SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED JULY 31, 1994
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
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. O. Box 400044, San Antonio, Texas 78229-8415
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
210-593-5700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
11.99% Subordinated debentures due 1996 New York Stock Exchange
Common Stock ($.01 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. /X/
The aggregate market value of the shares of Common Stock of the
Registrant held by non-affiliates as of October 17, 1994 was $2,864,962
which value, solely for the purposes of this calculation, excludes shares
held by the Registrant's executive officers and directors based on the
closing price of the stock as reported on the New York Stock Exchange.
As of October 17, 1994, there were 12,490,782 shares of the Registrant's
Common Stock outstanding (excluding treasury shares).
1
INTELOGIC TRACE, INC.
INDEX TO FORM 10-K
Page No.
PART I --------
Item 1. Business................................. 3
Item 2. Properties............................... 8
Item 3. Legal Proceedings........................ 9
Item 4. Submission of Matters to a Vote of
Security Holders....................... 10
PART II
Item 5. Market for the Registrant's Common Stock
and Related Security Holder Matters.... 11
Item 6. Selected Financial Data.................. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 13
Item 8. Financial Statements and Supplementary
Data .................................. 20
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................. 43
PART III
Item 10. Directors and Executive Officers of the
Registrant............................. 44
Item 11. Executive Compensation................... 46
Item 12. Security Ownership of Certain Beneficial
Owners and Management ................. 57
Item 13. Certain Relationships and Related
Transactions........................... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................ 62
2
PART I
ITEM 1. BUSINESS
GENERAL
Intelogic Trace, Inc. ("I T" or the "Company"), is an independent,
nationwide provider of computer and telecommunications maintenance and
support services. The Company was founded in 1968 and operated as the
domestic Customer Service Division of Datapoint Corporation. In July 1985,
Datapoint distributed all of the Company's common stock to the Datapoint
shareholders and created the independent service Company, I T. From its
inception, the Company has expanded its services and support capabilities
through internal development and acquisitions. The Company's service
programs utilize the Company's field force and technical headquarters
support functions to develop customized service solutions for customers.
These solutions include the installation and maintenance of hardware and
software, upgrade services, help services, help desk, network support,
project management services, remote diagnostic and repair capabilities and
database management systems. In 1994, I T added programs for the
installation, service, and support of telecommunications devices and
telephone debit card dispensers. Today, I T is working with potential
customers to develop service solutions for the users of PCs, minicomputers,
kiosks, call directors, ACD switches, and assorted telecommunications
devices and other electronic equipment.
REORGANIZATION UNDER CHAPTER 11
During Spring 1994, the Company experienced an increased reliance on
borrowed funds to satisfy working capital requirements, principally as a
result of continued erosion in operating performance. The Company engaged
Buccino & Associates, Inc. ("Buccino"), a nationally recognized company
which specializes in consulting with financially troubled businesses to
review cash flows, liquidity concerns, and provide recommendations to
establish both immediate and long-term improvements in cash flow,
profitability, asset management, and capital structure. Liquidity
pressures continued to increase and the Company determined that the
aggregate borrowing availability under its revolving credit agreement would
not be sufficient to meet the Company's obligations on a current basis.
The Company's liquidity shortfall was compounded by the semi-annual
interest payment due July 15, 1994, of $3.0 million on the $49.9 million in
principal amount of 11.99% Subordinated Debentures due 1996 (the
"Debentures"). In addition to ongoing discussions with its lender, during
late June and early July 1994, the Company held discussions with the
holders of a majority of principal amount of Debentures (the "Principal
Debentureholders") regarding a potential restructuring of that obligation.
On July 15, 1994, the Company filed a Current Report on Form 8-K disclosing
that it was negotiating with its Principal Debentureholders and that it
would not make the interest payment on the Debentures. On July 21, 1994,
the Indenture Trustee for the Debentures issued its notice of default.
Pursuant to the terms of the Indenture, a failure to make the semi-annual
interest payment within the thirty-day grace period allowed by the
Indenture would cause an Event of Default to have occurred. Due
principally to increasing pressures on available capital, the nonpayment of
a promissory note due to the Company and potential terminations of certain
leases, licenses, and contracts due to financial defaults, the Board of
Directors reached the conclusion that the protection of the Bankruptcy Code
was necessary in order to consummate the restructuring of the Debentures
and the revolving financing agreement.
3
On August 5, 1994, the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code
("Chapter 11") in the United States Bankruptcy Court for the Western
District of Texas, San Antonio Division (the "Court"). As a result of
discussions with its Principal Debentureholders, contemporaneously with
filing the petition, the Company filed a Plan of Reorganization setting
forth the terms of a proposed restructuring. Under Chapter 11, enforcement
of certain claims in existence prior to the filing of the petitions are
stayed, while the Company continues operations in the ordinary course of
business as debtor-in-possession.
On October 4, 1994, the Court approved the Company's Disclosure Statement
to the Company's Plan of Reorganization (the "Disclosure Statement"). The
Disclosure Statement, as modified and amended, describes the Plan of
Reorganization (the "Plan") proposed by the Company. The Plan has been
submitted to a vote of creditors, security holders and parties in interest,
and a hearing on confirmation of the Plan has been scheduled by the Court
for November 22, 1994. If confirmed, the Plan would, among other things,
cause the following to occur on the effective date of the Plan (the
"Effective Date"): (1) administrative and tax claims would be paid in
full; (2) a new series of preferred stock would be issued to holders of
unsecured claims; (3) a four-for-one reverse split of the common stock
would be consummated, with existing common shareholders retaining
approximately 25% of the Company's common stock outstanding after the
Effective Date, and holders of unsecured claims receiving 75% of the shares
of common stock outstanding after the Effective Date. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this filing. The terms of the Plan are subject to
acceptance by the parties to the Plan and confirmation by the Court;
therefore, the ultimate impact of the bankruptcy on the Company's results
of operations and financial position cannot presently be determined.
MARKETS & SERVICES
COMPUTER HARDWARE MAINTENANCE AND SUPPORT
The Company's services include preventive/remedial maintenance and basic
installation. This is the Company's core business and accounts for 95% of
the Company's service revenues during fiscal 1994. Customers include end-
users, manufacturers/resellers, and business partners.
The Company normally provides these services on an "on-call" basis either
pursuant to a contract of a specified term and coverage ("Service
Agreement") or on a time and materials ("T&M") basis. During fiscal year
1994, approximately 78% of the Company's revenue was generated from service
provided pursuant to Service Agreements. I T has these agreements with
end-users, major equipment manufacturers, and value-added resellers (VARs).
In addition, I T is an Authorized Service Provider for a number of
manufacturers, including AST, Datapoint, Magna, PAJ Electronics, Inc., and
Teknekron Infoswitch Corporation.
On-site repair service is initiated by a customer telephoning the Company's
Customer Support Center, which then dispatches a Customer Engineer from the
customer's service area to answer the call. The Customer Engineer
diagnoses the source of the problem and repairs or replaces the
malfunctioning component. The Company has expanded its on-site maintenance
business to respond to customers with many types of computer equipment from
a wide variety of vendors and now maintains approximately 2,000 different
products from over 150 vendors.
The Company also has a limited "carry-in" or "mail-in" business. The
Company maintains repair
4
facilities at selected district offices and in San Antonio, Texas to
perform maintenance for selected products.
TELECOMMUNICATIONS HARDWARE INSTALLATION, MAINTENANCE, AND SUPPORT
Traditional services provided in this market include installation, warranty
repair, preventive and remedial maintenance, system upgrades, moves, and
systems integration. Typically, this telecommunications market is served
by distributors or resellers who provide service and support on a local or
regional basis.
In 1994, I T developed new capabilities to provide customized service
solutions for the installation, service, and support of certain
telecommunications equipment. These programs include order entry,
scheduling, programming, remote diagnostic and repair capabilities, and
management database systems.
The foundation of these new services is an interactive communications
network system which administers the programs. This system allows orders
to be entered electronically and coordinates the installation activities.
The system communicates with installers via radio frequency devices and
provides the I T installer with the ability to communicate with the on-line
system with minimal human intervention.
The network also provides remote verification, diagnostic, and repair
capabilities for such equipment. I T performs monthly auto-polling during
the customer's off hours to verify the integrity of the installed equipment
and activity of the devices. If it detects an error in the equipment's
programming, the system notifies an I T technician on the "Help Desk" and
the technician can remotely interrogate the "ailing" device. The
technician frequently can repair and restore the device to proper operation
without the need for an on-site visit.
Another capability of the program is the "Call Home Sick" feature involving
such equipment. A device which begins to experience problems can go off-
line (enter into a by-pass mode with no disruption to telephone service)
and call the system in San Antonio. The technician can typically resolve
the problem remotely by interactively communicating with the device. If
this is not possible, the Help Desk technician can dispatch an I T customer
engineer to repair the device.
Other capabilities of the program include the creation of management
databases to track revenues generated by the dialers and maintain records
of the location and configuration of installed dialers.
During 1994, the Company capitalized on these new capabilities and entered
into an agreement with a telecommunications company to install and maintain
Dialers. This new activity accounted for $3.4 million of the Company's
1994 revenues.
5
OTHER EQUIPMENT
The Company's new capabilities provide opportunities for the installation,
service, and support of other electronic devices and equipment. These
include debit card dispensers and kiosk equipment similar to the units
which allow customers to create their own individual greeting cards.
MARKETING
The Company markets its services in the following ways:
* Through a national sales force, the Company pursues
multi-vendor installation, service, and support agreements
with end-users of computer, telecommunications and other
electronic equipment.
* The Company enters into agreements with leading
manufacturers to provide authorized service to their
end-users during both the warranty and post-warranty period.
* Agreements are established with value-added dealers,
distributors and systems integrators ("resellers") to market
the Company's services as a part of the reseller's total
product offering.
* The Company enters into subcontracting agreements to perform
services for other vendors, typically
a seller of equipment, where the seller serves as the
general contractor for all maintenance services.
* Solicitation agreements are established with independent
sales organizations, dealers and distributors which receive
a commission for obtaining service agreements for the
Company.
END-USER AGREEMENTS
Service Agreements with end-users normally have an initial term of one year
and continue thereafter until terminated by either the customer or the
Company upon 90-days prior written notice. After the first year, the
Company may increase or decrease maintenance prices upon 90-days prior
written notice to the customer. End-user agreements address the particular
service needs of the end-users, and therefore, each contract is unique to
individual requirements.
Service is also provided on a "time and materials" basis to those customers
who request services outside the terms of the Service Agreement. In such
instances, the customer typically is charged for labor and materials used
in making the required repairs, at predetermined labor rates and at the
Company's established prices for parts.
MANUFACTURER AGREEMENTS
Agreements with manufacturers usually call for the Company to provide
installation and database maintenance service to an end-user during the
manufacturer's warranty period, normally 90 days to three years from the
date of purchase. These agreements typically provide that the Company will
be compensated by the manufacturer either by receiving a fee for all units
shipped by the manufacturer or on a per incident basis.
6
The Company's agreements with manufacturers are generally for a term of
three years, and continue thereafter until terminated upon one year's
notice by either party, and provide that the Company will be an authorized
third-party maintainer for the manufacturer during the term of the
agreement. In addition, the Company receives favorable terms for the
supply, purchase and repair of spare parts, training and support equipment.
Under the terms of its agreement with Datapoint, the Company is the
exclusive service agent for Datapoint equipment throughout the United
States. The agreement with Datapoint, dated June 29, 1985, provides for an
exclusive relationship with the Company until terminated by either party,
notice of which termination must be given 180 days prior to the anniversary
of the execution of the agreement, to be effective six years thereafter.
Following termination, the Company would have a non-exclusive relationship
with Datapoint. As of the date of this document, neither party has issued
any such notice. During fiscal years 1994, 1993 and 1992, 13%, 17%, and
24% of the Company's maintenance service revenue was derived from servicing
Datapoint products. See Note 4 to the consolidated financial statements
included elsewhere in this filing.
RESELLER AGREEMENTS
The Company provides services at end-user sites pursuant to agreements with
resellers of the Company's services, whereby the resellers subcontract the
performance of services to the Company. The resellers receive a discount
from the Company's published or established prices based upon volume
commitments and achievements. The resellers are responsible for payment for
all services rendered by the Company to the end-user and are required to
perform certain services which lower the Company's cost of providing
maintenance services. Agreements with resellers are normally for an initial
term of three years, terminable thereafter by either party upon 90-days
written notice. Reseller agreements typically provide that the Company is
the sole third-party maintainer for the selected products of the reseller
during the term of the agreement.
SUBCONTRACTING AGREEMENTS
The Company provides services at end-user sites pursuant to subcontracting
agreements with other vendors, typically a seller of equipment acting as
the general contractor for all maintenance services at a site, regardless
of equipment manufacturer. The vendors are responsible for payment for all
services rendered by the Company to the end-user. The Company has
established subcontractor relationships with IBM, Digital Equipment
Corporation, and C&L Communications.
SOLICITATION AGREEMENTS
Pursuant to the Company's agreements with independent sales organizations,
dealers and distributors, the Company is obligated to pay such
organizations a commission for the first year of installation and
maintenance revenue received by the Company as a result of such solicitor
providing the Company with a Service Agreement between the end-user and the
Company.
7
CUSTOMERS
Providing service at end-user sites pursuant to subcontract agreements with
other vendors and agreements with resellers is a meaningful source of the
Company's revenue. The three most significant of these relationships (IBM,
MCI, and EDS) accounted for approximately 14%, 5%, and 4%, respectively, of
the Company's 1994 service revenue.
COMPETITION
The Company competes nationwide principally with service companies which
furnish service nationally on a multi-vendor basis; with many companies
which furnish multi-vendor service only on a local or regional basis; and
with computer manufacturers and distributors which have their own service
organizations.
Management believes that the Company competes with other multi-vendor
service organizations based on coverage, technical competence, customer
satisfaction, responsiveness, total service offering, and the
effectiveness of maintenance and support services and the price at which
such services are offered. In addition, the Company believes that its
independence and its ability to provide a full range of services gives it a
competitive advantage over pure maintenance companies and allows it to
compete with other large national service companies.
SPARE PARTS
The Company maintains an on-hand supply of spare parts to be utilized as
replacement parts in servicing its customers. As is the practice in the
service industry, a significant quantity of parts is required in order to
facilitate prompt repair service. Spare parts are obtained from
manufacturers or other reliable sources with which the Company has
maintenance and spare parts agreements. Spare parts also are obtained
pursuant to purchase contracts with vendors and are obtained through open
market purchases. In 1995, the Company plans to outsource this business.
As a result of this plan, the Company has commenced negotiations to sell
the majority of its field support spares to various third parties. Based
on estimates received by a prospective buyer, field support spares have
been written down by $17.3 million to their estimated realizable value of
$2.6 million. It is expected that the sale of the field support spares
will occur in 1995.
EMPLOYEES
At July 31, 1994, the Company had 726 employees. With the exception of
four employees with the Company's Canadian subsidiary, Intelogic Trace
Canada ("I T Canada"), all remaining employees of the Company are not
covered by any collective bargaining agreements and the Company has never
experienced a strike or work stoppage. The Company considers its relations
with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at Turtle Creek Tower
I, San Antonio, Texas. The Company leases its executive offices and other
office and warehouse facilities throughout the United States.
8
ITEM 3. LEGAL PROCEEDINGS
The Company filed a Voluntary Petition on August 5, 1994, under Chapter 11
of the United States Bankruptcy Court. The Company, as debtor-in-
possession, continues to operate and manage its affairs. A Disclosure
Statement to the Plan of Reorganization of the Company has been approved by
the Court, and is an exhibit to this filing. A Confirmation Hearing for
the Company's proposed Plan has been set for November 22, 1994. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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. 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
and 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 the 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 charged 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. 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 it and the Board of
Directors 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
Bankruptcy and District Court approval, the Company will receive $2.4
million less attorney's fees and expenses (not to exceed $800,000) awarded
by the Court. In addition, the Company has agreed to form a committee of
the Board to address and approve certain matters relating to the Company's
current and prospective investments. The cash portion of the settlement is
fully covered by the Company's director and officer liability insurance but
may be offset in whole or in part by future director and officer liability
insurance premium increases. The Honorable Leonard B. Sand, United States
District Judge for the Southern District of New York, has held a hearing
concerning the fairness of the proposed settlement. However, no opinion
has yet been issued. Judge Sand has referred the case to the Court for
further adjudication consistent with bankruptcy law. Due to the current
uncertainty as to any recovery the Company has not recorded any receivable.
On October 4, 1994, certain Debentureholders filed an adversary proceeding
in the Court against the Company alleging securities law violations and
certain other common law causes of action. The litigation relates to the
Company's purchases of securities, including Datapoint Stock and related
actions. The plaintiffs in the adversary proceeding seek monetary damages,
attorney's fees, and costs of suit. Any allowed claims against the Company
may be subordinated to the claims of secured and unsecured creditors.
9
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 totaling $31.0
million in additional taxes plus interest. The assessment primarily
involves 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 United States 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 $2.5
million 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. During 1994, the Company negotiated a
settlement with the IRS and on October 3, 1994 the IRS appeals officer
provided the Company a settlement document indicating a refund of
approximately $1.0 million net of interest costs. The IRS settlement
document is subject to approval by the Joint Committee of Congress and
therefore, the ultimate outcome cannot presently be determined. No
receivable has been recorded for any possible refund.
The Company is a party to various legal proceedings in the ordinary course
of business. The Company believes, based upon the advice of legal counsel
responsible for the review of such matters, that there is no proceeding
either threatened or pending against the Company that could result in a
materially adverse effect on the business or the financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The Company's common stock is traded on the composite tape on the New York
Stock Exchange under the symbol IT. The following table sets forth the
high and low sales prices on the composite tape for the New York Stock
Exchange for the periods indicated.
