Versatility stops trading amid turmoil

appeared in the March 20, 1998 print edition of the Washington Business Journal

Mark Hilpert   Staff Reporter
Versatility Inc., a Fairfax company that makes software for telemarketing operations, is itself getting some calls that it probably would rather not answer.

Faced with accounting corrections that are turning past profits into losses, a class-action investor lawsuit and a major management shake-up, Versatility announced March 12 that it would delay its quarterly earnings report to the Securities and Exchange Commission and stop trading its stock indefinitely.

Versatility (Nasdaq: VERS) said it would restate earnings for the past 18 months due to what may have been inaccurate accounting treatment of revenue, debt reserves "and other matters." No timetable was given for the earnings review to be completed, and no elaboration on the nature of the accounting problems was provided.

The company's stock stopped trading prior to the announcement and will not resume until the company addresses those problems.

Additionally, co-founder, Chairman and Chief Executive Officer Ronald Charnock has resigned and been replaced by Paul Zoukis, who was hired just last month as president and chief operating officer.

Zoukis previously worked for Hogan Systems Inc., a Dallas-based banking software company. He declined to comment on Versatility's troubles.

"Despite all the turmoil that's surrounding us now, there's nothing impeding getting the product out," Zoukis said. "It's business as usual."

Zoukis denied that Versatility is losing customers. Its client base includes Mellon Bank, Travelers Insurance and Lucent Technologies.

Charnock started the company along with Marcus Heth and Keith Roberts in 1991. Heth remains as a senior vice president with Versatility but stepped down from the company's board.

Charnock and Heth did not return calls for comment, and Roberts could not be reached. All three are major shareholders in the company, with Roberts holding 922,000 shares, according to a Feb. 9 SEC filing. Similar filings list Charnock owning 1.36 million shares as of Feb. 9 and Heth owning 1 million shares as of Feb. 10, 1997.

The announcement that it would have to delay its earnings report was the second disclosure of bad news for Versatility this year. Company shares plummeted following a Feb. 12 announcement that it expected to report a $2-per-share loss for the quarter ended Jan. 31, 1998. Analysts had expected a loss of only 9 cents per share.

That bombshell sent Versatility stock down almost 58 percent to a 52-week low of $2.38 the day after the announcement. Shares traded as high as $14.25 last June.

Company officials blamed the hard times on a significant drop in revenue from its value-added resellers and substantially higher costs.

The 186-person company has not reported any significant revenue gain since April 1997. Versatility reported a $2.6 million loss, or 36 cents per share, on revenue of $7.6 million for the quarter ended Sept. 30. That followed earnings of 1 cent per share gain on almost no profit and $9 million in revenue for the previous quarter.

Both quarters were a far cry from Versatility's initial 1997 fiscal year report of $1.9 million in earnings, or 30 cents per share, on $27.4 million in revenue.

But the company now says those figures "should not be relied upon" and restated earnings are expected to show lower revenue, resulting in an actual loss instead of a profit.

On March 6, the New York law firm of Schoengold & Sporn filed a class action lawsuit against the company on behalf of shareholders. The suit, filed in U.S. District Court for the Southern District of New York, alleges Versatility misled investors, particularly concerning a discontinued product line.

The suit also names as co-defendants Merrill Lynch & Co., Oppenheimer & Co., and Montgomery Securities, all of New York. The three investment banking companies underwrote Versatility's December 1996 initial public offering of 2.2 million shares at $15 per share.

Versatility called the suit's allegations "without merit," and Merrill Lynch spokesman Bill Halldin said the company had done nothing wrong.

"We deny the allegation," Halldin said. "We acted properly and professionally in our role as underwriter."

The suit does not specify the amount of damages are being sought.

A local broker who follows Versatility said the root of the company's current woes may have been taking itself public too early.

"Companies need to make their early mistakes in private," said Bonnie Wachtel, CEO of District-based Wachtel & Co. "This is a reminder that in the world of small companies, there's always going to be surprises, and you have to be ready."

Wachtel said the marketplace for Versatility's products is still promising and that if the company survives the current crisis, investors can still make money. Industry experts estimate the market for telemarketing software will grow from $600 million in 1996 to $1.4 billion in 1999.

Versatility's telemarketing software is used by financial institutions such as credit card companies to handle a high number of users on a single computer network. The company's main product line is used for telebanking, and customer and claims servicing. British Telecommunications accounts for more than 20 percent of Versatility's revenue.

The company started as National Political Resources Inc., a political consulting group specializing in donor solicitation. Charnock, Heth and Roberts started the company after working at the Republical National Committee in the late 1970s, where they constructed computer systems and phone banks for the Ronald Reagan presidential campaign of 1980.

Copyright 1998 American City Business Journals Inc.