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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
NOVEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-13616
INTERVOICE-BRITE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1927578
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17811 WATERVIEW PARKWAY, DALLAS, TX 75252
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
972-454-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
THE REGISTRANT HAD 32,929,863 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT.
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InterVoice-Brite, Inc.
Consolidated Balance Sheets
(Unaudited)
(In Thousands, Except Share Data)
November 30, February 29,
ASSETS 2000 2000
------------ ------------
Cash and cash equivalents $ 14,199 $ 23,263
Trade accounts receivable, net of allowance
for doubtful accounts of $2,246 in 2001 and
$4,161 in 2000 66,655 93,157
Income tax receivable 3,903 3,903
Inventory 43,980 27,211
Prepaid expenses and other current assets 7,700 8,997
Deferred income taxes 3,439 4,029
------------ ------------
Current Assets 139,876 160,560
Building 20,106 19,522
Computer equipment and software 45,901 46,228
Furniture, fixtures and other 4,453 4,566
Service equipment 6,946 5,956
------------ ------------
77,406 76,272
Less allowance for depreciation 42,034 35,257
------------ ------------
Net property and equipment 35,372 41,015
Intangible assets, net of amortization
of $25,380 in 2001 and
$14,400 in 2000 86,590 98,568
Other assets 1,084 2,880
------------ ------------
$ 262,922 $ 303,023
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 24,888 $ 27,240
Accrued expenses 13,804 14,596
Customer deposits 8,233 8,010
Deferred income 15,131 14,450
Current portion of long term borrowings 32,500 25,000
------------ ------------
Current liabilities 94,556 89,296
Long term liabilities -- 958
Deferred income taxes 23,718 25,738
Long term borrowings 42,500 75,000
Preferred Stock, $100 par value--2,000,000
shares authorized: none issued
Common Stock, no par value, at nominal
assigned value--62,000,000 shares
authorized: 33,017,208 issued
and outstanding in 2001,
32,587,524 issued and outstanding in 2000 16 16
Additional capital 52,140 49,984
Unearned compensation (2,165) (3,701)
Retained earnings 57,229 66,642
Accumulated other comprehensive loss (5,072) (910)
------------ ------------
Stockholders' equity 102,148 112,031
------------ ------------
$ 262,922 $ 303,023
============ ============
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InterVoice-Brite, Inc.
Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
November 30, November 30, November 30, November 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Sales $ 68,615 $ 82,035 $ 212,465 $ 201,972
Cost of goods sold 32,455 34,703 103,594 97,929
------------ ------------ ------------ ------------
Gross Margin 36,160 47,332 108,871 104,043
Research and development expenses 8,704 9,345 26,593 50,982
Selling, general and administrative
expenses 20,492 21,001 63,725 59,689
Amortization of goodwill and
acquired intangible assets 3,466 3,528 10,377 7,057
------------ ------------ ------------ ------------
Income (loss) from operations 3,498 13,458 8,176 (13,685)
Other income 390 82 1,184 1,159
Interest expense (1,675) (2,685) (5,686) (5,559)
------------ ------------ ------------ ------------
Income (loss) before taxes and the
cumulative effect of a change in
accounting principle 2,213 10,855 3,674 (18,085)
Income taxes 1,107 3,745 1,837 4,646
------------ ------------ ------------ ------------
Income (loss) before the cumulative effect
of a change in accounting principle 1,106 7,110 1,837 (22,731)
Cumulative effect on prior years of
adopting SEC Staff Accounting
Bulletin No. 101 -- -- (11,250) --
------------ ------------ ------------ ------------
Net income (loss) $ 1,106 $ 7,110 $ (9,413) $ (22,731)
============ ============ ============ ============
Per Basic Share:
Income (loss) before the cumulative effect
of a change in accounting principle $ 0.03 $ 0.22 $ 0.06 $ (0.76)
Cumulative effect on prior years of
adopting SEC Staff Accounting
Bulletin No. 101 -- -- (0.34) --
------------ ------------ ------------ ------------
Net income (loss) $ 0.03 $ 0.22 $ (0.29) $ (0.76)
============ ============ ============ ============
Per Diluted Share:
Income (loss) before the cumulative effect
of a change in accounting principle $ 0.03 $ 0.21 $ 0.05 $ (0.76)
Cumulative effect on prior years of
adopting SEC Staff Accounting
Bulletin No. 101 -- -- (0.33) --
------------ ------------ ------------ ------------
Net income (loss) $ 0.03 $ 0.21 $ (0.27) $ (0.76)
============ ============ ============ ============
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InterVoice-Brite, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(In Thousands, Except Share Data)
Common Stock
------------------------ Additional Unearned Retained Accumulated Other
Shares Amount Capital Compensation Earnings Comprehensive Loss Total
---------- ---------- ---------- ------------ ---------- ------------------ ----------
Balance at February 29, 2000 32,587,524 $ 16 $ 49,984 $ (3,701) $ 66,642 $ (910) $ 112,031
Net loss -- -- -- -- (9,413) -- (9,413)
Foreign currency translation
adjustment -- -- -- -- -- (4,162) (4,162)
Exercise of stock options 429,684 2,156 -- -- -- 2,156
Amortization of unearned
compensation -- -- -- 1,536 -- -- 1,536
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at November 30, 2000 33,017,208 $ 16 $ 52,140 $ (2,165) $ 57,229 $ (5,072) $ 102,148
========== ========== ========== ========== ========== ========== ==========
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InterVoice-Brite, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
November 30, November 30, November 30, November 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Income (loss) before the cumulative
effect of a change in accounting
principle $ 1,106 $ 7,109 $ 1,837 $ (22,730)
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 7,201 7,685 22,554 20,504
In-process research and
development charge -- -- -- 30,100
Changes in operating assets
and liabilities: (10,314) 6,270 (7,340) 73
------------ ------------ ------------ ------------
NET CASH FROM OPERATIONS (2,007) 21,064 17,051 27,947
INVESTING ACTIVITIES
Purchase of property
and equipment (1,817) (2,789) (4,998) (6,493)
Purchased software -- (200) (704) (729)
Purchase of Brite Voice Systems,
Inc., net of cash acquired -- -- -- (116,513)
Other -- -- 2,800 --
------------ ------------ ------------ ------------
(1,817) (2,989) (2,902) (123,735)
FINANCING ACTIVITIES
Exercise of stock options 335 208 2,156 1,868
Purchase of Treasury Stock -- -- -- --
Paydown of debt (7,500) (10,000) (32,500) (15,000)
Borrowings 7,500 -- 7,500 135,000
------------ ------------ ------------ ------------
335 (9,792) (22,844) 121,868
EFFECT OF EXCHANGE RATE ON CASH 46 -- (369) --
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (3,443) 8,283 (9,064) 26,080
Cash and cash equivalents,
beginning of period 17,642 29,992 23,263 12,195
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 14,199 $ 38,275 $ 14,199 $ 38,275
============ ============ ============ ============
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED NOVEMBER 30, 2000
NOTE A -- BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. The consolidated balance sheet at February 29, 2000 has been
derived from audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the unaudited November 30, 2000 and 1999
consolidated financial statements have been included. Operating results for the
three and nine month periods ended November 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending February 28,
2001 as they may be affected by a number of factors, including the timing and
ultimate receipt of orders from significant customers which continue to
constitute a large portion of the Company's sales, the sales channel mix of
products sold, and changes in general economic conditions, any of which could
have an adverse effect on operations.
