UNITED STATES
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 September 30, 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: 0-22046
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Bogen Communications International, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3114641
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
50 Spring Street, Ramsey, New Jersey 07446
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(201) 934-8500
----------------------------------------------------
(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
--- ---
As of November 9, 1998, 6,654,471 shares of the registrant's common stock, par
value $.001 per share, were outstanding.
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 and 1997 5
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 1998 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,301 $ 964
Accounts receivable (less allowance for doubtful
accounts of $430 and $376 at September 30,
1998 and December 31, 1997, respectively) 5,725 6,291
Inventories, net 7,784 8,285
Prepaid expenses and other current assets 639 468
------- -------
TOTAL CURRENT ASSETS 16,449 16,008
Property, equipment and leasehold improvements, net 2,517 2,136
Goodwill and intangible assets, net 17,204 13,569
Other assets 277 257
------- -------
TOTAL ASSETS $36,447 $31,970
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts outstanding under revolving credit agreement $ 161 $ 2,891
Accounts payable 2,047 2,376
Accrued expenses 2,521 3,084
Income taxes payable 1,034 238
Advances and notes payable to related parties -- 6
-------- --------
TOTAL CURRENT LIABILITIES 5,763 8,595
Amounts outstanding under revolving credit agreement,
net of current portion 3,425 --
Advances and notes payable to related parties 223 212
Preferred dividends payable -- 178
Other liabilities 295 433
Minority interest -- 1,130
-------- --------
TOTAL LIABILITIES 9,706 10,548
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 1,000,000 shares authorized;
200,000 shares issued and outstanding at December 31, 1997 -- --
Common stock - $.001 par value; 50,000,000 shares authorized;
6,654,471 and 2,118,226 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 7 2
Additional paid-in-capital 29,433 23,468
Accumulated deficit (2,470) (1,690)
Accumulated other comprehensive loss (229) (358)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 26,741 21,422
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,447 $ 31,970
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands of Dollars, Except Share and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 14,752 $ 13,090 $ 39,386 $ 37,135
Cost of goods sold 7,233 7,091 20,011 20,024
---------- ---------- ---------- ----------
Gross profit 7,519 5,999 19,375 17,111
Operating expenses:
Research and development 753 617 2,061 1,992
Purchased in-process research
and development -- -- 2,905 --
Selling, general and administrative 4,151 3,675 11,781 10,991
Amortization of goodwill and intangible assets 166 111 419 332
---------- ---------- ---------- ----------
Income from operations 2,449 1,596 2,209 3,796
Other (income) expenses:
Interest expense, net 96 113 201 336
Interest expense to related parties -- (5) -- 16
Minority interest of consolidated subsidiaries -- 119 254 393
Other income (32) (19) (132) (53)
---------- ---------- ---------- ----------
Income before provision for income taxes 2,385 1,388 1,886 3,104
Provision for income taxes 843 487 1,766 1,230
---------- ---------- ---------- ----------
Net income $ 1,542 $ 901 $ 120 $ 1,874
Preferred dividends -- -- 900 --
---------- ---------- ---------- ----------
Net income (loss) available to common shareholders $ 1,542 $ 901 $ (780) $ 1,874
========== ========== ========== ==========
Net income (loss) per common share-Basic $ 0.23 $ 0.16 $ (0.21) $ 0.33
========== ========== ========== ==========
Net income (loss) per common share-Diluted $ 0.20 $ 0.16 $ (0.21) $ 0.33
========== ========== ========== ==========
Weighted average number of common
shares outstanding-Basic 6,653,468 5,758,850 3,777,024 5,758,850
========== ========== ========== ==========
Weighted average number of common
shares outstanding-Diluted 7,807,177 5,758,850 3,777,024 5,758,850
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands of Dollars, Except Share and Per Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
Preferred Stock -------------------- Additional
Number of Number of Paid-In
Shares Amount Shares Amount Capital
--------------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 200,000 -- 2,118,226 $2 $23,468
Acquisition costs of Common Stock held by Geotek -- -- -- -- (35)
Sale of Common Stock -- -- 156,768 -- 862
Purchase of Speech Design minority interest -- -- 458,000 1 4,064
Translation adjustments -- -- -- -- --
Preferred dividends -- -- -- -- --
Conversion of Preferred Stock and
related dividends (200,000) -- 3,921,477 4 1,074
Net income -- -- -- -- --
-------- ---- --------- -- -------
Balance at September 30, 1998 -- -- 6,654,471 $7 $29,433
======== ==== ========= == =======
<CAPTION>
Accumulated
Other
Accumulated Comprehensive
Deficit Loss Total
----------- -------------- -------
<S> <C> <C> <C>
Balance at December 31, 1997 (1,690) $ 358 $21,422
Acquisition costs of Common Stock held by Geotek -- -- (35)
Sale of Common Stock -- -- 862
