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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
MAY 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-13616
INTERVOICE-BRITE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1927578
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17811 WATERVIEW PARKWAY, DALLAS, TX 75252
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
972-454-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO[ ]
THE REGISTRANT HAD 34,047,216 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF JULY 1, 2002.
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INTERVOICE-BRITE, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
May 31, 2002 February 28, 2002
------------ -----------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 13,993 $ 17,646
Trade accounts receivable, net of allowance for
doubtful accounts of $2,931 in fiscal 2003 and
$3,492 in fiscal 2002 36,273 40,783
Income tax receivable 7,908 --
Inventory 23,354 27,524
Prepaid expenses and other current assets 6,673 6,152
Deferred income taxes 811 819
------------ ------------
89,012 92,924
------------ ------------
Property and Equipment
Building 16,860 19,530
Computer equipment and software 29,911 30,379
Furniture, fixtures and other 2,635 2,328
Service equipment 7,932 7,902
------------ ------------
57,338 60,139
Less allowance for depreciation 34,670 33,787
------------ ------------
22,668 26,352
Other Assets
Intangible assets, net of amortization of $26,724 in
fiscal 2003 and $31,752 in fiscal 2002 31,458 37,439
Goodwill, net of accumulated amortization of
$7,672 in fiscal 2002 3,401 16,500
Other assets 2,045 2,153
------------ ------------
$ 148,584 $ 175,368
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 18,998 $ 22,661
Accrued expenses 14,096 14,988
Customer deposits 7,073 5,963
Deferred income 24,514 24,426
Current portion of long term borrowings 7,944 6,000
------------ ------------
72,625 74,038
Long term borrowings, net of current portion 18,980 23,980
Other long term liabilities 1,653 1,916
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: 34,047,216 issued and
outstanding in fiscal 2003, 34,029,180
issued and outstanding in fiscal 2002 17 17
Additional capital 65,040 61,725
Retained earnings (deficit) (4,852) 19,618
Accumulated other comprehensive loss (4,879) (5,926)
------------ ------------
Stockholders' equity 55,326 75,434
------------ ------------
$ 148,584 $ 175,368
============ ============
See notes to consolidated financial statements.
INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended
----------------------------
May 31, 2002 May 31, 2001
------------ ------------
Sales
Systems $ 21,635 $ 38,442
Services 16,781 23,064
------------ ------------
38,416 61,506
------------ ------------
Cost of goods sold
Systems 16,118 18,142
Services 6,671 9,650
------------ ------------
22,789 27,792
------------ ------------
Gross margin
Systems 5,517 20,300
Services 10,110 13,414
------------ ------------
15,627 33,714
Research and development expenses 6,005 7,563
Selling, general and administrative expenses 17,693 19,615
Amortization of acquisition related intangible assets 1,776 2,280
Amortization of goodwill -- 1,074
------------ ------------
Income (loss) from operations (9,847) 3,182
Other income (expense) (48) 506
Interest expense (1,465) (1,341)
------------ ------------
Income (loss) before taxes and the cumulative effect
of a change in accounting principle (11,360) 2,347
Income taxes (benefit) (2,681) 939
------------ ------------
Income (loss) before the cumulative effect
of a change in accounting principle (8,679) 1,408
Cumulative effect on prior years of a change
in accounting principle (15,791) --
------------ ------------
Net income (loss) $ (24,470) $ 1,408
============ ============
Per Basic Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ (0.26) $ 0.04
Cumulative effect on prior years of a change
in accounting principle (0.46) --
------------ ------------
Net income (loss) $ (0.72) $ 0.04
============ ============
Per Diluted Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ (0.26) $ 0.04
Cumulative effect on prior years of a change
in accounting principle (0.46) --
------------ ------------
Net income (loss) $ (0.72) $ 0.04
============ ============
See notes to consolidated financial statements.
INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
----------------------------
May 31, 2002 May 31, 2001
------------ ------------
Operating Activities
Income (loss) before the cumulative effect of a
change in accounting principle $ (8,679) $ 1,408
Adjustments to reconcile income (loss) before the
cumulative effect of a change in accounting
principle to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,176 6,446
Other changes in operating activities 2,841 (4,801)
------------ ------------
Net cash provided by (used in) operating activities (1,662) 3,053
------------ ------------
Investing Activities
Proceeds from sale of assets 1,852 --
Purchases of property and equipment (601) (1,374)
------------ ------------
Net cash provided by (used in) investing activities 1,251 (1,374)
------------ ------------
Financing Activities
Paydown of debt (26,000) (5,784)
Debt issuance costs (1,632) --
Borrowings 24,000 --
Exercise of stock options 88 565
------------ ------------
Net cash used in financing activities (3,544) (5,219)
------------ ------------
Effect of exchange rates on cash 302 (108)
------------ ------------
Decrease in cash and cash equivalents (3,653) (3,648)
Cash and cash equivalents, beginning of period 17,646 15,901
------------ ------------
Cash and cash equivalents, end of period $ 13,993 $ 12,253
============ ============
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 Retained Comprehensive
Shares Amount Capital Earnings Loss Total
------------ ------------ ------------ ------------ ----------------- ------------
Balance at February 28, 2002 34,029,180 $ 17 $ 61,725 $ 19,618 $ (5,926) $ 75,434
Net income -- -- -- (24,470) -- (24,470)
Foreign currency translation
adjustment -- -- -- -- 855 855
Valuation adjustment of
interest rate swap
hedge, net of tax effect
of $(118) -- -- -- -- 192 192
Exercise of stock options 18,036 -- 88 -- -- 88
Tax benefit from exercise of
stock options -- -- 2,171 -- -- 2,171
Issuance of warrants -- -- 1,056 -- -- 1,056
------------ ------------ ------------ ------------ ------------ ------------
Balance at May 31, 2002 34,047,216 $ 17 $ 65,040 $ (4,852) $ (4,879) $ 55,326
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2002
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, 2002 has been
derived from audited financial statements at that date. Certain prior year
balances have been reclassified to conform to the current year presentation. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the unaudited May 31,
2002 and 2001 consolidated financial statements have been included. Operating
results for the three month period ended May 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending February 28,
2003 as they may be affected by a number of factors including the timing and
ultimate receipt of orders from significant customers which continue to
constitute a large portion of the Company's sales, the sales channel mix of
products sold, and changes in general economic conditions, any of which could
have an adverse effect on operations.