HIGH LOW
------- --------
August 1, 1994 - October 17, 1994 ............... $ 11/16 $ 1/4
FISCAL QUARTER ENDED
1994
October 31, 1993 ................................. 2 7/8 1 7/8
January 31, 1994 ................................. 4 1/8 2 7/8
April 30, 1994 ................................... 3 5/8 1 1/2
July 31, 1994 .................................... 1 1/2 7/16
1993
October 31, 1992 ................................. 3/4 1/2
January 31, 1993 ................................. 1 1/8 3/8
April 30, 1993 ................................... 1 1/8 11/16
July 31, 1993 .................................... 2 3/8 13/16
As of October 17, 1994, there were 3,425 holders of record of the Company's
common stock.
The Company has not paid cash dividends to date and has no present
intention to pay cash dividends on its common stock in the future.
Restrictive provisions of the 11.99% Subordinated Debentures due 1996 limit
the payment of cash dividends and other distributions on capital stock, as
well as the acquisition or retirement, by the Company, of its capital
stock.
As a condition precedent to consummation of the Plan, the Company will be
required to enter into a Registration Rights Agreement (the "Registration
Rights Agreement") with certain principal holders of Debentures (the
"Principal Holders") on or prior to the Effective Date of the Plan. Under
the Registration Rights Agreement, the Company will be required, among
other things, to cause to be filed with the Securities and Exchange
Commission within thirty days of the Effective Date a registration
statement covering the shares of stock issued to Principal Holders in
connection with the Plan, with respect to the resale of such securities by
the Principal Holders from time to time.
11
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR
-----------------------------------------------------------------------
1994 1993 1992 1991 1990
-----------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Total Revenue .................................... $ 72,555 $ 88,172 $ 103,647 $ 105,500 $ 107,726
Earnings (Loss) from Operations .................. (27,278) 4,031 (6,568) (7,083) 3,038
Loss from Continuing Operations .................. (34,388) (3,431) (15,658) (13,108) (26,962)
Earnings (Loss) from
Discontinued Operations ....................... 505 -- (1,622) (5,452) (132)
Extraordinary Items .............................. -- 2,547<F1> 416<F2> 5,246<F3> 7,396<F4>
Net Loss ......................................... (33,883) (884) (16,864) (13,314) (19,698)
Net Loss Less Preferred
Stock Dividends ............................... (34,671) (1,528) (17,409) (13,668) (19,698)
Loss per Share:
Continuing operations ....................... (2.85) (.34) (1.36) (1.13) (2.14)
Net loss less preferred stock dividends ..... (2.81) (.13) (1.46) (1.15) (1.56)
BALANCE SHEET DATA:
Total Assets ..................................... $ 15,569 $ 44,461 $ 58,744 $ 74,039 $ 86,774
Long-Term Debt ................................... --<F5> 49,924 56,930 56,930 63,356
Redeemable Preferred Stock ....................... 4,691 3,903 3,259 2,714 --
Shareholders' Deficit ............................ (73,529) (39,249) (35,335) (17,973) (4,359)
<FN>
<F1> Gains from the repurchase of $7.0 million of the Company's 11.99%
Subordinated Debentures at a discount. See Note 8 of the Notes to
Consolidated Financial Statements included elsewhere in this
filing.
<F2> The Company's pro-rata share of Datapoint Corporation's
extraordinary gains for 1992. See Note 4 of the Notes to
Consolidated Financial Statements included elsewhere in this
filing.
<F3> Gains from the repurchase of $6.4 million of the Company's 11.99%
Subordinated Debentures at a discount and the Company's share of
Datapoint Corporation's extraordinary gains for 1991. See Notes 4
and 8 of the Notes to Consolidated Financial Statements included
elsewhere in this filing.
<F4> Gains from the repurchase of $21.6 million of the Company's 11.99%
Subordinated Debentures at a discount and the Company's share of
Datapoint Corporation's extraordinary items for 1990. See Notes 4
and 8 of the Notes to Consolidated Financial Statements included
elsewhere in this filing.
<F5> $49.9 million of 11.99% Subordinated Debentures has been classified
as liabilities subject to compromise at July 31, 1994.
</FN>
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(YEARS REFERRED TO ARE FISCAL YEARS)
OVERVIEW
During Spring 1994, the Company experienced an increased reliance on
borrowed funds to satisfy working capital requirements, principally as a
result of continued erosion in operating performance. The Company engaged
Buccino 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. Liquidity pressures continued to increase and the Company
determined that the aggregate borrowing availability under its revolving
credit agreement would not be sufficient to meet the Company's obligations
on a current basis. The Company's liquidity shortfall was compounded by
the semi-annual interest payment due July 15, 1994, of $3.0 million on the
$49.9 million in principal amount of Debentures. In addition to ongoing
discussions with its lender, during late June and early July 1994, the
Company held discussions with the Principal Debentureholders regarding a
potential restructuring of that obligation. On July 15, 1994, the Company
filed a Current Report on Form 8-K disclosing that it was negotiating with
its Principal Debentureholders and that it would not make the interest
payment on the Debentures. On July 21, 1994, the Indenture Trustee for the
Debentures issued its Notice of Default and Notice of Conditional Holders'
Meeting. Pursuant to the terms of the Indenture, a failure to make the
semi-annual interest payment within the thirty-day grace period allowed by
the Indenture would cause an Event of Default to have occurred. A meeting
of the holders of Debentures was scheduled for August 23, 1994, to discuss
the situation. In the interim, discussions continued with both the
Principal Debentureholders and Foothill Capital Corporation ("Foothill"),
the Company's primary lender. Due to increasing pressures on available
capital, including but not limited to the non-payment of a $750,000
promissory note to the Company and potential terminations of certain
leases, licenses, and contracts due to financial defaults, the Board of
Directors reached the conclusion that the protection of the Bankruptcy Code
was necessary in order to consummate the restructuring of the Debenture
obligations and the revolving financing facility.
Accordingly, on August 5, 1994, the Company initiated a Chapter 11 Case
under the Bankruptcy Code. Since the commencement of the Chapter 11 Case,
the Company has continued to conduct business in the ordinary course under
the protection of the Bankruptcy Code. The Company's financial condition
and results of operations will be affected by the ultimate terms of any
reorganization plan. A Disclosure Statement to the proposed Plan has been
approved by the Court. The case is pending as Cause No. 94-52172C in the
United States Bankruptcy Court for the Western District of Texas. The
Disclosure Statement, as modified and amended, describes the Plan proposed
by the Company after negotiations with creditors. The Plan has been
submitted to a vote of creditors, security holders and parties in interest,
and a hearing on confirmation of the Plan has been scheduled by the Court
for November 22, 1994. If confirmed, the Plan would, among other things,
cause the following to occur on the Effective Date: (1) administrative and
tax claims would be paid in full; (2) a new series of preferred stock would
be issued to holders of unsecured claims; (3) a four-for-one reverse split
of the common stock would be consummated, with existing common shareholders
retaining approximately 25% of the Company's common stock outstanding after
the Effective Date, and holders of unsecured claims receiving 75% of the
shares of common stock outstanding after the Effective Date.
13
Because of uncertainty regarding the outcome of the Chapter 11 Bankruptcy
Case and the effect of any bankruptcy reorganization plan on the interests
of the Company's creditors and securityholders, the ultimate impact of the
Chapter 11 Bankruptcy Case on the Company's results of operations and
financial position cannot presently be determined. The Company is also
unable to predict the value, if any, to be realized by securityholders in a
bankruptcy case whether or not a successful reorganization is achieved.
For this reason, any investment in the Company's common stock should be
considered speculative.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course
of business. However, as a result of the Chapter 11 filing and
circumstances relating to this event, such continuity of operations and
realization of assets and liquidation of liabilities are subject to
uncertainty. Further, the Plan will materially change the amounts reported
in the consolidated financial statements, which do not give effect to any
adjustments to the carrying value of assets or amounts of liabilities that
might be necessary as a consequence of the Plan. The appropriateness of
using the going concern basis is dependent upon, among other things, the
confirmation of the Plan, the ability to comply with debtor-in-possession
financing agreements, generation of sufficient cash from operations and
financing sources to meet obligations, and achievement of satisfactory
levels of future operating profit.
DEBTOR-IN-POSSESSION FINANCING
On September 16, 1994, the Court entered an order approving a debtor-in-
possession credit agreement (the "DIP Facility"). The DIP Facility
consists of an extension and modification of the previously existing credit
agreement with Foothill, the terms of which are described in Note 8 to the
consolidated financial statements. Borrowings under the DIP Facility bear
interest at the prime rate plus 4.5 percent, are payable monthly in
arrears, and are secured by a lien on substantially all of the assets of
the Company. Under the terms of the DIP Facility, the Company is not
authorized to use the collateral (i) upon an event of non-compliance with
the Bankruptcy Court order approving the DIP Facility, (ii) after December
31, 1994, unless extended by mutual agreement of the Company and Foothill,
or (iii) after entry of an order by the Court confirming a plan of
reorganization of the Company.
In September, the Company determined that it would require $1.3 million
post-petition credit in addition to the DIP Facility to provide additional
working capital for continued operations. Under approval of the Court, the
Company obtained this additional credit from Fidelity Capital and Income
Fund ("Fidelity"), a Principal Debentureholder, at an annual interest rate
of 15% and pursuant to the terms and conditions as further described under
Item 13 of this Report.
Although no assurance can be made, management believes the Company can
generate sufficient cash from operations and from existing financing
sources to meet its obligations on a current basis during the pendency of
the Case.
EXIT FINANCING
The Company is engaging in various negotiations to obtain an Exit Financing
Facility in order to provide for expected post-confirmation working capital
needs. Management anticipates that the
14
Exit Financing Facility would consist primarily of a $7.0 million
revolving loan primarily secured by senior liens on inventory,
receivables, and equipment. The Company has engaged in discussions
with financial institutions other than Foothill and Fidelity
regarding the provision of an Exit Financing Facility and have not
received favorable indications of interest from such institutions.
As a result, management has determined to pursue a commitment from,
and has commenced negotiations with Foothill and Fidelity for an
Exit Financing Facility. The terms of the Plan require the Company
to secure a firm commitment for a post-confirmation revolving
financing facility acceptable to the holders of a majority in
principal amount of the Debentures. Although management believes
that the Company can obtain a satisfactory exit financing facility,
no assurance can be made that an appropriate exit financing
facility will be obtained.
CONFIRMATION OF THE PLAN OF REORGANIZATION
There can be no assurance that the Plan will be confirmed. If the Plan is
not confirmed, the Company or any other party-in-interest could attempt to
formulate a different plan. Such a plan might involve a reorganization or
an orderly liquidation of the Company's assets. As substantially all of
the material assets of the Company are subject to liens of the Company's
debtor-in-possession lender, management believes a liquidation would result
in little, if any, distribution to Company shareholders. Further, if the
Plan is consummated after December 31, 1994, the Company would be required
to utilize its tax attributes, principally its net operating losses, to
offset the cancellations of debt income, due to changes in U.S. tax law
effective December 31, 1994 that repeal the stock-for-debt exception relied
upon by the Company for the issuance of common stock under the Plan.
REORGANIZATION ACCOUNTING ISSUES
In November 1990, the American Institute of Certified Public Accountants
issued SOP 90-7. Pursuant to the guidance provide by SOP 90-7, the Company
will adopt "fresh start" reporting as of the Effective Date. Under "fresh
start" reporting, the reorganization value of the entity is allocated to
the entity's assets. If any portion of the reorganization value cannot be
attributed to specific tangible or identifiable intangible assets of the
emerging entity, such amounts are to be reported as "reorganization value
in excess of amounts allocable to identifiable intangible assets" and
amortized over a period of years, generally substantially less than forty
years. As a result of adopting "fresh start" reporting upon emerging from
Chapter 11 status, the Company's consolidated financial statements will not
be comparable with those prepared before the Plan is confirmed, including
the historical consolidated financial statements included herein.
In addition to "fresh start" reporting, SOP 90-7 provides guidance for
financial reporting by entities that have filed petition with the Court and
expect to reorganize under Chapter 11. The Company followed these
guidelines in the accompanying July 31, 1994 consolidated financial
statements. Pursuant to SOP 90-7, prepetition liabilities are reported on
the basis of the expected amount of such allowed claims, as opposed to the
amounts for which those allowed claims may be settled. Under the Plan, if
accepted by the parties and confirmed by the Court, those claims will be
settled at amounts substantially less than their allowed amounts.
15
As of July 31, 1994, prepetition liabilities subject to compromise consist
of the following (in thousands):
11.99% Subordinated Debentures due 1996 ....................... $49,924
Accounts payable .............................................. 6,521
Accrued interest payable ...................................... 3,242
Contribution payable to pension plan .......................... 2,417
Other liabilities ............................................. 148
-------
$62,252
=======
The Plan also provides that the $10 Redeemable Preferred Stock issued by
the Company, all of which is owned by Datapoint, will be canceled and no
distributions will be made on account of this stock. The $10 Redeemable
Preferred Stock has been returned to the Company and the common stock in
the trust has been distributed to the Company (300,000 shares) and
Datapoint (2.4 million shares).
RESULTS OF OPERATIONS
1994 VS. 1993
Net loss increased from $884,000 in 1993 to $33.9 million in 1994. This
net loss increase of $33.0 million was due primarily to a decline in
revenues of $15.6 million and an increase in reorganization and
restructuring charges of $17.5 million.
REVENUE
Total revenue for 1994 declined $15.6 million (17.7%) primarily due to
cancellations of service contracts of $28.2 million outpacing new sales of
$18.0 million. Additionally, $5.4 million was due to a decline in revenue
from servicing Datapoint-manufactured products. This was due primarily to
the continued decline of the Datapoint customer base.
Management believes that the decline in revenue during 1994 is attributable
to a variety of factors including the price of service offerings, new
product warranty offerings and an increased level of competition in the
market for service-related products. These factors are expected to
continue into 1995 and as a result, revenues are expected to continue to
decline during 1995.
COST OF REVENUE
Total cost of revenue decreased $2.3 million in 1994 compared to 1993;
however, the revenue decline outpaced efforts to reduce expenses.
OPERATING EXPENSES
Operating expenses increased $18.0 million due primarily to the
reorganization and restructuring charges incurred in the writedown of field
support spares. During 1994, the Company began negotiations to sell the
majority of its field support spares to various third parties. Based on
estimates received by a prospective buyer, field support spares have been
written down by $17.3 million to their estimated fair market value.
Management expects that the sale of the field support spares will occur in
1995.
16
At the beginning of June 1994, the Company began implementing cost
reduction programs designed to reduce fixed and variable expenses,
including:
* Restructure and reduce staff.
* Arrange for the sale of field support spare parts inventories,
repair operations, and the logistics function to generate annual
expense savings and eliminate the majority of the Company's
depreciation expense.
* Terminate and renegotiate facilities leases to generate additional
expense reductions.
Management expects to begin realizing the benefits of these cost savings in
fiscal year 1995.
INTEREST EXPENSE
Interest expense increased $234,000 in 1994 compared to 1993 due to the
increase in the average borrowings under the Company's credit line. The
Company expects interest expense to decline during 1995 assuming the
proposed Plan is confirmed by the Court.
FEDERAL AND STATE INCOME TAX BENEFIT
The tax benefit of $1.2 million was the result of the change in the
valuation allowance associated with the tax refunds previously received.
1993 VS. 1992
At the beginning of 1993, the Company instituted an across-the-board salary
reduction averaging 6%. This reduction reduced expenses for the year by
$4.0 million. Overall, costs and expenses declined $26.1 million when
compared to 1992.
In October 1992, the Company moved to a new decentralized organization,
with responsibility for profitability and service satisfaction closer to
the customer. This geographic "business unit" structure combines service
and sales into one organization reporting to a General Manager.
REVENUE
Total revenue for 1993 of $88.2 million decreased $15.5 million (14.9%)
from 1992 primarily due to expirations and cancellations of service
contracts throughout the year exceeding new business generated during the
period, resulting in lower service revenue for 1993. New business
additions were below prior year levels due to a smaller yet more productive
sales force combined with a move away from marginal sales opportunities.
Revenue from servicing Datapoint products declined by $8.7 million
representing 56.1% of the total revenue decline. Canadian revenue
decreased from $4.5 million in 1992 to $3.3 million in 1993 representing
7.5% of the total revenue decline.
COST OF REVENUE
Cost of revenue decreased $17.3 million (20.8%) from 1992 to 1993.
Reductions in salaries and wages related to cost of service totaled $9.1
million representing 53.0% of this decline. Reductions in board repair
expense and material and freight totaled $1.5 million or 8.7% of the
17
total decrease. Canadian cost of service declined by $1.8 million.
GROSS PROFIT
Despite the above mentioned revenue decline, gross profit of $22.4 million
(25.4%) increased by $1.8 million from the previous year which reported
gross profit of $20.6 million (19.8%). The Company benefited from
reductions in personnel expense, board repair, and material and freight.
OPERATING EXPENSES
Selling, General & Administrative ("SG&A") expenses of $17.9 million for
1993 decreased $6.8 million (27.6%) from 1992. Further reductions of
management layers and across-the-board wage reductions enacted at the start
of the current fiscal year contributed $3.7 million of this improvement.
The cost of streamlining the Logistics and SG&A functions are shown in
other operating expenses for 1993 and 1992. These charges of $457,000 and
$2.4 million, respectively, primarily represent severance and facility
closing costs. Canadian operating expenses declined by $1.4 million (56%)
from 1992.
INTEREST EXPENSE
Interest expense decreased $251,000 in 1993 as compared to 1992. During
the year, the Company repurchased $7.0 million face value of its
outstanding Debentures for $4.4 million, recognizing extraordinary gains of
$2.5 million. Short-term borrowings under the Foothill credit line carried
an interest rate of prime plus 3 7/8% and averaged $5.9 million in 1993
compared to an average balance of $528,000 in 1992. The balance at July
31, 1993, of $4.4 million, however, was down $2.5 million from year-end
1992.
EQUITY IN INCOME (LOSS) OF AFFILIATE
As of July 31, 1993 and 1992, the Company's investment in Datapoint had
zero carrying value. Note 3 to the Company's consolidated financial
statements provides a complete discussion of this investment.