In accordance with Statement of Financial Accounting Standards No. 130, the
following comprehensive income disclosures are provided. Total comprehensive
income (loss), i.e., net income (loss) plus foreign currency translation
adjustments to stockholders' equity, for the third quarters of fiscal 2001 and
2000 was $0.5 million and $6.7 million. For the nine month period ended November
30, 2000 and 1999, it was ($13.6) million and ($22.9) million.
Financial statements of the Company's foreign subsidiaries have been translated
into U. S. dollars at current and average exchange rates. Resulting translation
adjustments are recorded in accumulated other comprehensive loss. Any
transaction gains or losses are included in the accompanying consolidated
statements of operations.
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Statement of Financial Accounting Standards No. 133 was issued in 1998 and will
be adopted by the Company in fiscal 2002. It requires that all derivatives be
valued on a market-to-market basis from the date of adoption. Along with the
derivatives, any underlying hedged items are also to be valued on a
market-to-market basis. The market value adjustments are to be included in the
income statement or stockholders' equity, depending on the nature of the
transaction. The Company will adopt the standard in the first quarter of 2002 on
a cumulative basis. The Company does not expect such adoption to have a material
effect on the Company's financial statements.
NOTE B - ACQUISITION OF BRITE VOICE SYSTEMS, INC.
As discussed in the Company's Form 10-K for the fiscal year ended February 29,
2000, during the second quarter of fiscal 2000, the Company acquired all of the
outstanding stock of Brite Voice Systems, Inc. (Brite) in a two-step transaction
involving aggregate consideration of approximately $165.1 million of cash and
common stock. Results of operations of Brite were consolidated with the Company
beginning June 1, 1999; therefore, the Company's results of operations presented
for the nine months ended November 30, 1999 include those of Brite only from
June 1, 1999 forward.
In connection with this transaction, the Company obtained senior secured credit
facilities amounting to $150 million from Bank of America, including a $125
million term loan facility and a $25 million revolving credit agreement. The
term loan agreement is subject to future scheduled repayments, as defined,
during 2001-2003. The revolving credit agreement will expire upon the earlier of
the termination of the term loan, or August 31, 2003. The credit facilities
require the Company to comply with certain financial covenants as defined in the
related credit agreements. As of November 30, 2000,
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$75 million was outstanding under the credit facilities. Interest under the
credit facilities accrues at a variable rate indexed to the prime rate or an
adjusted London Interbank Offering Rate. The current average annual interest
rate is 8.74%
NOTE C - CHANGE IN ACCOUNTING PRINCIPLE/REVENUE RECOGNITION
Effective March 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements". For systems that do not require
customization to be performed by the Company, revenue is recognized when the
related hardware and software are delivered, when there is persuasive evidence
that an arrangement exists, when the fee is fixed and determinable and when
collection is probable. Although the Company's contract arrangements often
include installation and customer acceptance provisions, revenue generally had
been recognized at the time of shipment based on the Company's belief that no
significant uncertainties regarding customer acceptance existed. For systems
that required significant customization where the completed contract method of
accounting was applicable, the Company historically had recognized revenue upon
completion of installation and testing procedures but prior to customer
acceptance. Under the new accounting method, effective March 1, 2000, the
Company now recognizes revenue upon customer acceptance. For more complex,
customized systems (generally over a $500,000 sales price), the Company has
continued to use a percentage of completion methodology based on labor inputs.
The Company also continues to recognize revenue from services when the services
are performed, or ratably over the contract period.
The Company historically also had recognized revenue upon shipment of products
to the customer for systems shipped FOB destination as a common carrier had been
used by the Company resulting in the transfer of substantially all the risks and
rewards of ownership. For systems for which the risk of loss
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legally transfers upon delivery to the customer's site and for which the Company
has no significant post-delivery implementation service obligation, the Company
now recognizes revenue upon delivery to the customer's site.
The cumulative effect of the change on prior years (which principally relates to
changes relating to customer acceptance provisions) resulted in a charge to
operations of $11.3 million (after reduction for income taxes of $7.0 million)
which is included in results of operations for the nine months ended November
30, 2000. For the three and nine month periods ended November 30, 2000, the
Company recognized $5.0 million and $22.0 million in revenue that is included in
the cumulative effect adjustment as of March 1, 2000. Assuming the accounting
change had been applied retroactively by the Company to prior periods, proforma
net income (loss) for the three and nine month periods ended November 30, 1999
would have been $9.8 million and ($23.0) million, respectively. Net income
(loss) per common share would have been $0.29 and ($0.77), respectively. Had the
Company not adopted SAB 101, revenues for the three months ended November 30,
2000 would have been $62.6 million and net loss per common share would have been
($0.04).
NOTE D - INVENTORIES
Inventories consist of the following (in millions):
NOVEMBER 30, 2000 FEBRUARY 29, 2000
----------------- ------------------
Purchased parts $ 33.8 $ 21.1
Work in progress 9.1 5.2
Finished goods 1.1 0.9
------------ ------------
$ 44.0 $ 27.2
============ ============
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NOTE E - EARNINGS PER SHARE
(in millions except per share data)
Three Months Ended Nine Months Ended
November 30, 2000 November 30, 1999 November 30, 2000 November 30, 1999
----------------- ----------------- ----------------- ------------------
Numerator:
Income (loss) before the
cumulative effect of a
change in accounting principle $ 1.1 $ 7.1 $ 1.8 $ (22.7)
Cumulative effect on prior
years of adopting
SAB No. 101 -- -- (11.3) --
------------ ------------ ------------ ------------
Net Income (loss) $ 1.1 $ 7.1 $ (9.4) $ (22.7)
------------ ------------ ------------ ------------
Denominator:
Denominator for basic
earnings per share 32.8 32.0 32.7 30.0
Employee Stock Options 1.3 1.6 1.7 --
Non-vested restricted shares 0.1 -- 0.1 --
------------ ------------ ------------ ------------
Dilutive Potential common
shares 1.4 1.6 1.8 0
Denominator for diluted
earnings per share $ 34.2 $ 33.6 $ 34.5 $ 30.0
BASIC:
Income (loss) before
the cumulative effect
of a change in accounting
principle 0.03 0.22 0.06 (0.76)
Cumulative effect on prior
years of adopting
SAB No. 101 -- -- (0.34) --
------------ ------------ ------------ ------------
Net Income (loss) $ 0.03 $ 0.22 $ (0.29) $ (0.76)
============ ============ ============ ============
DILUTED:
Income (loss) before
the cumulative effect
of a change in Accounting
principle $ 0.03 $ 0.21 $ 0.05 $ (0.76)
Cumulative effect on prior
years Of adopting
SAB No. 101 -- -- (0.33) --
------------ ------------ ------------ ------------
Net Income (loss) $ 0.03 $ 0.21 $ (0.27) $ (0.76)
============ ============ ============ ============
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Options to purchase 2,170,824 and 1,614,374 shares of common stock at average
prices of $13.97 and $15.14 were outstanding during the three and nine month
periods ended November 30, 2000, respectively, but were not included in the
computation of diluted earnings per share because the options' prices were
greater than the average market price of the Company's common stock during such
periods and, therefore, the effect would have been anti-dilutive. 1,705,127
potentially dilutive shares were excluded from the diluted earnings per share
calculations for the nine month period ending November 30, 1999 as they would be
anti-dilutive due to net losses.
