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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, 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 33,735,258 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 and Per Share Data)
ASSETS November 30, 2001 February 28, 2001
----------------- -----------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 11,751 $ 15,901
Trade accounts receivable, net of allowance for
doubtful accounts of $3,233 in fiscal 2002 and
$3,642 in fiscal 2001 75,011 72,148
Income tax receivable 3,323 3,323
Inventory 38,997 40,184
Prepaid expenses and other current assets 6,685 5,238
Deferred income taxes 4,180 3,968
-------------- --------------
139,947 140,762
-------------- --------------
Property and Equipment
Building 20,303 20,228
Computer equipment and software 46,143 46,316
Furniture, fixtures and other 4,609 4,528
Service equipment 7,731 6,905
-------------- --------------
78,786 77,977
Less allowance for depreciation 48,465 42,037
-------------- --------------
30,321 35,940
Other Assets
Intangible assets, net of amortization of $37,100 in
fiscal 2002 and $26,702 in fiscal 2001 68,823 79,760
Other assets 1,851 299
-------------- --------------
$ 240,942 $ 256,761
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 22,491 $ 22,952
Accrued expenses 14,965 16,863
Customer deposits 6,200 7,730
Deferred income 19,174 19,705
Current portion of long term borrowings 20,179 18,537
Income taxes payable 1,708 5,117
-------------- --------------
84,717 90,904
Deferred income taxes 20,127 20,127
Long term borrowings 14,846 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: 33,735,258 issued and
outstanding in fiscal 2002, 33,099,647
issued and outstanding in fiscal 2001 17 17
Additional capital 59,987 55,671
Unearned compensation (315) (1,311)
Retained earnings 67,473 64,308
Accumulated other comprehensive loss (5,910) (4,055)
-------------- --------------
Stockholders' equity 121,252 114,630
-------------- --------------
$ 240,942 $ 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 Nine Months Ended
------------------------------ ------------------------------
November 30, November 30, November 30, November 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales
Systems $ 36,777 $ 46,437 $ 117,673 $ 143,056
Services 21,276 22,178 66,374 69,409
------------ ------------ ------------ ------------
58,053 68,615 184,047 212,465
------------ ------------ ------------ ------------
Cost of goods sold
Systems 18,761 21,465 58,190 69,723
Services 8,760 10,990 28,550 33,871
------------ ------------ ------------ ------------
27,521 32,455 86,740 103,594
------------ ------------ ------------ ------------
Gross margin
Systems 18,016 24,972 59,483 73,333
Services 12,516 11,188 37,824 35,538
------------ ------------ ------------ ------------
30,532 36,160 97,307 108,871
Research and development expenses 6,938 8,704 21,561 26,593
Selling, general and administrative expenses 18,964 20,492 57,498 63,725
Amortization of goodwill and acquisition
related intangible assets 3,359 3,466 10,147 10,377
------------ ------------ ------------ ------------
Income from operations 1,271 3,498 8,101 8,176
Other income 137 390 1,094 1,184
Interest expense (1,355) (1,675) (3,919) (5,686)
------------ ------------ ------------ ------------
Income before taxes and the cumulative effect
of a change in accounting principle 53 2,213 5,276 3,674
Income taxes 21 1,107 2,111 1,837
------------ ------------ ------------ ------------
Income before the cumulative effect
of a change in accounting principle 32 1,106 3,165 1,837
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- -- -- (11,850)
------------ ------------ ------------ ------------
Net income (loss) $ 32 $ 1,106 $ 3,165 $ (10,013)
============ ============ ============ ============
Per Basic Share:
Income before the cumulative effect of
a change in accounting principle $ 0.00 $ 0.03 $ 0.09 $ 0.06
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- -- -- (0.36)
------------ ------------ ------------ ------------
Net income (loss) $ 0.00 $ 0.03 $ 0.09 $ (0.30)
============ ============ ============ ============
Per Diluted Share:
Income before the cumulative effect of
a change in accounting principle $ 0.00 $ 0.03 $ 0.09 $ 0.05
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- -- -- (0.34)
------------ ------------ ------------ ------------
Net income (loss) $ 0.00 $ 0.03 $ 0.09 $ (0.29)
============ ============ ============ ============
See notes to consolidated financial statements.