Purchase of Speech Design minority interest -- -- 4,065
Translation adjustments -- 129 129
Preferred dividends (900) -- (900)
Conversion of Preferred Stock and
related dividends -- -- 1,078
Net income 120 -- 120
------- ----- -------
Balance at September 30, 1998 $(2,470) $(229) $26,741
======= ===== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars, Except Share and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Net income $ 120 $ 1,874
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 703 699
Amortization of goodwill and intangible assets 419 332
Provisions for doubtful accounts and
inventory obsolescence 212 317
Utilization of pre-acquisition NOL charged to goodwill 544 188
Minority interest 254 393
Purchased in-process research and development 2,905 --
Change in operating assets and liabilities
Accounts receivable 588 343
Inventories 595 (1,526)
Prepaid expenses and other current assets (172) (158)
Payables and accrued expenses (341) (763)
Other (140) (103)
------- -------
Net cash provided by operating activities 5,687 1,596
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Speech Design minority interest (4,790) --
Acquisition of New England Audio Resource, Inc. -- (278)
Purchase of property, equipment and leasehold improvements (1,006) (848)
------- -------
Net cash used in investing activities (5,796) (1,126)
------- -------
Acquisition costs of common stock held by Geotek (35) --
Proceeds from sale of common stock 862 --
Amounts paid under revolving credit agreements (4,125) (282)
Borrowings under revolving credit agreements 4,700 --
Advances and notes payable - related parties 118 (439)
------- -------
Net cash provided by (used in) financing activities 1,520 (721)
------- -------
Effects of Foreign Exchange Rate on Cash (74) (2)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,337 (253)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 964 885
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,301 $ 632
======= =======
NON CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock accrued dividends $ 1,078 --
Stock issued in purchase of Speech Design minority interest 4,065 --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars, Except Share and Per Share Amounts)
(Unaudited)
1. Basis of Presentation
The consolidated balance sheet of Bogen Communications International, Inc.
and Subsidiaries (the "Company") as of December 31, 1997 has been derived
from the audited consolidated balance sheet contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and is
presented for comparative purposes. The consolidated balance sheet as of
September 30, 1998, the consolidated statements of operations and cash
flows for the nine months ended September 30, 1998 and 1997 and the
consolidated statement of changes in stockholders' equity for the nine
months ended September 30, 1998 have been prepared by the Company without
audit. In the opinion of management, all significant adjustments, including
normal recurring adjustments necessary to present fairly the financial
position, results of operations and cash flows for all periods presented
have been made. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
Footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
substantially omitted in accordance with the published rules and
regulations of the Securities and Exchange Commission. These consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
2. Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of the Company's 99% owned subsidiary, Bogen Corporation ("Bogen"); Bogen's
wholly-owned subsidiary, Bogen Communications, Inc. ("BCI"); BCI's
wholly-owned subsidiary, New England Audio Resource Corp. ("NEAR"); the
Company's wholly-owned subsidiary, Speech Design GmbH ("Speech Design"),
which was a 67% owned subsidiary through May 19, 1998; Speech Design's 67%
owned subsidiary Satelco AG ("Satelco"); and Speech Design's wholly-owned
subsidiaries: Speech Design (Israel), Ltd. and Speech Design (UK), Ltd. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The ownership interest of minority owners in the equity and earnings of the
Company's less than 100 percent-owned consolidated subsidiaries are
recorded as minority interest.
3. Acquisition
On May 20, 1998, the Company acquired the remaining 33% equity interest in
Speech Design not previously owned by the Company. As a result of this
acquisition, Speech Design became a wholly-owned subsidiary of the Company.
The aggregate purchase price of $8,855, including direct acquisition costs
(estimated at $492), consisted of approximately $4,790 in cash and 458,000
shares of common stock of the Company valued at approximately $4,065
($8.875 per share).
The acquisition has been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on estimates of fair market values
at the date of acquisition. The allocation of purchase price among the
identifiable intangible assets was based on an independent appraisal of the
fair market value of those assets. Such appraisal allocated $2,905 to
purchased in-process research and development, which has been reflected as
a charge in the accompanying consolidated statement of operations for the
nine months ended September 30, 1998. Other intangible assets acquired
include existing technology, tradenames, workforce and goodwill totaling
approximately $4,566.