18
FEDERAL AND STATE INCOME TAXES
During the second quarter of 1992, the Company ceased recording income tax
benefits on losses because realization of further tax benefits is
contingent upon income in future periods.
DISCONTINUED OPERATIONS
The results of the Company's hardware sales and leasing and application
software sales businesses, for all periods presented, have been shown
separately because of the sale of substantially all of the assets of those
operations effective July 1992.
In 1992 the Company reflected a loss of $1.6 million from discontinued
operations related to the sale of substantially all of the assets of those
businesses.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE NO.
----
Report of Independent Auditors ...................................................... 21
Consolidated Statements of Financial Position at July 31, 1994 and 1993 ............. 22
Consolidated Statements of Operations for each of the Years Ended
July 31, 1994, 1993 and 1992 ..................................................... 23
Consolidated Statements of Cash Flows for each of the
Years Ended July 31, 1994, 1993 and 1992 ......................................... 24
Consolidated Statements of Shareholders' Deficit for each of the
Years Ended July 31, 1994, 1993, and 1992 ........................................ 25
Notes to Consolidated Financial Statements .......................................... 26
Schedule V - Leasehold Improvements and Equipment and Field Support
Spares for each of the Years Ended July 31, 1994, 1993 and 1992 .................. 68
Schedule VI - Accumulated Depreciation of Leasehold Improvements
and Equipment and Field Support Spares for each of the Years
Ended July 31, 1994, 1993 and 1992 ............................................... 69
Schedule VIII - Valuation and Qualifying Accounts and Reserves
for each of the Years Ended July 31, 1994, 1993 and 1992 ......................... 70
Schedule IX - Short Term Borrowings for each of the Years
Ended July 31, 1994, 1993 and 1992 ............................................... 71
Schedule X - Supplementary Income Statement Information for each
of the Years Ended July 31, 1994, 1993 and 1992 .................................. 72
20
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Intelogic Trace, Inc.
We have audited the accompanying consolidated statements of financial
position of Intelogic Trace, Inc. as of July 31, 1994 and 1993, and the
related consolidated statements of operations, cash flows and shareholders'
deficit for each of the three years in the period ended July 31, 1994. Our
audits also included the financial statement schedules listed in the Index
at Item 14(a). These consolidated financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Intelogic Trace, Inc. at July 31, 1994 and 1993 and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended July 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Intelogic Trace, Inc. will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements on August 5,
1994, Intelogic Trace, Inc. has filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. This
event and circumstances relating to this event, including the Company's
losses, accumulated deficit and leveraged capital structure, raise
substantial doubt about its ability to continue as a going concern.
Continuation of the Company as a going concern and realization of its
assets and liquidation of its liabilities are dependent upon, among other
things, the confirmation of a plan of reorganization and the Company's
ability to generate sufficient cash from operations and obtain financing
sources to meet its obligations. As a result of the reorganization
proceedings, the Company may sell or otherwise realize assets and liquidate
or settle liabilities for amounts other than those reflected in the
consolidated financial statements. Further, the confirmation of a plan of
reorganization could materially change the amounts currently recorded in
the consolidated financial statements. If no reorganization plan is
approved, it is possible that the Company's assets could be liquidated.
The consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
As discussed in Note 16 to the consolidated financial statements, the
Internal Revenue Service issued assessments for additional taxes for the
years 1986 through 1992 which the Company disagreed with, and accordingly,
filed a protest appealing each assessment. During 1994, the Company
negotiated a settlement with the Internal Revenue Service indicating a
refund of approximately $1 million. The settlement is subject to approval
by the Joint Committee of Congress and, therefore, the ultimate outcome
cannot presently be determined. Accordingly, no amounts have been recorded
in the consolidated financial statements for any outcome that may result
from these assessments and settlement negotiations.
ERNST & YOUNG LLP
San Antonio, Texas
October 14, 1994, except for Note 2,
Paragraph 8 as to which the date is
November 9, 1994
21
INTELOGIC TRACE, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except share data)
JULY 31,
---------------------------
ASSETS 1994 1993
-------- --------
Current Assets
Cash and temporary investments ........................................................... $ 605 $ 1,626
Marketable securities, net of valuation allowance of
$2,693 in 1994 and 1993 ............................................................... -- --
Accounts receivable, net of valuation allowance of
$2,880 in 1994 and $3,342 in 1993 ..................................................... 7,192 8,728
Net assets of discontinued operations .................................................... 200 320
Other current assets ..................................................................... 1,624 2,070
-------- --------
Total Current Assets .................................................................. 9,621 12,744
Leasehold Improvements and Equipment, net .................................................... 1,213 2,076
Field Support Spares, net .................................................................... 2,625 26,788
Intangible Assets, net of accumulated amortization
of $4,490 in 1994 and $4,141 in 1993 ..................................................... 1,864 2,213
Other Assets ................................................................................. 246 640
-------- --------
Total Assets .......................................................................... $ 15,569 $ 44,461
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities Not Subject to Compromise
Accounts payable ......................................................................... $ 1,571 $ 3,689
Accrued expenses ......................................................................... 2,534 5,900
Short-term borrowings .................................................................... 7,919 4,377
Deferred revenue ......................................................................... 9,690 12,170
Other current liabilities ................................................................ -- 254
-------- --------
Total Current Liabilities ............................................................. 21,714 26,390
Liabilities Subject to Compromise ............................................................ 62,252 --
11.99% Subordinated Debentures Due 1996 ...................................................... -- 49,924
Deferred Income Taxes and Other Liabilities .................................................. 441 1,632
Deferred Pension Liability ................................................................... -- 1,861
Commitments and Contingencies (Note 14)
$10.00 Redeemable Preferred Stock: 65,000 shares authorized; 46,301 and
40,571 shares issued and outstanding at July 31, 1994 and 1993,
respectively, $100 per share mandatory redemption value .................................. 4,691 3,903
Shareholders' Deficit
Preferred stock ($.01 par; 20,000,000 shares authorized) ................................. -- --
Common stock ($.01 par; 40,000,000 shares authorized;
19,908,398 shares issued) ............................................................. 199 199
Additional paid-in capital ............................................................... 51,508 55,003
Retained deficit ......................................................................... (69,695) (35,024)
Foreign currency translation adjustment .................................................. 28 54
Less common stock in treasury - at cost (7,240,210 shares in 1994 and
7,812,495 shares in 1993) ............................................................ (53,152) (56,919)
Retirement valuation reserve ............................................................. (2,417) (2,562)
-------- --------
Total Shareholders' Deficit ........................................................... (73,529) (39,249)
-------- --------
Total Liabilities and Shareholders' Deficit ........................................ $ 15,569 $ 44,461
======== ========
See accompanying notes to consolidated financial statements.
22
INTELOGIC TRACE, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
FISCAL YEARS ENDED JULY 31,
---------------------------------------------
1994 1993 1992
-------- -------- ---------
Revenue
Service ................................................................ $ 71,388 $ 86,727 $ 101,346
Sales .................................................................. 1,167 1,445 2,301
-------- -------- ---------
Total Revenue ..................................................... 72,555 88,172 103,647
Cost of Revenue
Service ................................................................ 61,215 65,226 81,252
Sales .................................................................. 2,329 579 1,825
-------- -------- ---------
Total Cost of Revenue ............................................. 63,544 65,805 83,077
-------- -------- ---------
Gross Profit ...................................................... 9,011 22,367 20,570
Operating Expenses
Selling, general and administrative expenses ........................... 18,659 17,879 24,689
Restructuring charges:
Write down of field support spares .................................. 17,253 -- --
Other restructuring charges ......................................... 377 457 2,449
-------- -------- ---------
Total Operating Expenses .......................................... 36,289 18,336 27,138
-------- -------- ---------
Earnings (Loss) From Operations ................................... (27,278) 4,031 (6,568)
Other Expenses
Reorganization charges - bankruptcy .................................... 340 -- --
Interest expense ....................................................... 7,096 6,862 7,113
Equity in loss of affiliate ............................................ -- -- 1,876
Other, net ............................................................. 865 600 256
-------- -------- ---------
Loss From Continuing Operations
Before Income Taxes ............................................. (35,579) (3,431) (15,813)
Federal and State Income Tax Benefit ........................................ 1,191 -- 155
-------- -------- ---------
Loss From Continuing Operations ................................... (34,388) (3,431) (15,658)
Discontinued Operations
Loss from operations (net of tax benefits of $33) ...................... -- -- (63)
Earnings (Loss) on disposal (net of tax benefits of $1,082
for 1992) ............................................................ 505 -- (1,559)
-------- -------- ---------
Earnings (Loss) from Discontinued Operations ...................... 505 -- (1,622)
-------- -------- ---------
Loss Before Extraordinary Items ................................... (33,883) (3,431) (17,280)
Extraordinary Items ......................................................... -- 2,547 416
-------- -------- ---------
Net Loss .......................................................... $(33,883) $ (884) $ (16,864)
======== ======== =========
Net Loss Less Preferred Stock Dividends ..................................... $(34,671) $ (1,528) $ (17,409)
======== ======== =========
Earnings (Loss) per Common Share
Continuing operations .................................................. $ (2.85) $ (.34) $ (1.36)
Discontinued operations ................................................ .04 -- (.14)
Extraordinary items .................................................... -- .21 .04
-------- -------- ---------
Net Loss Less Preferred Stock Dividends Per Share .................. $ (2.81) $ (.13) $ (1.46)
======== ======== =========
Weighted Average Common Shares Outstanding .................................. 12,343 11,994 11,939
======== ======== =========
See accompanying notes to consolidated financial statements.
23
INTELOGIC TRACE, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FISCAL YEARS ENDED JULY 31,
--------------------------------------------
1994 1993 1992
-------- -------- --------
Operating Activities
Net loss ................................................................... $(33,883) $ (884) $(16,864)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss from discontinued operations ..................................... 323 -- 1,622
Depreciation and amortization ......................................... 11,543 12,150 15,208
Provision for doubtful accounts ....................................... 1,650 335 912
Write down of field support spares .................................... 17,253 -- --
Net loss from investment in affiliate ................................. -- -- 1,460
Extraordinary gain from debenture repurchases ......................... -- (2,547) --
Realized loss - securities ............................................ -- -- 4,116
Unrealized gain - securities .......................................... -- -- (4,059)
Foreign currency valuation (gains) losses ............................. (26) 67 79
Deferred income tax benefit ........................................... (1,191) -- (537)
Other ................................................................. 2,848 2,489 1,544
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable ................................................... (114) (1,143) 2,009
Other current assets .................................................. 446 830 265
Accounts payable and accrued expenses ................................. 4,443 (5,095) (2,485)
Deferred revenue ...................................................... (2,480) (359) (118)
Other current liabilities ............................................. 283 (33) 90
-------- -------- --------
Net Cash Provided by Operating Activities ........................... 1,095 5,810 3,242
Investing Activities
Purchase of field support spares and other fixed assets .................... (6,078) (8,482) (12,860)
Sale of equity and debt securities ......................................... -- -- 396
Proceeds from sale of discontinued operations .............................. -- 6,049 --
Other, net ................................................................. 272 1,359 1,292
-------- -------- --------
Net Cash Used in Investing Activities .............................. (5,806) (1,074) (11,172)
Financing Activities
Short-term borrowings (repayments) ......................................... 3,542 (2,536) 5,644
Repurchase of subordinated debentures ...................................... -- (4,459) --
Other ...................................................................... 148 -- (1,072)
-------- --------
Net Cash Provided by (Used in) Financing Activities ................ 3,690 (6,995) 4,572
-------- -------- --------
Net Decrease in Cash and Temporary Investments ............................... (1,021) (2,259) (3,358)
Cash and Temporary Investments, beginning of year ............................ 1,626 3,885 7,243
-------- -------- --------
Cash and Temporary Investments, end of year .................................. $ 605 $ 1,626 $ 3,885
======== ======== ========
See accompanying notes to consolidated financial statements.
24
INTELOGIC TRACE, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(In thousands, except share data)
FOREIGN NET
ADDITIONAL CURRENCY RETIREMENT SHAREHOLDERS'
COMMON PAID-IN RETAINED TRANSLATION TREASURY VALUATION EQUITY
STOCK CAPITAL DEFICIT ADJUSTMENT STOCK RESERVE (DEFICIT)
-------------------------------------------------------------------------------------------
BALANCE JULY 27, 1991 $199 $ 56,592 $(16,087) $ 54 $(58,731) $ -- $(17,973)
Net loss -- -- (16,864) -- -- -- (16,864)
Preferred dividends -- -- (545) -- -- -- (545)
Matching contribution
to 401(k) plan -- (769) -- -- 837 -- 68
Foreign currency
translation
adjustment -- -- -- (21) -- -- (21)
-------------------------------------------------------------------------------------------
BALANCE JULY 31, 1992 199 55,823 (33,496) 33 (57,894) -- (35,335)
Net loss -- -- (884) -- -- -- (884)
Preferred dividends -- -- (644) -- -- -- (644)
Matching contribution
to 401(k) plan -- (820) -- -- 975 -- 155
Retirement valuation
reserve -- -- -- -- -- (2,562) (2,562)
Foreign currency
translation
adjustment -- -- -- 21 -- -- 21
---------------------------------------------------------------------------------------------
BALANCE JULY 31, 1993 199 55,003 (35,024) 54 (56,919) (2,562) (39,249)
Net loss -- -- (33,883) -- -- -- (33,883)
Preferred dividends -- -- (788) -- -- -- (788)
Matching contribution
to 401(k) plan -- 167 -- -- 105 -- 272
Retirement valuation
reserve -- -- -- -- -- 145 145
Stock options exercised -- (3,662) -- -- 3,662 -- --
Foreign currency
translation
adjustment -- -- -- (26) -- -- (26)
--------------------------------------------------------------------------------------------------------
BALANCE JULY 31, 1994 $199 $ 51,508 $(69,695) $ 28 $(53,152) $(2,417) $(73,529)
================================================================================================
See accompanying notes to consolidated financial statements.
25
INTELOGIC TRACE, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Intelogic
Trace, Inc. and its wholly owned subsidiaries (the "Company"). Investments
in affiliated companies owned 20% or more are accounted for on the equity
method. All significant intercompany transactions and balances have been
eliminated.
MARKETABLE SECURITIES
Marketable equity securities are stated at the lower of aggregate cost or
market and other marketable securities are stated at cost. Net realized
gains/losses represent cash received less the cost of the securities sold,
which includes commissions and investment management fees, if any. The cost
of securities sold is based on the first-in, first-out method.
PROPERTY
Leasehold improvements and equipment are carried at cost and depreciated
using straight-line and accelerated methods over the estimated useful lives
of the assets, which are generally as follows:
Leasehold improvements 5 years
Computer equipment 4 - 5 years
Other machinery, equipment, furniture, and fixtures 3 - 10 years
Repair and maintenance costs are expensed as incurred. Gains or losses on
dispositions are included in earnings.
FIELD SUPPORT SPARES
Field support spares are carried at lower of cost or net realizable value
and depreciated using the straight-line method over an estimated useful
life of 5 years.
Other significant policies used by the Company in accounting for spares are
as follows:
* Repair costs of spares are accrued and expensed when the need for
repair is identified.
* Other costs associated with maintaining spares are expensed when
incurred.
INTANGIBLE ASSETS
Intangible assets include the excess of cost over net tangible assets of
businesses acquired by purchase. Goodwill arising from these acquisitions
is being amortized on a straight-line basis over 40 years. Excess costs
associated with the purchase of service contracts are being amortized on a
26
straight-line basis over five years.
REVENUE RECOGNITION
SERVICE REVENUE The majority of the Company's revenues are generated under
contractual arrangements. These arrangements are billed in advance on a
periodic basis. Contract service revenue is recognized ratably over the
contractual period or as services are provided. Amounts billed in excess
of amounts recognized are recorded as deferred revenue. Warranty service
revenue is recognized ratably over the warranty period beginning in the
month shipped. Revenue from services rendered on a "time and materials"
basis is recognized in the period the work is performed.
SALES REVENUE Revenue from equipment sales and the related cost of sales
are recognized when title to the equipment passes. Component repair
revenue and related costs are recognized upon completion of the repair.
EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of
shares outstanding during the period, after giving effect for preferred
stock dividends. Because operations resulted in a loss, common stock
equivalents were not considered in the computation as their effect would be
anti-dilutive.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be temporary investments.
2. PETITION FOR RELIEF UNDER CHAPTER 11
During Spring 1994, the Company experienced an increased reliance on
borrowed funds to satisfy working capital requirements, principally as a
result of a continued erosion in operating performance. The Company
engaged a company which specializes in consulting with financially troubled
businesses to review cash flows, liquidity concerns, and provide
recommendations to establish both immediate and long-term improvements in
cash flow, profitability, asset management, and capital structure.
Liquidity pressures continued to increase and the Company determined that
the aggregate borrowing availability under its revolving credit agreement
would not be sufficient to meet the Company's obligations on a current
basis. The Company's liquidity shortfall was compounded by the semi-annual
interest payment due July 15, 1994 of $3.0 million on the $49.9 million in
principal amount of 11.99% Subordinated Debentures due 1996 (the
"Debentures"). In addition to ongoing discussions with its lender, during
late June and early July 1994, the Company held discussions with the
holders of a majority in principal amount of Debentures (the "Principal
Debentureholders") regarding a potential restructuring of that obligation.
On July 15, 1994, the Company filed a Current Report on Form 8-K disclosing
that it was negotiating with its Principal Debentureholders and that it
would not make the interest payment on the Debentures. On July 21, 1994,
the Indenture Trustee for the Debentures issued its notice of default.
Pursuant to the terms of the Indenture, a failure to make the semi-annual
interest payment within the thirty-day grace period allowed by the
Indenture would cause an Event of Default to have occurred. Due
principally to increasing pressures on available capital,
27
the nonpayment of a promissory note to the Company and potential
terminations of certain leases, licenses, and contracts due to financial
defaults, the Company reached the conclusion that the protection of the
Bankruptcy Code was necessary in order to consummate the restructuring of
the Debentures and the revolving financing agreement.