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,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Operating Activities
Income before the cumulative effect of a
change in accounting principle $ 32 $ 1,106 $ 3,165 $ 1,837
Adjustments to reconcile income
before the cumulative effect of a change in
accounting principle to net cash provided
by operating activities
Depreciation and amortization 6,310 7,201 19,599 22,554
Other changes in operating activities (6,385) (10,314) (11,797) (7,340)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (43) (2,007) 10,967 17,051
Investing Activities
Purchases of property and equipment (1,511) (1,817) (4,678) (5,702)
Other (81) -- (81) 2,800
------------ ------------ ------------ ------------
Net cash used in investing activities (1,592) (1,817) (4,759) (2,902)
Financing Activities
Paydown of debt (5,045) (7,500) (14,612) (32,500)
Borrowings -- 7,500 -- 7,500
Exercise of stock options 2,199 335 4,316 2,156
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities (2,846) 335 (10,296) (22,844)
Effect of exchange rates on cash (58) 46 (62) (369)
------------ ------------ ------------ ------------
Decrease in cash and cash equivalents (4,539) (3,443) (4,150) (9,064)
Cash and cash equivalents, beginning of period 16,290 17,642 15,901 23,263
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 11,751 $ 14,199 $ 11,751 $ 14,199
============ ============ ============ ============
See notes to consolidated financial statements.
INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENT 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 3,165 3,165
Foreign currency translation
adjustment (1,406) (1,406)
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 $14 (24) (24)
Exercise of stock options 635,611 4,316 4,316
Amortization of unearned
compensation 996 996
---------- ---------- ---------- ------------ ---------- ------------ ------------
Balance at November 30, 2001 33,735,258 $ 17 $ 59,987 $ (315) $ 67,473 $ (5,910) $ 121,252
========== ========== ========== ============ ========== ============ ============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED NOVEMBER 30, 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 November 30, 2001 and 2000
consolidated financial statements have been included. Operating results for the
three and nine month periods ended November 30, 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 third quarters of fiscal 2002 and 2001 was $(1.6) million
and $0.5 million, respectively. For the nine month periods ended November 30,
2001 and 2000, comprehensive income (loss) was $1.3 million and $(14.2) 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,
("Statement No. 133") and the adjustments to the carrying value of certain
derivative instruments as of November 30, 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 (the "Statements"), which become effective
for fiscal years beginning after December 15, 2001. Under the new rules: 1)
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized and 2) such assets 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 in the first quarter of fiscal 2003.
The Company's preliminary estimate is that the application of the
non-amortization provisions of the Statements will result in an increase in net
income in fiscal 2003 of the $4.0 million ($0.12 per share). Final results,
however, may vary from this preliminary estimate, and any such variance may be
material.
The Company is not in a position to estimate the effect on fiscal 2003 net
income resulting from the impairment tests required by the Statements until the
tests and any additional required tests are performed during the fourth quarter
of fiscal 2002 and the first quarter of fiscal 2003. The balance, as of November
30, 2001, of unamortized goodwill and other indefinite lived assets was $25.6
million. The results of the required tests may result in a charge to
earnings if any such assets are deemed to be impaired. The Company will
not be in a position to determine what impact the impairment tests will have on
its fiscal 2003 earnings and financial position until the required tests are
completed, however, the impact could be material.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVES
Since entering into its current credit facilities in 1999, the Company has used
interest rate swap arrangements to hedge the variability of interest payments on
its variable rate debt. The swap arrangements have effectively converted the
Company's outstanding floating rate debt to a fixed rate basis. 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 No. 133 which 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 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 paid interest at a fixed rate of
6.2% and received interest at the three-month London Interbank Offering Rate
("LIBOR") (5.1% at March 1, 2001). Upon adoption of Statement No. 133, 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 represented the transition adjustment associated with the
cumulative effect on prior years of adopting Statement No. 133. During the three
and nine month periods ended November 30, 2001, the Company increased its
derivative liability by $0.0 million and $0.3 million, respectively, to reflect
changes in its fair value attributable to reductions in the LIBOR offset by the
reduction of the obligation through the payment of scheduled quarterly interest
rate swap settlements. During the same periods, the Company recorded a net of
tax charge to other comprehensive loss of less than $0.1 million and charges to
interest expense for the ineffective portion of the derivative and the payment
of its quarterly swap settlements of approximately $0.5 million and $1.1
million, respectively.