8
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars, Except Share and Per Share Amounts)
(Unaudited)
The following table presents unaudited pro forma results of operations as
if the acquisition of the minority interest of Speech Design had occurred
at the beginning of the three and nine month periods presented. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition
been made at the beginning of the periods presented or the results which
may occur in the future.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 14,752 13,090 39,386 37,135
Net income 1,542 986 365 2,165
Net income (loss) available to
common shareholders 1,542 986 (535) 2,165
Net income (loss) per common share - Basic 0.23 0.16 (0.13) 0.35
Net income per common share - Diluted 0.20 0.16 (0.13) 0.35
</TABLE>
On July 1, 1997, the Company, through its 99% owned subsidiary Bogen,
acquired substantially all of the net assets of NEAR, a leading
manufacturer of high performance, weather-proof speakers. The total
purchase price, including direct costs incurred as result of the
acquisition, amounted to $242 in cash and assumption of certain
liabilities. Excess of the purchase price over the estimated fair values of
the net assets acquired was $236 and has been recorded as goodwill, which
is being amortized over 20 years. The Company is currently evaluating the
recoverability of this goodwill. As part of this evaluation, the Company is
considering among other factors, the strategic position which NEAR will
take as part of the Company's previously announced acquisition strategy.
The acquisition has been accounted for by the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets acquired and certain liabilities assumed based on estimates of fair
values at the date of acquisition. The operating results of this
acquisition are included in the Company's consolidated statements of
operations from the date of acquisition.
4. Inventories
Inventory, at lower of cost (first in, first out) or market, as of
September 30, 1998 and December 31, 1997, is as follows:
1998 1997
------ ------
Raw materials and supplies $2,380 $1,874
Work in progress 1,160 742
Finished goods 4,244 5,669
------ ------
Total $7,784 $8,285
====== ======
The inventory balances are net of a reserve for inventory valuation and
obsolescence of $619 and $529 at September 30, 1998 and December 31, 1997,
respectively.
9
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars, Except Share and Per Share Amounts)
(Unaudited)
5. Income (Loss) Per Common Share
Income (loss) per common share ("EPS") has been computed based upon
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128").
Basic EPS is calculated by dividing net income (loss) available to common
shareholders by the weighted-average number of common shares outstanding
for the periods presented. Diluted EPS gives effect to all dilutive
potential common shares that were outstanding during the period. The
Company had outstanding convertible preferred stock which was converted
into 3,921,477 shares of common stock on July 1, 1998. Included in the
conversion were 3,721,000 shares of common stock issuable upon conversion
of 200,000 shares of preferred stock and 200,477 shares of common stock
issuable as a payment-in-kind of dividends payable on the preferred stock
through June 30, 1998.
6. Revolving Credit Agreements
In the first quarter of 1997, Bogen Communications, Inc. ("BCI"), a
wholly-owned subsidiary of Bogen, entered into a revolving credit facility
(the "Facility") with a bank, which was scheduled to mature on February 5,
1999. The Facility provided, subject to certain terms and conditions, for
borrowings up to a maximum of $7,000 with a $700 sub-limit for letters of
credit, unreimbursed time drafts and/or bankers acceptances, and was
limited to specified levels of eligible accounts receivable and inventory.
Borrowings under the Facility were available for working capital and
general corporate purposes and accrued interest at the bank's prime rate
plus .50% (9.00% at December 31, 1997). Obligations under the Facility were
collateralized by all of the accounts receivable, inventory, property and
equipment, and general intangibles of BCI and was guaranteed by the
Company. The Facility contained certain covenants, which limited the
ability of BCI to declare or pay dividends, return capital to its
stockholders or redeem or repurchase any of its outstanding capital stock.
Net assets of BCI restricted under the Facility were $9,710 at December 31,
1997.
On April 21, 1998, the Company entered into a $27,000 credit facility (the
"New Facility") with KeyBank N.A., which matures on April 30, 2000. The New
Facility replaces the previous Facility. The New Facility provides, subject
to certain criteria, a $20,000 revolving line for acquisition financing and
a $7,000 working capital line with a $1,000 sub-limit for letters of
credit, unreimbursed time drafts and/or bankers acceptances. The working
capital line is limited to specified levels of eligible accounts receivable
and inventory. The New Facility bears interest at either the bank's prime
rate or, at the Company's option, Libor plus 125 to 200 basis points, based
on certain financial conditions. At September 30, 1998, $3,425 was
outstanding under the New Facility, all of which was used to finance the
acquisition of the remaining 33% equity interest in Speech Design not
previously owned by the Company.
Speech Design has credit lines and overdraft facilities of approximately
6,000 Deutsche Marks ("DM"), or $3,500. At September 30, 1998 borrowings
and availability under these lines amounted to $300 DM, or $161 and 5,700
DM, or $3,339, respectively. These lines are collateralized by all of
Speech Design's accounts receivable and inventory.
