounting Principles
Effective January 1, 1998, Dialogic adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For Dialogic, other
comprehensive earnings include foreign currency translation adjustments and
unrealized gains and losses on marketable securities classified as
available-for-sale. Annual financial statements for prior periods will be
reclassified, as required. Dialogic's total comprehensive earnings were as
follows:
Three Months Ended March 31,
1998 1997
(In millions of dollars)
Net earnings $ 15,573 $ 3,227
Other comprehensive income, net of tax 3,842 (2,030)
----- -------
Total comprehensive earnings $ 19,415 $ 1,197
========= ==========
7. Earnings per share
The Company adopted the provisions of SFAS No. 128, "Earnings per share" in the
year ended December 31, 1997. SFAS No. 128 requires the dual presentation of
basic and diluted earnings per share ("EPS"). Basic EPS excludes dilution and is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if stock options or other contracts to
issue common stock were exercised and resulted in the issuance of common stock
that then shared in the earnings of the Company. Diluted EPS is computed using
the treasury stock method when the effect of common stock equivalents would be
dilutive. EPS for the quarter ended March 31, 1997, has been restated to comply
with the provisions of SFAS No. 128. The only reconciling item between the
denominator used to calculate basic EPS and the denominator used to calculate
diluted EPS is the dilutive effect of stock options issued pursuant to the
Company's Incentive Stock Compensation Plans.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
A. General
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements, the related Notes to Consolidated Financial
Statements and Management's Discussion and Analysis of Results of Operations and
Financial Condition incorporated by reference in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 and the Unaudited Consolidated
Financial Statements and related Notes to Consolidated Financial Statements
included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q. This Form
10-Q contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995
("Forward-Looking Statements"), which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include product demand and market acceptance risks, the effect of worldwide
economic conditions, the impact of competitive products and pricing, the
Company's ability to enter new markets, the adoption of new standards and the
Company's ability to meet those standards, product development, effects of
competitive forces and pace of deregulation in the telecommunications industry,
the status of intellectual property rights, commercialization and technological
difficulties, capacity and supply constraints or difficulties, consolidating of
capital resources, general business conditions, the effect of the Company's
accounting policies, and other risks detailed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. Such factors may also cause
substantial volatility in the market price of the Company's common stock
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amount of costs 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 reported
period. Significant estimates in the Company's financial statements include
allowances for accounts receivable, product returns and net realizable values of
inventories. Actual results could differ from these estimates.
B. Results of Operations
Consolidated revenues increased 16% for the three months ended March 31, 1998,
compared to the equivalent prior year period. North Americas' revenue increased
23% to $42 million for the quarter ended March 31, 1998, as compared to the
three months ended March 31, 1997. Revenue in Europe and Latin America increased
36% and 70% respectively for the quarter ended March 31, 1998, as compared to
the equivalent prior year period. Partially offsetting the growth in Europe and
Latin America, revenue in Asia/Pacific decreased 16% as compared to the three
months ended March 31, 1997. During the quarter, the Company continued to
release commercial production of its new products based on DM3 architecture. DM3
products are now available in PCI, cPCI, and VME configurations utilizing
industry standards such as H.323, G.723.1, G.711, GSM and T.38.
<PAGE>
Gross margins increased to 62.9% for the three months ended March 31, 1998,
compared to 61.9% for the three months ended March 31, 1997. The increase in
margins reflects the continued effects of Dialogic's cost reductions. In
addition, margins were impacted by favorable product mix related to the
increased volume of high-density products.
Research and development expenses as a percentage of revenues represented 20.7%
for the quarter ended March 31, 1998, as compared to 21.5% for the three months
ended March 31, 1997. The Company continues to invest engineering resources in
the development of the Dialogic DM3 Mediastream Resource Architecture ("DM3") as
well as development of IP telephony and open switch products. The Company
believes that investment in research and development is critical to future
growth and anticipates investing at current levels throughout the remainder of
1998 in an effort to enable the Company to maintain its technological leadership
in the marketplace. This estimate regarding future research and development as a
percentage of revenue represents a Forward-Looking Statement; actual results
could differ materially from the Company's expectations as a result of a variety
of factors including variations in revenue, product market and competitive
conditions, the availability of required resources and the Company's
technological needs.
Selling, general and administrative expenses increased to $19.0 million for the
three months ended March 31, 1998, as compared to $18.4 million in the
comparable prior year period. As a percentage of total revenues, selling,
general and administrative expenses decreased to 28.6% in the first quarter
compared to 32.2% for the comparable prior year period. These expenses increased
as the Company incurred additional sales commissions due to higher revenue
volume and expanded its executive management staff.
Asset impairment charges for the three months ended March 31, 1998, included the
write-down of goodwill associated with the 1996 acquisition of Dianatel
Corporation of $3.5 million and a $1.8 million pre-tax charge primarily
associated with the write-down of selected information technology assets. (See
Note 5 to the Unaudited Condensed Consolidated Financial Statements)
Net interest income for the quarter increased $278,000 over the comparable
period ended March 31, 1997. The increase reflects the earnings on the increase
in the Company's short-term investment portfolio and the proceeds from the sale
of Spectron Microsystems.