The interest rate swap arrangements were scheduled to expire in June 2002, but
in response to the continued downward movement in the LIBOR rate, the Company
terminated its swap arrangements in October 2001, retiring the derivative
liability and related accrued settlement charges through a cash payment of $1.4
million. Under the provisions of Statement No. 133, the Company will recognize
non-cash interest expense of approximately $0.4 million and $0.3 million in its
quarters ending February 28, 2002 and May 31, 2002, respectively, as a result of
the final reclassifications into earnings of the remaining balance in other
comprehensive loss that is related to the derivative agreements. The Company
will also continue to incur interest expense under the provisions of the credit
facilities.
Amounts due under the credit facilities totaled $35.0 million and $49.6 million
at November 30, 2001 and February 28, 2001, respectively. Interest accrues at
variable rates indexed to a combination of LIBOR, the prime rate and the federal
funds rate. The average annual interest rate under the facilities was 5.9% and
9.2% at November 30, 2001 and February 28, 2001, respectively, and was reduced
to 4.8% subsequent to November 30, 2001.
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 nine months ended November
30, 2000, the net effect of the change in accounting was to increase income
before the cumulative effect of the accounting change $3.0 million ($0.09 per
share) and $11.5 million ($0.34 per share), respectively. For the three and nine
months ended November 30, 2000, the Company recognized $5.0 million and $22.0
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):
November 30, 2001 February 28, 2001
----------------- -----------------
Purchased parts $ 28,577 $ 33,103
Work in progress 8,262 5,961
Finished goods 2,158 1,120
-------------- --------------
$ 38,997 $ 40,184
============== ==============
NOTE E - RESTRUCTURING ACTIVITIES AND UNUSUAL ITEMS
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 $1.4 million against this accrual during
the nine months ended November 30, 2001. During the third quarter of fiscal
2002, the Company determined that it had settled its severance related
obligations for less than originally anticipated, and, accordingly, the Company
reversed the remaining accrual of $0.4 million which reduced selling, general
and administrative expenses. Accrued expenses at February 28, 2001 also included
$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. During the third quarter of
fiscal 2002, the Company reached settlement with its affected customers for
amounts that were less than originally anticipated. As a result of its
settlement activities, the Company reversed $0.5 million of accrued settlement
expenses which reduced selling, general and administrative expenses and retained
$0.4 million in accrued liabilities for settlements to be completed in the
fourth quarter of fiscal 2002.
During the third quarter of fiscal 2002, the Company recognized $0.8 million of
revenue and pretax profit relating primarily to non-refundable customer deposits
received in prior quarters. During the quarter, the Company determined that the
orders associated with these deposits had been canceled and that the Company had
no remaining unperformed obligations.
NOTE F - EARNINGS PER SHARE
(in thousands except per share data)
Three Months Ended Nine Months Ended
November 30, 2001 November 30, 2000 November 30, 2001 November 30, 2000
----------------- ----------------- ----------------- -----------------
Numerator:
Income before the cumulative
effect of a change in accounting
principle $ 32 $ 1,106 $ 3,165 $ 1,837
Cumulative effect on prior
years of adopting
SEC SAB No. 101 -- -- -- (11,850)
--------------- --------------- --------------- ---------------
Net Income (loss) $ 32 $ 1,106 $ 3,165 $ (10,013)
--------------- --------------- --------------- ---------------
Denominator:
Denominator for basic
earnings per share 33,557 32,807 33,295 32,684
Employee stock options 1,541 1,370 1,401 1,770
Non-vested restricted shares 56 50 55 53
--------------- --------------- --------------- ---------------
Dilutive potential common shares 1,597 1,420 1,456 1,823
Denominator for diluted
earnings per share 35,154 34,227 34,751 34,507
BASIC:
Income before the cumulative
effect of a change in
accounting principle $ 0.00 $ 0.03 $ 0.09 $ 0.06
Cumulative effect on prior years
of adopting SEC SAB No. 101 -- -- -- (0.36)
--------------- --------------- --------------- ---------------
Net Income (loss) $ 0.00 $ 0.03 $ 0.09 $ (0.30)
=============== =============== =============== ===============
DILUTED:
Income before the cumulative
effect of a change in
accounting principle $ 0.00 $ 0.03 $ 0.09 $ 0.05
Cumulative effect on prior years
of adopting SEC SAB No. 101 -- -- -- (0.34)
--------------- --------------- --------------- ---------------
Net Income (loss) $ 0.00 $ 0.03 $ 0.09 $ (0.29)
=============== =============== =============== ===============
Options to purchase 1,430,937 and 1,528,437 shares of common stock at average
prices of $14.82 and $14.64, respectively, were outstanding during the three and
nine month periods ended November 30, 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 2,170,824 and 1,614,374 shares of common stock at average prices of
$13.97 and $15.14, respectively, were excluded from the diluted earnings per
share calculations for the three and nine month periods ended November 30, 2000,
respectively, 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 nine month
periods ended November 30, 2001 and 2000 are as follows (in thousands).