10
<PAGE>
BOGEN COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars, Except Share and Per Share Amounts)
(Unaudited)
7. Income Tax
Domestic and foreign earnings before taxes on income from operations
include income derived from operations in the respective U.S. and foreign
geographic areas, whereas provisions for taxes on income include all income
taxes payable to U.S., foreign and other governments as applicable,
regardless of the sites in which the taxable income is generated. Income
tax expense for the three and nine months ended September 30, 1998 and 1997
differs from the amount computed by applying the U.S. federal statutory
rates due to non-deductible purchased in-process research and development,
higher tax rates in Europe for which no U.S. tax benefit has been provided,
and the utilization of U.S. preacquisition loss carryforwards for which the
benefit has been charged to goodwill. In accordance with SFAS No. 109, the
Company has established a valuation allowance covering substantially all of
its net deferred tax assets as of September 30, 1998 and December 31, 1997.
The valuation allowance was established due to the uncertainty of the
realization of the deferred tax assets. A significant portion of the
deferred tax assets, which are currently subject to a valuation allowance,
may be allocated to reduce goodwill or other noncurrent intangible assets
when subsequently recognized.
8. Stockholders' Equity
In connection with the Company's initial public offering of its units (the
"Units"), the Company granted to GKN Securities Corp. and its affiliates
(collectively, "GKN") an option to purchase an aggregate of 150,000 Units
(the "UPO") at $6.60 per Unit. Each Unit issuable upon exercise of the UPO
consisted of one share of Common Stock and warrants to purchase two shares
of Common Stock at $5.50 per share. GKN and the Company had discussions
regarding the interpretation of certain anti-dilution provisions and other
provisions in the UPO, but no resolution was achieved. By its terms, the
UPO expired on October 7, 1998.
9. Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires the unrealized
losses on the Company's foreign currency translation adjustments, which
prior to adoption were reported separately in stockholders' equity, to be
included in other comprehensive income (loss).
The following presents a reconciliation of the net income to comprehensive
income for the three and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $1,542 $901 $120 $1,874
Other comprehensive income (loss):
Foreign currency translation adjustment 126 28 129 (240)
------ ---- ---- ------
Other comprehensive (income) loss 126 28 129 (240)
------ ---- ---- ------
Comprehensive income $1,668 $929 $249 $1,634
====== ==== ==== ======
</TABLE>
11
<PAGE>
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: competitive factors, including the fact that the Company's
competitors are highly focused and may have greater resources and/or name
recognition than the Company; changes in technology and the Company's ability to
develop or acquire new or improved products and/or modify and upgrade its
existing products; changes in labor, equipment and capital costs; changes in
access to suppliers; currency fluctuations; changes in regulations affecting the
Company's business; future acquisitions or strategic partnerships; the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; general business and economic conditions;
political instability in certain regions; and other factors described from time
to time in the Company's reports filed with the Securities and Exchange
Commission. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements which statements are made pursuant to the
Private Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(All Amounts In Thousands of Dollars)
The following discussion addresses the financial condition of the Company as of
September 30, 1998 and the results of its operations for the three and nine
months ended September 30, 1998, compared to the same period last year. The
discussion should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations for the fiscal year
ended December 31, 1997 included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Results of Operations
Three Months Ended September 30, 1998, Compared to the Three Months Ended
September 30, 1997
Net Sales
Net sales increased by $1,662, or 12.7% to $14,752, for the three months ended
September 30, 1998, as compared to $13,090 for the same period in 1997. The
increase in sales resulted from increased sales of $353 in the Company's
Commercial Sound product line, increased sales of $209 in the Company's
Engineered Systems product line and increased sales of $1,100 in the Company's
Telco product line.
Net sales from the Commercial Sound products increased to $3,852 for the three
months ended September 30, 1998, or 10.1% over net sales of $3,498 for the same
period in 1997. Net sales from the Engineered Systems products increased to
$2,578 for the three months ended September 30, 1998, or 8.8% from net sales of
$2,369 for the same period in 1997. Net sales from the Telco product line
increased to $8,323 for the three months ended September 30, 1998, or 15.23%
from net sales of $7,223 for the same period in 1997. The Telco product line
includes foreign sales from Speech Design. Domestic sales increased to $3,058
for the three months ended September 30, 1998, or 9.0% from net sales of $2,804
for the three months ended September 30, 1997. Foreign sales translated into
U.S. dollars increased to $5,265 for the three months ended September 30, 1998,
or 19.2% over net sales of $4,419 for the same period in 1997. Foreign sales
stated in local currency increased to 9,269 DM for the three months ended
September 30, 1998, or 16.3% over net sales of 7,972 DM for the three months
ended September 30, 1997.