On August 5, 1994, the Company filed a voluntary petition for
reorganization under Chapter 11. As a result of discussions with its
Principal Debentureholders, contemporaneously with filing the petition, the
Company filed a Plan of Reorganization setting forth the terms of the
proposed restructuring. Under Chapter 11, enforcement of certain claims in
existence prior to the filing of the petitions are stayed, while the
Company continues operations in the ordinary course of business as debtor-
in-possession. These claims are reflected in the consolidated financial
statements as of July 31, 1994, as "liabilities subject to compromise."
Additional claims may arise subsequent to the petition date resulting from
the rejection of executory contracts and/or leases and determination of the
Court of allowed claims for contingencies and other disputed amounts.
On October 4, 1994, the Court approved the Company's Disclosure Statement.
The Disclosure Statement, as modified and amended, describes the Plan
proposed by the Company. The Plan has been submitted to a vote of
creditors, security holders and parties in interest, and a hearing on
confirmation of the Plan has been scheduled by the Court for November 22,
1994. If confirmed, the Plan would, among other things, cause the
following to occur on the Effective Date of the Plan: (1) administrative
and tax claims would be paid in full; (2) a new series of Preferred Stock
would be issued to holders of unsecured claims; (3) a four-for-one reverse
split of the common stock would be consummated, with existing common
shareholders retaining approximately 25% of the Company's common stock
outstanding after the Effective Date, and holders of unsecured claims
receiving 75% of the shares of common stock outstanding after the
Effective Date.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course
of business. However, as a result of the Chapter 11 filing and
circumstances relating to this event, such continuity of operations and
realization of assets and liquidation of liabilities are subject to
uncertainty. While under the protection of Chapter 11, the Company may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the consolidated financial
statements. Further, the Plan will materially change the amounts reported
in the consolidated financial statements, which do not give effect to any
adjustments to the carrying value of assets or amounts of liabilities that
might be necessary as a consequence of the Plan. The appropriateness of
using the going concern basis is dependent upon, among other things, the
confirmation of the Plan, the ability to comply with debtor-in-possession
financing agreements, generation of sufficient cash from operations and
financing sources to meet obligations, and achievement of satisfactory
levels of future operating profit.
In November 1990, the American Institute of Certified Public Accountants
issued Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Pursuant to the
guidance provide by SOP 90-7, the Company will adopt "fresh start"
reporting as of the effective date of the Plan. Under "fresh start"
reporting, the reorganization value of the entity is allocated to the
entity's assets. If any portion of the reorganization value cannot be
attributed to specific tangible or identifiable intangible assets of the
emerging entity, such amounts are to be reported as "reorganization value
in excess of amounts allocable to identifiable intangible assets" and
amortized over a period of years, generally
28
substantially less than forty years. As a result of adopting "fresh start"
reporting upon emerging from Chapter 11 status, the Company's consolidated
financial statements will not be comparable with those prepared before the
Plan is confirmed, including the historical consolidated financial
statements included herein.
In addition to fresh start reporting, SOP 90-7 provides guidance for
financial reporting by entities that have filed petition with the Court and
expect to reorganize under Chapter 11. The Company followed these
guidelines in the accompanying July 31, 1994 consolidated financial
statements. Pursuant to SOP 90-7, prepetition liabilities are reported on
the basis of the expected amount of such allowed claims, as opposed to the
amounts for which those allowed claims may be settled. Under the Plan, if
accepted by the parties and confirmed by the Court, those claims will be
settled at amounts substantially less than their allowed amounts.
As of July 31, 1994, prepetition liabilities subject to compromise consist
of the following (in thousands):
11.99% Subordinated Debentures due 1996 $49,924
Accounts payable 6,521
Accrued interest payable 3,242
Contribution payable to pension plan 2,417
Other liabilities 148
-------
$62,252
=======
The Plan provides that the Company must negotiate a settlement with the
Pension Benefit Guaranty Corporation (the "PBGC") on terms acceptable to
the holders of a majority of the Debentureholders, provided however, that
if no settlement is reached, the allowed unsecured claim shall be treated
as an unsecured claim subject to compromise. Subsequent to July 31, 1994,
the Company notified the PBGC of its intent to terminate its pension plan
effective December 31, 1994. A Bankruptcy Court hearing was held on
November 9, 1994, at which the Honorable Leif Clark found that a distress
termination of the retirement income plan was appropriate and so ordered.
The Plan also provides that the $10 Redeemable Preferred Stock issued by
the Company, all of which is owned by Datapoint, will be canceled and no
distributions will be made on account of this stock (see Note 3). The $10
Redeemable Preferred Stock has been returned to the Company and the common
stock in the trust has been distributed to the Company (300,000 shares) and
Datapoint (2.4 million shares).
The Company has requested approval from the Court to pay or otherwise honor
certain of its prepetition obligations, including certain wages, salaries
and related benefits of employees, claims for certain limited contributions
to an employee benefit plan, and claims up to $900 per creditor arising
from the deposit of money for certain services, claims of vendors to
contracts under which the Company has posted a bond. The Plan provides
that unsecured claims (other than subordinated Debentureholders) of $5,000
or less, which will be entitled to receive the lesser of a payment of cash
equal to 50% of such claim or such creditors pro rata share of $650,000.
The Company's short-term borrowings under a revolving financing agreement
is a secured claim. Under the Plan, the Company is responsible for either
renegotiating the revolving financing agreement or finding a lender that
will satisfy the creditor's claim.
29
Under the terms of the Plan, each holder of an unsecured claim not
specifically classified in another class will receive, after the Effective
Date of the Plan, a pro rata share of a new series of preferred stock and
new common stock. The new series of preferred stock will consist of
1,133,333 shares, subject to increase based upon unsecured claims other
than the Debentureholders in excess of $5 million, and will have an
aggregate liquidation preference of at least $17 million. The new common
stock will constitute 75% of the total outstanding common stock of the
Company after the Effective Date.
The above terms are subject to acceptance by the parties to the Plan and
confirmation by the Court; therefore, the ultimate impact of the
bankruptcy on the Company's results of operations and financial position
cannot presently be determined.
3. ACQUISITIONS
In 1990 the Company acquired all of the outstanding stock of Datapoint
Canada, Inc., a wholly owned subsidiary of Datapoint. Datapoint Canada,
subsequently renamed I T Canada, sells and services computer hardware
throughout Canada, primarily products marketed by Datapoint and Teknekron
Infoswitch Corp. The transaction was accounted for as a purchase. The
purchase price of $2.8 million consisted of $300,000 in cash and 25,000
shares of Intelogic Trace $10 Redeemable Preferred Stock ("Preferred
Stock"). In addition, the Company issued to Datapoint a five-year option
("Option") to repurchase substantially all of the Company's holdings of
Datapoint's common and preferred stock.
The Preferred Stock is subject to optional redemption by the Company
through November 9, 1994, at $87.50 per share; after November 9, 1994, at
$100 per share; and to mandatory redemption on November 9, 1995, at $100
per share. The carrying value of the Preferred Stock has been increased by
periodic accretion of the difference between the fair value at issuance and
the mandatory redemption value.
The Preferred Stock accumulates dividends annually at a rate of $10 per
share if paid in cash or $18 per share if paid in additional shares of
Preferred Stock. The Preferred Stock is cumulative and has no voting
rights. The Preferred Stock has a liquidation preference of $100 per share
plus dividends in arrears to the date of such liquidation. To date, an
additional 21,301 shares of Preferred Stock have been issued in payment of
dividends.
The Option allows Datapoint to purchase, from the Company, up to 2.7
million shares of Datapoint common stock for $.75 per share and up to
85,000 shares of Datapoint preferred stock for $1.375 per share, payable in
cash or by delivery of shares of Preferred Stock if permissible under the
terms of the Company's agreements. Datapoint exercised its option on the
85,000 shares of Datapoint preferred stock in 1992. The remaining
Datapoint common stock shares subject to the Option will be held in a
Grantor Trust until exercised or upon expiration of the Option on November
9, 1995.
Subsequent to July 31, 1994, the Company and Datapoint mutually agreed to a
division of the corpus in the Grantor Trust in lieu of the above Option.
Pursuant to this agreement, the Company and Datapoint sought Bankruptcy
Court approval to have the trustee of the Grantor Trust transfer and
distribute 2.4 million shares of Datapoint Common Stock held in the Grantor
Trust to Datapoint, and transfer and distribute the remaining 300,000
shares of Datapoint Common Stock to the Company, and to terminate the
Option and the Grantor Trust. The Court approved the
30
agreement on September 9, 1994. In connection with the division of the
corpus in the Grantor Trust, the $10 Redeemable Preferred Stock will be
canceled subsequent to July 31, 1994. The $10 Redeemable Preferred Stock
has been returned to the Company and the common stock in the trust has been
distributed to the Company (300,000 shares) and Datapoint (2.4 million
shares).
Financial information of I T Canada is summarized as follows:
1994 1993 1992
--------------------------
(In thousands)
Revenue $1,890 $3,668 $5,122
Loss from operations (861) (286) (2,205)
Net Loss (1,447) (281) (1,998)
Identifiable assets 146 1,950 1,947
I T Canada ceased its operations effective September 30, 1994.
4. INVESTMENT IN AFFILIATE
In 1989, the Company purchased an aggregate of 2,545,600 shares of
Datapoint common stock which, combined with shares already owned, increased
the Company's holdings to 2,743,385 shares, or approximately 27% of
Datapoint's outstanding common stock.
In 1992, Datapoint issued additional shares of common stock and a new class
of preferred stock in exchange for its then outstanding preferred stock.
The issuance of the additional common stock diluted the Company's holdings
to approximately 20% of Datapoint's outstanding common stock.
The Company's share of Datapoint's fiscal 1992 consolidated results were
based on 27% of Datapoint's 1992 consolidated net earnings through the
third quarter and 20% of Datapoint's results in the fourth quarter. For
1992, the Company's share of Datapoint's losses exceeded its recorded
investment, therefore, a loss was recognized in 1992 equal to the beginning
of year investment balance of $1.5 million.
The Company's recorded investment balance currently equals zero. The
Company's share of Datapoint's future earnings will have to exceed $21.4
million before the Company can again reflect results on this investment.
See Note 3 for a description regarding an agreement between the Company and
Datapoint which reduced the Company's holdings in Datapoint common stock to
343,385 shares subsequent to July 31, 1994.
31
Financial information for Datapoint as of July 31, 1994, 1993, and August
1, 1992, and for the years then ended is summarized below. Datapoint uses
a 52- or 53-week fiscal year ending on the last Saturday in July.
1994 1993 1992
---------------------------------
(In thousands)
Total Revenue .............................. $ 172,936 $ 208,344 $ 255,243
Gross Profit ............................... 65,565 86,149 101,877
Loss before Extraordinary Items ............ (94,765) (11,859) (10,409)
Net Loss ................................... (93,425) (11,260) (8,756)
Net Loss Applicable to Common Stockholders . (95,209) (13,044) (16,357)
Current Assets ............................. 79,915 94,169 121,991
Total Assets ............................... 127,434 202,275 248,813
Current Liabilities ........................ 98,202 74,759 90,581
Total Liabilities .......................... 178,195 155,254 173,978
Stockholders' Equity (Deficit) ............. (50,761) 47,021 74,835
5. PROPERTY
The Company's property consists of the following:
1994 1993
-------------------
(In thousands)
Leasehold Improvements and Equipment (at cost):
Leasehold improvements ............................... $ 4,459 $ 4,442
Computer equipment ................................... 19,434 19,498
Other machinery, equipment, furniture and fixtures ... 6,994 7,429
-------- --------
30,887 31,369
Less: Accumulated Depreciation ........................... (29,674) (29,293)
-------- --------
Net Leasehold Improvements and Equipment ................. $ 1,213 $ 2,076
======== ========
Field Support Spares (at cost) ........................... $ 35,775 $ 63,891
Less: Accumulated Depreciation ........................... (33,150) (37,103)
-------- --------
Net Field Support Spares ................................. $ 2,625 $ 26,788
======== ========
See Note 12 for a discussion of the Company's intent to sell its field
support spares in 1995.
6. DISCONTINUED OPERATIONS
During 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 the Systems Group.
The total sales price, including assumed liabilities, was $26.1 million,
which, after satisfaction of existing financing related to the lease base,
resulted in $8.1 million to be paid to the Company, subject to the transfer
of leases under the provision of the sales agreement, as amended. The
remainder of the net receivable is due, with interest from the closing
date, as leases are confirmed
32
under the provisions of the sales agreement, as amended.
For all periods presented, the operating results of the businesses sold
have been shown as discontinued operations. Summary operating results for
each of the periods is as follows:
1994 1993 1992
------------------------
(In thousands)
Revenue $ - $ - $ 27,927
Loss before taxes and loss on disposal - - (96)
Net Loss - - (1,622)
7. ACCRUED EXPENSES
Accrued expenses include $1.8 million and $3.7 million for salaries and
employee benefits at July 31, 1994 and 1993, respectively and $250,000 for
accrued interest at July 31, 1993.
8. DEBT
11.99% SUBORDINATED DEBENTURES
On July 29, 1986, the Company issued $100 million of 11.99% Subordinated
Debentures due July 15, 1996. Interest is payable January 15 and July 15 of
each year. The Debentures are redeemable at the option of the Company at
any time, at prices ranging from 102.67% of the principal amount in 1994 to
100% of the principal amount in 1995 and thereafter. Restrictive
provisions of the Debentures limit the payment of cash dividends and other
distributions on capital stock as well as the acquisition or retirement, by
the Company, of its capital stock. On July 15, 1994, the Company failed to
make the semi-annual interest payment which constituted a default under
terms of the Subordinated Debentures Indenture. As of August 14, 1994, an
event of default existed for failure to remedy this default within the 30-
day grace period. As a result of the Company's filing on August 5, 1994,
of a voluntary petition for reorganization under Chapter 11, the Debentures
are classified as "liabilities subject to compromise" at July 31, 1994.
Prior to 1991, the Company purchased $43.1 million face value of the
Debentures. During 1993, the Company purchased $7.0 million face value of
the Debentures and recognized extraordinary gains, after tax, of $2.5
million. No Debentures were purchased in 1992 or 1994.
SHORT-TERM BORROWINGS
In June 1991 the Company entered into a revolving financing agreement.
Loan proceeds may be used to repurchase the Company's outstanding
Debentures and up to $9.0 million may be used for general corporate
purposes. Under an 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
accounts receivable plus 20% of eligible net field support spares or $2.0
million, whichever is less. Borrowings are secured by the Company's
accounts receivable, field support spares, leasehold improvements and
equipment. Outstanding borrowings accrue interest at 4 1/2 percentage
points above the prime rate. The Company is required to pay a commitment
fee of 1/2 of 1 percent per annum on the average daily unborrowed amounts.
In
33
addition, the Company is required to pay an annual commitment fee equal
to 3/8 of 1 percent of the committed amount and a fee of 11/2% of the face
value of all Debentures repurchased by the Company during the term of the
financing agreement, with a minimum fee of $150,000. The agreement expires
December 31, 1995, at which time all outstanding borrowings are due. The
agreement contains restrictive covenants which, among other things, require
the Company to maintain certain financial ratios. At July 31, 1994, the
Company is not in compliance with the financial covenants of the revolving
financing agreement. At July 31, 1994 and 1993, $7.9 million and $4.4
million, respectively, were outstanding under this agreement.
Subsequent to July 31, 1994, the Company consummated a loan agreement with
Fidelity, its Principal Debentureholder. Pursuant to this agreement, the
Company received an additional $1.3 million in working capital in order to
satisfy certain loan covenants of the revolving financing agreement. The
Principal Debentureholder received a junior lien on all of the Company's
assets subject to the revolving financing agreement. The Principal
Debentureholder also received a senior lien on the Company's field support
spares, the Company's potential refund from the IRS; the 300,000 shares of
Datapoint Common Stock to be distributed to the Company under the
arrangement with Datapoint described in Note 3; and certain marketable
securities held by the Company with priority over the liens of the
revolving financing agreement. The Company has agreed to sell its
Datapoint Common Stock and such marketable securities and remit all
proceeds of such sales to the Debentureholder.
Interest paid was $3.5 million, $6.7 million, and $6.8 million for the
years ended July 31, 1994, 1993, and 1992, respectively.
9. INCOME TAXES
Effective August 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Under Statement No. 109, the liability
method is used in accounting for income taxes. Under this method, deferred
tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities (temporary
differences) and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. Prior to
the adoption of Statement No. 109, income tax expense was determined using
the deferred method. Deferred tax expense was based on items of income and
expense that were reported in different years in the financial statements
and tax returns and were measured at the tax rate in effect in the year the
difference originated.
As permitted by Statement No. 109, the Company has elected not to restate
the consolidated financial statements of any prior years. The effect of
the change on pretax income from continuing operations for the years ended
July 31, 1994 and 1993 was not material.