Three Months Ended Three Months Ended
November 30, 2001 November 30, 2000
-------------------------------------------- --------------------------------------------
Enterprise Network Enterprise Network
Solutions Solutions Total Solutions Solutions Total
------------ ------------ ------------ ------------ ------------ ------------
Systems $ 20,421 $ 16,356 $ 36,777 $ 25,613 $ 20,824 $ 46,437
Services 8,068 13,208 21,276 6,360 15,818 22,178
------------ ------------ ------------ ------------ ------------ ------------
Total sales to external customers 28,489 29,564 58,053 31,973 36,642 68,615
------------ ------------ ------------ ------------ ------------ ------------
Systems 10,357 7,659 18,016 15,096 9,876 24,972
Services 6,102 6,414 12,516 3,640 7,548 11,188
------------ ------------ ------------ ------------ ------------ ------------
Total gross margin 16,459 14,073 30,532 18,736 17,424 36,160
------------ ------------ ------------ ------------ ------------ ------------
Segment operating expenses 12,292 13,610 25,902 14,423 14,773 29,196
------------ ------------ ------------ ------------ ------------ ------------
Segment operating income* $ 4,167 $ 463 $ 4,630 $ 4,313 $ 2,651 $ 6,964
============ ============ ============ ============ ============ ============
Nine Months Ended Nine Months Ended
November 30, 2001 November 30, 2000
-------------------------------------------- --------------------------------------------
Enterprise Network Enterprise Network
Solutions Solutions Total Solutions Solutions Total
------------ ------------ ------------ ------------ ------------ ------------
Systems $ 65,666 $ 52,007 $ 117,673 $ 74,880 $ 68,176 $ 143,056
Services 22,969 43,405 66,374 18,352 51,057 69,409
------------ ------------ ------------ ------------ ------------ ------------
Total sales to external customers 88,635 95,412 184,047 93,232 119,233 212,465
------------ ------------ ------------ ------------ ------------ ------------
Systems 33,716 25,767 59,483 40,779 32,554 73,333
Services 16,603 21,221 37,824 9,961 25,577 35,538
------------ ------------ ------------ ------------ ------------ ------------
Total gross margin 50,319 46,988 97,307 50,740 58,131 108,871
------------ ------------ ------------ ------------ ------------ ------------
Segment operating expenses 37,537 41,522 79,059 45,454 44,864 90,318
------------ ------------ ------------ ------------ ------------ ------------
Segment operating income* $ 12,782 $ 5,466 $ 18,248 $ 5,286 $ 13,267 $ 18,553
============ ============ ============ ============ ============ ============
* Consolidated income from operations includes amortization of goodwill and
acquisition related intangible assets of $3,359 and $10,147 for the three
and nine month periods ended November 30, 2001, respectively, that is not
allocated by the Company to individual segments. Such expenses were $3,466
and $10,377 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 Nine Months Ended
------------------------------------- --------------------------------------
November 30, 2001 November 30, 2000 November 30, 2001 November 30, 2000
----------------- ----------------- ----------------- -----------------
Geographic Area Net Sales:
United States $ 30,726 $ 38,758 $ 96,678 $ 109,426
The Americas (Excluding U.S.) 2,297 3,032 12,757 12,387
Pacific Rim 1,137 2,965 4,825 10,095
Europe, Middle East & Africa 23,893 23,860 69,787 80,557
-------------- -------------- -------------- --------------
Total $ 58,053 $ 68,615 $ 184,047 $ 212,465
============== ============== ============== ==============
Concentration of Revenue
One Network Solutions Division customer, British Telecom (together with its
affiliate BT Cellnet), accounted for approximately 14% and 15% of the Company's
sales during the three-month periods ended November 30, 2001 and 2000,
respectively. The same customer accounted for 14% and 19% of the Company's sales
during the nine-month periods ended November 30, 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 at current exchange rates, BT Cellnet continued to
purchase managed services totaling at least $2.6 million per month through July
2001, and the Company will recognize revenues of approximately $2.1 million per
month for the six month period ending January 2002 and totaling approximately
$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 nine month periods ended November 30, 2001.