In accordance with Statement of Financial Accounting Standards No. 130, the
following comprehensive income disclosures are provided. Total comprehensive
income (loss) for the first quarter of fiscal 2003 and 2002 was $(23.4) million
and $0.2 million, respectively. Total comprehensive income (loss) 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 during each period.
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.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE FOR GOODWILL AND OTHER INTANGIBLE ASSETS
Effective March 1, 2002, the Company adopted Statements of Financial Accounting
Standards No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets (the "Statements"). Statement No. 141 refines the definition
of what assets may be considered as separately identified intangible assets
apart from goodwill. Statement No. 142 provides that goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized, but will be
subject to annual impairment tests.
In adopting the Statements, the Company first reclassified $2.7 million of
intangible assets associated with its assembled workforce (net of related
deferred taxes of $1.4 million) to goodwill because such assets did not meet the
new criteria for separate identification. The Company then allocated its
adjusted goodwill balance of $19.2 million to its ESD and NSD divisions and
completed the transitional impairment tests required by Statement No. 142. The
fair values of the reporting units were estimated using a combination of the
expected present values of future cash flows and an assessment of comparable
market values. As a result of these tests, the Company determined that the
goodwill associated with its NSD division was fully impaired and, accordingly,
it recognized a non-cash, goodwill impairment charge of $15.8 million as the
cumulative effect on prior years of this change in accounting principle. This
impairment resulted primarily from the significant decline in NSD's sales and
profitability during the fourth quarter of fiscal 2002 and related reduced
forecasts for the division's sales and profitability.
1
Intangible assets other than goodwill at May 31, 2002 and February 28, 2002 are
comprised of the following (in thousands):
May 31, 2002
--------------------------------------------
Gross
Amortization Carrying Accumulated Unamortized
Amortized Intangible Assets Period Amount Amortization Balance
--------------------------- ------------ ------------ ------------ --------------
Customer relations 10 years $ 32,800 $ 9,840 $ 22,960
Developed technology 5 years 22,727 15,086 7,641
Other intangibles 5-12 years 2,655 1,798 857
------------ ------------ ------------
Total $ 58,182 $ 26,724 $ 31,458
============ ============ ============
February 28, 2002
------------------------------------------
Gross
Amortization Carrying Accumulated Unamortized
Amortized Intangible Assets Period Amount Amortization Balance
--------------------------- ----------- ------------ ------------ ------------
Customer relations 10 years $ 32,800 $ 9,020 $ 23,780
Developed technology 5 years 22,727 14,132 8,595
Assembled workforce 5 years 9,200 5,060 4,140
Trade name 10 years 1,760 1,760 --
Other intangibles 5-12 years 2,704 1,780 924
------------ ------------ ------------
Total $ 69,191 $ 31,752 $ 37,439
============ ============ ============
The estimated amortization expense for the balance of fiscal 2003 and for each
of the next four years is as follows (in thousands):
Balance of fiscal year ending February 28, 2003 $ 6,614
Fiscal 2004 $ 7,439
Fiscal 2005 $ 4,552
Fiscal 2006 $ 3,485
Fiscal 2007 $ 3,377
The changes in the carrying amount of goodwill for the quarter ended May 31,
2002 are as follows (in thousands):
ESD NSD Total
------------ ------------ ------------
Balance as of February 28, 2002 $ 2,727 $ 13,773 $ 16,500
Reclassification of assembled workforce,
net of deferred income taxes, upon
adoption of SFAS No. 141 674 2,018 2,692
Transitional impairment loss upon
adoption of SFAS No. 142 -- (15,791) (15,791)
------------ ------------ ------------
Balance as of May 31, 2002 $ 3,401 $ -- $ 3,401
============ ============ ============
As required by SFAS No. 142, the following table of proforma net income (in
thousands) and earnings per share presents summary results for the quarters
ended May 31, 2002 and 2001 adjusted to exclude amortization expense related to
goodwill and intangible assets that are no longer being amortized as a result of
the Company's adoption of SFAS No. 141 and 142.
For the Quarter Ended May 31,
-----------------------------
2002 2001
------------- ------------
Reported net income (loss) $ (24,470) $ 1,408
Add back goodwill amortization -- 614
Add back assembled workforce amortization -- 460
------------ ------------
Adjusted net income (loss) $ (24,470) $ 2,482
============ ============
2
Basic earnings per share:
For the Quarter Ended May 31,
----------------------------
2002 2001
------------ ------------
Reported net income (loss) $ (0.72) $ 0.04
Add back goodwill amortization -- 0.02
Add back assembled workforce amortization -- 0.01
------------ ------------
Adjusted net income (loss) $ (0.72) $ 0.07
============ ============
Diluted earnings per share:
For the Quarter Ended May 31,
-----------------------------
2002 2001
------------ ------------
Reported net income (loss) $ (0.72) $ 0.04
Add back goodwill amortization -- 0.02
Add back assembled workforce amortization -- 0.01
------------ ------------
Adjusted net income (loss) $ (0.72) $ 0.07
============ ============
If the Company had not been required to adopt the Statements during the quarter,
the Company would not have recognized the cumulative effect on prior years of a
change in accounting principle of $15.8 million but would have recognized
approximately $1.0 million in additional amortization relating to goodwill and
other intangible assets. In such circumstances, the Company's net loss for the
quarter would have been $9.7 million or $0.28 per share.
