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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
AUGUST 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-13616
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 33,441,786 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
(In Thousands, Except Share Data)
ASSETS August 31, 2001 February 28, 2001
--------------- -----------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 16,290 $ 15,901
Trade accounts receivable, net of allowance for
doubtful accounts of $3,499 in fiscal 2002 and
$3,642 in fiscal 2001 76,765 72,148
Income tax receivable 3,323 3,323
Inventory 33,594 40,184
Prepaid expenses and other current assets 10,350 5,238
Deferred income taxes 4,211 3,968
--------- ---------
144,533 140,762
--------- ---------
Property and Equipment
Building 20,301 20,228
Computer equipment and software 47,945 46,316
Furniture, fixtures and other 4,599 4,528
Service equipment 7,387 6,905
--------- ---------
80,232 77,977
Less allowance for depreciation 47,385 42,037
--------- ---------
32,847 35,940
Other Assets
Intangible assets, net of amortization of $33,676 in
fiscal 2002 and $26,702 in fiscal 2001 72,537 79,760
Other assets 297 299
--------- ---------
$ 250,214 $ 256,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 24,596 $ 22,952
Accrued expenses 12,320 16,863
Customer deposits 6,577 7,730
Deferred income 20,491 19,705
Current portion of long term borrowings 20,179 18,537
Income taxes payable 5,653 5,117
--------- ---------
89,816 90,904
Deferred income taxes 20,127 20,127
Long term borrowings 19,891 31,100
Stockholders' Equity
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: 33,441,786 issued and
outstanding in fiscal 2002, 33,099,647
issued and outstanding in fiscal 2001 17 17
Additional capital 57,788 55,671
Unearned compensation (632) (1,311)
Retained earnings 67,441 64,308
Accumulated other comprehensive loss (4,234) (4,055)
--------- ---------
Stockholders' equity 120,380 114,630
--------- ---------
$ 250,214 $ 256,761
========= =========
See notes to consolidated financial statements.
INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
August 31, August 31, August 31, August 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Sales
Systems $ 42,455 $ 48,523 $ 80,897 $ 96,619
Services 22,034 23,859 45,098 47,231
--------- --------- --------- ---------
64,489 72,382 125,995 143,850
--------- --------- --------- ---------
Cost of goods sold
Systems 21,287 24,672 39,429 48,260
Services 10,139 11,566 19,789 22,879
--------- --------- --------- ---------
31,426 36,238 59,218 71,139
--------- --------- --------- ---------
Gross margin
Systems 21,168 23,851 41,468 48,359
Services 11,895 12,293 25,309 24,352
--------- --------- --------- ---------
33,063 36,144 66,777 72,711
Research and development expenses 7,060 8,872 14,623 17,889
Selling, general and administrative expenses 18,919 21,336 38,534 43,233
Amortization of goodwill and acquisition
related intangible assets 3,435 3,437 6,788 6,911
--------- --------- --------- ---------
Income from operations 3,649 2,499 6,832 4,678
Other income 451 603 956 794
Interest expense (1,224) (1,963) (2,565) (4,011)
--------- --------- --------- ---------
Income before taxes and the cumulative effect
of a change in accounting principle 2,876 1,139 5,223 1,461
Income taxes 1,151 606 2,090 730
--------- --------- --------- ---------
Income before the cumulative effect
of a change in accounting principle 1,725 533 3,133 731
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- -- -- (11,850)
--------- --------- --------- ---------
Net income (loss) $ 1,725 $ 533 $ 3,133 $ (11,119)
========= ========= ========= =========
Per Basic Share:
Income before the cumulative effect of
a change in accounting principle $ 0.05 $ 0.02 $ 0.09 $ 0.02
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- -- -- (0.36)
--------- --------- --------- ---------
Net income (loss) $ 0.05 $ 0.02 $ 0.09 $ (0.34)
========= ========= ========= =========
Per Diluted Share:
Income before the cumulative effect of
a change in accounting principle $ 0.05 $ 0.02 $ 0.09 $ 0.02
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- -- -- (0.34)
--------- --------- --------- ---------
Net income (loss) $ 0.05 $ 0.02 $ 0.09 $ (0.32)
========= ========= ========= =========
See notes to consolidated financial statements.
INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended Six Months Ended
---------------------- ----------------------
August 31, August 31, August 31, August 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Operating Activities
Income before the cumulative effect of a
change in accounting principle $ 1,725 $ 533 $ 3,133 $ 731
Adjustments to reconcile income before the cumulative effect of a change in
accounting principle to net cash provided by operating activities
Depreciation and amortization 6,843 7,113 13,289 15,353
Other changes in operating activities (611) 1,369 (5,412) 2,974
-------- -------- -------- --------
Net cash provided by operating activities 7,957 9,015 11,010 19,058
Investing Activities
Purchases of property and equipment (1,793) (2,368) (3,167) (3,885)
Other -- 2,800 -- 2,800
-------- -------- -------- --------
Net cash provided by (used in) investing activities (1,793) 432 (3,167) (1,085)
Financing Activities
Paydown of debt (3,783) (5,000) (9,567) (25,000)
Exercise of stock options 1,551 806 2,117 1,821
-------- -------- -------- --------
Net cash used in financing activities (2,232) (4,194) (7,450) (23,179)
Effect of exchange rates on cash 105 (21) (4) (415)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents 4,037 5,232 389 (5,621)
Cash and cash equivalents, beginning of period 12,253 12,410 15,901 23,263
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 16,290 $ 17,642 $ 16,290 $ 17,642
======== ======== ======== ========
See notes to consolidated financial statements.
INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands, Except Share Data)
Common Stock Accumulated Other
----------------------- Additional Unearned Retained Comprehensive
Shares Amount Capital Compensation Earnings Loss Total
---------- -------- ---------- ------------ ---------- ----------------- ----------
Balance at February 28, 2001 33,099,647 $ 17 $ 55,671 $ (1,311) $ 64,308 $ (4,055) $ 114,630
Net income -- -- -- -- 3,133 -- 3,133
Foreign currency translation
adjustment -- -- -- -- -- 322 322
Cumulative effect on prior
years of adopting
Statement of Financial
Accounting Standards
No. 133, as amended,
net of tax effect of $261 (425) (425)
Valuation adjustment of
interest rate swap
hedge, net of tax effect
of $46 (76) (76)
Exercise of stock options 342,139 -- 2,117 -- -- -- 2,117
Amortization of unearned
compensation -- -- -- 679 -- -- 679
---------- -------- ---------- ---------- ---------- ---------- ----------
Balance at August 31, 2001 33,441,786 $ 17 $ 57,788 $ (632) $ 67,441 $ (4,234) $ 120,380
========== ======== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED AUGUST 31, 2001
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 28, 2001 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 August 31, 2001 and 2000
consolidated financial statements have been included. Operating results for the
three and six month periods ended August 31, 2001 are not necessarily indicative
of the results that may be expected for the year ending February 28, 2002, as
such results 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) for the second quarters of fiscal 2002 and 2001 was $2.8 million
and ($0.8) million, respectively. For the six month periods ended August 31,
2001 and 2000, comprehensive income (loss) was $3.0 million and ($14.7) million,
respectively. Total comprehensive income is comprised of net income (loss),
foreign currency translation adjustments, the cumulative effect of the adoption
in fiscal 2002 of Statement of Financial Accounting Standards No. 133 -
Accounting for Derivative Instruments and Hedging Activities, as amended, and
the adjustment to the carrying value of certain derivative instruments as of May
31 and August 31, 2001. 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 as a separate
component of stockholders' equity. Any transaction gains or losses are included
in the accompanying consolidated statements of operations.
In June 2001, the Financial Accounting Standards Board issued new rules on
accounting for goodwill and other intangible assets in its Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, which become effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to impairment tests at least annually in accordance with the Statements.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2003. The Company's
preliminary estimate is that application of the nonamortization provisions of
the Statements will result in an increase in net income in fiscal 2003 of $4.0
million ($0.12 per share). Final results, however, may vary from this
preliminary estimate. During fiscal 2003, the Company will perform the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of March 1, 2002. The Company has not yet determined what the effect of these
tests will be on the earnings and financial position of the Company.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVES
The Company uses interest rate swap arrangements to hedge the variability of
interest payments on its variable rate credit facilities. The swap arrangements
effectively convert the Company's outstanding floating rate debt to a fixed rate
basis through June 2002. Amounts due under the debt facilities totaled $40.1
million and $49.6 million at August 31, 2001 and February 28, 2001,
respectively. Interest accrues at variable rates indexed to a combination of the
London Interbank Offering Rate, the prime rate and the federal funds rate. The
average annual interest rate under the facilities was 6.7% and 9.2% at August
31, 2001 and February 28, 2001, respectively. Prior to March 1, 2001, the
Company did not assign a value to the interest rate swaps, and gains and losses
from the swaps were included on the accrual basis in interest expense.
Effective March 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 -- Accounting for Derivative Instruments and Hedging
Activities, as amended, ("the Statement"). The Statement requires that the
Company record an asset or liability for the fair value of its derivatives and
that it mark such asset or liability to market on an ongoing basis. For
derivatives, such as the Company's interest rate swaps, which are defined as
cash flow hedges, changes to the derivative's market value are initially
reported at the adoption of the Statement as a component of other comprehensive
loss to the extent that the hedge is determined
to be effective. Such changes are subsequently reclassified into earnings when
the related transaction (the quarterly payment of variable rate interest)
affects earnings. Changes in market value attributable to the ineffective
portion of a hedge are reported in earnings immediately as incurred.
At March 1, 2001, the Company was a party to swap arrangements with a notional
amount of $50 million under which the Company pays interest at a fixed rate of
6.2% and receives interest at the LIBOR three-month rate (5.1% at March 1,
2001). Upon adoption of the Statement, the Company recorded an initial
derivative liability included in accrued liabilities of approximately $0.7
million and incurred a charge to other comprehensive loss totaling approximately
$0.4 million (net of tax). The charge to other comprehensive loss represents the
transition adjustment associated with the cumulative effect on prior years of
adopting the Statement. For the six months ended August 31, 2001, the Company
increased its derivative liability by $0.3 million to reflect changes in its
fair value attributable to the reduction in the LIBOR three-month rate to 3.5%
offset by the reduction of the obligation through the payment of scheduled
quarterly interest rate swap settlements. During the same period, the Company
recorded a net of tax charge to other comprehensive loss of approximately $0.1
million and a charge to interest expense for the ineffective portion of the
derivative of approximately $0.2 million. The Company also recognized interest
expense during the six months ended August 31, 2001 of approximately $0.4
million related to its quarterly swap settlements.
The interest rate swap arrangements expire in June 2002. Based on current
interest rates and scheduled principal repayments, the Company expects to incur
interest expense of approximately $0.3 million per quarter for the next three
quarters related to the settlement of its swap liability and the
reclassification of other comprehensive loss into earnings. The Company will
also continue to incur interest expense under the provisions of the credit
facilities.
NOTE C - CHANGE IN ACCOUNTING PRINCIPLE FOR 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" issued by the Securities and
Exchange Commission. The cumulative effect of the adoption of SAB 101 on prior
years resulted in a charge to operations of $11.9 million (after reduction for
income taxes of $6.4 million) which is included in results of operations for the
three months ended May 31, 2000. For the three and six months ended August 31,
2000, the net effect of the change in accounting was to increase income before
the cumulative effect of the accounting change $4.3 million ($0.13 per share)
and $8.5 million ($0.25 per share), respectively. For the three and six months
ended August 31, 2000, the Company recognized $1.2 million and $17.0 million,
respectively, in revenue whose contribution to income is included in the
cumulative effect adjustment as of March 1, 2000.