The Company's effective income tax rate at March 31, 1998, is 43.8% as compared
to 36% for the period ended March 31, 1997. The increase is attributable to the
write-down of the non-tax deductible goodwill of Dianatel Corporation in the
amount of $3.5 million, as well as the higher effective tax rate on the gain on
the Spectron sale.
Net income for the quarter ended March 31, 1998, was $15.6 million or $.93 per
share on a diluted basis, compared to $3.2 million or $0.20 per share on a
diluted basis, for the comparable period ended March 31, 1997. Results for the
quarter include an after-tax gain of $14.0 million or $.83 per share from the
sale of the principal assets and operations of Spectron Microsystems, and a one
time after-tax charge of $3.5 million or $.21 per share for the write-down of
goodwill associated with the 1996 acquisition of Dianatel Corporation, and a
$1.3 million after-tax charge or $.08 per share write-down of selected
technology assets. Management believes that this additional information
regarding earnings is useful and meaningful to an understanding of the operating
performance of the Company. However, this measurement of earnings should not be
considered by the reader as an alternative to net income as an indicator of the
Company's operations or performance, or to cash flows as an indicator of
liquidity. Weighted average diluted shares outstanding represented 16.8 million
and 16.5 million for the three months ended March 31, 1998, and 1997,
respectively.
<PAGE>
C. Financial Condition
As of March 31, 1998, and December 31, 1997, Dialogic had working capital of
$144 million and $120 million respectively, and a current ratio (i.e., the
ratio of current assets to current liabilities) of 4.2 to 1 and 4.7 to 1,
respectively. For the three months ended March 31, 1998, Dialogic's cash and
cash equivalents increased by $27.1 million. Cash inflows from proceeds of the
sale of Spectron Microsystems were $26.0 million for the first quarter of
1998. Cash outflows of approximately $2.2 million were expended for capital
purchase related to the growth at Corporate Headquarters. Net cash flows from
operating activities were $2.5 million. Cash outflows for the repurchase of
treasury stock of $1.7 million, was partially offset by the proceeds from the
exercise of stock options and the issuance of common stock. Dialogic believes
that its current liquidity, coupled with cash generated from operations and
credit available under its credit lines, will be sufficient to meet its
liquidity and capital requirements for at least the next twelve months. This
statement constitutes a Forward-Looking Statement. The actual sufficiency of
such capital resources could differ materially from the Company's
expectations, depending among other things upon the extent to which
unanticipated capital requirements may arise and the extent to which
unanticipated events may have a materially adverse effect on the Company's
profitability.
D. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which is
effective for the Company beginning January 1, 1998. This statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that these
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. The Company is currently evaluating
the impact that the adoption of SFAS No. 131 will have on its consolidated
financial statements.
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings
For information regarding certain pending legal proceedings, see Item
3 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. As previously disclosed, the complaint filed
against the Company and certain of its directors alleging breach of
principles of common law fraud was dismissed with prejudice by the New
Jersey Superior Court on February 18, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 - Financial Data Schedule
(b) A Current Report on Form 8-K was filed on January 30, 1998,
disclosing (under Items 5 and 7) the Company's definitive agreement to
sell the principal assets and operations of Spectron Microsystems, a
wholly-owned subsidiary to Texas Instruments Incorporated. A Current
Report on Form 8-K was filed on February 18, 1998, disclosing (under
Item 5) consummation of that sale.
(c) A Current Report on Form 8-K was filed on February 25, 1998,
disclosing (under Item 5) dismissal with prejudice of a June 30, 1996,
class action lawsuit "Schwartz v. Dialogic Corporation et al." (see
Item 1 of Part II, above).
<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.
DIALOGIC CORPORATION
By: /s/Thomas G. Amato
Thomas G. Amato
Vice President,
Chief Financial Officer
By: /s/Jean M. Beadle
Jean M. Beadle
Chief Accounting Officer,
Controller
Dated: May 11, 1998
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page
27.1 Financial Data Schedule E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information
extracted from Dialogic Corporation's financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 45,889
<SECURITIES> 48,430
<RECEIVABLES> 48,670
<ALLOWANCES> 1,605
<INVENTORY> 32,198
<CURRENT-ASSETS> 189,484
<PP&E> 47,927
<DEPRECIATION> (27,167)
<TOTAL-ASSETS> 214,138
<CURRENT-LIABILITIES> 45,247
<BONDS> 0
0
0
<COMMON> 208
<OTHER-SE> 163,769
<TOTAL-LIABILITY-AND-EQUITY> 214,138
<SALES> 66,388
<TOTAL-REVENUES> 66,388
<CGS> 24,657
<TOTAL-COSTS> 24,657
<OTHER-EXPENSES> 38,031
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> 27,731
<INCOME-TAX> 12,158
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,573
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.93
</TABLE>