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 were 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." These lawsuits have been consolidated in the case of David
Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, pending in the United States
District Court, Northern District of Texas, Dallas Division. 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 Complaint, 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 must answer or otherwise respond to these complaints, which have now
been consolidated into one proceeding, on or before January 14, 2002. Plaintiffs
will then have 45 days to respond. 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 15% of the Company's total sales during the three month periods
ended November 30, 2001 and 2000, respectively. For the nine month
periods ended November 30, 2001 and 2000, sales to British Telecom
accounted for 14% and 19% of the Company's sales, respectively. British
Telecom's managed services contract with the Company was 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 revenues have been reduced to approximately $2.1 million per
month for the six month period that commenced July 18, 2001, and will
be further reduced to approximately $0.9 million 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. The Company noted a slowing of general business
activity in the period immediately following the September 11, 2001
incident, however, it is too soon for the Company to determine whether
the slow down will be sustained and whether it 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 third quarter of fiscal 2002 were $58.1
million, including $0.8 million of revenue and pretax profit relating primarily
to non-refundable customer deposits received in prior quarters. During the
quarter, the Company determined that the orders associated with these deposits
had been canceled and that the Company had no remaining unperformed obligations.
Total sales for the nine months ended November 30, 2001 were $184.1 million.
Third quarter sales decreased $10.5 million, or 15%, when compared to the same
period of fiscal 2001. The Company's Enterprise Solutions Division ("ESD") sales
were down $3.5 million or 11% and its Network Solutions Division ("NSD") sales
were down $7.0 million or 19% from the prior year's third quarter totals. Sales
during the first nine months of fiscal 2002 decreased $28.4 million, or 13%,
when compared to the same period of fiscal 2001. The Company's ESD sales were
down $4.6 million or 5% while its NSD sales were down $23.8 million or 20% from
the prior year's nine-month totals.
Sales and gross margin results for the Company's segments for the three and nine
month periods ended November 30, 2001 and 2000 are as follows (in millions).
Three Months Ended Three Months Ended
November 30, 2001 November 30, 2000
-------------------------------------------- --------------------------------------------
Enterprise Network Enterprise Network
Solutions Solutions Total Solutions Solutions Total
------------ ------------ ------------ ------------ ------------ ------------
Systems $ 20.4 $ 16.4 $ 36.8 $ 25.6 $ 20.8 $ 46.4
Services 8.1 13.2 21.3 6.4 15.8 22.2
------------ ------------ ------------ ------------ ------------ ------------
Total sales to external customers 28.5 29.6 58.1 32.0 36.6 68.6
------------ ------------ ------------ ------------ ------------ ------------
Systems 10.3 7.7 18.0 15.1 9.9 25.0
Services 6.1 6.4 12.5 3.6 7.5 11.1
------------ ------------ ------------ ------------ ------------ ------------
Total gross margin 16.4 14.1 30.5 18.7 17.4 36.1
------------ ------------ ------------ ------------ ------------ ------------
Nine Months Ended Nine Months Ended
November 30, 2001 November 30, 2000
-------------------------------------------- --------------------------------------------
Enterprise Network Enterprise Network
Solutions Solutions Total Solutions Solutions Total
------------ ------------ ------------ ------------ ------------ ------------
Systems $ 65.7 $ 52.0 $ 117.7 $ 74.9 $ 68.2 $ 143.1
Services 23.0 43.4 66.4 18.4 51.0 69.4
------------ ------------ ------------ ------------ ------------ ------------
Total sales to external customers 88.7 95.4 184.1 93.3 119.2 212.5
------------ ------------ ------------ ------------ ------------ ------------
Systems 33.7 25.8 59.5 40.8 32.5 73.3
Services 16.6 21.2 37.8 9.9 25.6 35.5
------------ ------------ ------------ ------------ ------------ ------------
Total gross margin 50.3 47.0 97.3 50.7 58.1 108.8
------------ ------------ ------------ ------------ ------------ ------------
ESD system sales in the third quarter and first nine months of fiscal 2002 were,
respectively, $20.4 million, down $5.2 million or 20% from the prior year's same
period totals, and $65.7 million, down $9.2 million or 12%. 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 and were also affected in the third quarter
by a general slowing of business activity following the terrorists attacks of
September 11, 2001. ESD service sales in the third quarter and first nine months
of fiscal 2002 were $8.1 million and $23.0 million, respectively, an increase of
$1.7 million or 27% and $4.6 million or 25%, 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 11% and 14% of the Company's total ESD sales during the third
quarter and the first nine months of fiscal 2002, respectively, versus 20% and
17% for the same periods in fiscal 2001.