Gross Profit
Gross profit, as a percentage of total net sales, increased to 50.9% for the
three months ended September 30, 1998, compared to 45.8% for the same period in
1997. The increase in gross profit is attributable to cost reduction measures
primarily through the renegotiation of certain purchase agreements which were
implemented during late 1997 and early 1998.
12
<PAGE>
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("SG&A") increased by $476, or
12.9% for the three months ended September 30, 1998, as compared to the three
months ended September 30, 1997. SG&A was $4,151, or 28.1% of net sales for the
three months ended September 30, 1998, as compared to $3,675, or 28.1% of net
sales for the same period in 1997. The increase is primarily attributable to
expenses incurred as part of the Company's plans to implement a new marketing
focus and to grow through acquisitions and joint ventures.
Research and Development
The Company's Research and Development ("R&D") programs are designed to
efficiently introduce innovative products in a timely manner. R&D expense was
$753, or 5.1% of net sales for the three months ended September 30, 1998, as
compared to $617, or 4.7% of net sales for the three months ended September 30,
1997. The increase is primarily attributable to the development of the Company's
next generation of products.
Interest Expense
Interest expense was $96, or 0.7% of net sales for the three months ended
September 30, 1998, as compared to $113, or 0.9% of net sales for the three
months ended September 30, 1997. The decrease of $17, or 14.9%, primarily
relates to reductions in amounts outstanding under revolving lines of credit and
lower interest rates.
Income Taxes
Income tax expense increased for the three months ended September 30, 1998 to
$843, as compared to $487 for the comparable period in 1997. The increase of
$356 is due to increased profits.
Nine Months Ended September 30, 1998, Compared to the Nine Months Ended
September 30, 1997
Net Sales
Net sales increased by $2,251, or 6.1% to $39,386, for the nine months ended
September 30, 1998, as compared to $37,135 for the same period in 1997. The
increase in sales primarily resulted from increased sales of $1,053 in the
Company's Commercial Sound product lines and $1,455 in the Company's Telco
product lines. This increase was offset by a decrease in sales in the Engineered
Systems product lines of $257.
Net sales from the Commercial Sound product line increased to $10,216 for the
nine months ended September 30, 1998, or 11.5% over net sales of $9,163 for the
same period in 1997. Net sales from the Engineered Systems products decreased to
$6,076 for the nine months ended September 30, 1998, or 4.1% from net sales of
$6,333 for the same period in 1997. Net sales from the Telco product line
increased to $23,095 for the nine months ended September 30, 1998, or 6.7% from
net sales of $21,640 for the same period in 1997. The Telco product line
includes foreign sales from Speech Design. Domestic sales decreased to $7,976
for the nine months ended September 30, 1998, or 3.4% from net sales of $8,257
for the nine months ended September 30, 1997. Foreign sales translated into U.S.
dollars increased to $15,119 for the nine months ended September 30, 1998, or
13.0% over net sales of $13,383 for the same period in 1997. However, foreign
net sales stated in local currency increased to 27,099 DM for the nine months
ended September 30, 1998, or 17.3% over net sales of 23,106 DM for the same
period in 1997.
Gross Profit
Gross profit as a percentage of total net sales increased to 49.2% for the nine
months ended September 30, 1998, compared to 46.1% for the same period in 1997.
The increase in gross profit is attributable to cost reduction measures
primarily through the renegotiation of certain purchase agreements which were
implemented during late 1997 and early 1998.
Selling, General and Administrative Expenses
Selling, General and Administrative Expenses ("SG&A") increased by $790, or 7.2%
for the nine months ended
13
<PAGE>
September 30, 1998, as compared to the nine months ended September 30, 1997.
SG&A was $11,781, or 29.9% of net sales for the nine months ended September 30,
1998, as compared to $10,991, or 29.6% of net sales for same period in 1997. The
increase is primarily attributable to expenses incurred as part of the Company's
plans to implement a new marketing focus and to grow through acquisitions and
joint ventures.
Research and Development
The Company's Research and Development ("R&D") programs are designed to
efficiently introduce innovative products in a timely manner. R&D expense was
$2,061, or 5.2% of net sales for the nine months ended September 30, 1998, as
compared to $1,992, or 5.4% of net sales for the nine months ended September 30,
1997. The increase is primarily attributable to the development of the Company's
next generation of products.
Purchased in-process research and development
Purchased in-process research and development represents a one-time non-cash
charge of $2,905 of in-process research and development in connection with the
acquisition of the remaining 33% equity interest of Speech Design not previously
owned by the Company.