34
Significant components of the Company's deferred tax assets and liabilities
as of July 31, 1994 are as follows:
DEFERRED TAX ASSETS:
Field Support Spares Obsolescence ........................... $ 4,883
Bad Debt Reserve ............................................ 255
Accrued Expenses ............................................ 390
Equity in Subsidiary Loss Carryforwards ..................... 5,791
Loss on Marketable Securities ............................... 601
Net Operating Loss .......................................... 10,200
Miscellaneous ............................................... 341
--------
Total Deferred Tax Assets .............................. 22,461
Valuation Allowance for Deferred Tax Assets ............ (18,710)
--------
Net Deferred Tax Assets ................................ 3,751
DEFERRED TAX LIABILITIES:
Depreciation ................................................ 3,580
Deferred State Income Tax Liability ......................... 287
Miscellaneous ............................................... 325
--------
Total Deferred Tax Liabilities ......................... 4,192
--------
Net Deferred Tax Liabilities ........................... $ 441
========
Income tax benefits from continuing operations were composed of the
following:
LIABILITY DEFERRED DEFERRED
METHOD METHOD METHOD
1994 1993 1992
----------------------------
Current: ..................................... $ - $ - $ -
Federal ...................................... - - -
State ..................................... - - -
----------------------------
Total Current ......................... - - -
============================
Deferred:
Federal ................................... (1,191) - -
State ..................................... -- - (155)
Total Deferred ........................ (1,191) - (155)
============================
Total Income Tax Benefit .............. $(1,191) $ - $(155)
============================
35
The differences between the actual benefit from continuing operations in
the financial statements and the expected benefit computed at the United
States federal statutory tax rate of 35% are as follows:
1994 1993 1992
---------------------------------
Expected Tax Benefit ...................... $(12,017) $(1,166) $(5,376)
Capital Loss Carryforward ................. - (41) -
Financial Reporting Loss Carryforward ..... - 1,207 5,126
Change in Valuation Allowance ............. 10,734 - -
Other ..................................... 92 - 95
---------------------------------
Total Income Tax Benefit ............. $ (1,191) $ 0 $ (155)
=================================
The tax benefit of $1.2 million in 1994 was the result of the change in the
valuation allowance associated with tax refunds previously received.
At July 31, 1994, the Company had a net operating loss carryforward of
$29.0 million for U.S. income tax purposes that expires in years 2005
through 2009. At June 30, 1994, I T Canada had a net operating loss
carryforward for Canadian tax purposes of approximately $7 million expiring
in various amounts beginning in 1996. For financial reporting purposes, a
valuation allowance of $18.7 million has been recognized to offset the
deferred tax asset principally related to the carryforwards and the field
support spares.
Based on the discussions in Note 2 relating to the bankruptcy filing, if
the Court accepts the plan of reorganization, the net operating loss
carryforward may be reduced as a result of possible income tax positions
that will be available to the Company in 1995. Any future benefits
realized from preconfirmation net operation loss carryforwards will first
reduce any reorganization value in excess of amounts allocable to
identifiable intangible assets and other intangible assets until exhausted
and thereafter be reported as a direct addition to additional paid-in
capital.
10. CAPITAL STOCK AND STOCK OPTION PLANS
In addition to the common and redeemable preferred stock disclosed in the
Consolidated Statements of Financial Position, the Company is authorized to
issue 20 million shares of preferred stock with a par value of $.01 per
share. No such preferred shares were outstanding on July 31, 1994 or 1993.
Under the terms of two approved stock option plans, an aggregate of 798,034
shares of the Company's common stock are reserved and available for
issuance under such plans as described below:
* Employee stock option plan - Employees may be granted options to
purchase common stock and related stock appreciation rights. Under the
terms of this plan, options may be granted at no less than 75% of the
fair market value of the shares on the date of the grant, and expire
no later than ten years and one day after the date of the grant. The
Board of Directors may grant options exercisable in full or in
installments, and will determine the date after which the options may
be exercised in whole or in part.
* Director stock option plan - Members of the Board of Directors may be
granted options to purchase common stock at the fair market value at
the date of grant. The options may be
36
exercised at any time after the date of grant and will expire ten
years and one day from the date of grant. Each current Director has
received, and each newly elected Director, at the time of election,
will be entitled to receive, an option for 25,000 shares. The
outstanding options granted to current Directors elected prior to 1987
have been increased to reflect the 10% common stock dividend paid in
June 1986.
The changes in the number of common shares under option for the years 1994
and 1993 are summarized as follows:
NUMBER
DESCRIPTION PRICE PER SHARE OF SHARES
- - ----------- -------------------------------
OUTSTANDING AT JULY 31, 1992 . . . . . . $ .53 to $ 15.05 1,874,288
Granted . . . . . . . . . . . . . . . . . $ .37 to $ 2.37 1,708,059
Canceled . . . . . . . . . . . . . . . . $ .42 to $ 14.03 (1,113,836)
Exercised . . . . . . . . . . . . . . . . $ .42 to $ 1.06 (27,333)
---------
OUTSTANDING AT JULY 31, 1993 . . . . . . $ .37 to $ 15.06 2,441,178
Granted . . . . . . . . . . . . . . . . . $ .55 to $ 3.94 1,928,707
Canceled . . . . . . . . . . . . . . . . $ .42 to $ 13.98 (863,974)
Exercised . . . . . . . . . . . . . . . . $ .42 to $ 3.38 (398,333)
---------
OUTSTANDING AT JULY 31, 1994 . . . . . . $ .37 to $ 15.06 3,107,578
=========
EXERCISABLE AT JULY 31, 1994. . . . . . . $ .37 to $ 15.06 1,162,402
=========
AVAILABLE FOR GRANT AT JULY 31, 1994 . . 798,034
=========
All common shares under option which are beneficially owned by one of the
Company's Directors and member of the Office of the President will be
canceled as of the effective date of the Plan.
The Company established an Employee Stock Purchase Plan in 1992.
Participants in this plan may purchase shares monthly, at the market price,
through payroll deductions. Common stock for the plan will be purchased on
the open market.
11. LEASES
The Company leases certain facilities and equipment under various operating
leases. Most of the leases contain renewal options for varying periods and
require the Company to provide maintenance of the property. Certain leases
contain provisions for periodic rate adjustments to reflect Consumer Price
Index changes.
Rent expense under these leases for 1994, 1993 and 1992 was $3.9 million,
$4.1 million, and $5.5 million, respectively.
37
The future minimum rental commitments as of July 31, 1994, for all
noncancellable leases are as follows (in thousands):
1995......................... $1,915
1996......................... 1,643
1997......................... 1,263
1998......................... 997
1999......................... 807
In connection with filing for Chapter 11 protection, the Company has
obtained approval of the Court to reject real property leases at closed
locations. The above schedule of minimum rental commitments has not been
modified for such renegotiations subsequent to July 31, 1994.
12. RESTRUCTURING CHARGES
In 1994, the Company began negotiations to sell the majority of its field
support spares to various third parties. Based on estimates received by
the prospective buyer, field support spares have been written-down by $17.3
million to their estimated realizable value. It is expected that the sale
of the field support spares will occur in 1995. During 1994, 1993, and
1992, the Company recorded other restructuring charges of $377,000,
$457,000, and $2.4 million, respectively, representing primarily severance
and facility closing costs.
13. BENEFIT PLANS
The Company has a defined benefit pension plan. The benefits are based on
years of service and the employee's average compensation for the five
highest compensation years during the ten consecutive years preceding
retirement or termination. The cost of the plan is actuarially determined,
including amortization of the unrecognized actuarial net obligation over a
15-year period, and is funded annually based on the minimum amount that can
be deducted for federal income tax purposes.
On October 28, 1991, the Retirement Income Plan was frozen. The
curtailment of the plan limits future retirement income payments to only
those employees participating in the plan on that date. The future
payments to those employees will be based on their salary and service as of
October 28, 1991. See Note 2.
The following table sets forth the plan's funded status and accrued pension
cost at July 31, 1994 and 1993:
38
Actuarial present value of accumulated benefit obligations:
1994 1993
-----------------
(In thousands)
Vested ................................................... $ 6,822 $ 6,055
Non-vested ............................................... 247 381
------- -------
7,069 6,436
======= =======
Projected benefit obligation for service rendered to date .. (7,069) (6,436)
Plan assets at fair value .................................. 4,652 3,874
------- -------
Projected benefit obligation in excess of plan assets -
Accrued pension cost ..................................... $(2,417) $(2,562)
======= =======
Net pension cost included the following components:
1994 1993 1992
-----------------------
(In thousands)
Service costs-benefits earned during the period ..... $ -- $ -- $ 96
Interest cost on projected benefit obligation ....... 528 339 373
Actual return on plan assets ........................ (10) (42) (83)
Net amortization and deferral ....................... 64 (193) (238)
----- ----- -----
Net periodic pension cost ....................... $ 582 $ 104 $ 148
===== ===== =====
During 1993, due to the decline in interest rates the plan adopted a lower
weighted average discount rate in determining the actuarial present value
of its projected benefit obligation and assumed a lower expected long-term
rate of return on its assets. This, coupled with the use of updated
mortality tables, caused the projected benefit obligation for service
rendered to date, which benefits were frozen at the time the Company
curtailed the pension plan, to increase to an amount in excess of the fair
value of the plan's assets. A valuation reserve, representing the excess
of the projected benefit obligation over the fair value of the plan's
assets has been established by a charge to the Company's shareholders'
equity. This excess liability will be funded over time as actuarial
computations of pension cost and funding requirements are determined.
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation at July 31, 1994 and 1993
was 8%. No rate of increase in future compensation levels was assumed for
1994 and 1993 due to the curtailed status of the plan. The expected
long-term rate of return on assets was 8% for 1994 and 1993, and 9.5% for
1992. At July 31, 1994, the plan's assets consisted of cash and
investments in money market funds.
Upon the suspension of the Retirement Income Plan, a 401(k) savings plan
covering substantially all employees was established. Under that plan the
Company matches a portion of an employee's contribution. Treasury stock
was used for the Company's matching portion. The amounts charged to
expense for the years ended July 31, 1994, 1993, and 1992 were $272,000,
$155,000, and $68,000, respectively.
39
14. CONTINGENCIES
The Company filed a Voluntary Petition on August 5, 1994 under Chapter 11
of the United States Bankruptcy Court. The Company, as debtor-in-
possession, continues to operate and manage its affairs. A Disclosure
Statement to the Plan of Reorganization of the Company has been approved by
the Court. A Confirmation Hearing for the Company's proposed Plan has been
set for November 22, 1994. See Note 2 for further discussion.
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. 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
and 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 the 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 charged 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. 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 it and the Board of
Directors 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
Bankruptcy and District Court approval, the Company will receive $2.4
million less attorney's fees and expenses (not to exceed $800,000) awarded
by the Court. In addition, the Company has agreed to form a committee of
the Board to address and approve certain matters relating to the Company's
current and prospective investments. The cash portion of the settlement is
fully covered by the Company's director and officer liability insurance but
may be offset in whole or in part by future director and officer liability
insurance premium increases. A United States District Judge for the
Southern District of New York has held a hearing concerning the fairness of
the proposed settlement. However, no opinion has yet been issued. The
Judge has referred the case to the Bankruptcy Court for further
adjudication consistent with bankruptcy laws. Due to the current
uncertainty as to any recovery, the Company has not recorded any
receivable.
On October 4, 1994, certain Debentureholders filed an adversary proceeding
in the Court against the Company alleging securities law violations and
certain other common law causes of action. The litigation relates to the
Company's purchases of securities, including Datapoint Stock and related
actions. The plaintiffs in the adversary proceeding seek monetary damages,
attorney's fees, and costs of suit. Any allowed claims against the Company
may be subordinated to the claims of secured and unsecured creditors.
The Internal Revenue Service ("IRS") has issued assessment letters relating
to the consolidated
40
federal income tax returns of the Company for the years 1986 through 1992.
The IRS letters propose assessments totaling $31.0 million in additional
taxes plus interest. The assessment primarily involves 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 United
States 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 $2.5 million 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. During 1994, the Company negotiated a settlement with the
IRS and on October 3, 1994 the IRS appeals officer provided the Company a
settlement document indicating a refund of approximately $1.0 million net
of interest costs. The IRS settlement document is subject to approval by
the Joint Committee of Congress and therefore, the ultimate outcome cannot
presently be determined. No receivable has been recorded for any possible
refund.
The Company is a party to various legal proceedings in the ordinary course
of business. The Company believes, based upon the advice of legal counsel
responsible for the review of such matters, that there is no proceeding
either threatened or pending against the Company that could result in a
materially adverse effect on the business or the financial condition of the
Company.
15. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
As of October 17, 1994, the Company beneficially owned approximately 2.5%
of Datapoint's outstanding common stock. The Company's Chairman of the
Board and three other directors are also members of Datapoint's eight-
person Board of Directors. Mr. Agranoff, a member of the Company's and
Datapoint's Board of Directors, became General Counsel of Datapoint in
September 1994. Such relationships may result in conflicts of interest as
a result of the loyalties owed by the same persons acting as corporate
fiduciaries for two different companies may have adverse interests. Mr.
Agranoff reports no direct ownership of Datapoint stock and disclaims
ownership of 274,766 shares owned by Plaza Securities Company of which he
is a general partner.
All transactions between the Company and Datapoint have been pursuant to an
agreement between the parties and relate to the ordinary business
operations of the Company. Pursuant to the agreement, the Company is
charged by Datapoint for equipment and field support spares, royalties, and
repairs, and Datapoint is charged by the Company for services and sales.
Investments in marketable securities include securities of companies
affiliated with the Company by virtue of certain common directors. The
aggregate cost of such securities at July 31, 1994 and 1993 was $2.7
million. Included in accounts receivable at July 31, 1994 is $103,000 due
from employees.
41
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is an unaudited summary of quarterly financial information
for 1994 and 1993:
QUARTER ENDED
-------------------------------------------------------
OCTOBER JANUARY 31 APRIL 30 JULY 31
------- ---------- -------- -------
1994
Revenue ....................................................... $ 20,102 $ 18,798 $ 16,984 $ 16,671
Loss from Operations .......................................... (850) (647) (4,152) (21,629)<F6>
Loss from Continuing Operations ............................... (1,393) (2,493) (6,030) (24,472)
Net Loss ...................................................... (565) (2,493) (6,030) (24,795)
Net Loss Less Preferred Stock Dividends ....................... (744) (2,685) (6,244) (24,998)
Earnings (Loss) per Common Share<F7>
Loss from continuing operations ........................... (.13) (.22) (.52) (1.97)
Earnings (loss) from discontinued operations .............. .07 -- -- (.03)
------- ------- ------- -------
Net loss less preferred stock dividends
per common share ....................................... (.06) (.22) (.52) (2.00)
1993
Revenue ....................................................... $ 23,762 $ 22,464 $ 20,738 $ 21,208
Earnings from Operations ...................................... 275 1,071<F8> 1,3278 1,358
Loss from Continuing Operations ............................... (1,686) (916) (447) (382)
Extraordinary Items ........................................... 1,997 691 -- (141)
Net Earnings (Loss) ........................................... 311 (225) (447) (523)
Net Earnings (Loss) Less Preferred Stock Dividends ............ 161 (382) (611) (696)
Earnings (Loss) per Common Share<F7>
Loss from continuing operations ............................. (.15) (.08) (.04) (.05)
Extraordinary items ......................................... .16 .05 -- (.01)
------- ------- ------- -------
Net loss less preferred stock dividends
per common share ......................................... .01 (.03) (.04) (.06)
<FN>
<F6> Reflects restructuring and reorganization charges of $18.0 million
in the fourth quarter.
<F7> The sum of the quarterly per share amounts do not necessarily equal
the annual amount reported, as per share amounts are computed
independently for each quarter and the full year based on
respective weighted average common shares outstanding.
<F8> Reflects restructuring charges of $213,000 in the second quarter
and $244,000 in the third quarter.
</FN>
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth certain information regarding the directors and
executive officers of the Company as of October 17, 1994. All executive
officers serve at the discretion of the Board of Directors.
NAME AGE OFFICE
------ --- ------
Asher B. Edelman 54 Chairman of the Board; Director;
Office of the President
Mark S. Helwege 43 Director; Office of the President;
Chief Executive Officer
Gerald N. Agranoff 47 Director
Leon Botstein 47 Director
Daniel R. Kail 59 Director
Michael E. Schultz 59 Director; Executive Vice President-
Special Projects
Philip D. Freeman 46 Senior Vice President; General Counsel;
Secretary
ASHER B. EDELMAN was elected to the Office of the President in 1991 and
has been a Director of the Company since 1985. Mr. Edelman has been
General Partner of Plaza Securities Company, an investment partnership,
since July 1979; General Partner of Asco Partners, a general partner of
Arbitrage Securities Company, a broker/dealer, since July 1984; and General
Partner of Arbitrage Securities Company, from January 1977 until June 1984.
Mr. Edelman is a Director, Chairman of the Board, and Chairman of the
Executive Committee of Datapoint Corporation ("Datapoint"), and a Director,
Chairman of the Board and Chairman of the Executive Committee of Canal
Capital Corporation ("Canal Capital"). Since February 1985, Canran Corp., a
corporation controlled by Mr. Edelman and of which he is a Director and
President, has been a General Partner of Canal-Randolph Limited Partnership
(which is the successor liquidating partnership to Canal-Randolph
Corporation).
MARK S. HELWEGE was elected to the Office of the President and Chief
Executive Officer in May 1994. He was elected as a Director of the Company
in June 1994. Previously, Mr. Helwege served as Executive Vice President -
Sales and Operations, with the additional responsibility for IT Canada
from January 1992 to May 1994. From August 1991 to December 1991 Mr.
Helwege served as Senior Vice President, Sales and Operations. Previously,
Mr. Helwege was the Company's National Sales Manager from 1986 to 1988,
Vice President, Sales from 1988 to 1989, and Area Vice President, Eastern
Area Sales and Operations from 1989 to 1991.
GERALD N. AGRANOFF was elected as a Director of the Company in 1991. Mr.
Agranoff was General Partner, Asco Partners (the General Partner of
Arbitrage Securities Company ("Arbitrage Securities") from July 1984
through December 1991; a General Partner of Arbitrage Securities, a
broker/dealer, and of Plaza Securities Company ("Plaza"), an investment
partnership for more than five years; Trustee, Management Assistance Inc.
Liquidating Trust ("Management Assistance Trust") since February, 1986;
General Counsel to Plaza and Arbitrage Securities for more than five years;
Director of Bull Run Corporation since December 1990; Director of Datapoint
Corporation since 1991; Director of Canal Capital Corporation since 1984
and the General Counsel of Datapoint, effective September 1994.
44
LEON BOTSTEIN was elected as a Director of the Company in 1985. Dr.
Botstein has been President of Bard College for more than five years and is
also a Director of Interferon Sciences, Inc.