NSD system sales in the third quarter and first nine months of fiscal 2002 were,
respectively, $16.4 million, down $4.4 million or 22% from the prior year's same
period totals, and $52.0 million, down $16.2 million or 24%. 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 system sales were also affected in the third quarter by a general
slowing of business activity following the terrorists attacks of September 11,
2001. NSD services sales totaled $13.2 million and $43.4 million for the third
quarter and first nine months of fiscal 2002, down $2.6 million or 17% and $7.6
million or 15% 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. 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. NSD
international sales constituted 81% and 79% of the Company's total NSD sales
during the third quarter and first nine months of fiscal 2002 as compared to 64%
and 73% 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
four quarters from service and support contracts, including contracts for ASP
managed services, have averaged approximately 35% of the Company's quarterly
sales. On average, 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 31% of service and support sales during the third quarter of
fiscal 2002 and 33% of service and support sales during the first nine months of
fiscal 2002. See "Disclosures Regarding Forward-Looking Statements" for a
discussion of BT Cellnet's monthly revenue commitments through July 2003, under
its managed services contract, including reductions in monthly revenue 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 November 30, 2001, August 31, 2001. May 31, 2001 and February
28, 2001 the Company's backlog of systems sales was approximately $21.3 million,
$25.4 million, $31.0 million and $35.0 million, respectively. As a result of the
decline in backlog and the reduction of quarterly revenues under the managed
services contract with BT Cellnet, the Company will have to increase sales from
its pipeline of opportunities for systems sales and/or other service and support
contracts to maintain or increase revenues in future quarters. 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 third quarter and first nine
months of fiscal 2002 was $27.5 million or 47% of sales and $86.7 million or 47%
of sales, respectively, as compared to 47% and 49% of sales for the same periods
of fiscal 2001. ESD systems costs averaged approximately 49% of sales for the
third quarter and first nine months of fiscal 2002 compared to 41% and 46% for
the same periods of fiscal 2001. NSD systems costs averaged 53% of sales for the
third quarter of fiscal 2002 and 51% of sales for the first nine months of
fiscal 2002 as compared to 53% of sales and 52% of sales for the same periods of
fiscal 2001. ESD services cost of sales was 24% of sales for the third quarter
of fiscal 2002, and 28% of sales for the first nine months of fiscal 2002,
significantly down from 43% of sales for the third quarter of fiscal 2001 and
46% of sales for the first nine months of fiscal 2001. ESD services costs for
the first nine months of fiscal 2001 included a larger than normal charge of
$0.5 million (3% 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 51%
of sales for the third quarter and first nine months of fiscal 2002 compared to
52% and 50% for the same periods of fiscal 2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the
third quarter and first nine months of fiscal 2002 were approximately $6.9
million or 12% of the Company's total sales and $21.6 million or 12% of sales,
respectively. R&D expenses in comparable periods of fiscal 2001 totaled $8.7
million and $26.6 million, or 12% of sales for each period. 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 third quarter and first nine months of fiscal
2002 were approximately $19.0 million and $57.5 million, or 33% and 31%,
respectively, of the Company's total sales. Such expenses totaled $20.5 million
and $63.7 million, respectively, each approximately 30% of the Company's total
sales for comparable periods in fiscal 2001. SG&A expenses in the third quarter
of fiscal 2002 were reduced by $0.9 million ($0.02 per diluted share) as a
result of the favorable settlement of certain restructuring accruals originally
established in fiscal 2001. The Company's results for the nine months ended
November 30, 2001 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 $10.1 million for
the third quarter and first nine 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: 1) goodwill and intangible assets deemed
to have indefinite lives will no longer be amortized and 2) such assets will be
subject to impairment test 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 in the first quarter of fiscal 2003.
The Company's preliminary estimate is that the application of the
non-amortization 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.