NOTE F - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates as a single operating segment which develops, sells and
services call automation systems. The Company's Chief Operating Decision Maker
(CODM) assesses performance and allocates resources on an enterprise wide basis.
Therefore, no separately reportable operating segments exist.
The CODM monitors sales based on customer markets, including Business Systems,
Network Systems and Services. The Business Systems market includes interactive
voice response (IVR) and customer relationship management (CRM) systems. The
Network Systems customer market focuses on systems for telecommunications
network operators. Services sales include fees for system maintenance, software
license fees and fees for providing voice and call processing services to the
Company's customers on equipment owned and operated by the Company.
The Company's net sales by market and geographic area were as follows (in
millions):
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, 2000 NOVEMBER 30, 1999 NOVEMBER 30, 2000 NOVEMBER 30, 1999
----------------- ----------------- ----------------- -----------------
Sales:
Business Systems $ 25.6 $ 26.8 $ 74.9 $ 82.0
Network Systems 20.8 32.0 68.2 71.2
Services 22.2 23.2 69.4 48.8
------ ------ ------- -------
Total $ 68.6 $ 82.0 $ 212.5 $ 202.0
====== ====== ======= =======
Geographic Area Net Sales:
United States $ 38.7 $ 46.5 $ 115.9 $ 122.4
The Americas (Excluding U.S.) 3.0 3.8 5.9 12.5
Pacific Rim 3.0 4.5 10.3 12.5
Europe, Middle East & Africa 23.9 27.2 80.4 54.6
------ ------ ------- -------
Total $ 68.6 $ 82.0 $ 212.5 $ 202.0
====== ====== ======= =======
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One customer accounted for approximately 15% and 19% of the Company's sales
during the three and nine month periods ended November 30, 2000. One customer
accounted for approximately 11% of the Company's sales during the three month
period ended November 30, 1999. No customer accounted for 10% or more of the
Company's sales during the nine month period ended November 30, 1999.
NOTE G - WARRANT
During fiscal 1997, the Company received a warrant to purchase 741,237 shares of
SpeechWorks International, Inc. common stock at an exercise price of $2.05 per
share. The warrant was issued in connection with a supply agreement, pursuant to
which SpeechWorks supplies the Company with software products and services. Upon
the Company's receipt of the warrant, SpeechWorks was not a publicly traded
company and no value was assigned to the warrant. The warrant and the shares
underlying the warrant are unregistered securities with no readily ascertainable
market valuation, therefore, the warrant is carried at cost, i.e. no value, on
the Company's balance sheet at November 30, 2000. SpeechWorks became a publicly
traded company on August 1, 2000. The January 11, 2001 closing price for a share
of SpeechWorks common stock was $30.36.
For several reasons, the Company is currently unable to estimate what gain, if
any, it will ultimately realize in connection with the warrant. First, the
Company has not completed its evaluation of its
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alternatives with respect to monetizing the warrant. Second, the ultimate price
received for the warrant or the shares underlying the warrant cannot be
determined due to relatively long periods of time before such securities could
be sold in a private or public placement. The Company has agreed not to sell the
warrant or underlying securities in a private placement for six months after
SpeechWorks' initial public offering (August 1, 2000). Should the Company
exercise the warrant with the intent of selling the underlying shares in the
public market, the unregistered shares must be held at least one year before the
Company could sell such shares, subject to limitations under the Securities and
Exchange Commission's Rule 144. The Company does have certain demand
registration rights which could allow the sale of the shares in the public
market before the Rule 144 one year holding period lapses. However, such rights
cannot be exercised unilaterally, except in the case of a registration of the
shares by SpeechWorks on Form S-3, for which SpeechWorks will not be eligible
until at least August 1, 2001. Third, there is not a readily ascertainable price
for the unregistered warrant or underlying unregistered shares. Generally,
unregistered securities sold through a private offering sell at discounts from
the then current market price. Fourth, a large percentage of SpeechWorks'
outstanding common stock is unregistered and is subject to a lock up period, as
are the shares underlying the Company's warrant. Such an arrangement is not
unusual, but the potential introduction of a large number of shares following a
lock up period can affect the market for an issuer's shares.
Should the Company decide to exercise its warrant, the underlying shares
received will be valued at market as a current asset with a corresponding
increase to the Company's stockholders' equity. Any change of valuation prior to
the final disposition of the underlying shares will be reflected as an
adjustment to the Company's stockholders' equity through accumulated other
comprehensive income.
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NOTE H - CONTINGENCIES
The Company provides certain automated call processing services on a managed
services basis for a large domestic telecommunications company. The
telecommunications company has asserted that the Company should pay monetary
penalties under the managed services contract for failing to achieve certain
representations, covenants and specified levels of service. The
telecommunications company is also in the process of performing an audit of the
Company's records relating to the managed services, as expressly contemplated by
the contract. While the Company does not believe that the audit will result in
any claims for material amounts, it is possible that the telecommunications
company could make such claims and such claims could be material. The Company
has acknowledged that it may owe an immaterial amount as a monetary penalty for
failing to adhere to a specific service level, and has denied all other asserted
failures under the contract. A reserve has been established to cover the
immaterial amount the Company has acknowledged it might owe. The parties are in
the process of attempting to negotiate mutually satisfactory agreements to
resolve their dispute and to extend the managed services contract. There is no
assurance that the parties will negotiate mutually acceptable agreements. The
telecommunications company has not threatened litigation against the Company. In
the event litigation is instituted against the Company concerning the dispute
under the contract, the Company intends to vigorously contest the claims and to
assert appropriate defenses. As with any legal proceeding, there is no guarantee
that the Company would prevail in any litigation that might be asserted against
the Company in connection with the managed services contract.