DANIEL R. KAIL was elected a Director as of the date of the distribution of
the outstanding shares of the Company's Common Stock by Datapoint (July 28,
1985). Mr. Kail has been Managing Trustee, since January 1986, of
Management Assistance Inc. Liquidating Trust, and prior thereto, since
October 1984, had been Executive Vice President, Chief Operating Officer
and a Director of Management Assistance Inc. ("MAI"), a computer
manufacturing and servicing company. He was also Executive Vice President
and Director of Canal Capital Corporation from November 1987 through 1991.
Mr. Kail is also a Director of Datapoint.
MICHAEL E. SCHULTZ was elected Executive Vice President - Special Projects
in 1992. Mr. Schultz was elected a Director as of the date of the
distribution of the outstanding shares of the Company's Common Stock by
Datapoint (July 28, 1985). Mr. Schultz has been a partner in the law firm
of Ehrenkranz, Ehrenkranz & Schultz for more than five years. Mr. Schultz
serves as a Director and President of Canal Capital. Effective October
31, 1994, Mr. Schultz ceased to be an executive officer of the Company.
PHILIP D. FREEMAN has been employed as Vice President and General Counsel
since the Spin-off and in September 1985 was elected Secretary. In 1989,
Mr. Freeman was elected Senior Vice President. Mr. Freeman is also the
Director of the Human Resources and Facilities functions of the Company.
45
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table sets forth information for the three years ended July
31, 1994, concerning the compensation of the Company's chief executive
officer and its four next most highly compensated executive officers (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------
LONG -TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------------- -------------
OTHER
ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL COMPENSATION SARS COMPENSATION
POSITION YEAR SALARY($) BONUS($) ($)(d) GRANTED ($)(e)
- - --------------------------------------------------------------------------------------------------------------
Asher B. Edelman 1994 169,200 0 31,263 (b) 100,000 572 (e)
Chairman, Member 1993 169,200 80,620 53,757 (c) 2,701 390 (f)
Office of the 1992 150,000 0 -- 300,000
President
Mark S. Helwege 1994 148,338 0 -- 315,000 1,788 (e)
Director, Member 1993 137,387 45,000 -- 12,101 1,014 (f)
Office of the 1992 140,000 16,560 -- 69,100
President, Chief
Executive Officer
Philip D. Freeman 1994 141,606 0 -- 140,000 2,530 (e)
Senior Vice 1993 134,872 25,000 -- 12,101 1,699 (f)
President General 1992 140,000 0 -- 62,222
Counsel and
Secretary
Michael E. Schultz 1994 150,010 0 -- 100,000 3,303 (e)
Director, Executive 1993 109,696 80,620 -- 200,000 0 (f)
Vice President- 1992 N/A N/A(a) -- N/A N/A
Special Projects
<FN>
(a) Mr. Schultz became an executive officer on November 2, 1992. Prior
to that date, Mr. Schultz received compensation for his services as
a Director of the Company as described in "Compensation of
Directors." Mr. Schultz ceased to be executive officer of the
Company effective October 31, 1994.
(b) Mr. Edelman's other annual compensation for fiscal year 1994
includes $25,263 paid under the Executive Medical Plan and $6,000
for preparation of his U.S. federal income tax return. Other annual
compensation for the other Named Executive Officers was not greater
than the lesser of $50,000 or 10% of the total of annual salary and
bonus reported for such officer during fiscal year 1994.
(c) Mr. Edelman's other annual compensation for fiscal year 1993
includes $48,757 paid under the Executive Medical Plan and $5,000
for preparation of his U.S. federal income tax return. Other annual
compensation for the other Named Executive Officers was not greater
than the lesser of $50,000 or 10% of the total of annual salary and
bonus reported for such officer during fiscal year 1993.
(d) As permitted by Securities and Exchange Commission transition
rules, information in these columns is provided for fiscal years
1994 and 1993 only.
(e) Other compensation for fiscal year 1994 includes $410, $1,183,
$1,041 and $0 for Messrs. Edelman,
46
Helwege, Freeman and Schultz, respectively, for the Company's
matching contributions to the executives' accounts in the Company's
401(k) retirement plan. Other compensation also includes $162,
$605, $1,489 and $3,303 for Messrs. Edelman, Helwege, Freeman and
Schultz, respectively, for life insurance premiums paid by the
Company on the officers behalf.
(f) Other compensation for fiscal year 1993 includes $390, $550, $516
and $0 for Messrs. Edelman, Helwege, Freeman and Schultz,
respectively, for the Company's matching contributions to the
executives' accounts in the Company's 401(k) retirement plan. Other
compensation also includes $0, $464, $1,183 and $0 for Messrs.
Edelman, Helwege, Freeman and Schultz, respectively, for life
insurance premiums paid by the Company on the officers behalf.
</FN>
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement, dated as of July 1, 1991,
with Mr. Asher B. Edelman pursuant to which Mr. Edelman was appointed a
member of the Company's Office of the President. In addition, Mr. Edelman
continues to serve as Chairman of the Board. The agreement has a three-
year term. Mr. Edelman's agreement will be renewed automatically for
successive three-year periods if not terminated. The agreement provided
for an initial annual base salary of $150,000. Mr. Edelman's annual salary
was increased to $180,000 starting on July 1, 1992, in accordance with the
agreement. The agreement also provides that Mr. Edelman will be entitled
to executive officer-level perquisites and benefits.
Under the provisions of the First Amendment made as of July 10, 1992, Mr.
Edelman was entitled to receive an annual bonus payable as follows:
(A) for the Company's 1993 fiscal year, if at least $3 million of
operating income has been achieved, the bonus payment will be 2%
of the greater of (x) operating income or (y) net income before
taxes; provided that, if the Company's business plan, for such
fiscal year, with respect to net income before taxes is met, then
the bonus payment will be 3% of the greater of (x) operating
income or (y) net income before taxes (without any threshold
requirement); and
(B) for the Company's 1994 fiscal year and thereafter, the bonus
payment will be 3% of net income before taxes; provided, however,
that, if the Company's business plan for the relevant fiscal year
with respect to net income before taxes is met, then the bonus
payment for such fiscal year will be 4% of net income before
taxes.
The effect of this First Amendment was to delay the effective dates of
these provisions, as set forth in the original agreement, for one
additional year.
Mr. Edelman is entitled to receive a lump-sum severance payment equal to
(i) two-years' salary, and (ii) an amount equal to the bonus he would have
received through the end of the fiscal year in which the termination occurs
and twelve months thereafter assuming the Company's business plan had been
met for such periods, in the event of the involuntary termination of his
employment other than for "cause" or in the event Mr. Edelman's contract is
not renewed or if a majority of the directors on the Board are not
"continuing directors" and Mr. Edelman resigns within sixty days after the
occurrence of such event.
In connection with the agreement, on September 24, 1991, the options
previously granted to Mr. Edelman were canceled and he was granted 200,000
new options under the Company's 1985 Employee Stock Option Plan at an
exercise price of $0.5625 per share (the market value on the date of grant)
such options vesting ratably over 4 years.
47
Under the terms of a Second Amendment made as of July 31, 1992, Mr. Edelman
consented to a six percent (6%) reduction in base salary. The agreement
also provides that the aforementioned reduction shall not apply to any
severance payment to be made under the Agreement.
As of November 2, 1992, the Company entered into an employment agreement
with Michael E. Schultz providing for a term of one (1) year which is
terminable thereafter upon six (6) months prior written notice. Mr.
Schultz' bonus provision is the same as provided to Mr. Edelman. Mr.
Schultz is required to devote a minimum of fifty (50) days at the Company's
premises during each one (1) year period. Mr. Schultz is permitted to
continue to perform services for the law firm of Ehrenkranz, Ehrenkranz and
Schultz and Canal Capital Corporation. Mr. Schultz does not have any
severance provision in his contract. Mr. Schultz received his monthly
salary through October 31, 1994 pursuant to court order and shall receive
no other payments. Mr. Schultz is required to relinquish and waive any
claims he might have with respect to his employment agreement with the
Company. Mr. Schultz ceased to be an executive officer of the Company
effective October 31, 1994.
Messrs. Helwege and Freeman have entered into employment agreements with
the Company which provide for an initial term of one year and which
automatically renew for successive annual periods after their respective
anniversaries. Unless either Officer's employment is terminated for
defined causes, the Officer is entitled to a continuance of his base salary
and perquisites for eighteen and twelve months, respectively, from the date
of termination plus a pro rata amount based upon his last preceding bonus
and a lump sum payment, respectively, of $20,000 and $10,000 on the date of
termination.
Subsequent to the end of the 1994 fiscal year, a Modified First Amended
Chapter 11 Plan ("Plan") was submitted to a vote of the Company's creditors
which calls for the assumption of modified employment agreements with Mark
S. Helwege and Philip D. Freeman as of the date of confirmation of the
Plan. The modified agreements contain a revised bonus compensation plan
and a revised stock option plan, and provide for a release of any claims
against the Company, except for indemnification and as may be set forth in
the modified agreements.
The Plan also provides for the assumption of a modified agreement with Mr.
Edelman, effective as of the date of confirmation, which provides only for
a severance benefit payable over 24 months in equal monthly payments of
$15,000, totaling $360,000 and for a release of claims except for
indemnification and as may be set forth in the modified agreement.
DIRECTORS' COMPENSATION
Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors or its committees, other
than pursuant to the 1985 Director Stock Option Plan discussed below. Each
director who is not an employee of the Company receives an annual fee of
$15,000 for serving on the Board which is paid quarterly in arrears, $1,000
for serving on a committee (other than the Executive Committee), $5,000 for
serving on the Executive Committee and an additional $2,000 if he serves as
chairman of a committee. Each non-employee director receives a fee of $750
for each Board of Directors meeting attended and $500 for each committee
meeting attended. Directors are reimbursed for expenses incurred in
attending Board of Directors and committee meetings, including those for
travel, food and lodging. The Board of Directors
48
voluntarily reduced the aforementioned fees by six (6%) percent for
services to be performed during the 1993 fiscal year effective August 1,
1992. The Board of Directors has not rescinded the reduction.
Each non-employee director is provided, at the Company's expense, $50,000
of group term life insurance and $250,000 of accidental death insurance.
STOCK OPTIONS FOR DIRECTORS
The 1985 Director Stock Option Plan (the "Director Plan") provides for the
issuance of a maximum of 550,000 shares of the Company's Common Stock
(which may be authorized and unissued or treasury shares) pursuant to the
exercise of stock options granted under the Director Plan to directors of
the Company.
Each director of the Company is eligible to receive options under the
Director Plan, whether or not he is an employee of the Company. Each
current director has received, and each newly elected director at the time
of his election will receive, an option for 25,000 shares of Common Stock.
Each Chairman at the time of his election shall be entitled to receive an
option to purchase 50,000 shares of Common Stock in addition to those
otherwise granted for services as a director. The director stock options
of the current chairman have been canceled as more fully described below.
The outstanding options granted to current directors elected prior to
fiscal year 1987 have been increased to reflect the 10% Common Stock
dividend paid to holders of record on June 9, 1986. An amendment to the
Director Stock Option Plan to reprice options held by each director and the
Chairman of the Board as of September 23, 1988 was approved by the
shareholders on December 6, 1988. The revised option price per share was
$4.07. As of July 31, 1993, options for 132,500 shares were outstanding
with an average per share exercise price of $3.53. Expiration dates of
these options range from July 28, 1995 to April 11, 2001.
Only non-incentive stock options may be granted under the Director Plan.
The option price per share, except for those affected by the Director Plan
amendment, equals the fair market value of a share of Common Stock on the
date of grant. The exercise price of a stock option may be paid in cash,
shares of Common Stock (subject to such conditions as may be set by the
Compensation Committee referred to below) or a combination of cash and
stock. Options may be exercised at any time after the date of grant. A
stock option may not be granted which expires more than ten years and one
day from the date of grant.
The Director Plan is administered by the Management Compensation and Stock
Option Committee of the Board of Directors (the "Compensation Committee"),
which sets the terms and conditions of the stock option agreements, subject
to the provisions of the Director Plan. However, the Compensation Committee
has no discretion either to determine which directors receive options or to
set the number of shares subject to such options.
49
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has the following committees, the
membership and principal responsibilities of which are below.
EXECUTIVE COMMITTEE
Members: Asher B. Edelman (Chairman), Daniel R. Kail and Michael E.
Schultz
Between meetings of the Board of Directors, the Executive Committee has all
powers which may be lawfully delegated to it under New York law. In
general, the Executive Committee may supervise the management of all
business of the Company except for matters which, by law, specifically
require the action of the Board of Directors or of the shareholders.
Actions taken by the Executive Committee are reported to the Board of
Directors at its next meeting. During the 1994 fiscal year, the Executive
Committee held no meetings.
AUDIT COMMITTEE
Members: Daniel R. Kail (Chairman), Gerald N. Agranoff, and Michael E.
Schultz
The Audit Committee, which held two meetings during the 1994 fiscal year,
reviews the scope and results of the audit by the independent auditors and
the adequacy of the Company's system of internal accounting controls and
procedures, proposes the appointment of the independent auditors subject to
approval of the Board of Directors and ratification by the shareholders,
and approves the fees paid for services rendered by such auditors.
MANAGEMENT COMPENSATION AND STOCK OPTION COMMITTEE
Members: Daniel R. Kail (Chairman) and Gerald N. Agranoff.
The Management Compensation and Stock Option Committee reviews and makes
recommendations with respect to the Company's various compensation
programs. This Committee administers the Company's 1985 Employee Stock
Option Plan, providing for the grant of stock options and stock
appreciation rights, and designates the employees to participate in these
and certain other benefit plans of the Company. This Committee also
reviews and approves the remuneration of all officers of the Company and
the terms of any employment contracts with officers. During the 1994
fiscal year, the Committee held three meetings.
SPECIAL LITIGATION COMMITTEE
Members: Leon Botstein (Chairman), Daniel R. Kail and Michael E. Schultz
The Special Litigation Committee was appointed to consider the demand
brought by two shareholders in separate lawsuits against the Company and
its Board of Directors. During the 1994 fiscal year, the Committee had no
meetings.
50
The Board of Directors does not have a standing nominating committee or a
committee performing similar functions.
RETIREMENT INCOME PLAN
A defined benefit pension plan is maintained by the Company, solely at its
cost, for its officers and employees. On September 24, 1991, the Company's
Board of Directors approved the curtailment of the Retirement Income Plan.
Effective October 28, 1991, the accrual of defined benefits for all
employees' future service was eliminated. No additional participants have
been added to the Retirement Income Plan after the date of the Plan's
curtailment. A hearing was held on November 9, 1994, at which the
Honorable Leif Clark found that a distress termination of the retirement
income plan was appropriate and so ordered.
The annual pension to which a participant is entitled at normal retirement
age (65) is based on the average of his covered compensation for the five
plan years prior to the Plan's curtailment. Covered compensation includes
salary as reported in the Summary Compensation Table.
The estimated annual benefit payable to Mr. Edelman, Mr. Helwege and Mr.
Freeman under the Retirement Income Plan is $4,608, $5,207 and $10,937,
respectively, assuming they remain in the Company's employ and retire at
the normal retirement age of 65. None of the other Named Executive
Officers were qualified to receive benefits under the Retirement Income
Plan prior to its curtailment in 1991.
Estimated credited years of service for each of the participating Named
Executive Officers is: Mr. Edelman, 7 years; Mr. Helwege, 6 years; and Mr.
Freeman, 10 years.
INTELOGIC TRACE, INC. 401(K) RETIREMENT SAVINGS PLAN
On September 24, 1991, the Company's Board of Directors approved the
implementation of the 401(k) Plan pursuant to Sections 401(a) and 401(k) of
the Internal Revenue Code of 1986, as amended. The effective starting date
of the 401(k) Plan was January 1, 1992. This 401(k) Plan covers
substantially all employees and executive officers. Participants in the
401(k) Plan may authorize the Company to make salary deferral contributions
limited to the lesser of $8,994 or 15% of total pay. Amounts in the
compensation table include such amounts deferred. Such contributions are
forwarded to a trustee for investment into one or more of the five pre-
established investment funds as the employee may choose. The Company
matches 15% of the employee's contribution up to 4% of the employee's
compensation. The Company's match is in the form of Intelogic Trace common
stock valued at the closing price on the date of the contribution, and
vests according to a five-year graded schedule. Increases and decreases in
the value of the stock accrue to the employee but the employee has no
voting rights. Upon leaving the 401(k) Plan, the participant receives the
cash value of shares held in his or her behalf.
Withdrawals of contributions, earnings and vested matching funds in the
401(k) Plan may be made in the event of hardship or attainment of age 59-
1/2 under the provisions of Section 401(k). Other distributions may occur
following separation from service or the occurrence of a permanent
disability. In addition, loans to a participant from his or her Section
401(k) fund are available.
51
During fiscal 1994, the dollar value of the Company's matching
contributions to the 401(k) Plan accounts of Messrs. Edelman, Helwege,
Freeman and Schultz were $410, $1,183, $1,041 and $0, respectively.
52
STOCK OPTIONS AND SARS GRANTED IN LAST FISCAL YEAR
The following table sets forth information concerning stock options and
stock appreciation rights granted during the fiscal year ended July 31,
1994, to the Named Executive Officers.
OPTION/SAR GRANTS FOR FISCAL YEAR
The following table sets forth information concerning stock options and
stock appreciation rights granted during the fiscal year ended July 31,
1994, to the Named Executive Officers.