The Company is not in a position to estimate the effect on fiscal 2003 net
income resulting from the impairment tests required by the Statements until the
tests and any additional required tests are performed during the fourth quarter
of fiscal 2002 and the first quarter of fiscal 2003. The balance, as of November
30, 2001, of unamortized goodwill and other indefinite lived assets was $25.6
million. The result of the required tests may result in a charge to earnings if
any of such assets are deemed to be impaired. However, ongoing amortization
expense associated with any impaired asset would be reduced. The Company will
not be in a position to determine what impact the impairment tests will have on
its fiscal 2003 earnings and financial position until the required tests are
completed, however, the impact could be material.
OTHER INCOME. Other income of $0.1 million and $1.1 million during the third
quarter and first nine months of fiscal 2002, respectively, was primarily
interest income.
INTEREST EXPENSE. Interest expense was $1.4 million and $3.9 million during the
third quarter and first nine months of fiscal 2002, respectively, versus $1.7
million and $5.7 million for the same periods of the previous fiscal year. The
Company reduced its outstanding long term debt by $40 million from November 30,
2000 to November 30, 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 $1.3 million and $0.0 million, respectively, for the
third quarter of fiscal 2002 as compared to $3.5 million and $1.1 million,
respectively, for the third quarter of fiscal 2001. For the first nine months of
fiscal 2002, the Company generated operating income and net income of $8.1
million and $3.2 million, respectively. For the first nine months of fiscal
2001, the Company generated operating income of $8.2 million, income before the
cumulative effect of a change in accounting principle of $1.8 million, and a net
loss of $10.0 million, respectively. The Company's third quarter results were
negatively affected by softness in the Company's sales and were positively
affected by the Company's continuing efforts to control operating expenses.
LIQUIDITY AND CAPITAL RESOURCES. At November 30, 2001, the Company had cash
reserves of $11.8 million and borrowings under the Company's long-term debt
facilities of $35.0 million. Net cash provided by operating activities for the
third quarter and first nine months of fiscal 2002 was $0.0 million and $11.0
million, respectively.
Investing activities for the three and nine month periods, primarily the
purchase of computer equipment and software, used cash of $1.6 million and $4.8
million, respectively. Financing activities included the pay down of debt, which
used $5.0 million and $14.6 million of cash during the third quarter and first
nine months of fiscal 2002, respectively, and the receipt of net proceeds from
the exercise of employee stock options which provided $2.2 million and $4.3
million for the third quarter and first nine months of fiscal 2002. Net cash
flow was a negative $4.5 million for the third quarter and a negative $4.2
million for the first nine months of fiscal 2002.
The Company continuously monitors its days sales outstanding (DSO) of accounts
receivable. At November 30, 2001, DSO was 116 days, up from 104 days at February
28, 2001. The increase arises from both the softness in fiscal 2002 third
quarter sales and the increase in the Company's international business where
more extended payments terms are frequently required as a condition of the sale.
In addition, 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 $27.9 million at November 30, 2001, up
from $25.6 million at August 31, 2001 and up from $24.1 million at February 28,
2001. The Company expects to bill and collect unbilled receivables as of
November 30, 2001 within the next twelve months.
As noted above, 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. Historically, customer extended
payment terms have 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 purchased $2.8 million and $0.9
million in software licenses from a vendor during the quarters ended November
30, 2001 and August 31, 2001, respectively. Payment for the third quarter
purchases will be due in the Company's fourth fiscal quarter. The Company
expects to resell these licenses during its fiscal year ending February 28,
2003.
During the third quarter of fiscal 2002, the Company modified its managed
services agreement with BT Cellnet by transferring title to certain assets used
in the provision of the service to BT Cellnet in exchange for BT Cellnet's
assumption of certain responsibilities under the agreement. In connection with
this modification, the parties also amended the contract payment terms such that
the Company will now receive approximately $0.9 million more in net cash flow
from this contract in the fourth quarter of fiscal 2002 and approximately $1.3
million less in net cash flow in the first quarter of fiscal 2003. The amount
and timing of revenue recognized in the third fiscal quarter and to be
recognized in future quarters on the BT Cellnet managed services contract were
not materially changed as a result of these modifications.