From time to time Ronald A. Katz Technology Licensing L.P. ("RAKTL") has sent
letters to certain customers of the Company suggesting that the customer should
negotiate a license agreement to cover the practice of certain patents owned by
RAKTL. In the letters, RAKTL has alleged that certain of its patents pertain to
certain enhanced services offered by network providers, including prepaid card
and
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wireless services and postpaid card services. RAKTL has further alleged that
certain of its patents pertain to certain call processing applications,
including applications for call centers that route calls using a called party's
DNIS identification number. Certain products offered by the Company can be
programmed and configured to provide enhanced services to network providers and
call processing applications for call centers. The Company's contracts with
customers usually include a qualified obligation to indemnify and defend
customers against claims that products as delivered by the Company infringe a
third party's patent.
To the Company's knowledge, RAKTL has not initiated litigation against any of
the Company's customers. Moreover, none of the customers have notified the
Company that RAKTL has claimed that any product provided by the Company
infringes any claims of any RAKTL patent. Accordingly, the Company has not been
required to defend any customers against a claim of infringement under a RAKTL
patent. The Company has, however, received letters from customers notifying the
Company of the efforts by RAKTL to license its patent portfolio and reminding
the Company of its potential obligations under the indemnification provisions of
the applicable agreements in the event that a claim is asserted. Even though
RAKTL has not instituted litigation against any customers, it is always possible
that RAKTL may do so. In the event of such litigation, a customer could attempt
to invoke the Company's indemnity obligations under the applicable agreement. As
with most sales contracts with suppliers of computerized equipment, the
Company's contractual indemnity obligations are generally limited to the
products provided by the Company, and generally require the customer to allow
the Company to have sole control over any litigation and settlement negotiations
with the patent holder. The customers who have received letters from RAKTL
generally have multiple suppliers of the types of products that might
potentially be subject to claims by RAKTL.
Even though no claims have been made that a specific product offered by the
Company infringes any claim under the RAKTL patent portfolio, the Company has
received opinions from its outside patent
16
counsel that certain products and applications offered by the Company do not
infringe certain claims of the RAKTL patents. The Company has also received
opinions from its outside counsel that certain claims under the RAKTL patent
portfolio are invalid. Furthermore, based on the reviews by outside counsel, the
Company is not aware of any claims under the RAKTL portfolio that are infringed
by the Company's products. If the Company does become involved in litigation in
connection with the RAKTL patent portfolio, under a contractual indemnity or any
other legal theory, the Company intends to vigorously contest the claims and to
assert appropriate defenses. A number of companies, including some large, well
known companies and some customers of the Company, have already licensed certain
rights under the RAKTL patent portfolio. During November 2000, RAKTL announced
license agreements with, among others, AT&T Corp., Microsoft Corporation and
International Business Machines Corporation.
17
NOTE I REORGANIZATION
Subsequent to the end of the Company's fiscal third quarter, it announced a
reorganization of its personnel to achieve a better focus on core products and
competencies. A workforce adjustment impacting approximately 100 positions has
resulted from the reorganization. The Company also announced that it is
evaluating strategic alternatives with respect to its less profitable products.
These items, along with other cost reduction items, will result in non-recurring
pre-tax charges of $1.5 million to $5.0 million during the fourth quarter of
fiscal 2001.
NOTE J INCOME TAXES
The Company's effective Tax rate for the three and nine month periods ended
November 30, 2000 differ from the federal statutory rate primarily due to the
amoritization of nondeductible goodwill.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements" located elsewhere herein regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations and industry conditions, are
forward-looking
18
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. In addition to important factors
described elsewhere in this report, the following significant factors, among
others, sometimes have affected, and in the future could affect, the Company's
actual results and could cause such results during fiscal 2001, and beyond, to
differ materially from those expressed in any forward-looking statements made by
or on behalf of the Company:
o The Company faces intense competition based on product capabilities and
experiences ever increasing demands from its actual and prospective
customers for its products to be compatible with a variety of rapidly
proliferating computing, telephony and computer networking technologies and
standards. The ultimate success of the Company's products is dependent, to
a large degree, on the Company allocating its resources to developing and
improving products compatible with those technologies, standards and
functionalities that ultimately become widely accepted by the Company's
actual and prospective customers. The Company's success is also dependent,
to a large degree, on the Company's ability to implement arrangements with
other vendors with complementary product offerings to provide actual and
prospective customers greater functionality and to ensure that the
Company's products are compatible with the increased variety of
technologies and standards.
o Continued availability of suitable non-proprietary computing platforms and
system operating software that are compatible with the Company's products.
o Certain components for the Company's products are available from select
suppliers and, as a result, the Company's operating results could be
adversely affected if the Company were unable to obtain such components in
the future.
19
o Increasing litigation with respect to the enforcement of patents,
copyrights and other intellectual property.
o The ability of the Company to retain its customer base and, in particular,
its more significant customers such as British Telecom, which purchases
both systems and managed services from the Company. Sales to British
Telecom accounted for approximately 19% of the Company's total sales during
the first nine months of fiscal 2001. The Company's installed base of
customers generally are not contractually obligated to place further
systems orders with the Company or are not obligated to extend their
services contracts with the Company at the expiration of their current
contracts. British Telecom's managed services contract with the Company
expires in December, 2001, unless extended.
o Legislative and administrative changes and, in particular, changes
affecting the telecommunications industry, such as the Telecommunications
Act of 1996. While many industry analysts expect the Telecommunications Act
of 1996 ultimately to result in at least a temporary surge in the
procurement of telecommunications equipment and related software and other
products, there is no assurance that the Company can estimate with
sufficient accuracy those products which will ultimately be purchased, the
timing of any such purchases or the quantities to be purchased.
o The Company's sales are largely dependant upon the strength of the domestic
and international economies and, in particular, demand for the types of
systems offered by the Company in its primary markets. In this regard,
demand for all of the Company's systems is partially dependant upon the
general level of demand for telecommunications equipment, computers,
software and other technology products. Furthermore, demand for the
Company's products offered to
20
telecommunications companies is very dependant upon the general level of
demand for telephone switches and other telecommunications equipment for
public networks. There are certain indications that, at least for the short
term, demand for such technology products and network-based
telecommunications equipment might be softening.