Interest Expense
Interest expense was $201, or 0.5% of net sales for the nine months ended
September 30, 1998, as compared to $336, or 0.9% of net sales for the nine
months ended September 30, 1997. The decrease of $135, or 40.2%, primarily
relates to reductions in amounts outstanding under revolving lines of credit,
lower interest rates, as well as the final repayment of a $500 note to Geotek
Communications, Inc. on July 3, 1997, which accrued interest at a rate of 11%
per annum.
Income Taxes
Income tax expense increased for the nine months ended September 30, 1998 to
$1,766, as compared to $1,230 for the comparable period in 1997. The increase of
$536 is due to increased profits before the non-deductible charge for purchased
in-process research and development.
Liquidity and Capital Resources
During the nine months ended September 30, 1998, cash utilization focused on
current working capital requirements, the paydown of related party debt and
subordinated notes, and the purchase of equipment and leasehold improvements.
The Company's operating activities provided $5,687 of cash. The Company's net
income of $120 for the nine months ended September 30, 1998 included net
non-cash charges of $5,037, which principally consisted of (i) depreciation and
amortization of $1,122, (ii) increased inventory and doubtful account reserves
of $212, (iii) minority interest of consolidated subsidiaries of $254, (iv)
utilization of acquired tax benefits credited to goodwill of $544, and (v)
purchased in-process research and development of $2,905. Further, net changes in
operational assets and liabilities provided $530 in cash. Additionally, accounts
receivable decreased by $588, inventory decreased by $595, prepaid expenses and
other assets increased by $172, accounts payable and accrued expenses increased
by $341 and net changes in other operating assets and liabilities used $140 in
cash.
Net cash used in investing activities amounted to $5,796. The purchase of
equipment and other fixed assets used $1,006 and the remaining balance of $4,790
was used in the purchase of the remaining 33% equity interest in Speech Design
not previously owned by the Company.
Net cash provided from financing activities amounted to $1,520. The Company paid
down $4,125 of revolving credit agreement debt and related party debt. The
Company received $827 from the sales of certain equities (net of $35 of
acquisition expenses).
As of September 30, 1998, the Company's total liabilities were $9,706, of which
$5,763 is due and payable within
14
<PAGE>
one year. Under the New Facility, the Company borrowed $4,700 to acquire the
remaining 33% equity interest in Speech Design, and received $118 from advances
and notes payable from related parties.
In the first quarter of 1997 BCI obtained from a bank a $7,000 revolving credit
line for a period of two years. This line was collateralized by the accounts
receivable, inventory, property and equipment and general intangibles of BCI and
was guaranteed by the Company.
In April 1998, the Company obtained from KeyBank N.A. a $27,000 revolving credit
facility, which matures on April 30, 2000. The new facility replaces the
previous borrowing facility. This facility includes a $20,000 revolving credit
line for acquisition financing and a $7,000 revolving credit line for working
capital requirements. The interest rate under the new revolving line is at the
bank's prime rate, or, at the Company's option, LIBOR plus 125 to 200 basis
points, based on certain financial criteria. As of September 30, 1998, the
Company had borrowings outstanding under the revolving credit facility of
$3,425, all of which was used to finance the acquisition of the remaining 33%
equity interest in Speech Design not previously owned by the Company.
Speech Design has credit lines and overdraft facilities of approximately 6
million DM, or $3.5 million. At September 30, 1998 borrowings and availability
under these lines amounted to 0.3 million DM, or $161 and 5.7 million DM, or
$3,339, respectively. These lines are collateralized by all of Speech Design's
accounts receivable and inventory. In November 1998, Speech Design obtained from
DG Bank, of Frankfurt, Germany, a 15,000 DM, or $9,000 credit facility for
acquisition financing. The interest rate under this facility is up to 200 basis
points above the FIBOR rate.
The Company believes that it has adequate liquidity to finance its normal
business activities and capital expenditures for the near term.
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued Statement 131, Disclosures about Segments of an
Enterprise and Related Information, effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
comply with the disclosure requirements of the statement in its 1998 Annual
Report on Form 10-K.
In June 1998, the FASB issued Statement 133, Accounting for Derivative
Instruments and Hedging Activities. Statement 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
Company has not determined the impact that Statement 133 will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of initial adoption.
Year 2000
The Year 2000 ("Y2K") readiness issue is the result of information technology
("IT") system programs being written using two digits rather than four digits to
define the application year. Any of the Company's IT systems that have
date-sensitive software may recognize a date using "00" for the applicable year
as the year 1900 and not the year 2000. This could result in miscalculations,
system failures, or other business disruptions.
The Company is implementing a plan which addresses Y2K technology compliance for
its IT and non-IT systems. The plan includes a review of the Company's suppliers
and customers to assure that they are working toward Y2K compliance.