NOTE C - INVENTORIES
Inventories consist of the following (in thousands):
May 31, 2002 February 28, 2002
------------ -----------------
Purchased parts $ 16,386 $ 18,043
Work in progress 4,233 6,870
Finished goods 2,735 2,611
------------ ------------
$ 23,354 $ 27,524
============ ============
NOTE D - SALE OF FIXED ASSETS
On May 31, 2002, the Company completed the previously announced sale of its
Wichita, Kansas office building. The Company used the $2.0 million in gross
proceeds from the sale to pay down amounts outstanding under its revolving
credit facility.
NOTE E - ACCRUED EXPENSES AND SPECIAL CHARGES
Accrued expenses and other long-term liabilities at February 28, 2002 included
amounts associated with certain special charges incurred during the fourth
quarter of fiscal 2002. Activity during the first quarter of fiscal 2003 related
to such accruals was as follows: (in thousands)
Accrued Balance Revisions Accrued Balance
February 28, 2002 Payments to Estimates May 31, 2002
----------------- ------------ ------------ ---------------
Severance and related charges $ 3,047 $ (1,624) $ (230) $ 1,193
Future lease costs for properties
no longer being used $ 3,643 $ (812) $ (2) $ 2,829
The reduction in estimated severance and related charges of $0.2 million during
the first quarter of fiscal 2003 was recognized through a reduction in first
quarter selling, general and administrative expenses.
During the first quarter of fiscal 2003, the Company continued to implement
actions designed to lower costs. As a result, the Company incurred special
charges of approximately $2.8 million, including $2.4 million for severance
payments and related benefits, and $0.4 million for the closure of its leased
facility in Chicago, Illinois. The severance and related costs were associated
with a workforce reduction affecting
3
103 employees, including 63 and 18 in the Company's ESD and NSD divisions,
respectively, and 22 in the Company's administrative areas. The charges also
included costs associated with the resignation during the quarter of the NSD
president. At May 31, 2002, approximately $1.1 million of the special charges
incurred in the first quarter of fiscal 2003 remained unpaid. The net effect of
all special charges activities for the quarter resulted in charges to cost of
goods sold, research and development and selling, general and administrative
expenses of $1.3 million, $0.5 million and $0.8 million, respectively.
NOTE F - LONG-TERM BORROWINGS
During fiscal 2000, the Company entered into a $125 million amortizing term loan
facility and a $25 million revolving credit facility to finance its merger with
Brite Voice Systems, Inc. ("Brite"). Initial borrowings under the facilities
were $135 million, and at February 28, 2002, the Company owed approximately
$22.5 million and $7.5 million under the term loan and revolving credit
facility, respectively.
Although it had made all required payments under the facilities as well as
certain discretionary prepayments of principal on the term loan during the life
of the facilities, at February 28, 2002, the Company was not in compliance with
a designated fixed charge coverage ratio, one of four financial covenants
required by the facilities. In response to this situation, during the quarter
ended May 31, 2002, the Company restructured its long-term debt. In connection
with this restructuring, the Company retired the term loan, amended the
revolving credit facility and received a waiver from the lending group for the
past non-compliance with the financial covenant. As a result of the
restructuring, at May 31, 2002, the Company's long-term debt was comprised of
the following (in thousands):
MAY 31, 2002
------------
Mortgage loan with a bank, bearing interest payable monthly at
the greater of 10.5% or the prime rate plus 2.0%; principal due
May 28, 2005 $ 14,000
Convertible notes, net of discount of $1,056, as described below 8,944
Revolving credit, bearing interest payable monthly at the prime
rate plus a margin (combined rate of 6.5% at May 31, 2002) 3,980
------------
26,924
Less: current portion (7,944)
------------
$ 18,980
============
In connection with the restructuring, the Company incurred approximately $1.6
million in new debt issuance costs, consisting primarily of legal and investment
banking fees, which were capitalized and which will be charged to interest
expense over the life of the related debt obligations. The Company also wrote
off to interest expense in the quarter $0.4 million in remaining debt issuance
costs related to the retired term loan.
REVOLVING CREDIT FACILITY
The amended revolving credit facility provides for a maximum revolving
commitment equal to the lesser of $12.0 million or a defined borrowing base
comprised of a percentage of eligible domestic receivables and inventory, both
as defined in the agreement. The interest rate margin under the facility
increases 50 basis points per quarter for the remaining life of the agreement.
The facility terminates June 1, 2003.
The revolving credit facility contains a covenant prohibiting the Company from
paying any installments on the convertible notes discussed below in cash at any
time the Company has indebtedness outstanding under the revolving credit
facility. On June 19, 2002, the Company repaid the approximately $4.0 million of
indebtedness then outstanding under the agreement, and no amounts are
outstanding as of the date of this filing.