NOTE D - INVENTORIES
Inventories consist of the following (in thousands):
August 31, 2001 February 28, 2001
--------------- -----------------
Purchased parts $24,241 $33,103
Work in progress 7,797 5,961
Finished goods 1,556 1,120
------- -------
$33,594 $40,184
======= =======
NOTE E - ACCRUED EXPENSES
Accrued expenses at February 28, 2001 included $1.8 million of severance and
related special charges incurred by the Company in the fourth quarter of fiscal
2001. The Company charged payments of $1.2 million and $0.2 million against this
accrual during the first and second quarters of fiscal 2002, respectively, and
$0.4 million remains accrued at August 31, 2001. In addition, $0.9 million of
accrued customer settlement expenses recorded in the fourth quarter of fiscal
2001 in connection with the Company's discontinuance of its Agent Connect
product line remain accrued at August 31, 2001.
NOTE F - EARNINGS PER SHARE
(in thousands except per share data)
Three Months Ended Six Months Ended
August 31, 2001 August 31, 2000 August 31, 2001 August 31, 2000
--------------- --------------- --------------- ---------------
Numerator:
Income before the cumulative
effect of a change in accounting
principle $ 1,725 $ 533 $ 3,133 $ 731
Cumulative effect on prior
years of adopting
SEC SAB No. 101 -- -- -- (11,850)
-------- -------- -------- --------
Net Income (loss) $ 1,725 $ 533 $ 3,133 $(11,119)
-------- -------- -------- --------
Denominator:
Denominator for basic
earnings per share 33,245 32,708 33,152 32,624
Employee stock options 1,509 899 1,326 1,596
Non-vested restricted shares 39 38 36 50
-------- -------- -------- --------
Dilutive potential common shares 1,548 937 1,362 1,646
Denominator for diluted
earnings per share 34,793 33,645 34,514 34,270
BASIC:
Income before the cumulative
effect of a change in
accounting principle $ 0.05 $ 0.02 $ 0.09 $ 0.02
Cumulative effect on prior years
of adopting SEC SAB No. 101 -- -- -- (0.36)
-------- -------- -------- --------
Net Income (loss) $ 0.05 $ 0.02 $ 0.09 $ (0.34)
======== ======== ======== ========
DILUTED:
Income before the cumulative
effect of a change in
accounting principle $ 0.05 $ 0.02 $ 0.09 $ 0.02
Cumulative effect on prior years
of adopting SEC SAB No. 101 -- -- -- (0.34)
-------- -------- -------- --------
Net Income (loss) $ 0.05 $ 0.02 $ 0.09 $ (0.32)
======== ======== ======== ========
Options to purchase 1,515,937 and 1,595,437 shares of common stock at average
prices of $14.67 and $14.49, respectively, were outstanding during the three and
six month periods ended August 31, 2001, 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. Options to
purchase 3,319,992 and 79,874 shares at average prices of $12.64 and $20.87,
respectively, were excluded from the diluted earnings per share calculations for
the three and six month periods ended August 31, 2000 because their prices were
greater than the average market price of the Company's common stock during such
periods.
NOTE G - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
Beginning in fiscal 2002, the Company has defined two reportable segments: the
Enterprise Solutions Division ("ESD") and the Network Solutions Division
("NSD"). The ESD focuses on the interactive voice response (IVR) market in which
the Company provides automated customer service and self-help solutions to
enterprises and institutions. The NSD focuses on the enhanced telecommunications
market in which the Company provides value-added, revenue generating solutions
to network service providers. Each division sells integrated systems and related
services including system maintenance and software licenses. As a complement to
the Company's
systems sales, the NSD also provides and manages enhanced network services and
IVR applications for customers on an application service provider (ASP) basis.
The Company's reportable segments are strategic business units that focus on
separate customer groups. They are managed separately to enable the Company to
target its product development and marketing efforts to meet the unique needs of
the Company's target markets.
The accounting policies of the segments are the same as those of the Company.
The Company evaluates performance based on profit or loss from operations before
income taxes, excluding the amortization of goodwill and acquisition related
intangible assets. Corporate operating expenses are allocated to the segments
based on budgeted and historical percentages of revenue. The Company does not
have material intersegment sales and does not allocate Company assets to
individual segments.
The operating results of the Company's segments for the three and six month
periods ended August 31, 2001 and 2000 are as follows (in thousands).
Three Months Ended Three Months Ended
August 31, 2001 August 31, 2000
-------------------------------- --------------------------------
Enterprise Network Enterprise Network
Solutions Solutions Total Solutions Solutions Total
---------- --------- ------- ---------- --------- -------
Systems $24,427 $18,028 $42,455 $25,455 $23,068 $48,523
Services 7,630 14,404 22,034 6,139 17,720 23,859
------- ------- ------- ------- ------- -------
Total sales to external customers 32,057 32,432 64,489 31,594 40,788 72,382
------- ------- ------- ------- ------- -------
Systems 12,649 8,519 21,168 13,213 10,638 23,851
Services 5,189 6,706 11,895 3,320 8,973 12,293
------- ------- ------- ------- ------- -------
Total gross margin 17,838 15,225 33,063 16,533 19,611 36,144
------- ------- ------- ------- ------- -------
Segment operating expenses 12,075 13,904 25,979 15,195 15,013 30,208
------- ------- ------- ------- ------- -------
Segment operating income* $ 5,763 $ 1,321 $ 7,084 $ 1,338 $ 4,598 $ 5,936
======= ======= ======= ======= ======= =======
Six Months Ended Six Months Ended
August 31, 2001 August 31, 2000
----------------------------------- -----------------------------------
Enterprise Network Enterprise Network
Solutions Solutions Total Solutions Solutions Total
---------- --------- -------- ---------- --------- --------
Systems $ 45,246 $ 35,651 $ 80,897 $ 49,267 $ 47,352 $ 96,619
Services 14,901 30,197 45,098 11,992 35,239 47,231
-------- -------- -------- -------- -------- --------
Total sales to external customers 60,147 65,848 125,995 61,259 82,591 143,850
-------- -------- -------- -------- -------- --------
Systems 23,360 18,108 41,468 25,682 22,677 48,359
Services 10,502 14,807 25,309 6,321 18,031 24,352
-------- -------- -------- -------- -------- --------
Total gross margin 33,862 32,915 66,777 32,003 40,708 72,711
-------- -------- -------- -------- -------- --------
Segment operating expenses 25,246 27,911 53,157 31,029 30,093 61,122
-------- -------- -------- -------- -------- --------
Segment operating income* $ 8,616 $ 5,004 $ 13,620 $ 974 $ 10,615 $ 11,589
======== ======== ======== ======== ======== ========
* Consolidated income from operations includes amortization of goodwill and
acquisition related intangible assets of $3,435 and $6,788 for the three
and six month periods ended August 31, 2001, respectively, that is not
allocated by the Company to individual segments. Such expenses were $3,437
and $6,911 for the same periods of fiscal 2001.