The Company uses IT systems in various aspects of its business, including
manufacturing, research and development, distribution and many administrative
functions. A significant amount of the Company's software and systems may need
to be updated, modified or replaced to address the Y2K readiness issue. In that
regard, the
15
<PAGE>
Company has retained consultants to evaluate the effect of appropriately
modifying the Company's IT systems and the Company has projects underway to
address the Y2K readiness of its IT systems and the IT systems of material third
parties.
The Company has prioritized its IT systems into three categories: critical,
necessary or other. The Company currently expects that critical and necessary
systems, the loss or failure of which could result in a serious disruption of
revenue or serious processing delay, respectively, will be Y2K compliant by June
30, 1999, with modifications to the existing software and or conversions to new
software. The Company currently expects that the remainder of the Company's IT
systems will be Y2K compliant within such timeframe or shortly thereafter. There
can be no assurance, however, that the Company's critical, necessary and other
IT systems will become Y2K compliant by the projected time.
The Company's non-IT systems include embedded technology such as
microcontrollers included in production equipment, office equipment,
environmental control equipment and time locks. All of the Company's non-IT
systems are already Y2K ready except for some products that were discontinued by
the Company. With respect to such products, the Company is evaluating its
alternatives and expects this review to be completed by the second quarter of
next fiscal year. Material third party vendors have been contacted and asked to
attest to Y2K compliance. Alternate vendors will be evaluated as potential
replacements for non-compliant or non-responsive vendors.
Currently, management estimates that the Company will expend up to $1,000,000 on
system upgrade and replacement projects, which upgrades and replacements will,
among other things, make the Company's IT systems Y2K compliant. Y2K remediation
programs and ongoing systems upgrade and replacement projects are funded through
the Company's operations.
If IT systems affected by the Y2K were not addressed as the Company is doing,
they could conceivably cause technological failures throughout the Company,
disrupting normal business operations. These risks are similar to those faced by
other manufacturing companies. Management does not believe that the Company's
business will be materially affected by Y2K readiness issues. Nevertheless, the
Company expects to have contingency plans that address the most reasonably
likely worst case Y2K scenarios. In the event that the Company can not complete
its system upgrade and replacement projects in a timely manner, the Company will
use a software patch to make its IT systems Y2K compliant.
If non-IT systems affected by the Y2K were not addressed as the Company is
doing, they could disrupt normal business operations. These theoretical
consequences are generally shared with other manufacturing companies.
Nevertheless, the Company expects to have contingency plans that address the
most reasonably likely worst case Y2K scenarios. The Company has contacted its
key suppliers and vendors to assess the potential impact on the Company's
operations if those third parties fail to become Y2K compliant in a timely
manner. While certain of the Company's suppliers and vendors have provided the
Company with written certification that the IT systems used by such third
parties will be Y2K compliant prior to the Year 2000, the Company is currently
in the process of identifying the potential risks of external business
relationships with those third parties who have not certified to the Company as
to the status of their Y2K compliance. Action steps and contingency plans
related to significant third party relationships are expected to be completed by
mid to late 1999.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
17
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this report (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-K for an Annual
Report on Form 10-K):
Exhibit No.
- -----------
3.1 Certificate of Incorporation.(1)
3.2 By-laws.(1)
3.3 Certificate of Correction to the Certificate of Incorporation,
dated March 8, 1995 and filed with the Secretary of State of the
State of Delaware on March 10, 1995.(2)
3.4 Certificate of Amendment to the Certificate of Incorporation,
dated August 21, 1995 and filed with the Secretary of State of
the State of Delaware on August 21, 1995.(3)
3.5 Certificate of Designation, Preferences and Rights of Convertible
Preferred Stock of Bogen Communications International, Inc.(7)
3.6 Certificate of Correction to the Certificate of Designation,
Preferences and Rights of Convertible Preferred Stock of Bogen
Communications International, Inc.(7)
4.1 Form of Common Stock Certificate.(1)
4.2 Form of Warrant Certificate.(1)
4.3 Unit Purchase Option Granted to GKN Securities Corp.(1)
4.4 Warrant Agreement between Continental Stock Transfer & Trust
Company and the Company.(1)
4.5 Bogen Communications, International, Inc. 1996 Incentive Stock