4
The facility also contains certain representations and warranties, certain
negative and affirmative covenants and certain conditions and events of default
which are customarily required for similar financings. Such covenants include,
among others, restrictions and limitations on liens and negative pledges;
limitations on mergers, consolidations and sales of assets; limitations on
incurrence of debt; limitations on dividends, stock redemptions and the
redemption and/or prepayment of other debt; limitations on investments and
acquisitions (other than the acquisition of the Company); and limitations on
capital expenditures. Key financial covenants based on the Company's
consolidated financial statements include minimum net worth, maximum leverage
ratio, minimum fixed charges coverage ratio and minimum levels of EBITDA. The
credit facility also requires a first priority perfected security interest in
(i) all of the capital stock of each of the domestic subsidiaries of the
Company, and 65% of the capital stock of each of the Company's first tier
foreign subsidiaries, which capital stock shall not be subject to any other lien
or encumbrance and (ii) subject to permitted liens, all other present and future
material assets and properties of the Company and its material domestic
subsidiaries (including, without limitation, accounts receivable and proceeds,
inventory, real property, machinery and equipment, contracts, trademarks,
copyrights, patents, license rights and general intangibles).
CONVERTIBLE NOTES, WARRANTS AND REGISTRATION REQUIREMENTS
On May 29, 2002, the Company entered into a Securities Purchase Agreement, by
and among the Company and the buyers named therein (the "Buyers"), pursuant to
which the Buyers agreed to purchase convertible notes (the "Convertible Notes"),
in an aggregate principal amount of $10.0 million, convertible into shares of
the Company's common stock (the "Conversion Shares"), and warrants (the
"Warrants") initially exercisable for an aggregate of 621,304 shares of the
Company's common stock (the "Warrant Shares") at an exercise price of $4.0238
per share. The fair value ($1.1 million) of the Warrants issued by the Company
has been recorded as a discount on the Convertible Notes. The discount will be
amortized to interest expense over the term of the notes. The following is a
summary of the material terms of the Convertible Notes, the Warrants and certain
registration requirements:
Under the Securities Purchase Agreement, the Company had an option, which has
now expired, to issue up to an additional $10 million in convertible notes and
accompanying warrants on substantially the same terms as the Convertible Notes
and the Warrants. The Company did not issue such additional notes and warrants.
The Securities Purchase Agreement obligates the Company to seek shareholder
approval, at the Company's next annual meeting, of the potential issuance of
common stock upon the conversion and exercise, respectively, of the Convertible
Notes and Warrants to the extent such issuance equals or exceeds 20% of the
Company's outstanding shares. The Company is subject to financial penalties for
failure to seek such approval. If such approval is sought and not obtained, no
penalties will be assessed. The Company intends to seek the required approval.
AMORTIZATION OF CONVERTIBLE NOTES
The Convertible Notes will be repaid in monthly installments ("Installment
Amounts") of principal in the amount of $1.0 million, plus accrued interest on
the applicable installments at 6% per annum, commencing September 1, 2002, and
will be fully amortized by June 30, 2003. At the Company's option, the
Installment Amounts may be paid in cash or through a partial conversion of the
Convertible Notes through the Company's issuance of common stock at a conversion
rate equal to the lesser of (i) $6.184, representing 200% of the weighted
average trading price for the Company's common stock as reported on the Nasdaq
National Market on the issuance date, subject to various adjustments, as set
forth in the Convertible Notes (the "Fixed Conversion Price"), or (ii) 95% of
the average of the weighted average trading prices of the Company's common stock
during the time period to which the installment relates. In order to preserve
the ability to pay the Installment Amounts in common stock, the Company must
comply with several conditions, including maintaining the effectiveness of a
registration statement (as more fully described below), complying with the
listing requirements of the Nasdaq National Market, timely delivery of common
stock upon conversion of the Convertible Notes, and compliance with other
requirements under the Convertible Notes, the Securities Purchase Agreement and
the Registration Rights Agreement.
If any principal amount of the Convertible Notes remains outstanding on June 30,
2003, the holders must surrender the Convertible Notes to the Company and the
principal amount will be redeemed by payment on such date to the holders of a
cash amount equal to the sum of 105% of the principal amount plus accrued
interest at 6% per annum with respect to the principal amount.
5
In addition, subject to certain conditions, the Company may redeem some or all
of the principal amount of the Convertible Notes in excess of current monthly
installments for a cash amount equal to the sum of 105% of the principal amount
being redeemed plus accrued interest at 6% per annum with respect to the
principal amount.
CONVERSION OF CONVERTIBLE NOTES AT THE OPTION OF THE HOLDER
Each of the Convertible Notes is convertible at the option of the holder into
that number of shares of common stock equal to (i) the principal amount being
converted, plus accrued interest at 6% per annum, divided by (ii) the Fixed
Conversion Price of $6.184, as adjusted pursuant to the terms of the Convertible
Notes. If the Company does not timely effect a conversion of the Convertible
Notes, the Company will be subject to certain cash penalties, adjustments to the
applicable Fixed Conversion Price and certain other penalties as more fully
described in the Convertible Notes. Moreover, in such case, the holders of the
Convertible Notes may require the Company to redeem all of the outstanding
principal amount of the Convertible Notes.
Any holder of the Convertible Notes is prohibited from converting its respective
Convertible Notes if, after giving effect to such conversion, the holder would
hold in excess of 4.99% of the Company's outstanding common stock following such
conversion.
ACCELERATION AND DEFAULT PROVISIONS IN CONVERTIBLE NOTES
If certain events, referred to as "Triggering Events," occur, the holders of the
Convertible Notes may cause the Company to redeem the Convertible Notes in cash
at a price equal to the greater of (i) 125% of the principal amount, plus
accrued interest at 6% per annum and (ii) the number of shares of common stock
issuable upon conversion multiplied by the weighted average price of the common
stock on the trading day immediately preceding such event. Triggering Events
include, without limitation, the failure to maintain the effectiveness of a
registration statement, suspension from trading or the failure to be listed for
a period of 5 consecutive trading days or for more than 10 trading days in any
365-day period, the failure to timely deliver shares of common stock and a
material breach by the Company under the transaction documents.