Geographic Operations
The Company's net sales by geographic area were as follows (in thousands):
Three Months Ended Six Months Ended
----------------------------------- ---------------------------------
August 31, 2001 August 31, 2000 August 31, 2001 August 31, 2000
--------------- --------------- --------------- ---------------
Geographic Area Net Sales:
United States $ 34,047 $ 36,226 $ 65,953 $ 70,668
The Americas (Excluding U.S.) 6,898 1,956 10,460 9,355
Pacific Rim 2,651 3,523 3,688 7,130
Europe, Middle East & Africa 20,893 30,677 45,894 56,697
-------- -------- -------- --------
Total $ 64,489 $ 72,382 $125,995 $143,850
======== ======== ======== ========
Concentration of Revenue
One Network Solutions Division customer, British Telecom (together with its
affiliate BT Cellnet), accounted for approximately 14% and 23% of the Company's
sales during the three-month periods ended August 31, 2001 and 2000,
respectively. The same customer accounted for 15% and 21% of the Company's sales
during the six-month periods ended August 31, 2001 and 2000, respectively.
During the three months ended May 31, 2001, the Company extended its managed
services contract with British Telecom through July 2003. Under the terms of the
extended contract and current exchange rates, BT Cellnet continued to purchase
managed services totaling at least $2.6 million per month through July 2001 and
will purchase services totaling at least $2.1 million per month for the six
month period ending January 2002 and totaling $0.9 million per month thereafter
for the remaining term of the contract. No other customer accounted for 10% or
more of the Company's sales during the three and six month periods ended August
31, 2001. Another customer accounted for 18% and 10% of the Company's sales
during the three and six month periods ended August 31, 2000.
NOTE H - CONTINGENCIES
Customer Dispute
The Company provides certain automated call processing services on a managed
services basis for a large domestic telecommunications company. As previously
disclosed by the 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 telecommunications company recently expressed confidence that if
it conducted an exhaustive audit, it would find that the Company issued material
amounts of improper credits to the telecommunications company's customers. The
Company believes that it did not issue material amounts of improper credit. If
the audit ultimately proves that the Company issued such improper credits, the
Company could be assessed significant penalties under the managed services
contract, but the telecommunications company has not provided the Company with
evidence to substantiate its beliefs. 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 recently amended and extended
their managed services agreement. The parties are in the process of attempting
to negotiate mutually satisfactory agreements to resolve their dispute. There is
no assurance that the parties will negotiate mutually acceptable agreements. The
telecommunications company has not threatened litigation against the Company in
connection with this matter. 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.
Intellectual Property Matters
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. In response to
correspondence from RAKTL, a few customers have attempted to tender to the
Company the defense of its products under contractual indemnity provisions. The
Company has informed these customers that while it fully intends to honor any
contractual indemnity provisions, it does not believe it currently has any
obligation to provide such a defense because RAKTL does not appear to have made
a claim that a Company product infringes a patent. 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 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.
In the matter of Aerotel, Ltd. et al, vs. Sprint Corporation, et al, Cause No.
99-CIV-11091 (SAS), pending in the United States District Court Southern
District of New York, Aerotel, Ltd., has sued Sprint Corporation alleging that
certain prepaid services offered by Sprint are infringing Aerotel's U.S. Patent
No. 4,706,275 ("275 patent"). According to Sprint, the suit originally focused
on land-line prepaid services not provided by the Company. Recently, as part of
an unsuccessful mediation effort, Aerotel also sought compensation for certain
prepaid wireless services provided to Sprint PCS by the Company. As a result of
the mediation effort, Sprint has requested that the Company provide a defense
and indemnification to Aerotel's infringement claims, to the extent that they
pertain to any wireless prepaid services offered by the Company. In response to
this request, the Company has offered to assist Sprint's counsel in defending
against such claims, to the extent they deal with issues unique to the system
and services provided by the Company, and to reimburse Sprint for the reasonable
attorneys' fees associated therewith. The trial court has stayed the lawsuit
pending certain rulings from the United States Patent and Trademark Office. The
Company has received opinions from its outside patent counsel that the wireless
prepaid services offered by the Company do not infringe the "275 patent". If the
Company does become involved in litigation in connection with the "275 patent",
under a contractual indemnity or any other legal theory, the Company intends to
vigorously contest any claims that its prepaid wireless services infringe the
"275 patent" and to assert appropriate defenses.
Pending Litigation
Several related class action lawsuits have been filed in the United States
District Court for the Northern District of Texas on behalf of purchasers of
common stock of the Company during the period from October 12, 1999 through June
6, 2000, the "Class Period." Plaintiffs have filed claims under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and the Securities and Exchange
Commission Rule 10b-5 against the Company as well as certain named current and
former officers and directors of the Company on behalf of the alleged class
members. In the Petition, Plaintiffs claim that the Company and the named
current and former officers and directors issued false and misleading statements
during the Class Period concerning the financial condition of the Company, the
results of the Company's merger with Brite Voice Systems, Inc., and the alleged
future business projections of the Company. Plaintiffs have asserted that these
alleged statements resulted in artificially inflated stock prices.