o Risks involved in the Company's international distribution and sale of its
products, including unexpected and adverse changes in regulatory
requirements, unexpected changes in exchange rates, the difficulty and
expense of maintaining foreign offices and distribution channels, tariffs
and other barriers to trade, difficulty in protecting intellectual property
rights, and foreign governmental regulations that may limit or restrict
sales of call automation systems. Additionally, changes in foreign credit
markets and currency exchange rates may result in requests by many
international customers for extended payment terms and may have an adverse
impact on the Company's cash flow and its level of accounts receivable. Due
in part to the merger with Brite, the Company's sales outside the United
States, as a percentage of the Company's total sales, increased from 25% to
43% from the first quarter of fiscal 2000 to the first quarter of fiscal
2001.
o The quantity and size of large sales (sales valued at approximately $4
million or more) during any fiscal quarter, which can cause wide variations
in the Company's sales and earnings on a quarterly basis.
o Many of the Company's contracts, particularly for managed services, foreign
contracts and contracts with telecommunication companies, include
provisions to assessing liquidated damages for delayed performance by the
Company. Since the Company's projects frequently require a significant
degree of customization, it is difficult for the Company to predict when it
will complete such projects. Accordingly, the Company has had to pay
liquidated damages in the past and may have to pay
21
additional liquidated damages in the future. Any such future liquidated
damages could be significant.
o The Company's ability to properly estimate costs under fixed price
contracts in developing application software and otherwise tailoring its
systems to customer-specific requests.
o The Company's ability to hire and retain, within the Company's compensation
parameters, qualified sales, administrative and technical talent and
outside contractors in highly competitive markets for the services of such
personnel.
o Mergers and acquisitions between companies in the telecommunications and
financial industries which could result in fewer companies purchasing the
Company's products for telecommunications and banking applications, and/or
delay such purchases by companies that are in the process of reviewing
their strategic alternatives in light of a merger or acquisition.
o Extreme price and volume trading volatility in the U.S. stock market, which
has had a substantial effect on the market prices of securities of many
high technology companies, frequently for reasons other than the operating
performance of such companies. These broad market fluctuations could
adversely affect the market price of the Company's common stock.
o The ability of the Company to successfully integrate the products,
customers, employees and other business components of the former InterVoice
and the former Brite in an efficient fashion.
o The ability of the Company to retain certain customers of the former Brite
in light of the Company's decision to phase out certain Brite products and
its ability to persuade such customers to purchase similar products offered
by the Company.
22
o The Company's business transactions in foreign currencies are subject to
adverse movements in foreign currency exchange rates.
SALES. The Company has complied with generally accepted accounting principles
for its historical revenue recognition. However, in December 1999, the
Securities and Exchange Commission issued new guidance, to which all registrants
are expected to comply, on revenue recognition in its Staff Accounting Bulletin
No. 101. "Revenue Recognition in Financial Statements". Under such guidance, the
Company changed its revenue recognition policy effective with the first quarter
of fiscal 2001. The result of such change is that, for a portion of the
Company's system sales, revenue recognition has shifted from the date of
shipment to the date of customer acceptance, which generally occurs after
shipment.
The Company's total sales in the third quarter and first nine months of fiscal
2001 were approximately $68.6 million and $212.5 million, respectively. Third
quarter sales decreased approximately $13.4 million, or 16%, when compared to
the same period of fiscal 2000. Contributing factors for the sales decrease
include: 1) a sluggish demand from the former Brite customer base as it
evaluates the Company's product roadmap resulting from the merger with Brite,
(2) sluggish demand from existing and prospective customers as they evaluate
their post-Y2K capital expenditures, (3) a lengthening of the overall sales
cycle resulting from the transition in customer demand from simpler, touch-tone
to complex, speech enabled applications, (4) some possible softness, at least in
the short term, in the markets for technology products and for network-based
telecommunications equipment, and (5) attrition in the Company's Network Systems
sales force. Sales during the first nine months of fiscal 2001 were $212.5
million as compared to $202.0 million during the same period of the prior year.
The increase is primarily due to the Company's merger with Brite Voice Systems,
Inc. (Brite) which was accounted for
23
using the purchase method of accounting. Results of Brite's operations were
consolidated with those of InterVoice, Inc. effective June 1, 1999, the first
day of the Company's second fiscal quarter of fiscal 2000. One customer
accounted for approximately 15% and 19% of the Company's total sales during the
third quarter and first nine months of fiscal 2001, respectively.
To enhance comparability of the Company's sales for the third quarter and first
nine months of fiscal 2001, the information below is presented on an "as
adjusted" basis as though the merger with Brite and the adoption of SAB 101 (See
Notes B and C to the Consolidated Financial Statements) had occurred at the
beginning of the respective periods presented.
(In millions)
AS ADJUSTED AS REPORTED
------------------------- -------------------------
THIRD QUARTER 2001 2000* 2001 2000*
---------- ---------- ---------- ----------
Sales:
Business Systems $ 25.6 $ 30.7 $ 25.6 $ 26.8
Network Systems 20.8 33.6 20.8 32.0
Services 22.2 23.2 22.2 23.2
---------- ---------- ---------- ----------
Total $ 68.6 $ 87.5 $ 68.6 $ 82.0
========== ========== ========== ==========
FIRST NINE MONTHS
Sales:
Business Systems $ 74.9 $ 89.1 $ 74.9 $ 82.0
Network Systems 68.2 85.8 68.2 71.0
Services 69.4 62.8 69.4 49.0
---------- ---------- ---------- ----------
Total $ 212.5 $ 237.7 $ 212.5 $ 202.0
========== ========== ========== ==========
* InterVoice-Brite's fiscal year ends the last day of February. Brite's fiscal
year ended December 31. No adjustment has been made to account for the two
companies' different fiscal year ends.
24
The following discussion compares third quarter and nine month sales performance
on an "As Adjusted" basis only.
Business Systems sales during the third quarter of fiscal 2001 were
approximately $25.6 million and decreased 17% when compared to the same period
of the previous year. Such sales were $74.9 million during the first nine months
of fiscal 2001 and declined 16% when compared to the same period of the previous
year. The Company believes the declines are the result of: (1) a sluggishness in
demand from the former Brite customer base as those companies continue to
evaluate the Company's product roadmap resulting from the merger with Brite, (2)
a continued sluggish demand from the Company's existing and prospective
customers as they evaluate their post-Y2K capital expenditures, (3) some
possible softness, at least in the near term, in the market for
telecommunications equipment, computers, software and other technology products,
and (4) a lengthening of the overall sales cycle resulting from a transition in
customer demand from relatively simple touch-tone based applications to complex
applications embodying speech recognition capabilities. Additionally, speech
recognition enabled sales opportunities tend to be larger in dollar value, which
may extend the customer purchasing cycle. International Business Systems sales
constituted 24% and 20% of the Company's total Business Systems sales during the
third quarter and first nine months of fiscal 2001, respectively.
Network Systems sales during the third quarter of fiscal 2001 were approximately
$20.8 million and declined 38% when compared to the same period of the previous
fiscal year. Such sales for the first nine months of fiscal 2001 were $68.2
million and declined 21% when compared to the same period of the previous year.