If the Company is unable to effect a redemption as a result of a Triggering
Event, the holders are entitled to void their redemption notices and receive a
reset of their applicable Fixed Conversion Price to the lesser of (i) the Fixed
Conversion Price as in effect on the date on which the holder delivers notice to
the Company of its intent to void the redemption notice and (ii) the lowest
weighted average price of the Company's common stock during the period beginning
on the date on which the notice of redemption is delivered to the Company and
ending on the date the holder delivers notice to the Company of its intent to
void the redemption notice.
If the Company is unable to redeem all of the Convertible Notes submitted for
redemption, the Company must (i) redeem a pro rata amount from each holder of
the Convertible Notes and (ii) pay to the holders interest at the rate of 2.0%
per month with respect to the unredeemed principal amount until paid in full.
Upon a Change of Control (as defined in the Convertible Notes) of the Company,
the holders of the Convertible Notes have the right to require the Company to
redeem all or a portion of the principal amount at a price equal to the greater
of (i) the sum of (A) 115% of such principal amount, plus (B) accrued interest
at 6% per annum, and (ii) the number of shares of common stock issuable upon
conversion multiplied by the arithmetic average of the weighted average prices
of the common stock during the 5 trading days immediately preceding such date.
If an Event of Default (as defined in the Convertible Notes) occurs, the holders
of the Convertible Notes may declare the Convertible Notes, including all
amounts due thereunder, to be due and payable immediately. Such amount shall
bear interest at the rate of 2.0% per month until paid in full. If the Company
does not timely pay the amounts due, the holders of the Convertible Notes may
void the acceleration and the Fixed Conversion Price shall be adjusted to the
lesser of (i) the Fixed Conversion Price as in effect on the date on which the
holders of the Convertible Notes notify the Company of their intent to void the
acceleration and (ii) the lowest weighted average price of the Company's common
stock during the period beginning on the date on which the Convertible Notes
became accelerated and ending on the date on which the holders of the
Convertible Notes notify the Company of their intent to void the acceleration.
The Events of Default include a default in payment of any principal amount of
the Convertible Notes, failure to comply with a material provision of the
Convertible Notes, payment defaults with respect to certain indebtedness and
initiation of bankruptcy proceedings.
6
WARRANTS
In connection with the sale of the Convertible Notes, the Company issued
Warrants to the Buyers. The Warrants give the holders the right to purchase from
the Company, for a period of three years, an aggregate of 621,304 shares of the
Company's common stock for $4.0238 per share as of the date of issuance. Both
the number of Warrants and the exercise price of the Warrants are subject to
antidilution adjustments as set forth in the Warrants. If the Company is
prohibited from issuing Warrant Shares under the rules of the Nasdaq National
Market, the Company must redeem for cash those Warrant Shares which cannot be
issued at a price per Warrant Share equal to the difference between the weighted
average market price of the Company's common stock on the date of attempted
exercise and the applicable exercise price.
REGISTRATION REQUIREMENTS
The Company and the Buyers also entered into a Registration Rights Agreement,
dated as of May 29, 2002 (the "Registration Rights Agreement"), pursuant to
which the Company has filed a registration statement on Form S-3 covering the
resale of the Conversion Shares and the Warrant Shares. The registration
statement became effective on June 27, 2002.
USE OF INTEREST RATE SWAP ARRANGEMENTS IN FISCAL 2002
From July 1999 through October 2001, the Company used interest rate swap
arrangements to hedge the variability of interest payments on its variable rate
credit facilities. While in effect, the swap arrangements essentially converted
the Company's then outstanding floating rate debt to a fixed rate basis. The
Company terminated its swap arrangements in October 2001 in response to the
continued downward movement in interest rates during fiscal 2002 and had no
derivative contracts in place as of May 31, 2002 or February 28, 2002.
NOTE G - INCOME TAXES
On March 7, 2002, United States tax law was amended to allow Companies which
incurred net operating losses in 2001 and 2002 to carry such losses back a
maximum of five years instead of the maximum of two years previously allowed. As
a result of this change, the Company used $21.5 million of its previously
reported net operating loss carryforwards and $0.4 million of its previously
reported tax credit carryforwards and recognized a one-time tax benefit of $7.9
million, of which $2.2 million was recognized as additional capital associated
with previous stock option exercises.
Also during the quarter, and as discussed in Note B, the Company reduced its
deferred tax liabilities by $1.4 million in connection with the reclassification
of its assembled workforce intangible asset to goodwill. As a result of this
transaction, the Company increased the valuation allowance associated with its
net deferred tax asset by $1.4 million.
The effects of both of these first quarter events are included in the Company's
net tax benefit of $2.7 million in the consolidated statement of operations for
the quarter ended May 31, 2002. The Company continues to incur current income
tax expense on the pretax income of certain foreign subsidiaries. The Company
has not recognized a current benefit associated with its domestic pretax losses
because the existence of recent losses prevent it from concluding that it is
more likely than not that such benefit will be realized.