The Company has not been required to answer or otherwise respond to these
complaints which have now been consolidated into one proceeding. The Company
believes that it and its officers complied with their obligations under the
securities laws, and intends to defend the lawsuits vigorously.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE 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 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 2002,
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 The 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 only 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.
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. The
Company's installed base of customers generally is not contractually
obligated to place further systems orders with the Company or to extend
their services contracts with the Company at the expiration of their
current contracts. Sales to British Telecom accounted for approximately
14% and 23% of the Company's total sales during the three month periods
ended August 31, 2001 and 2000, respectively. For the six month periods
ended August 31, 2001 and 2000, sales to British Telecom accounted for
15% and 21% of the Company's sales, respectively. British Telecom's
managed services contract with the Company was recently extended by
eighteen months through July 17, 2003. Under the managed services
contract at current exchange rates, BT Cellnet purchased services in a
minimum amount of approximately $2.6 million per month through July 17,
2001, and the minimum amount has been reduced to $2.1 million per month
for the six month period that commenced July 18, 2001, and will be
further reduced to a flat fee of $900,000 per month for the eighteen
month period commencing on January 18, 2002. The amounts received under
the agreement may vary based on future changes in the exchange rate
between the dollar and the British pound.
o The Company's ability to successfully qualify, estimate and close
"pipeline" opportunities for systems sales during a quarter. See the
discussion entitled "Sales" in this "Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a
discussion of the Company's "pipeline" of systems sales opportunities.
o Legislative and administrative changes and, in particular, changes
affecting the telecommunications industry, such as the
Telecommunications Act of 1996.
o The Company's sales are largely dependent 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 dependent
upon the general level of demand for telecommunications equipment,
computers, software and other technology products. Furthermore, demand
for the Company's products offered to telecommunications companies is
very dependent upon the general level of demand for telephone switches
and other telecommunications equipment for public networks. There are
indications that, at least for the short term, demand for such
technology products and network-based telecommunications equipment has
softened. In addition, the slow down in certain sectors of the economy
that followed the attacks by terrorists on September 11, 2001, has
increased concerns that demand for the types of products offered by the
Company might soften as a result of domestic and global economic and
political conditions. It is too soon, however, for the Company to
determine whether the recent slow down in certain sectors of the
economy will have a material adverse effect on the Company's future
financial performance. The Company's revenues are not overly dependent
upon sales to the travel, lodging and entertainment industries, which
were among the industries most severely affected by the events of
September 11, 2001.
o Risks involved in the Company's international distribution and sales 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, the difficulty in protecting
intellectual property rights, and foreign governmental regulations that
may limit or restrict the sales of the Company's 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.
o The ability of the Company to currently estimate the impact on future
earnings of Statements of Financial Accounting Standards No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible
Assets which the Company will adopt beginning with fiscal 2003. These
Statements will affect the Company's amortization of goodwill and other
intangible assets and could require the Company to write off certain of
those assets should the Company conclude that the value of such assets
has been impaired. See "Item 2 - Amortization of Goodwill and Acquired
Intangible Assets."
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 quarterly sales and earnings.
o Many of the Company's contracts, particularly for managed services,
foreign contracts and contracts with telecommunication companies,
include provisions for the assessment of liquidated damages for delayed
performance by the Company or for system down time under ASP contracts.
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 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 financial
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 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.
o The Company's business transactions in foreign currencies are subject
to adverse movements in foreign currency exchange rates.
o The effect of class action lawsuits alleging securities law violations
and other litigation filed against the Company which could negatively
affect the Company and its financial condition if adversely determined.
See "Item 1 - Legal Proceedings" in Part II for a discussion of these
lawsuits.
RESULTS OF OPERATIONS
SALES. The Company's total sales for the second quarter and first six months of
fiscal 2002 were $64.5 million and $126.0 million, respectively. Second quarter
sales decreased $7.9 million, or 11%, when compared to the same period of fiscal
2001. The Company's Enterprise Solutions Division ("ESD") sales were up $0.5
million while its Network Solutions Division ("NSD") sales were down $8.4
million from the prior year's second quarter totals. Sales during the first six
months of fiscal 2002 decreased $17.8 million, or 12%, when compared to the same
period of fiscal 2001. The Company's ESD sales were down $1.1 million while its
NSD sales were down $16.7 million from the prior year's six-month totals.
Sales and gross margin results for the Company's segments for the three and six
month periods ended August 31, 2001 and 2000 are as follows (in millions).
Three Months Ended Three Months Ended
August 31, 2001 August 31, 2000
--------------------------------- ----------------------------------
Enterprise Network Enterprise Network
Solutions Solutions Total Solutions Solutions Total
---------- --------- ----- ---------- --------- -----
Systems $24.5 $18.0 $42.5 $25.4 $23.1 $48.5
Services 7.6 14.4 22.0 6.2 17.7 23.9
----- ----- ----- ----- ----- -----
Total sales to external customers 32.1 32.4 64.5 31.6 40.8 72.4
----- ----- ----- ----- ----- -----
Systems 12.7 8.5 21.2 13.2 10.6 23.8
Services 5.2 6.7 11.9 3.3 9.0 12.3
----- ----- ----- ----- ----- -----
Total gross margin 17.9 15.2 33.1 16.5 19.6 36.1
----- ----- ----- ----- ----- -----
Six Months Ended Six Months Ended
August 31, 2001 August 31, 2000
------------------------------------ ------------------------------------
Enterprise Network Enterprise Network
Solutions Solutions Total Solutions Solutions Total
---------- --------- ------ ---------- --------- ------
Systems $ 45.2 $ 35.7 $ 80.9 $ 49.2 $ 47.4 $ 96.6
Services 14.9 30.2 45.1 12.0 35.2 47.2
------ ------ ------ ------ ------ ------
Total sales to external customers 60.1 65.9 126.0 61.2 82.6 143.8
------ ------ ------ ------ ------ ------
Systems 23.4 18.1 41.5 25.7 22.7 48.4
Services 10.5 14.8 25.3 6.3 18.0 24.3
------ ------ ------ ------ ------ ------
Total gross margin 33.9 32.9 66.8 32.0 40.7 72.7
------ ------ ------ ------ ------ ------
ESD system sales in the second quarter and first six months of fiscal 2002 were
$24.5 million, down $0.9 million, and $45.2 million, down $4.0 million,
respectively, from the prior year's same period totals. ESD systems sales
continue to be affected by a lengthening of the overall sales cycle resulting
from the transition in customer demand from simpler, touch-tone systems to
complex, speech enabled applications. ESD service sales in the second quarter
and first six months of fiscal 2002 were $7.6 million and $14.9 million,
respectively, an increase of $1.4 million and $2.9 million, respectively, over
the same periods from the prior year. The increase was primarily attributable to
growth in the Company's sales of extended warranty services. International sales
accounted for approximately 15% of the Company's total ESD sales during the
second quarter and the first six months of fiscal 2002, respectively, unchanged
from the same periods in fiscal 2001.