OPTION/SAR GRANTS FOR FISCAL YEAR
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
- - -------------------------------------------------------------------------------- AT ASSUMED ANNUAL
% OF TOTAL RATES OF
OPTIONS STOCK PRICE
GRANTED TO EXERCISE APPRECIATION FOR
NO. EMPLOYEES OR BASE OPTION TERM
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------------
NAME GRANTED YEAR ($/SH) DATE 0%($) 5%($) 10%($)
- - ----------- ------------ -------- --------- ---------- ------ --------- ---------
A. Edelman 100,000(a) 5.2% $ 2.95630 9/23/98 $0 $ 152,316 $ 417,649
M. Helwege 40,000(b) 2.1% $ 2.68750 9/23/03 $0 $ 67,606 $ 171,327
25,000(c) 1.3% $ 0.93750 5/31/04 $0 $ 14,740 $ 37,353
250,000(d) 13.0% $ 0.78125 6/15/04 $0 $ 122,831 $ 311,278
P. Freeman 40,000(b) 2.1% $ 2.68750 9/23/03 $0 $ 67,606 $ 171,327
100,000(d) 5.2% $ 0.78125 6/15/04 $0 $ 49,132 $ 124,511
M. Schultz 100,000(b) 5.2% $ 2.68750 9/23/03 $0 $ 169,015 $ 428,318
(a) Options granted under the 1985 Employee Stock Option Plan. These options
vest ratably over two years. The term of the options is five years.
(b) Options granted under the 1985 Employee Stock Option Plan. These options
vest ratably over three years. The term of the options is ten years.
(c) Options granted under the 1985 Director Stock Option Plan. These options
vested on May 31, 1994, the date of grant. The term of the options is ten
years.
(d) Options granted under the 1985 Employee Stock Option Plan. These options
vest ratably over eighteen months. The term of the options is ten years.
53
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table sets forth information concerning stock options and
SARs exercised during the fiscal year ended July 31, 1994, and the fiscal
year-end value of unexercised options and SARs for the Named Executive
Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END OPTIONS AT FY-END
(#) ($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- - ---------------------------------------------------------------------------
A. Edelman 0 $ 0 152,701/ $19,383/
250,000 $18,750
M. Helwege 20,101 $63,920 137,450/ $ 0/
269,550 $ 1,875
P. Freeman 6,101 $18,795 92,390/ $ 0/
153,610 $ 0
M. Schultz 0 $ 0 77,500/ $10,935/
250,000 $32,805
(1) Computed based upon the difference between the fair market value
and aggregate exercise price at July 31, 1994.
LONG-TERM INCENTIVE PLAN
The Company does not maintain any long-term incentive plan under which
awards were granted or paid during 1994.
54
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION PHILOSOPHY
The Compensation Committee of the Company's Board of Directors administers
the Company's executive compensation program. Each of the members of the
Compensation Committee are non-employee directors.
Each year the Compensation Committee reviews the compensation of the
Company's executive officers. Total compensation consists of three (3)
elements: (i) base compensation set at levels commensurate with the
responsibility attendant to such position; (ii) annual bonus, determined
either by a formula or pre-set goals thereby linking pay to performance;
and (iii) long-term compensation as established by stock option grants.
The Compensation Committee believes that stock-based performance
arrangements and bonuses directly based upon the Company's results aligns
the interests of management with the interests of the Company's
shareholders which ultimately results in increased shareholder value. The
Named Executive Officers and other employees received stock option grants
during the 1994 fiscal year following an assessment by the Committee of
various factors such as personnel's contribution to the long-term growth
prospects for the Company and the necessity of retention of key personnel.
No bonuses were paid in 1994. The Committee is of the opinion that stock
options offer incentives to the Company's personnel to build for the future
and encourage management to take actions which will provide the
shareholders and such personnel with the opportunity for long-term benefits
even though such actions might adversely impact such personnel's short-term
earnings potential.
OFFICE OF THE PRESIDENT-CHIEF EXECUTIVE OFFICER
In July 1991, the Board of Directors established the Office of the
President. The incumbents in this position are Messrs. Edelman and
Helwege. During the Company's 1994 fiscal year, Mr. Helwege assumed the
role of Chief Executive Officer. The Compensation Committee determined that
Mr. Helwege's compensation should be tied directly to the performance of
the Company and therefore, under his contract with the Company, he received
an increase in base salary plus an additional grant of stock options.
COMPENSATION COMMITTEE
Daniel R. Kail, Chairman
Gerald N. Agranoff
55
STOCK PRICE PERFORMANCE
The following graph depicts the Company's stock price performance relative
to the performance of the Standard & Poor Composite Index and a Peer Group
Index of 25 companies.
[LINEAR GRAPH PLOTTED FROM POINTS IN TABLE BELOW]
Cumulative Total Return
----------------------------------------
7/89 7/90 7/91 7/92 7/93 7/94 97471IT
--- --- --- --- --- --- --------
Intelogic Trace Inc IT 100 42 21 25 75 25 10/17/94
PEER GROUP PPEER1 100 75 82 80 89 125 974UIT
S & P 500 I500 100 106 120 135 147 155 97477500
The graph above assumes an investment of $100 in the Company's Common
Stock, the Standard & Poor 500 Composite Index and the Peer Group Index on
July 31, 1989, and assumes the reinvestment of all dividends. The Company
has not paid cash dividends on its Common Stock. Note that the Company's
Common Stock price performance on the graph above is not necessarily
indicative of future stock price performance.
SECTION 16(A) REPORTING
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission and the New York Stock Exchange initial
reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and
greater than ten-percent shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the two-year period ended July 31, 1994, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with by all
reporting persons. Participants in the 401(k) Plan may be deemed to have
beneficial ownership; however, no voting rights or shares are acquired by
the participant.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table furnishes information concerning all persons known to
the Company, other than directors or officers, who beneficially own 5% or
more of the voting stock of the Company as of July 31, 1994:
NAME AND ADDRESS OF SHARES OF COMMON STOCK PERCENTAGE OF COMMON
BENEFICIAL OWNER BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED
- - --------------------------------------------------------------------------------
Shufro Rose & Ehrman (1) 3,040,047 24.3%
63 Wall Street
New York, NY 10005
Asher B. Edelman(2) 1,928,757 15.2%
717 Fifth Avenue
New York, NY 10022
(1) As reported by such holder in a Schedule 13G as of February 14,
1994, filed with the Securities and Exchange Commission.
(2) Includes shares for which Mr. Edelman had the right to acquire
beneficial ownership within sixty days through exercise of stock
options. Mr. Edelman held options covering 200,000 shares under the
1985 Employee Stock Option Plan which are exercisable in annual
increments of 50,000 commencing on September 24, 1992. Mr. Edelman
received a grant of 100,000 stock options under the 1985 Employee
Stock Option Plan on July 10, 1992 which vests ratably over four
(4) years commencing on July 10, 1993. A grant of 2,701 immediately
vested options was made to Mr. Edelman under the 1985 Employee
Stock Option Plan when a corporate wide wage decrease was made
effective August 4, 1992 on the basis of one option for each four
dollar reduction in compensation. On September 23, 1993, Mr.
Edelman was granted an option for 100,000 shares under the 1985
Employee Stock Option Plan vesting in three annual increments
commencing September 23, 1994. All of these options will be
canceled as of the Effective Date.
57
SECURITIES OWNED BY MANAGEMENT
The following table sets forth certain information as of October 17, 1994,
with respect to the beneficial ownership of the Company's Common Stock with
respect to all persons who are directors, each of the executives named in
the Summary Compensation Table and by all directors and officers as of the
most practicable date. Unless otherwise indicated, the percentage of stock
owned constitutes less than one percent of the outstanding Common Stock and
the beneficial ownership for each person consists of sole voting and sole
investment power.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
NO. OF COMMON SHARES
BENEFICIALLY PERCENT OF CLASS
NAME OWNED OF COMMON STOCK
- - -----------------------------------------------------------------------------
Asher B. Edelman (e) 1,928,757(a)(b)(c) 15.2%
Mark S. Helwege (e) 158,366 1.3%
Gerald N. Agranoff (e) 25,000(b)
Leon Botstein (e) 27,500
Daniel R. Kail (e) 28,600(b)
Michael E. Schultz (e) 167,333(b)(d) 1.3%
Philip D. Freeman (e) 108,060
All directors and executive
Officers as a group (7 persons)(e) 2,443,616 18.5%
(a) Mr. Edelman, as controlling General Partner of Citas Partners, the
General Partner of Felicitas Partners, L.P. ("Felicitas") may be
deemed to be the beneficial owner of the 1,963 shares of Common
Stock held by Felicitas. As the sole holder of beneficial interests
in A.B. Edelman Limited Partnership ("Edelman Limited
Partnership"), Mr. Edelman may be deemed to be the beneficial owner
of the 854,952 shares of the Common Stock held by Edelman Limited
Partnership. As the sole stockholder of Aile Blanche, Inc. ("Aile
Blanche"), Mr. Edelman may be deemed to be beneficial owner of the
11,100 shares of Common Stock held by Aile Blanche. Mr. Edelman
also may be deemed to be the beneficial owner of the 149,300 shares
of Common Stock held by his wife. Mr. Edelman, as custodian for
three accounts benefiting Mr. Edelman's children, may be deemed to
be the beneficial owner of 51,840 shares of Common Stock. The total
reported herein for Mr. Edelman excludes (i) 71,600 shares of
Common Stock held in three accounts of which Mr. Edelman's former
wife is custodian, for the benefit of Mr. Edelman's three children,
(ii) 149,300 held by Mr. Edelman's wife, and (iii) 51,840 shares
owned by custodial accounts for Mr. Edelman's children.
(b) Each of Messrs. Edelman, Agranoff and Schultz is a Director of
Canal Capital Corporation ("Canal Capital") and each of Messrs.
Edelman, Agranoff and Kail is a Director of Datapoint Corporation
("Datapoint"). Canal Capital holds 454,260 shares of Common Stock
of the Company and Datapoint holds 292,920 shares. Discretionary
power with respect to investments by Canal Capital and Datapoint is
held by A. B. Edelman Management Company Inc. ("Edelman
Management") as investment manager for both Canal Capital and
Datapoint. Mr. Edelman is the sole stockholder and officer and
Director of Edelman Management. All of Canal Capital's and
Datapoint's shares have been included in the number of shares
reported by Mr. Edelman only.
(c) Excludes 37,000, 15,000 and 175,745 shares of Common Stock owned by
the Canal Capital Corporation Retirement Plan (the "Canal Capital
Plan"), the Intelogic Trace Retirement Income Plan (the "Intelogic
Trace Plan") and the Intelogic Trace 401(k) Retirement Savings Plan
(the "401(k) Plan") more fully described below, respectively. Mr.
Edelman serves as trustee of the Canal Capital Plan, and Messrs.
Edelman, Agranoff, Kail and Schultz serve as trustees of the 401(k)
Plan. Messrs. Edelman, Agranoff, Kail, and Schultz resigned as
trustees of both the Intelogic Trace Plan and the 401K Plan as of
September 29, 1994.
(d) Excludes 421,257 shares of Common Stock held in three trusts, of
which Mr. Schultz is trustee, for benefit of Mr. Edelman's three
children.
58
(e) The following table set forth the detail of amounts held by each of
the directors and Named Executive Officers of the Company:
COMMON STOCK COMMON STOCK
BENEFICIALLY OPTIONS EXERCISABLE
NAME OWNED WITHIN 60 DAYS TOTAL
- - ------------------------------------------------------------------------------------------------
Asher B. Edelman 1,692,723 236,034 1,928,757
Mark S. Helwege 2,583 155,783 158,366
Gerald N. Agranoff - 25,000 25,000
Leon Botstein - 27,500 27,500
Daniel R. Kail 1,100 27,500 28,600
Michael E. Schultz 6,500 160,833 167,333
Philip D. Freeman 2,337 105,723 108,060
All directors & executives of the
Company as a group (7 persons) 1,705,243 738,373 2,443,616
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of October 17, 1994, the Company beneficially owns approximately 2.5% of
Datapoint's outstanding common stock. The Company's Chairman of the Board
and three other directors are also members of Datapoint's eight-person
Board of Directors. Mr. Agranoff, a member of the Company's and
Datapoint's Board of Directors, became General Counsel of Datapoint in
September 1994. Such relationships may result in conflicts of interest as
a result of the loyalties owed by the same persons acting as corporate
fiduciaries for two different companies may have adverse interests. Mr.
Agranoff reports no direct ownership of Datapoint stock and disclaims
ownership of 248,995 shares owned by Plaza Securities Company of which he
is a general partner.
All transactions between the Company and Datapoint have been pursuant to an
agreement between the parties and relate to the ordinary business
operations of the Company. The agreement with Datapoint, dated June 29,
1985, provides for an exclusive relationship with the Company until
terminated by either party, notice of which termination must be given 180
days prior to the anniversary of the execution of the agreement, to be
effective six years thereafter. Pursuant to the agreement, the Company is
charged by Datapoint for equipment and field support spares, royalties, and
repairs, and Datapoint is charged by the Company for services and sales.
Following termination, the Company would have a non-exclusive relationship
with Datapoint. As of the date of this document, neither party has issued
any such notice. During fiscal years 1994, 1993 and 1992, 13%, 17%, and
24% of the Company's maintenance service revenue was derived from servicing
Datapoint products. See Note 4 to the consolidated financial statements
included elsewhere in this filing.
On August 5, 1986, the Company entered into an agreement with Arbitrage
Securities Company whereby Arbitrage Securities Company provides investment
management and financial advisory services to the Company. On October 24,
1988, Arbitrage Securities Company assigned all of its rights, interest,
and obligations under the agreement to A.B. Edelman Management Company,
Inc. Each calendar quarter the Company is obligated to pay an investment
management fee equal to 25% of any realized gains from transactions in the
Company's portfolio less realized and net
59
unrealized losses in securities positions for such calendar quarter.
Realized losses in excess of realized gains in any quarter are carried over
to subsequent quarters. Since 1988, no investment management fees have
been paid under this agreement.
As of July 31, 1994, Company held investments in marketable securities of
certain companies affiliated to the Company by virtue of certain common
directors, including 234,440 shares of common stock of Canal Capital (the
"Canal Stock"). On September 30, 1994, the Company sold the Canal Stock in
a private transaction, with court approval, at a price of $.50 per share.
On April 11, 1991, Mr. Edelman and certain affiliates settled an action
brought by the SEC alleging failure to promptly amend a Schedule 13D in
connections with purchases of the common stock of Datapoint Corporation by
the Company and others on September 11 and 12, 1989. Without admitting or
denying the allegations of the SEC's complaint, the defendants consented to
the entry of a judgment enjoining them from violating Section 13(d) of the
Securities Exchange Act of 1934 and Rule 13d-2 thereunder and requiring
disgorgement of savings alleged to have been achieved as a result of the
failure promptly to amend the Schedule 13(d). The Board of Directors
approved indemnification of Mr. Edelman, in accordance with the by-laws of
the Company, for a pro rata portion of the disgorged amount and legal fees
incurred with respect to the SEC's allegations, which amounted to $380,037.
On November 9, 1990, the Company acquired all of the outstanding stock of
Datapoint Canada, Inc., a wholly owned subsidiary of Datapoint. Datapoint
Canada, Inc. is no longer active and the Company is in the process of
winding up its affairs. The purchase price of $2.8 million consisted of
$300,000 in cash and 25,000 shares of the Company's $10 Redeemable
Preferred Stock ("Preferred Stock"). In addition, the Company issued to
Datapoint a five-year option to purchase substantially all of the Company's
holdings of Datapoint's common and preferred stock (the "Datapoint
Option"). The Company entered into a Grantor Trust Agreement to establish
a Grantor Trust to hold the Datapoint Common Stock subject to the Datapoint
Option. In 1992, Datapoint exercised the Option with respect to the
Datapoint preferred stock for the agreed upon price of $1.375 per share or
$116,875. None of the Datapoint Option pertaining to the common stock of
Datapoint was exercised in 1994 or 1993. Through September 30, 1994, an
additional 21,301 shares of Preferred Stock of the Company have been issued
in payment of dividends on the Preferred Stock.
After July 31, 1994, the Company and Datapoint mutually agreed to a
division of the corpus in the Grantor Trust and cancellation of the
Datapoint Option. Pursuant to this agreement, the Company and Datapoint
sought Bankruptcy Court approval to (i) have the trustee of the Grantor
Trust transfer and distribute 2.4 million shares of Datapoint Common Stock
held in the Grantor Trust to Datapoint, and transfer and distribute the
remaining 300,000 shares of Datapoint Common Stock to the Company, and (ii)
to terminate the Datapoint Option and the Grantor Trust Agreement. An
order of the Bankruptcy Court authorizing these matters was entered
September 9, 1994.
On September 27, 1994, the Company consummated a loan transaction with
Fidelity. Pursuant to the Loan Agreement, the Company received an
additional $1.3 million in working capital in order to satisfy certain loan
covenants with Foothill. Fidelity received a first-lien security interest
in, among other things, the 300,000 shares of Datapoint Common Stock
distributed to the Company under the arrangement with Datapoint described
in the preceding paragraph, and a first-lien security interest in the
shares of Canal Stock. Pursuant to the loan agreement, the Company has
60
commenced the sale of its Datapoint Common Stock and Canal Capital Stock
and will continue to remit all proceeds of such sales to Fidelity. As of
the date of this filing, the Company has remitted $223,000 to Fidelity from
such sales.
Investments in marketable securities include securities of companies
affiliated with the Company by virtue of certain common directors. The
aggregate cost of such securities at July 31, 1994 and 1993 was $2.7
million with no determinable market value. Included in accounts receivable
at July 31, 1994 is $103,000 due from employees.
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) CERTAIN DOCUMENTS FILED AS PART OF THE FORM 10-K
1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and financial statement
schedules are set forth in Item 8 of the Form 10-K Annual Report.
Financial statement schedules not included in this Form 10-K Annual Report
have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
PAGE NO.
--------
Report of Independent Auditors . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Financial Position
at July 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Operations for each of the three years
in the period ended July 31, 1994 . . . . . . . . . . . . . . . 23
Consolidated Statements of Cash Flows for each of the three years
in the period ended July 31, 1994 . . . . . . . . . . . . . . . 24
Consolidated Statements of Shareholders' Deficit for each
of the three years in the period ended July 31, 1994 . . . . . 25
Notes to Consolidated Financial Statements . . . . . . . . . . . . 26
Schedule V - Leasehold Improvements and Equipment and Field
Support Spares . . . . . . . . . . . . . . . . . . . . . . . . 68
Schedule VI - Accumulated Depreciation of Leasehold Improvements
and Equipment and Field Support Spares , . . . . . . . . . . . . 69
Schedule VIII - Valuation and Qualifying Accounts and Reserves. . . 70
Schedule IX - Short Term Borrowings . . . . . . . . . . . . . . . . 71
Schedule X - Supplementary Income Statement Information . . . . . . 72
3. EXHIBITS
3.1- Certificate of Incorporation (filed as Exhibit 3.1 to the
Company's Registration Statement on Form 10 filed with the
Commission on July 3, 1985, (the "Form 10") and incorporated herein
by reference).