7
NOTE H - EARNINGS PER SHARE
(in thousands, except per share data) May 31, 2002 May 31, 2001
------------ ------------
Numerator:
Income (loss) before the cumulative effect
of a change in accounting principle $ (8,679) $ 1,408
Cumulative effect on prior years of a
change in accounting principle (15,791) --
------------ ------------
Net income (loss) $ (24,470) $ 1,408
------------ ------------
Denominator:
DENOMINATOR FOR BASIC EARNINGS PER SHARE 34,039 33,058
------------ ------------
Effect of dilutive securities:
Employee stock options -- 1,153
Non-vested restricted stock -- 23
------------ ------------
Dilutive potential common shares -- 1,176
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 34,039 34,234
------------ ------------
Basic:
Income (loss) before the cumulative effect of a
change in accounting principle $ (0.26) $ 0.04
Cumulative effect on prior years of a
change in accounting principle (0.46) --
------------ ------------
Net income (loss) $ (0.72) $ 0.04
============ ============
Diluted:
Income (loss) before the cumulative effect
of a change in accounting principle $ (0.26) $ 0.04
Cumulative effect on prior years of a
change in accounting principle (0.46) --
------------ ------------
Net income (loss) $ (0.72) $ 0.04
============ ============
Options to purchase 4,378,654 shares of common stock at an average exercise
price of $10.17 per share and warrants to purchase 621,304 shares at an exercise
price of $4.0238 per share were outstanding at May 31, 2002 but were not
included in the computation of diluted earnings per share for the first three
months of fiscal 2003 because the effect would have been antidilutive given the
Company's loss for the quarter. In addition, the Company's convertible notes
plus accrued interest were convertible at the option of the note holders into
1,617,342 shares at an exercise price of $6.184 per share as of May 31, 2002 but
were similarly excluded from the computation of diluted earnings per share for
the quarter. Options to purchase 2,009,553 shares of common stock at an average
exercise price of $13.59 per share were outstanding at May 31, 2001 but were not
included in the computation of diluted earnings per share for the first quarter
of fiscal 2002 because the options' prices were greater than the average market
price of the Company's common shares during such period and, therefore, the
effect would have been antidilutive.
NOTE I - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company has 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 solutions to network service providers. Each division sells
integrated systems and related services including system maintenance and
software licensing fees. As a complement to the Company's systems sales, it 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.
8
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 acquisition related intangible
assets and, in fiscal 2002, the amortization of goodwill. 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 for routine
reporting purposes.
The operating results of the Company's segments for the three months ended May
31, 2002 and 2001 are as follows (in thousands).
Three Months Ended May 31, 2002
--------------------------------------------
Enterprise Network Segment
Solutions Solutions Totals
------------ ------------ ------------
Systems $ 12,310 $ 9,325 $ 21,635
Services 8,685 8,096 16,781
------------ ------------ ------------
Total sales to external customers 20,995 17,421 38,416
------------ ------------ ------------
Systems 4,092 1,425 5,517
Services 6,776 3,334 10,110
------------ ------------ ------------
Total gross margin 10,868 4,759 15,627
------------ ------------ ------------
Segment operating expenses 11,550 12,148 23,698
------------ ------------ ------------
Segment operating loss* $ (682) $ (7,389) $ (8,071)
============ ============ ============
Three Months Ended May 31, 2001
------------------------------------------
Enterprise Network Segment
Solutions Solutions Totals
------------ ------------ ------------
Systems $ 20,819 $ 17,623 $ 38,442
Services 7,271 15,793 23,064
------------ ------------ ------------
Total sales to external customers 28,090 33,416 61,506
------------ ------------ ------------
Systems 10,711 9,589 20,300
Services 5,313 8,101 13,414
------------ ------------ ------------
Total gross margin 16,024 17,690 33,714
------------ ------------ ------------
Segment operating expenses 13,171 14,007 27,178
------------ ------------ ------------
Segment operating income* $ 2,853 $ 3,683 $ 6,536
============ ============ ============
* Consolidated income from operations includes amortization of acquisition
related intangible assets of $1,776 for the quarter ended May 31, 2002 and
amortization of goodwill and acquisition related intangible assets of
$3,354 for the quarter ended May 31, 2001, that are not allocated by the
Company to the individual segments.
Geographic Operations
The Company's net sales by geographic area were as follows (in thousands):
Three Months Ended
---------------------------
May 31, 2002 May 31, 2001
------------ ------------
Geographic Area Net Sales:
United States $ 22,423 $ 31,906
The Americas (Excluding U.S.) 1,499 3,562
Pacific Rim 520 1,037
Europe, Middle East & Africa 13,974 25,001
------------ ------------
Total $ 38,416 $ 61,506
============ ============
9
Concentration of Revenue
One NSD customer, British Telecom (together with its affiliate MMO2, formerly BT
Cellnet), has purchased both systems and ASP services from the Company. Such
combined purchases accounted for approximately 11% and 14% of the Company's
total sales during the three-month periods ended May 31, 2002 and 2001,
respectively. Under the terms of its managed services contract with MMO2 and at
current exchange rates, the Company will recognize revenues of $0.9 million per
month through July 2003. The amount received under the agreement may vary based
on future changes in the exchange rate between the dollar and the British pound.
There were no other customers accounting for 10% or more of the Company's sales
during the quarters ended May 31, 2002 or 2001.
NOTE J - CONTINGENCIES
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.
None of the Company's 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. In the matter of Katz Technology Licensing, LP v.
Verizon Communications Inc., et al, No. 01-CV-5627, pending in U.S. District
Court, Eastern District of Pennsylvania, RAKTL has alleged that Verizon
Communications, Inc. ("Verizon") and certain of its affiliates infringe patents
held by RAKTL. From 1997 until November 2001 the Company's wholly owned
subsidiary, Brite, provided prepaid services to an affiliate of Verizon under a
managed services contract. The affiliate, which is named as a defendant in the
lawsuit, recently notified Brite of the pendency of the lawsuit and referenced
provisions of the managed services contract which require Brite to indemnify the
affiliate against claims that its services infringe a patent. The claims in the
lawsuit make general references to prepaid services and a variety of other
services offered by Verizon and the affiliate but do not refer to Brite's
products or services. The Company has informed the affiliate that it can find no
basis for an indemnity obligation under the expired contract.