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 $27.5 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 $5.0 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 November 30,
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 November 30, 2001, the Company had $35.0 million of borrowings outstanding
under the agreement at an average annual interest rate of 5.9%. This variable
rate was reduced to 4.8% subsequent to November 30, 2001. Interest under the
credit facility accrues at variable rates indexed to a combination of the
adjusted LIBOR, the prime rate and the federal funds rate. The Company's annual
interest cost and cash flow have also been impacted by its interest rate swap
contracts as discussed below.
The Company has historically used interest rate swap contracts to hedge the
variability of interest payments on its variable rate debt. As of the beginning
of the third quarter of fiscal 2002, the Company was a party to swap
arrangements with a notional amount of $50 million under which the Company paid
interest at a fixed rate of 6.2% and received interest at the LIBOR three-month
rate. The swap arrangements were scheduled to expire in June 2002, but in
response to the continued downward movement in the LIBOR rate, the Company paid
$1.4 million in October 2001 to terminate the contracts.
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 above 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.
ASSET AND ORGANIZATIONAL REVIEWS. The Company anticipates reviewing the current
and future positioning of all product lines brought forward from its merger with
Brite. The Company also anticipates reviewing the ongoing value of the Brite
tradename and other separately identifiable intangible assets. It is possible
that, as a result of these reviews, the Company might make decisions about its
future direction that could cause the Brite tradename and certain of its
separately identifiable intangible assets to be impaired and/or to be subject to
a shortened useful life. The result of any such decision may result in a charge
to earnings if any such assets are deemed to be impaired, with a resulting
decrease to ongoing amortization expense. If any such asset is deemed to have
only a shortened useful life, there could be an increase to amortization
expense. Until the reviews are conducted and any such decisions are made, it is
not possible for the Company to determine what impact, if any, such activities
may have on its financial position or on earnings in the fourth quarter of
fiscal 2002 or in fiscal 2003, however, the impact could be material.
The Company also anticipates a review of its inventories and equipment in the
light of any decision it may make as a result of its product line review. The
results of such a review may result in a charge to earnings if such assets are
deemed to be impaired. Until the reviews are conducted, it is not possible for
the Company to determine what impact, if any, the results of the review may have
on its financial position or on earnings in the fourth quarter of fiscal 2002 or
in fiscal 2003, however, the impact could be material.
The Company continuously monitors its organization for areas to improve
efficiencies and reduce expenses. The Company also reviews its facilities
utilization for the same purposes. Any decisions made to improve efficiencies or
to reduce expenses with respect to the size of the Company's organization or
its facilities utilization could result in restructuring charges, which could
be material to the Company's financial position or on its earnings in the fourth
quarter of fiscal 2002 or in fiscal 2003.
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.
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 $52.5 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 November 30, 2001, the Company had $35.0 million
outstanding under the credit agreement. The fair value of the borrowings
approximate their carrying value at November 30, 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.
The following table provides information about the Company's credit agreement
which is 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 November 30, 2001 and as
anticipated by the Company.
Fair Value Fiscal
-------------------- -----------------------------------------
(dollars in millions) November 30, 2001 2002* 2003 2004 Total
-------------------- --------- --------- -------- --------
Long-term borrowings, including current portion $ 35.0
Maturities by fiscal year $ 5.0 $ 20.2 $ 9.8 $ 35.0
Projected weighted average interest rate 4.8% 5.5% 7.5%
* For the three months ending February 28, 2002.
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 were 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." These lawsuits have been consolidated in the case of David
Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al; No. 3-01CV1071-D, pending in the United States
District Court, Northern District of Texas, Dallas Division. 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 Complaint, 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 must answer or otherwise respond to these complaints, which have now
been consolidated into one proceeding, on or before January 14, 2002. Plaintiffs
will then have 45 days to respond. The Company believes that it and its officers
complied with their obligations under the securities laws, and intends to defend
the lawsuits vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 First Amended Employment Agreement dated as of October 31,
2001, between the Company and David W. Brandenburg.
10.2 Second Amendment to Employment Agreement dated as of October
31, 2001, between the Company and Rob-Roy J. Graham.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three month period
ended November 30, 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: January 11, 2002 By: /s/ ROB-ROY J. GRAHAM
---------------------- ----------------------
Rob-Roy J. Graham
Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 First Amended Employment Agreement dated as of October 31,
2001, between the Company and David W. Brandenburg.
10.2 Second Amendment to Employment Agreement dated as of October
31, 2001, between the Company and Rob-Roy J. Graham.