Third-party surveys indicate good long term prospects for growth in the market
addressed by the Company's Network Systems products. The Company believes
contributing factors to its sales
25
decline in this market segment include sales force attrition and some possible
softness, at least for the short term, in the market for network-based
telecommunication equipment. International Network Systems sales constituted 64%
and 81% of the Company's total Network Systems sales during the third quarter
and first nine months of fiscal 2001, respectively.
Services sales during the third quarter and first nine months of fiscal 2001
were $22.2 million and $69.4 million, respectively, and decreased 4% and
increased 11%, respectively, when compared to the same periods of the previous
fiscal year. The Company's Application Service Provider (ASP) sales were the
primary reason for the decrease and increase in Services sales. As an ASP, the
Company provides certain voice and call processing services to its customers on
equipment owned and operated by the Company. In return, the Company charges its
customers for such services in one of multiple ways, including fixed rates per
month or per transaction, and/or a share of the revenue generated by the
Company's customer based on such services. Generally, the Company receives a
portion of the prepaid calling revenues generated by its customers. ASP sales
decreased slightly in the third quarter primarily due to decreased call volumes
by North American customers offering prepaid telecommunication calling services.
ASP sales increased in the first nine months of fiscal 2001 primarily due to
increased prepaid call volumes experienced by the Company's customers in Europe
and North America. International Services sales constituted 47% of the Company's
total Services sales during both the third quarter and the first nine months of
fiscal 2001.
The Company continues to believe the long term prospects in its current markets
remain strong. At the same time, the Company realizes its markets are being
transformed by the ongoing convergence of voice, data and internet technologies.
As a result, the Company is investigating alternate methods of combining its
products and services and is focusing on new, strategic partnerships to profit
from this transformation. The result of such investigations may lead the Company
to redirect its marketing efforts
26
and/or increase its investments in application engineering, customer service,
research and development, sales, sales support, marketing and administrative
personnel and resources to pursue new opportunities.
COST OF GOODS SOLD. Cost of goods sold was approximately $32.5 million and
$103.6 million for the third quarter and first nine months of fiscal 2001,
respectively, and, as a percentage of sales, was 47.3% and 48.8%, respectively.
Such expenses during the third quarter were favorably impacted by a better than
expected software to hardware sales mix. During the third quarter of the
previous year, such expenses were $34.7 million, or 42.3% of the Company's total
sales. During the first nine months of the previous year, such expenses were
$97.9 million and included non-recurring charges of $9.1 million. These
non-recurring charges are described in the Company's Form 10-K as filed with the
Securities and Exchange Commission on May 26, 2000. Without these non-recurring
charges, cost of goods sold, as a percentage of the Company's total reported
sales, would have been 44.0% during the first nine months of the previous year.
The increase in cost of goods sold during the third quarter and first nine
months of fiscal 2001, as a percentage of sales, when compared to cost of goods
sold, net of non-recurring charges, in the previous year, is attributable to the
Company's continued investments in application engineering and customer service
resources to support opportunities in all of its markets. Additionally, the
products acquired in the merger with Brite historically have had a greater cost
of goods sold, as a percentage of sales, than the Company's other products due
to higher third party hardware content. The Company has taken certain actions to
reduce a portion of its cost of goods sold. These actions are discussed below in
"Sales, General and Administration Expenses."
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the
third quarter and first nine months of fiscal 2001 were approximately $8.7
million and $26.6 million, or 12.7% and 12.5% of the Company's total sales,
respectively. During the third quarter of the previous fiscal year, research and
development expenses were $9.3 million or 11.4% of the Company's total
27
sales. During the first nine months of the previous year, such expenses were
$51.0 million, including a charge of approximately $30.1 million for in-process
research and development acquired in connection with the Brite merger, as
described in the Company's Form 10-K as filed with the Securities and Exchange
Commission on May 26, 2000. Net of this charge, research and development
expenses, as a percentage of reported sales, for the first nine months of the
previous year would have been 10.2%. Research and development expenses included
the design of new products and the enhancement of existing products. The Company
has taken certain actions to reduce a portion of its research and development
expenses. These actions are discussed below in "Sales, General and
Administration Expenses."
SELLING, GENERAL AND ADMINISTRATION EXPENSES. Selling, general and
administration expenses during the third quarter and first nine months of fiscal
2001 were approximately $20.5 million and $63.7 million, or 29.9% and 30.0% of
the Company's total sales, respectively. Such expenses during the third quarter
of the previous year were $21.0 million, or 25.6% of the Company's total sales.
During the first nine months of the previous year, such expenses were $59.7
million and included non-recurring charges totaling $5.9 million. These
non-recurring charges are described in the Company's Form 10-K as filed with the
Securities and Exchange Commission on May 26, 2000. Without these non-recurring
charges, selling, general and administrative expenses for the first nine months
of the previous year, as a percentage of the Company's total sales, would have
been 26.7%. The increase in selling, general and administrative expenses during
the third quarter and first nine months of fiscal 2001, as a percentage of
sales, versus such expenses, net of non-recurring charges, during the previous
year is the result of the Company's decision to continue to hire and train new
and existing sales and sales support personnel and expand its marketing and
advertising programs worldwide. Subsequent to the end of the third quarter of
fiscal 2001, the Company announced organization changes to improve its focus on
its core competencies and products. The changes resulted in a workforce
adjustment impacting
28
approximately 100 positions. The workforce adjustment plus other cost reduction
actions are expected to reduce Company expenses by up to $3.0 million per
quarter when fully realized. Such expense reductions could be offset in part by
spending initiatives to pursue the new opportunities being created by the
ongoing convergence of voice, data and internet technologies.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLE ASSETS. Goodwill and intangible
assets acquired in the merger with Brite totaled approximately $104 million with
useful lives averaging seven years. Amortization of these assets began during
the second quarter of fiscal 2000. Such expenses were approximately $3.5 million
and $10.4 million for the third quarter and first nine months of fiscal 2001,
respectively, versus $3.5 million and $7.1 million for the same periods of the
previous fiscal year. Nine month results for fiscal 2001 include three quarters
of amortization expense while nine month results for the previous fiscal year
include only two quarters of amortization expense.
OTHER INCOME. Other income of approximately $0.4 million and $1.2 million during
the third quarter and first nine months of fiscal 2001, respectively, was
primarily interest paid on the Company's net cash reserves.