3.2- Certificate of Amendment of the Certificate of Incorporation
(filed as Exhibit 3.1 to Amendment No. 2 to the Form 10 ("Form 10,
Amendment No. 2") filed with the Commission on October 24, 1985 and
incorporated herein by reference).
3.3- By-laws of the Company, as amended (filed as Exhibit 3.2 to Form
10, Amendment No. 2 and incorporated herein by reference). 62
3.4- Certificate of Amendment of the Certificate of Incorporation,
dated November 8, 1990 (filed as Exhibit 3(d) to the 1990 Form 10-K
and incorporated herein by reference).
4.1- Form of 11.99% Subordinated Debenture due July 15, 1996 (filed as
Exhibit 4(a) to the Company's Registration Statement on Form S-1
filed with the Commission on July 22, 1986 (the "Form S-1") and
incorporated herein by reference).
4.2- Form of Indenture between the Company and Manufacturers Hanover
Trust Company, as Trustee, relating to the Debentures registered
(filed as Exhibit 4(b) to the Form S-1 and incorporated herein by
reference).
4.3- Indenture dated October 1, 1985 between the Company and the
Manufacturers Hanover Trust Company, as Trustee, relating to the
14 1/2% Subordinated Notes Due 1995 (filed as Exhibit (c) to Amendment
No. 2 on Form 8 to the Company's Registration Statement on Form 8-A
filed with the Commission on September 19, 1985 and incorporated
herein by reference).
4.4- Article Fourth of the Certificate of Incorporation of the Company
(included in Exhibit 3.2).
10.1- Agreement for Transfer of Assets and Liabilities in Exchange for
Stock, dated June 29, 1985, between Datapoint and the Company
(filed as Exhibit 10.1 to the Form 10 and incorporated herein by
reference).
10.2- Master Maintenance Agreement, dated June 28, 1985, between
Datapoint and the Company (filed as Exhibit 10.2 to the Form 10 and
incorporated herein by reference).
10.3- Assignment and License, dated as of June 29, 1985, between the
Company and Datapoint (filed as Exhibit 10.3 to the Form 10 and
incorporated herein by reference).
10.4- Datapoint License Agreement, dated as of June 29, 1985, between
the Company and Datapoint (filed as Exhibit 10.4 to the Form 10 and
incorporated herein by reference).
10.5- I T License Agreement, dated as of June 29, 1985, between the
Company and Datapoint (filed as Exhibit 10.5 to the Form 10 and
incorporated herein by reference).
*10.6- Employment Agreement, dated January 27, 1986, between Philip
D. Freeman and the Company (filed as Exhibit 10(j) to the Form S-1
and incorporated herein by reference).
*10.7- 1985 Directors Stock Option Plan (filed as Exhibit 10.10 to
the Form 10 and incorporated herein by reference). 63
*10.8- 1985 Employee Stock Option Plan (filed as Exhibit 10.11 to
the Form 10 and incorporated herein by reference).
*10.9- Retirement Income Plan (filed as Exhibit 10.12 to the Form
10 and incorporated herein by reference).
*10.10- Executive Benefit Plan (filed as Exhibit 10.14 to the Form
10 and incorporated herein by reference).
10.11- Directors' and Officers' Liability Insurance Policy (filed as
Exhibit 10(s) to the Form S-1 and incorporated herein by
reference).
10.12- TexCom Purchase Agreement, dated November 25, 1987, between the
Company and TexCom, Inc. (filed as Exhibit C(2) to the Form 8-K
filed with the Commission on December 9, 1987 and incorporated
herein by reference).
*10.13- Amendment to the 1985 Directors Stock Option Plan (filed as
Exhibit 10(o) to the 1989 Form 10-K and incorporated herein by
reference).
10.14- First Amendment to the TexCom Purchase Agreement, dated June 20,
1989, between the Company and TexCom, Inc. (filed as Exhibit 10(v)
to the 1989 Form 10-K and incorporated herein by reference).
10.15- Acquisition Agreement, dated November 9, 1990, between Datapoint
and the Company (filed as Exhibit 10(v) to the 1990 Form 10-K and
incorporated herein by reference).
10.16- Option Agreement, dated November 9, 1990, between Datapoint and the
Company (filed as Exhibit 10(w) to the 1990 Form 10-K and
incorporated herein by reference).
*10.17- Employment Agreement, dated July 1, 1991, between Asher B.
Edelman and the Company (filed as Exhibit 10(s) to the 1991 Form
10-K and incorporated herein by reference).
*10.18- Intelogic Trace, Inc. 401(k) Retirement Savings Plan (filed
as Exhibit 10.22 to the 1992 Form 10-K and incorporated herein by
reference).
10.19- Purchase Agreement, dated June 23, 1992, between Gemini Systems
Leasing Corp., Intelogic Trace TexCom Group, Inc. and The Lockwood
Association, Inc. (filed as Exhibit 10.23 to the 1992 Form 10-K and
incorporated herein by reference).
10.20- First Amendment to Purchase Agreement, dated June 23, 1992, between
Gemini Systems Leasing Corp., Intelogic Trace TexCom Group, Inc.
and The Lockwood Association, Inc. (filed as Exhibit 10.24 to the
1992 Form 10-K and incorporated herein by reference).
*10.21- First Amendment to the Employment agreement, dated July 1,
1991, between
64
Asher B. Edelman and the Company (filed as Exhibit 10.29 to the 1992
Form 10-K and incorporated herein by reference).
*10.22- Second Amendment to the Employment Agreement, dated July 1,
1991, between Asher B. Edelman and the Company (filed as Exhibit
10.35 to the 1992 Form 10-K and incorporated herein by reference).
*10.23- First Amendment to the Employment Agreement, dated July 28,
1991, between Mark S. Helwege and the Company (filed as Exhibit
10.36 to the 1992 Form 10-K and incorporated herein by reference).
*10.24- Employment Agreement, dated August 1, 1993, between Martin
J. Landon and the Company (filed as Exhibit 10.37 to the 1993 Form
10-K and incorporated herein by reference).
*10.25- Employment Agreement, dated October 26, 1992, between John
Alexander Wilder and the Company (filed as Exhibit 10.38 to the
1993 Form 10-K and incorporated herein by reference).
*10.26- Employment Agreement, dated November 2, 1992, between
Michael E. Schultz and the Company (filed as Exhibit 10.39 to the
1993 Form 10-K and incorporated herein by reference).
*10.27- Second Amendment to the Employment Agreement, dated July 28,
1991, between Mark S. Helwege and the Company.
*10.28- Second Amendment to the Employment Agreement dated January
27, 1986, between Philip D. Freeman and the Company.
10.29- Agreement, dated September 27, 1994, between the Company and
Datapoint Corporation.
10.30- Final Order Authorizing Use of Cash Collateral, Post-Petition
Financing, and Grant of Security Interests (describing
debtor-in-possession Financing Facility between the Company and
Foothill Capital Corporation) dated September 16, 1994.
10.31- Final Order (1) Authorizing the Debtor to Incur Secured Priority
Administrative Indebtedness Pursuant to Section 364 (c) of the
Bankruptcy Code, (2) Granting Security Interests, (3) Approving
Agreement Related to the Foregoing and (4) Granting Other Relief
(describing the loan agreement between Fidelity Capital and Income
Fund and the Company) dated November 8, 1994.
65
11 - Computation of Earnings Per Share.
21 - Subsidiaries of the Registrant.
23 - Consent of Ernst & Young LLP.
25 - Powers of Attorney.
99 - Modified First Amended Plan of Reorganization of the Company, dated
October 12, 1994.
*Management compensatory plan or arrangement.
66
(B) REPORTS ON FORM 8-K:
During the quarter ended July 31, 1994, the Company filed the following
current reports on Form 8-K:
DATE FILED DESCRIPTION
- - ------------ -----------
May 16, 1994 Form 8-K reported the settlement of two shareholders
derivative lawsuits brought against certain of the
Company's present and former directors (see Note 16 to
the consolidated financial statements included elsewhere
in this filing).
May 24, 1994 Form 8-K announced that Mark S. Helwege had been named
Chief Executive Officer and a Member of the Office of
the President. Additionally, it reported the
resignation of J. Alec Wilder as Chief Operating Officer
and a Member of the Office of the President.
June 8, 1994 Form 8-K announced the resignation of Dwight D.
Sutherland as a director and the appointment of Mark S.
Helwege, Chief Executive Officer and Member, Office of
the President, as director.
July 15, 1994 Form 8-K reported that the Company is engaged in
discussions with its largest bondholders to explore the
restructuring of the Company's debt.
67
SCHEDULE V
INTELOGIC TRACE, INC. AND SUBSIDIARY
LEASEHOLD IMPROVEMENTS AND EQUIPMENT AND FIELD SUPPORT SPARES
(In thousands)
BALANCE
AT BALANCE
BEGINNING OTHER<F9> AT END
CLASSIFICATION OF YEAR ADDITIONS RETIREMENTS CHANGES OF YEAR
- - ------------------------------------------------------------------------------------------------------------------------------------
JULY 31, 1994
Leasehold improvements and equipment:
Leasehold improvements .......................... $ 4,442 $ 30 $ (13) $- $ 4,459
Computer equipment .............................. 19,498 246 (310) -- 19,434
Other machinery, equipment, furniture
and fixtures .................................. 7,429 38 (473) -- 6,994
------- -------- -------- -------- -------
$31,369 $ 314 $ (796) $- $30,887
======= ======== ======== ======== =======
Field support spares .............................. $63,891 $ 5,764 $(14,140) $(19,740) $35,775
======= ======== ======== ======== =======
JULY 31, 1993
Leasehold improvements and equipment:
Leasehold improvements .......................... $ 4,427 $ 15 $- $- $ 4,442
Computer equipment .............................. 19,364 134 -- -- 19,498
Other machinery, equipment, furniture
and fixtures .................................. 7,389 40 -- -- 7,429
------- -------- -------- -------- -------
$31,180 $ 189 $- $- $31,369
======= ======== ======== ======== =======
Field support spares .............................. $89,602 $ 8,293 $(31,928) $ (2,076) $63,891
======= ======== ======== ======== =======
JULY 31, 1992
Leasehold improvements and equipment
Leasehold improvements .......................... $ 4,299 $ 159 $ (18) $ (13) $ 4,427
Computer Equipment .............................. 19,432 281 -- (349) 19,364
Other machinery, equipment, furniture
and fixtures .................................. 7,196 200 (7) -- 7,389
------- -------- -------- -------- -------
$30,927 640 (25) (362) $31,180
======= ======== ======== ======== =======
Field support spares .............................. $85,392 $ 12,220 $ (7,159) $ (851) $89,602
======= ======== ======== ======== =======
<FN>
<F9> "Other Changes" represents transfers to and from inventory and
other classifications and a write down of field support spares to
net realizable value in 1994.
</FN>
68
SCHEDULE VI
INTELOGIC TRACE, INC. AND SUBSIDIARY
ACCUMULATED DEPRECIATION OF LEASEHOLD IMPROVEMENTS AND
EQUIPMENT AND FIELD SUPPORT SPARES
(In thousands)
BALANCE
AT CHARGED TO BALANCE
BEGINNING PROFIT OTHER<F10> AT END
CLASSIFICATION OF YEAR AND LOSS RETIREMENT CHANGE OF YEAR
- - ------------------------------------------------------------------------------------------------------------------------------------
JULY 31, 1994
Leasehold improvements and equipment:
Leasehold improvements ............................................ $ 4,126 $ 135 $ -- $ -- $ 4,261
Computer equipment 18,240 580 (71) -- 18,749
Other machinery, equipment, furniture
and fixtures .................................................... 6,927 292 (555) -- 6,664
------- -------- -------- ------- -------
$29,293 $ 1,007 $ (626) $ -- $29,674
======= ======== ======== ======= =======
Field support spares .................................................. $37,103 $ 10,187 $(14,140) $ -- $33,150
======= ======== ======== ======= =======
JULY 31, 1993
Leasehold improvements and equipment:
Leasehold improvements ............................................ $ 3,942 $ 184 $ -- $ -- $ 4,126
Computer equipment 17,744 496 -- -- 18,240
Other machinery, equipment, furniture
and fixtures .................................................... 6,279 648 -- -- 6,927
------- -------- ------- ------ -------
$27,965 $ 1,328 $ -- $ -- $29,293
======= ======== ======= ======== =======
Field support spares .................................................. $58,940 $ 10,039 $(31,928) $ 52 $37,103
======= ======== ======== ======== =======
JULY 31, 1992
Leasehold improvements and equipment:
Leasehold improvements ............................................ $ 3,766 $ 216 $ (36) $ (4) $ 3,942
Computer equipment ................................................ 16,710 1,062 -- (28) 17,744
Other machinery, equipment, furniture
and fixtures .................................................... 5,837 447 (5) -- 6,279
------- -------- -------- -------- -------
$26,313 $ 1,725 $ (41) $ (32) $27,965
======= ======== ======== ======== =======
Field support spares .................................................. $53,631 $ 12,468 $ (7,159) -- $58,940
======= ======== ======== ======== =======
<FN>
<F10> "Other Changes" represents transfers to and from inventory and
other classifications.
</FN>
69
SCHEDULE VIII
INTELOGIC TRACE, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
ADDITIONS
BALANCE AT --------------------------- BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
CLASSIFICATION OF YEAR EXPENSES<F11> REVENUE<F12> DEDUCTIONS OF YEAR
- - --------------------------------------------------------------------------------------------------------------
ALLOWANCE DEDUCTED FROM ASSETS FOR
DOUBTFUL ACCOUNTS RECEIVABLE:
YEAR ENDED JULY 31, 1994 $3,342 $1,650 $(1,171) $(941)<F13> $2,880
====== ====== ======= ===== ======
YEAR ENDED JULY 31, 1993 $3,353 $335 $237 $(583)<F13> $3,342
====== ====== ======= ===== ======
YEAR ENDED JULY 31, 1992 $2,437 $912 $54 $(750)<F13> $3,353
====== ==== ====== ===== ======
VALUATION ALLOWANCE FOR DEFERRED TAX
ASSETS:
YEAR ENDED JULY 31, 1994 $ - $ - $ - $ 18,710<F14> $18,710
===== ===== ===== ========= =======
YEAR ENDED JULY 31, 1993 $ - $ - $ - $ - $ -
===== ===== ===== ========= =======
YEAR ENDED JULY 31, 1992 $ - $ - $ - $ - $ -
===== ===== ===== ========= ========
<FN>
<F11> Provision for bad debt.
<F12> Provision for billing adjustments.
<F13> Amounts written off net of recoveries.
<F14> Valuation allowance recognized to offset deferred tax asset.
<FN>
70
SCHEDULE IX
INTELOGIC TRACE, INC. AND SUBSIDIARY
SHORT TERM BORROWINGS
(IN THOUSANDS)
WEIGHTED MAXIMUM AVERAGE AMOUNT WEIGHTED
BALANCE AVERAGE AMOUNT OUTSTANDING AVERAGE
CATEGORY OF AGGREGATE AT END INTEREST OUTSTANDING DURING INTEREST RATE
SHORT TERM BORROWINGS OF YEAR RATE DURING PERIOD PERIOD<F15> DURING PERIOD<F16>
1994:
PAYABLE TO BANK .............. $7,919 9.3% $10,080 $6,033 10.3%
====== ==== ======= ====== =====
1993:
PAYABLE TO BANK ............ $4,377 9.9% $9,730 $5,889 8.8%
====== ==== ======= ====== =====
1992:
PAYABLE TO BANK ............ $6,913 9.9% $6,913 $528 10.7%
====== ==== ======= ====== =====
<FN>
<F15> Average amounts outstanding during the year were determined based
on the daily amounts outstanding. The weighted average interest
rate during the year was computed by dividing actual interest
expense for the year by average short term borrowings during the
year.
<F16> Amounts are secured by accounts receivable, field support spares
and equipment.
</FN>
71
SCHEDULE X
INTELOGIC TRACE, INC. AND SUBSIDIARY
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
YEARS ENDED JULY 31,
--------------------------------------------
1994 1993 1992
--------------------------------------------
MAINTENANCE AND REPAIRS $ 9,506 $ 7,433 $10,101
======= ======= =======
The majority of maintenance and repairs expenses relate to the repair of
field support spares. Amounts for depreciation, amortization, taxes other
than payroll and income taxes, royalties and advertising are not presented,
as such amounts are either less than 1% of total revenue or have been
disclosed in the consolidated financial statements.
72
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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)
DATED: NOVEMBER 14, 1994
BY: MIKE R. ELLIS
MIKE R. ELLIS
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY DATE
--------- -------- ----
* DIRECTOR, CHAIRMAN OF THE NOVEMBER 14, 1994
(ASHER B. EDELMAN) BOARD OF DIRECTORS, OFFICE
OF THE PRESIDENT
* DIRECTOR NOVEMBER 14, 1994
(GERALD N. AGRANOFF)
* DIRECTOR NOVEMBER 14, 1994
(LEON BOTSTEIN)
* DIRECTOR, OFFICE OF THE PRESIDENT, NOVEMBER 14, 1994
(MARK S. HELWEGE) AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
* DIRECTOR NOVEMBER 14, 1994
(DANIEL R. KAIL)
* DIRECTOR NOVEMBER 14, 1994
(MICHAEL E. SCHULTZ)
*BY MIKE R. ELLIS, VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND
ATTORNEY-IN-FACT.
73