Even though RAKTL has not alleged that a product provided by the Company
infringes a RAKTL patent, it is always possible that RAKTL may do so. In the
event that a Company product becomes the subject of 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 and services 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.
10
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. RAKTL has previously 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. 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
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:
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." 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 and the alleged future business projections of
the Company. Plaintiffs have asserted that these alleged statements resulted in
artificially inflated stock prices.
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 has responded to these complaints, which have now been consolidated into
one proceeding, by filing a motion to dismiss the complaint in the consolidated
proceeding. The Company has asserted that the complaint lacks the degree of
specificity and factual support to meet the pleading standards applicable to
federal securities litigation. On this basis, the Company has requested that the
United States District Court for the Northern District of Texas dismiss the
complaint in its entirety. Plaintiffs have responded to the Company's request
for dismissal, and the Company has filed a supplemental brief to support its
position that the complaint should be dismissed. The Company is awaiting a
ruling by the Court. All discovery and other proceedings not related to the
dismissal have been stayed pending resolution of the Company's request to
dismiss the complaint.
11
On or about April 26, 2002, Telemac Corporation ("Telemac") commenced an
arbitration proceeding in the Los Angeles, California, office of JAMS against
the Company and InterVoice Brite Ltd. and Brite Voice Systems, Inc., JAMS Case
No. 1220026278, claiming fraud, negligent misrepresentation and breach of
contract in connection with formation of and the performance under certain
agreements between the Company, and/or its alleged predecessors, and Telemac,
and seeking compensatory damages of approximately $58 million, punitive damages
and attorneys' fees and other costs and fees. Telemac's allegations arise out of
the negotiations and terms of the Amended and Restated Prepaid Phone Processing
Agreement between Telemac and Brite Voice Systems Group, Ltd., dated November 1,
1998, and certain amendments thereto under which Telemac licensed prepaid
wireless software for use in various markets and exploited in the United Kingdom
under agreement with Cellnet, a provider of wireless telephony in the United
Kingdom.
The Company has asserted counterclaims against Telemac for breach of contract,
breach of warranty and breach of the implied covenant of good faith and fair
dealing with respect to the capabilities of software supplied by Telemac and
handsets provided by parties contracting with Telemac.
The Company and Telemac have selected as arbitrator Justice William A. Masterson
(Ret.) formerly of the California Court of Appeal and the Los Angeles County
Superior Court,. The arbitration hearing is set to commence January 13, 2003, in
Los Angeles, California. The Company acknowledges it may owe an immaterial
amount for certain software development services rendered by Telemac. With the
exception of these immaterial amounts, the Company believes that the claims
asserted by Telemac are without merit. The Company further believes it has
meritorious defenses and counterclaims and intends to vigorously defend the
claims of Telemac and assert the Company's claims in the arbitration.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known contingencies, including the matters described above, is
uncertain, and there can be no assurance that future costs related to such
matters would not be material to the Company's financial position or results of
operations.
Note K -- Subsequent Events
On June 24, 2002, the Company announced that it had begun a process to effect an
internal reorganization and consolidation to reduce expenses and to more
efficiently and effectively manage the Company. The Company will be eliminating
the NSD/ESD divisional structure and reducing its workforce by approximately 80
to 130 additional positions. Robert Ritchey, the President and General Manager
of ESD, will transition to President of the Company. David W. Brandenburg will
continue as Chairman of the Board and Chief Executive Officer. The Company
estimates that it will incur charges of between $3.5 million and $4.5 million
during the second and third fiscal quarters in connection with the
restructuring. The Company anticipates that operating expenses will be reduced
approximately $2.0 million to $3.0 million per quarter from fiscal 2003 first
quarter levels once these restructuring activities are completed.
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements" located elsewhere herein regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations, and industry conditions, are
forward-looking 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 2003,
and beyond, to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company:
o The Company has experienced recent operating losses and may not
operate profitably in the future. The Company incurred net losses of
approximately $44.7 million in fiscal 2002, $2.3 million in fiscal
2001 and $14.8 million in fiscal 2000. For the first quarter of fiscal
2003, the Company incurred a net loss of $24.5 million. The Company
may continue to incur losses, which could hinder the Company's ability
to operate its current business. The Company cannot provide assurances
that it will be able to generate sufficient revenues from its
operations to achieve or sustain profitability in the future.
o General business activity has declined. The Company's sales are
largely dependent on the strength of the domestic and international
economies and, in particular, on demand for telecommunications
equipment, computers, software and other technology products. The
market for telecommunications equipment has declined sharply, and the
markets for computers, software and other technology products also
have declined. In addition, there is an increased concern that demand
for the types of products offered by the Company will remain soft for
some period of time as a result of domestic and global economic and
political conditions following the attacks by terrorists on September
11, 2001.
o In recent quarters, the Company has fallen short of its sales and
earnings expectations. Many of the Company's transactions are
completed in the same fiscal quarter as ordered. The size and timing
of some transactions have historically caused sales fluctuations from
quarter to quarter. While in the past the impact of these fluctuations
was mitigated to some extent by the geographic and vertical market
diversification of the Company's existing and prospective customers,
the Company has become increasingly prone to quarterly sales
fluctuations because of its sales to the enhanced telecommunications
services systems market. The quantity and size of large sales (sales
valued at approximately $2.0 million or more) during any quarter can
cause wide variations in the Company's quarterly sales and earnings,
as such sales are unevenly distributed throughout the fiscal year. The
Company's accuracy in estimating future sales is largely dependant on
its ability to successfully qualify, estimate and close system 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
system sales opportunities.
o The Company is subject to potential and pending lawsuits and other
claims. The Company is subject to certain potential and pending
lawsuits and other claims discussed in Item 1 "Legal Proceedings" in
Part II, and in the Company's other SEC filings. The Company believes
that each of the potential and pending lawsuits and other claims to
which it is subject is without merit and intends to defend each matter
vigorously. There can be no assurances, however, that the Company will
prevail in any or all of the litigation or other matters. An adverse
judgment in any of these matters, as well as the Company's expenses
relating to its defense of a given matter, could have consequences
materially adverse to the Company.