Option Plan.(5)
10.1 Form of Agency Agreement, dated as of June 28, 1993, between the
Company and GKN Securities Corp. (without schedules)(1)
10.2 Form of Indemnification Agreement between the Company and its
officers, directors and advisors.(4)
10.3 Summary of Agreement for Business Credit between Speech Design
GmbH and Statelparkasse Munchen.(6)
10.4 Asset Purchase Agreement, dated as of July 1, 1997, between Bogen
Communications International, Inc. Bog-Comm Acquisition
Corporation, New England Audio Resource, Inc., Mr. William
Kieltyka and Mr. Lee Lareau.(9)
10.5 Stock Purchase Agreement, dated November 26, 1997, between the
Company and Geotek.(7)
10.6 Convertible Preferred Stock Purchase Agreement, dated November
26, 1997, between the Company and the Investors.(7)
10.7 Employment Agreement, dated November 26, 1997, between the
Company and Mr. Jonathan Guss.(7)
10.8 Employment Agreement, dated November 26, 1997, between the
Company and Mr. Michael Fleischer.(7)
10.9 Option Agreement, dated November 26, 1997, between the Company
and Mr. Jonathan Guss.(7)
10.10 Option Agreement, dated November 26, 1997, between the Company
and Mr. Michael Fleischer.(7)
10.11 Common Stock and Warrant Purchase Agreement, dated November 26,
1997 between the Company and D&S Capital, LLC.(7)
10.12 Warrant, dated November 26, 1997, issued by the Company to D&S
Capital, LLC.(7)
18
<PAGE>
10.13 Mergers and Acquisition Engagement Agreement, dated August, 1997,
as amended as of November 28, 1997 between Helix Capital
Services, LLC and Bogen Communications International, Inc.(8)
10.14 Warrant Purchase Agreement, dated as of November 28, 1997,
between Helix Capital II, LLC and Bogen Communications
International, Inc.(8)
10.15 Warrant, dated November 28, 1997, issued by Bogen Communications
International, Inc. to Helix Capital II, LLC.(8)
10.16 Share Transfer Agreement, dated May 20, 1998, by and among Bogen
Communications International, Inc., Kasimir Arciszewski and Hans
Meiler.(10)
10.17 Management Agreement, dated May 20, 1998, between Speech Design
GmbH and Kasimir Arciszewski.(10)
10.18 Management Agreement, dated May 20, 1998, between Speech Design
GmbH and Hans Meiler.(10)
10.19 Credit Agreement, dated as of April 21, 1998, among Bogen
Communications International, Inc., Bogen Communications, Inc.,
various financial institutions and KeyBank National
Association.(10)
10.20 Guaranty of Payment and Performance, dated April 21, 1998, by
Bogen Corporation.(10)
10.21 Guaranty of Payment and Performance, dated April 21, 1998, by New
England Audio Resource Corp.(10)
10.22 Security Agreement, dated April 21, 1998, by Bogen Communications
International, Inc. in favor of KeyBank National Association.(10)
10.23 Security Agreement, dated April 21, 1998, by Bogen Communications,
Inc. in favor of KeyBank National Association.(10)
10.24 Security Agreement, dated April 21, 1998, by Bogen Corporation in
favor of KeyBank National Association.(10)
10.25 Security Agreement, dated April 21, 1998, by New England Audio
Resource Corp. in favor of KeyBank National Association.(10)
10.26 Borrower Pledge Agreement, dated April 21,1998, by and between
Bogen Communications International, Inc. and KeyBank National
Association.(10)
10.27 Borrower Pledge Agreement, dated April 21,1998, by and between
Bogen Communications International, Inc. and KeyBank National
Association.(10)
10.28 Guarantor Pledge Agreement, dated April 21, 1998, by and between
Bogen Corporation and KeyBank National Association.(10)
10.29 Guarantor Pledge Agreement, dated April 21, 1998, by and between
Bogen Communications, Inc. and KeyBank National Association.(10)
*27.1 Financial Data Schedule
- ------------
*Filed Herewith
19
<PAGE>
1. Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-65294), dated October 7, 1993.
2. Incorporated by reference to the Exhibits to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1994.
3. Incorporated by reference to the Exhibits to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1995.
4. Incorporated by reference to the Exhibits to the Company's Current Report
on form 8-K dated August 21, 1995.
5. Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-8 (File No. 333-21245), dated February 4, 1997.
6. Incorporated by reference to the Exhibits to the Company's Annual report
on Form 10-K for the year ended December 31, 1996.
7. Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K, dated November 25, 1997.
8. Incorporated by reference and the Exhibits to the Company's Current report
on Form 8-K, dated December 12, 1997.
9. Incorporated by reference to the Exhibits to the Company's Annual report
on Form 10-K for the year ended December 31, 1997.
10. Incorporated by reference to the Exhibits to the Company's Current Report
on Form 8-K, dated May 20, 1998.
20
<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.
BOGEN COMMUNICATIONS INTERNATIONAL, INC.
(Registrant)
Date: November 12, 1998 By: /s/
----------------------------------------
Name: Michael P. Fleischer
Title: President
Date: November 12, 1998 By: /s/
----------------------------------------
Name: Yoav M. Cohen
Title: Chief Financial Officer
21
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