NSD system sales in the second quarter and first six months of fiscal 2002 were
$18.0 million, down $5.1 million or 22%, and $35.7 million, down $11.7 million
or 25%, respectively, from the prior year's totals. Contributing factors to the
decline in system sales are the rebuilding and training of the sales force and
softness in the markets for network-based telecommunications systems. NSD
services sales totaled $14.4 million and $30.2 million for the second quarter
and first six months of fiscal 2002, down $3.3 million or 19% and $5.0 million
or 14% compared to the same periods of fiscal 2001. The decline in NSD service
sales is primarily comprised of a reduction in managed services (ASP) revenues
attributable to a decrease in the volume of activity processed under certain of
the division's ASP contracts. NSD international sales constituted 80% and 78% of
the Company's total NSD sales during the second quarter and first six months of
fiscal 2002 as compared to 76% and 77% for the same periods 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 continues to investigate
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 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.
The Company uses a system combining estimated sales from its service and support
contracts, "pipeline" of systems sales opportunities, and backlog of committed
systems orders to estimate sales and trends in its business. Sales for the last
three quarters from service and support contracts, including contracts for ASP
managed services, have averaged approximately 35% of the Company's quarterly
sales. The pipeline of opportunities for systems sales and backlog of systems
sales during the same period contributed approximately 35% and 30% of quarterly
revenues, respectively.
The Company's service and support contracts range in duration from one month to
three years, with many longer duration contracts allowing customer cancellation
privileges. The Company's largest services customer is BT Cellnet, which
accounted for 38% of service and support sales during the second quarter of
fiscal 2002 and 37% of service and support sales during the first six months of
fiscal 2002. See "Disclosures Regarding Forward-Looking Statements" for a
discussion of BT Cellnet's monthly contractual revenue commitments through July
2003, including reductions in monthly revenue commitments that began in July
2001 and further reductions commencing in January 2002. It is easier for the
Company to estimate service and support sales than to measure systems sales for
the next quarter because service and support contracts generally span multiple
quarters and revenues recognized under each contract are generally similar from
one quarter to the next.
The Company's backlog is made up of customer orders for systems for which it has
received complete purchase orders and which the Company expects to ship within
twelve months. At August 31, 2001, May 31, 2001 and February 28, 2001 the
Company's backlog of systems sales was approximately $25.4 million, $31.0
million and $35.0 million, respectively. The Company's pipeline of opportunities
for systems sales is the aggregation of its sales opportunities, with each
opportunity evaluated for the date the potential customer will make a purchase
decision, competitive risks, and the potential amount of any resulting sale. No
matter how promising a pipeline opportunity may appear, there is no assurance it
will ever result in a sale. While this pipeline may provide the Company some
sales guidelines in its business planning and budgeting, pipeline estimates are
necessarily speculative and may not consistently correlate to revenues in a
particular quarter or over a longer period of time. While the Company knows the
amount of systems backlog available at the beginning of a quarter, it must
speculate on its pipeline of systems opportunities for the quarter. The
Company's accuracy in estimating total systems sales for future fiscal quarters
is, therefore, highly dependent upon its ability to successfully estimate which
pipeline opportunities will close during the quarter.
COST OF GOODS SOLD. Cost of goods sold for the second quarter and first six
months of fiscal 2002 was $31.4 million or 49% of sales and $59.2 million or 47%
of sales, respectively, as compared to 50% of sales for the same periods of
fiscal 2001. ESD systems costs averaged approximately 48% of sales for the
second quarter and first six months of fiscal 2002 as well as for the same
periods of fiscal 2001. NSD systems costs averaged 53% of sales for the second
quarter of fiscal 2002 and 49% of sales for the first six months of fiscal 2002
as compared to 54% of sales and 52% of sales for the same periods of fiscal
2001. ESD services cost of sales was 32% of sales for the second quarter of
fiscal 2002, and 30% of sales for the first six months of fiscal 2002,
significantly down from 46% of sales for the second quarter of fiscal 2001 and
47% of sales for the first six months of fiscal 2001. ESD services costs for the
first six months of fiscal 2001 included a larger than normal charge of $0.5
million (4.2% of services sales) to increase the obsolescence reserve on the
division's customer service inventory. The remainder of the improvement resulted
primarily from efficiency gains as the division was able to reduce its absolute
support costs while serving a larger customer base. NSD services costs were 53%
of sales for the second quarter of fiscal 2002 and 51% of sales for the first
six months of fiscal 2002, up from 49% for the same periods of fiscal 2001 as a
result of the reduction in the volume of ASP services.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the
second quarter and first six months of fiscal 2002 were approximately $7.1
million or 11% of the Company's total sales and $14.6 million or 12% of sales,
respectively. R&D expenses in comparable periods of fiscal 2001 totaled $8.9
million and $17.9 million, or 12% of sales. Research and development expenses
include the design of new products and the enhancement of existing products.