INTEREST EXPENSE. Interest expense was approximately $1.7 million and $5.7
million during the third quarter and first nine months of fiscal 2001,
respectively, versus $2.7 million and $5.6 million for the same periods of the
previous fiscal year. The Company obtained long term borrowings during the
second quarter of fiscal 2000 in connection with its merger with Brite. See
"Liquidity and Capital Resources" for a description of the Company's long term
borrowings. Initial borrowings were $135 million and have been paid down to $75
million at November 30, 2000. The decrease in interest expense during the third
quarter of fiscal 2001 is the result of decreased borrowings. While interest
expense during the first nine months of fiscal 2001 is comparable to the same
period of the previous year, the
29
first nine months of fiscal 2001 contained three quarters' interest expense on
the Company's long term borrowings versus two quarters' interest expense
included in the same period of the previous year. Interest expense during the
first nine months of fiscal 2001 also reflected the Company's paydown of
borrowings.
INCOME (LOSS) FROM OPERATIONS. The Company generated operating income and net
income of $3.5 million and $1.1 million during the third quarter of fiscal 2001.
The Company generated operating income of $13.5 million and net income of $7.1
million during the third quarter of the previous year.
During the first nine months of fiscal 2001, the Company generated $8.2 million
in operating income, $1.8 million in income before the cumulative effect of a
change in accounting principle, and a net loss of $9.4 million. As described in
Note C of the Notes to the Consolidated Financial Statements, during the first
quarter of fiscal 2001, the Company recorded a charge of $11.3 million relating
to the cumulative effect of a change in accounting principle as the result of
changing its revenue recognition policy pursuant to guidance issued by the
Securities and Exchange Commission in its Staff Accounting Bulletin No. 101.
During the first nine months of the previous year, the Company generated an
operating and net loss of $1.8 million and $22.7 million, respectively. Without
the non-recurring charges totaling $45.1 million discussed above, the Company
would have had operating and net income for the first nine months of the
previous year of $31.4 million and $18.8 million, respectively.
To enhance comparability of the Company's operating results, the information
below is presented on an "as adjusted" basis, excluding the $11.3 million charge
booked in the first quarter of fiscal 2001 relating to the cumulative effect of
a change in accounting principle and the previously described non-recurring
30
charges totaling $45.1 million booked in the second quarter of fiscal 2000.
(In millions)
AS ADJUSTED AS REPORTED
------------------------- --------------------------
THIRD QUARTER 2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating income $ 3.5 $ 13.5 $ 3.5 $ 13.5
Net income $ 1.1 $ 7.1 $ 1.1 $ 7.1
FIRST NINE MONTHS
Operating income (loss) $ 8.2 $ 31.4 $ 8.2 $ (13.7)
Net income (loss) $ 1.8 $ 18.8 $ (9.4) $ (22.7)
During the third quarter and first nine months of fiscal 2001, the Company
continued to invest in application engineering, customer service, research and
development, sales, sales support and administration personnel and resources to
pursue opportunities in all its markets. This resulted in a decline in the
Company's "as adjusted" operating and net income versus the same periods in the
previous fiscal year.
LIQUIDITY AND CAPITAL RESOURCES. At November 30, 2000, the Company had cash
reserves of approximately $14.2 million while borrowings under the Company's
term loan facility were $75.0 million. Operating cash flow during the third
quarter and first nine months of fiscal 2001 was a negative $2.0 million and a
positive $17.1 million, respectively. Income before the cumulative effect of a
change in accounting principle plus non-cash expense items during the third
quarter and first nine months totaled $8.3 million and $24.4 million,
respectively, while increases in operating assets totaled $10.3 million and $7.3
million, respectively. Days sales outstanding (DSO's) of accounts receivable
continue
31
to be a focus for the Company. At November 30, 2000, DSO's were 87, down from 99
days at February 29, 2000. Investing activities during the quarter, primarily
the purchase of computer and test equipment, used cash of approximately $1.8
million. Investing activities during the first nine months used $2.9 million,
net of $2.8 million received during the second quarter in connection with the
extinguishment of a warrant acquired in the Company's merger with Brite to
purchase shares of the common stock of EPS Solutions Corporation. Financing
activities, included pay down of debt, which used $7.5 million and $32.5 million
during the third quarter and first nine months. Net proceeds from the exercise
of employee stock options, which provided $0.3 million and $2.2 million during
the same periods and borrowings during the third quarter which provided $7.5
million cash during the quarter and first nine months. Net cash flow during the
third quarter was a negative $3.4 million, while net cash flow for the first
nine months was a negative $9.1 million. The Company believes its cash reserves
and internally generated cash flow will be sufficient to meet its operating cash
requirements for the foreseeable future. In addition, the Company has $17.5
million available under its $25 million revolving credit facility. The Company
reviews share repurchase and acquisition opportunities from time to time and
believes it has access to the financial resources necessary to pursue attractive
repurchase and/or acquisition opportunities as they arise. However, the term
loan and revolving credit agreement discussed below includes normal and
customary provisions which limit the Company's ability to make such repurchases
and acquisitions.
In connection with the merger with Brite, the Company entered into a loan
agreement with Bank of America and nine other banks to provide a senior secured
credit facility amounting to $150 million, including a $125 million term loan
and a $25 million revolving credit agreement. The term loan agreement is subject
to future scheduled repayments, as defined, during 2001-2003. The revolving
credit agreement will expire upon the earlier of the termination of the term
loan, or August 31, 2003. The cash required to service the facilities could have
a material impact upon the operating cash requirements of
32
the Company for the foreseeable future. At January 11, 2001, the Company had $75
million of borrowings outstanding under the agreement, at an average annual
interest rate of 8.74%. Interest under the credit facility accrues at a variable
rate indexed to the prime rate, the federal funds rate or an adjusted London
Interbank Offering Rate.
During June 2000, the Company entered into interest rate swap agreements,
expiring June 2002, to change the characteristics of interest payments on a
portion of its long-term borrowings from LIBOR-based variable-rate payments to
fixed-rate payments. At November 30, 2000 a notional amount of $40.0 million on
debt with a variable rate of 8.74% had been swapped for an effective rate of
8.34%. The effects of interest rate swaps during the third quarter and first
nine months of fiscal 2001 were immaterial.
During fiscal 1997, the Company received a warrant to purchase 741,237 shares of
SpeechWorks International, Inc. common stock at an exercise price of $2.05 per
share. The warrant was issued in connection with a supply agreement, pursuant to
which SpeechWorks supplies the Company with software products and services. Upon
the Company's receipt of the warrant, SpeechWorks was not a publicly traded
company and no value was assigned to the warrant. The warrant and the shares
underlying the warrant are unregistered securities with no readily ascertainable
market valuation, therefore, the warrant is carried at cost, i.e. no value, on
the Company's balance sheet at November 30, 2000. SpeechWorks became a publicly
traded company on August 1, 2000. The January 11, 2001 closing price for a share
of SpeechWorks common stock was $30.36.
