Nasdaq Issues Versatility a Threat

Source: Securities and Exchange Commission

Nasdaq Issues Versatility a Threat

By Bob Starzynski
Staff Writer

After several months of mayhem, Nasdaq National Market officials have given Versatility Inc. officials an ultimatum: Get your financials in order by the end of June, or lose your market listing.

The Fairfax, Va.-based company, which had its trading halted on Nasdaq earlier this year, greeted the ultimatum with a warning to shareholders that there is "no assurance" the company will meet Nasdaq's requirements.

"It's really uncertain," Paul Zoukis, the new president and chief operating officer, said in an interview last week. Zoukis, who assumed the top job in March at the software developer, is working on keeping the company's net tangible assets above $10 million.

National Association of Securities Dealers officials told him that if he is not able to do so by June 30, Versatility will be delisted. NASD is the corporate parent of the Nasdaq stock market. NASD officials declined comment.

To help wade through its options and find the best solutions, the company retained NationsBanc Montgomery Securities. According to Securities and Exchange Commission documents, NationsBanc will review such alternatives as "additional capital raising activities and ... potential corporate partners."

Versatility, whose software helps make telephone call centers run more efficiently, garnered one-third of its $18.3 million in revenue last year from British Telecommunications. Other large customers include Chase Card Members Services, Mellon Bank and Avantel S.A.

But the company has suffered many hits in the past two months, starting with its March announcement that financial results for the past 18 months would be restated because of "accounting problems." For fiscal 1997, Versatility's revenue was restated from $27.4 million to $18.3 million, and net income of $1.9 million was restated as a loss of $7.9 million.

Because of pending lawsuits, Zoukis would not specify why there were discrepancies in the company's financial documents.

Because the accounting problems pre-dated Versatility's December 1996 initial public offering, shareholders responded to the restating announcement with five class action lawsuits against the company, its officers, auditors and underwriters in the past two months.

Ron Charnock, the founder, chairman and chief executive officer, resigned from Versatility in March amid the flurry of lawsuits, leaving Zoukis to handle it. Zoukis joined the company a month earlier to help strengthen operations management. Other senior officers, including the chief financial officer and the vice president of sales, followed Charnock out the door and have since been replaced.

NASD suspended trading of Versatility on Nasdaq from March 12 until the restated financial results were released April 30. Trading resumed May 5. Meanwhile, Versatility's stock has dropped from its initial public offering price of nearly $20 a share 17 months ago to less than $2 this month.

With NASD's ultimatum of $10 million in net tangible assets by June 30, Versatility has a difficult task. At the end of January - the last time the company released a balance sheet - it had $10.3 million in net tangible assets. But according to Ken Nelson, the new CFO, that number will drop as the company uses money to fund its operating losses. In the first three quarters of this fiscal year, Versatility lost more than $18 million.

Zoukis immediately recognized one of Versatility's biggest problems was an excessive work force. The company grew from 186 employees to 256 employees in the 10 months before his February arrival, outpacing revenue growth. During March and April this year, Zoukis cut the work force down to 174.

Asked if any other layoffs are anticipated, Zoukis replied: "Am I currently working on any other reductions? The answer is 'no.' "

To meet the requirements set by the NASD, Versatility has two options, said one person familiar with the company. "Either they can raise money by selling more stock, or they can sell the company."

Zoukis is not dismissing either idea. Versatility is trying to raise money through a private placement, although Zoukis declined to elaborate. As for the possibility of selling the company, he only said: "If you look around [this industry], you see a lot of acquisitions in the last 12 months. We'll see what happens."

Zoukis is optimistic about Versatility's chances of pulling through its slump. He said only a "couple of orders" were moved back while customers waited to see the restated financial information. That, he said, will not have much impact on the company's financial sheets.

"On the sales front, we are much more focused now," he said, pointing out that his strategy going forward is primarily direct sales to higher-end clients in the telecommunications and financial industries. "The company is performing better than it was 10 weeks ago."

But investors will need to see results to think favorably about the company. Analysts at Friedman, Billings, Ramsey & Co. and Merrill Lynch have dropped coverage of Versatility.

Versatility Inc.'s Restated Figures For fiscal Year Ended April 30, 1997
Originally Reported As Restated
Total Revenue $27.4 Million $18.3 Million
Total Cost of Revenue $6.4 Million $7 Million
Selling, General andAdministrative Costs $15.3 Million $16.8 Million
Income (Loss) Before Taxes $2.9 Million ($8.2 Million)
Net Income (Loss) $1.9 Million ($7.9 Million)

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