SELLING, GENERAL AND ADMINISTRATION EXPENSES. Selling, general and
administration expenses during the second quarter and first six months of fiscal
2002 were approximately $18.9 million and $38.5 million, or 29% and
31%, respectively, of the Company's total sales. Such expenses totaled $21.3
million and $43.2 million, respectively, each approximately 30% of the Company's
total sales for comparable periods in fiscal 2001. The Company's results
continue to reflect the benefits from cost reduction initiatives implemented by
the Company during the fourth quarter of fiscal 2001.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLE ASSETS. Goodwill and intangible
assets acquired in the fiscal 2000 merger with Brite Voice Systems, Inc.
("Brite") totaled approximately $104 million with useful lives averaging seven
years. Amortization of these assets totaled $3.4 million and $6.8 million for
the second quarter and first six months of fiscal 2002, respectively. Such
expenses are essentially unchanged from the same periods of the prior year.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to
impairment tests at least annually in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2003. The Company's
preliminary estimate is that application of the nonamortization provisions of
the Statements will result in an increase in net income in fiscal 2003 of $4.0
million ($0.12 per share). Final results, however, may vary from this
preliminary estimate, and any such variance may be material. During fiscal 2003,
the Company will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of March 1, 2002. The Company has not
yet determined what the effect of these tests will be on the earnings and
financial position of the Company. The balance of unamortized goodwill and
acquisition related intangibles as of August 31, 2001 that will be subject to
the new impairment tests is currently estimated to be $27.1 million.
OTHER INCOME. Other income of $0.5 million and $1.0 million during the second
quarter and first six months of fiscal 2002, respectively, was primarily
interest income.
INTEREST EXPENSE. Interest expense was $1.2 million and $2.6 million during the
second quarter and first six months of fiscal 2002, respectively, versus $2.0
million and $4.0 million for the same periods of the previous fiscal year. The
Company reduced its outstanding long term debt by $35 million from August 31,
2000 to August 31, 2001. See "Liquidity and Capital Resources" for a description
of the Company's long term borrowings and related interest rate swap
arrangements.
INCOME FROM OPERATIONS AND NET INCOME (LOSS). The Company generated operating
income and net income of $3.6 million and $1.7 million, respectively, for the
second quarter of fiscal 2002 as compared to $2.5 million and $0.5 million,
respectively, for the second quarter of fiscal 2001. For the first six months of
fiscal 2002, the Company generated operating income and net income of $6.8
million and $3.1 million, respectively. For the first six months of fiscal 2001,
the Company generated operating income of $4.7 million, income before the
cumulative effect of a change in accounting principle of $0.7 million, and a net
loss of $(11.1) million, respectively. The Company's results continue to reflect
the benefits from cost reduction initiatives implemented by the Company during
the fourth quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES. At August 31, 2001, the Company had cash
reserves of $16.3 million and borrowings under the Company's long-term debt
facilities of $40.1 million. Net cash provided by operating activities for the
second quarter and first six months of fiscal 2002 was $8.0 million and $11.0
million, respectively. Investing activities for the three and six month periods,
primarily the purchase of computer equipment and software, used cash of $1.8
million and $3.2 million, respectively. Financing activities included the pay
down of debt, which used $3.8 million and $9.6 million of cash during the second
quarter and first six months of fiscal 2002, respectively, and the receipt of
net proceeds from the exercise of employee stock options which provided $1.6
million and $2.1 million for the second quarter and first six months of fiscal
2002. Net cash flow was a positive $4.0 million for the second quarter and a
positive $0.4 million for the first six months of fiscal 2002.
The Company continuously monitors its days sales outstanding (DSO) of accounts
receivable. At August 31, 2001, DSO was 107 days, up slightly from 104 days at
February 28, 2001. For sales of certain of its more complex, customized systems
(generally ones with a sales price of $500,000 or more), the Company recognizes
revenue based on a percentage of completion methodology. Unbilled receivables
accrued under the methodology totaled $25.6 million at August 31, 2001, down
from $29.5 million at May 31, 2001 and up slightly from $24.1 million at
February 28, 2001. The Company expects to bill and collect unbilled receivables
as of August 31, 2001 within the next twelve months.
The Company generates a significant percentage of its sales outside of the
United States. Certain customers outside the United States are accustomed to
vendor financing in the form of extended payment terms. To remain competitive in
markets outside the United States, the Company may offer its most creditworthy
customers such payment terms. For the quarters ended August 31, 2001 and 2000,
customer extended payment terms had no material adverse impact on the Company's
DSO. However, there is no assurance such extended payment terms will not
adversely impact DSO for the remainder of fiscal 2002 and beyond.
In connection with its plans to sell software solutions that integrate speech
and wireless internet technologies, the Company, during the quarter ended August
31, 2001, purchased $1.0 million in software licenses from a vendor and
committed to purchase an additional $3.0 million of such licenses during the
quarter ending November 30, 2001. Payment for these licenses will be due in the
Company's third and fourth fiscal quarters, respectively. The Company expects to
resell these licenses during its fiscal year ending February 28, 2003.
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. Although 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, the Company believes that should an attractive opportunity arise,
the Company will be able to access the necessary financial resources to pursue
the opportunity and to extinguish any remaining borrowings under its existing
credit agreement.
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
(subsequently reduced to $32.6 million as a result of principal repayments) and
a $25 million revolving credit agreement. The term loan agreement is subject to
future scheduled repayments of $10.1 million, $20.2 million, and $2.3 million
during fiscal 2002, 2003 and 2004, respectively. 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 the Company for the foreseeable future.
At August 31, 2001, the Company had $40.1 million of borrowings outstanding
under the agreement at an average annual interest rate of 6.7%. Interest under
the credit facility accrues at variable rates indexed to combination of the
adjusted London Interbank Offering Rate, the prime rate and the federal funds
rate. The Company's annual interest cost is also impacted by its interest rate
swap contracts which are discussed below.