For several reasons, the Company is currently unable to estimate what gain, if
any, it will ultimately realize in connection with the warrant. First, the
Company has not completed its evaluation of its alternatives with respect to
monetizing the warrant. Second, the ultimate price received for the warrant
33
or the shares underlying the warrant cannot be determined due to relatively long
periods of time before such securities could be sold in a private or public
placement. The Company has agreed not to sell the warrant or underlying
securities in a private placement for six months after SpeechWorks' initial
public offering (August 1, 2000). Should the Company exercise the warrant with
the intent of selling the underlying shares in the public market, the
unregistered shares must be held at least one year before the Company could sell
such shares, subject to limitations under the Securities and Exchange
Commission's Rule 144. The Company does have certain demand registration rights
which could allow the sale of the shares in the public market before the Rule
144 one year holding period lapses. However, such rights cannot be exercised
unilaterally, except in the case of a registration of the shares by SpeechWorks
on Form S-3, for which SpeechWorks will not be eligible until at least August 1,
2001. Third, there is not a readily ascertainable price for the unregistered
warrant or underlying unregistered shares. Generally, unregistered securities
sold through a private offering sell at discounts from the then current market
price. Fourth, a large percentage of SpeechWorks' outstanding common stock is
unregistered and is subject to a lock up period, as are the shares underlying
the Company's warrant. Such an arrangement is not unusual, but the potential
introduction of a large number of shares following a lock up period can
negatively affect the market for an issuer's shares.
Should the Company decide to exercise its warrant, the underlying shares
received will be valued at market as a current asset with a corresponding
increase to the Company's stockholders' equity. Any change of valuation prior to
the final disposition of the underlying shares will be reflected as an
adjustment to the Company's stockholders' equity through accumulated other
comprehensive income.
IMPACT OF INFLATION
The Company does not expect any significant short term impact of inflation on
its financial condition.
34
Technological advances should continue to reduce costs in the computer and
communications industries. Further, the Company presently is not bound by long
term fixed price sales contracts which should reduce the Company's exposure to
inflationary effects.
The Company's debt facilities financing is considered to be a material long term
debt obligation, which may expose the Company to inflationary effects associated
with such variable rate loans; however, the Company has entered into interest
rate swap agreements to partially hedge such exposure.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's current term loan and revolving credit agreement
provides for borrowings up to $150 million which bear interest at variable rates
based on either a prime rate, the federal funds rate or the London Interbank
Offering Rate, plus an applicable margin. As of November 30, 2000, the Company
had $75 million outstanding under the credit agreement. The credit agreement
matures on August 31, 2003 and the term loan facility is subject to quarterly
principal amortization. The fair value of the borrowings approximate their
carrying value at November 30, 2000. Due to the magnitude of this credit
facility, the Company believes that the effect of any reasonably possible
near-term changes in interest rates on the Company's financial position, results
of operations, and cash flows may be material. To mitigate the effect of
interest rate changes, the Company enters into interest rate swap arrangements
to change the characteristics of interest payments on its borrowings from
LIBOR-based, variable rate payments to fixed rate payments. As of November 30,
2000, a notional amount of $40 million of the Company's long term borrowings
with a variable interest rate of 8.74% had been swapped for an effective
interest rate of 8.34%. The effect of interest rate swaps on the Company's
interest expense during the quarter was immaterial.
35
The Company transacts business in certain foreign currencies, including the
British pound. Accordingly, the Company is subject to exposure from adverse
movements in foreign currency exchange rates. The Company attempts to mitigate
this risk by transacting business in the functional currency of each of its
subsidiaries, thus creating a natural hedge by paying expenses incurred in the
local currency in which revenues will be received. However, the Company's major
foreign subsidiary procures much of its raw materials inventory from its U.S.
parent. Such transactions are denominated in U. S. dollars, limiting the
Company's ability to hedge against adverse movements in foreign currency
exchange rates.
36
PART II. OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
From time to time Ronald A. Katz Technology Licensing L.P. ("RAKTL") has sent
letters to certain customers of the Company suggesting that the customer should
negotiate a license agreement to cover the practice of certain patents owned by
RAKTL. In the letters, RAKTL has alleged that certain of its patents pertain to
certain enhanced services offered by network providers, including prepaid card
and wireless services and postpaid card services. RAKTL has further alleged that
certain of its patents pertain to certain call processing applications,
including applications for call centers that route calls using a called party's
DNIS identification number. Certain products offered by the Company can be
programmed and configured to provide enhanced services to network providers and
call processing applications for call centers. The Company's contracts with
customers usually include a qualified obligation to indemnify and defend
customers against claims that products as delivered by the Company infringe a
third party's patent.
To the Company's knowledge, RAKTL has not initiated litigation against any of
the Company's customers. Moreover, none of the customers have notified the
Company that RAKTL has claimed that any product provided by the Company
infringes any claims of any RAKTL patent. Accordingly, the Company has not been
required to defend any customers against a claim of infringement under a RAKTL
patent. The Company has, however, received letters from customers notifying the
Company of the efforts by RAKTL to license its patent portfolio and reminding
the Company of its potential obligations under the indemnification provisions of
the applicable agreements in the event that a claim is asserted. Even though
RAKTL has not instituted litigation against any customers, it is always possible
37
that RAKTL may do so. In the event of such litigation, a customer could attempt
to invoke the Company's indemnity obligations under the applicable agreement. As
with most sales contracts with suppliers of computerized equipment, the
Company's contractual indemnity obligations are generally limited to the
products provided by the Company, and generally require the customer to allow
the Company to have sole control over any litigation and settlement negotiations
with the patent holder. The customers who have received letters from RAKTL
generally have multiple suppliers of the types of products that might
potentially be subject to claims by RAKTL.
Even though no claims have been made that a specific product offered by the
Company infringes any claim under the RAKTL patent portfolio, the Company has
received opinions from its outside patent counsel that certain products and
applications offered by the Company do not infringe certain claims of the RAKTL
patents. The Company has also received opinions from its outside counsel that
certain claims under the RAKTL patent portfolio are invalid. Furthermore, based
on the reviews by outside counsel, the Company is not aware of any claims under
the RAKTL portfolio that are infringed by the Company's products. If the Company
does become involved in litigation in connection with the RAKTL patent
portfolio, under a contractual indemnity or any other legal theory, the Company
intends to vigorously contest the claims and to assert appropriate defenses. A
number of companies, including some large, well known companies and some
customers of the Company, have already licensed certain rights under the RAKTL
patent portfolio. During November 2000, RAKTL announced license agreements with,
among others, AT&T Corp., Microsoft Corporation and International Business
Machines Corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERVOICE-BRITE, INC.
Date: 01/12/01 By: /s/ ROB-ROY J. GRAHAM
-----------------------------
Rob-Roy J. Graham
Chief Financial Officer
(Chief Accounting Officer)