The Company is a party to interest rate swap arrangements with a notional amount
of $50 million under which the Company pays interest at a fixed rate of 6.2% and
receives interest at the LIBOR three month rate (3.5% at August 31, 2001). The
arrangements expire in June 2002. Based on current interest rates, the Company
expects to pay approximately $0.3 million per quarter for the remaining term of
the interest rate swap arrangements related to the settlement of such
arrangements.
Impact of Inflation
The Company does not expect any significant short term impact of inflation on
its financial condition. 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
Interest Rate Risks
The Company invests cash balances in excess of operating requirements in
short-term securities that generally have maturities of 90 days or less. The
carrying value of these securities approximates market value, and there is no
long-term interest rate risk associated with this investment.
The Company's current term loan and revolving credit agreement provides for
borrowings of up to $57.6 million which bear interest at variable rates based on
the London Interbank Offering Rate, a prime rate or the federal funds rate plus
an applicable margin. As of August 31, 2001, the Company had $40.1 million
outstanding under the credit agreement. The fair value of the borrowings
approximate their carrying value at August 31, 2001.
The credit agreement matures on August 31, 2003, and the term loan facility is
subject to quarterly principal amortization. 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 potentially
adverse effect of interest rate increases, the Company has entered into interest
rate swap arrangements which effectively convert the Company's outstanding
floating rate debt to a fixed rate basis through June 2002.
The following table provides information about the Company's credit agreement
and its interest rate swap arrangements that are sensitive to changes in
interest rates. For the credit agreement, the table presents cash flows for
scheduled principal payments and related weighted-average interest rates by
expected maturity dates. Weighted-average variable rates are based on rates in
effect as of August 31, 2001. For interest rate swaps, the table presents the
notional amount of the swap arrangements and the weighted-average interest rates
anticipated to be in effect on the quarterly settlement dates of the
arrangements. Notional amounts are used to calculate the contractual cash flows
to be exchanged under the contract.
Fair Value Fiscal
------------------ ---------------------------------------
(dollars in millions) August 31, 2001 2002* 2003 2004 Total
--------------- --------- --------- --------- -------
Long-term borrowings, including current portion $ 40.1
Maturities by fiscal year $ 10.1 $ 20.2 $ 9.8 $ 40.1
Projected weighted average interest rate 6.7% 6.7% 6.7%
Interest rate swap arrangements (pay fixed/receive
variable) related to long-term borrowings
Notional amount $ 50.0 $ 50.0
Fixed pay rate 6.2% 6.2%
Projected average receive rate 3.5% 3.5%
* For the six months ending February 28, 2002.
The interest rate swap arrangements settle quarterly and expire in June 2002.
Based on the notional amounts and interest rates shown above, the Company
expects to pay approximately $0.3 million per quarter for the remaining term of
the interest rate swap arrangements related to the settlement of such
arrangements.
Foreign Currency Risks
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 US
parent. Such transactions are denominated in dollars, limiting the Company's
ability to hedge against adverse movements in foreign currency exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Several related class action lawsuits have been filed in the United States
District Court for the Northern District of Texas on behalf of purchasers of
common stock of the Company during the period from October 12, 1999 through June
6, 2000, the "Class Period." Plaintiffs have filed claims under Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and the Securities and Exchange
Commission Rule 10b-5 against the Company as well as certain named current and
former officers and directors of the Company on behalf of the alleged class
members. In the Petition, Plaintiffs claim that the Company and the named
current and former officers and directors issued false and misleading statements
during the Class Period concerning the financial condition of the Company, the
results of the Company's merger with Brite Voice Systems, Inc., and the alleged
future business projections of the Company. Plaintiffs have asserted that these
alleged statements resulted in artificially inflated stock prices.
The Company has not been required to answer or otherwise respond to these
complaints which have now been consolidated into one proceeding. The Company
believes that it and its officers complied with their obligations under the
securities laws, and intends to defend the lawsuits vigorously.
The Company provides certain automated call processing services on a managed
services basis for a large domestic telecommunications company. As previously
disclosed by the 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 telecommunications company recently expressed confidence that if
it conducted an exhaustive audit, it would find that the Company issued material
amounts of improper credits to the telecommunications company's customers. The
Company believes that it did not issue material amounts of improper credit. If
the audit ultimately proves that the Company issued such improper credits, the
Company could be assessed significant penalties under the managed services
contract, but the telecommunications company has not provided the Company with
evidence to substantiate its beliefs. 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 recently amended and extended
their managed services agreement. The parties are in the process of attempting
to negotiate mutually satisfactory agreements to resolve their dispute. There is
no assurance that the parties will negotiate mutually acceptable agreements. The
telecommunications company has not threatened litigation against the Company in
connection with this matter. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held at 10:00 a.m., local
time, on Wednesday, June 27, 2001 in Plano, Texas.
For/Against and Broker Non Votes
Proxies were solicited by the Board of Directors of the Company pursuant to
Regulation 14A under the Securities Exchange Act of 1934. There was no
solicitation in opposition to the Board of Directors nominees as listed in the
proxy statement and all such nominees were duly elected. The following persons
are the nominees of the Board of Directors who were elected as directors at the
annual meeting: David W. Brandenburg, Joseph J. Pietropaolo, George C. Platt,
Grant A. Dove and Stanley G. Brannan. The number of votes cast for the election
of each of the nominees for director, and the number of abstentions, were as
follows: 31,018,682 votes for the election of David W. Brandenburg, with 262,021
abstentions; 30,982,881 votes for the election of Joseph J. Pietropaolo, with
297,822 abstentions; 31,010,495 votes for the election of George C. Platt, with
270,208 abstentions; 30,999,421 votes for the election of Grant A. Dove, with
281,282 abstentions; 30,942,186 votes for the election of Stanley G. Brannan,
with 338,517 abstentions. No votes were cast against the election of any nominee
for director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three
month period ended August 31, 2001.
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: October 9, 2001 By: /s/ MARK C. FALKENBERG
-------------------------
Mark C. Falkenberg
Chief Accounting Officer