13
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. The principal competitors for the Company's ESD systems are
AVAYA, IBM and Nortel Networks; the principal competitors for the
Company's NSD systems are Comverse Technology, Ericsson, Lucent
Technologies and UNISYS. Many of the Company's competitors have
greater financial, technological and marketing resources than the
Company has. Although the Company has committed substantial resources
to enhance its existing products and to develop and market new
products, there is no assurance it will be successful.
o The Company may not be able to retain its customer base and, in
particular, its more significant customers, such as British Telecom.
The Company's success depends substantially on retaining its
significant customers. The loss of one of the Company's significant
customers could negatively impact the Company's results of operations.
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. Moreover, the Company has
phased out a number of Brite products and has attempted to migrate
Brite customers over to the Company's own functionally similar
products, but there can be no assurance that the Company will be able
to maintain Brite's customer base.
Sales to British Telecom (together with its affiliate MMO2, formerly
BT Cellnet), which purchases both systems and managed services from
the Company, accounted for approximately 11% and 14% of the Company's
total sales during the three month periods ended May 31, 2002 and
2001, respectively. Under the terms of its managed services contract
with MMO2 and at current exchange rates, the Company will recognize
revenues of approximately $0.9 million per month through July 2003,
down from a first quarter fiscal 2002 high of approximately $2.6
million per month. 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 reliance on significant vendor relationships could
result in significant expense or an inability to serve its customers
if it loses these relationships. Although the Company generally uses
standard parts and components for its products, some of its
components, including semi-conductors and, in particular, digital
signal processors manufactured by Texas Instruments and AT&T Corp.,
are available only from a small number of vendors. Likewise, the
Company licenses speech recognition technology from a small number of
vendors. To date, the Company has been able to obtain adequate
supplies of needed components and licenses in a timely manner. If the
Company's significant vendors are unable or cease to supply components
or licenses at current levels, the Company may not be able to obtain
these items from another source. Consequently, the Company would be
unable to provide products and to service its customers, which would
negatively impact its business and operating results.
o The Company's inability to protect its intellectual property against
infringement and infringement claims could negatively impact its
business. The Company's protection of its patent, copyright,
trademarks and other proprietary rights in its products and
technologies is critical to the continued success of its business.
Although the Company's proprietary rights are protected by a
combination of intellectual property laws, nondisclosure safeguards
and license agreements, it is technologically possible for the
Company's competitors to copy aspects of the Company's products in
violation of these protected rights. Moreover, it may be possible for
competitors to provide products and technologies competitive to those
of the Company without violating the Company's protected rights.
14
Even in cases where patents protect aspects of the Company's
technology, the detection and policing of the unauthorized use of the
patented technology is difficult. Further, judicial enforcement of
patents, trademarks and copyrights may be uncertain, particularly in
foreign countries. Unauthorized use of the Company's proprietary
technology by its competitors could negatively impact its business,
operating results and financial condition.
o If third parties assert claims that the Company's products or services
infringe on their technology and related intellectual property rights,
whether the claims are made directly against the Company or against
the Company's customers, the Company could incur substantial costs to
defend these claims. If any of these claims is ultimately successful,
a third party could require the Company to pay substantial damages,
discontinue the use and sale of infringing products, expend
significant resources to acquire non-infringing alternatives, and/or
obtain licenses to use the infringed intellectual property rights.
Moreover, where the claims are asserted with respect to the Company's
customers, additional expenses may be involved in indemnifying the
customer and/or designing and providing non-infringing products.
o The Company is exposed to risks related to its international
operations that could increase its costs and hurt its business. The
Company's products are currently sold in more than 75 countries. The
Company's international sales, as a percentage of total Company sales,
were 42% and 48% in the three months ended May 31, 2002 and 2001,
respectively. International sales are subject to certain risks,
including:
o fluctuations in currency exchange rates;
o the difficulty and expense of maintaining foreign offices and
distribution channels;
o tariffs and other barriers to trade;
o greater difficulty in protecting and enforcing intellectual property
rights;
o general economic conditions in each country;
o loss of revenue, property and equipment from expropriation;
o import and export licensing requirements; and
o additional expenses and risks inherent in conducting operations in
geographically distant locations, including risks arising from
customers speaking different languages and having different cultural
approaches to the conduct of business.
o The Company's inability to properly estimate costs under fixed price
contracts could negatively impact its profitability. Some of the
Company's contracts to develop application software and customize
systems provide for the customer to pay a fixed price for its products
and services regardless of whether the Company's costs to perform
under the contract exceed the amount of the fixed price. If the
Company is unable to estimate accurately the amount of future costs
under these fixed price contracts, or if unforeseen additional costs
must be incurred to perform under these contracts, the Company's
ability to operate profitably under these contracts will be adversely
affected. 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. 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 Increasing consolidation in the telecommunications and financial
industries could affect the Company's revenues and profitability.
Several of the Company's significant customers are in the
telecommunications and financial industries, which are undergoing
increasing consolidation as a
15
result of merger and acquisition activity. This activity involving the
Company's significant customers could decrease the number of customers
purchasing the Company's products and/or delay purchases of the
Company's products by customers that are in the process of reviewing
their strategic alternatives in light of a pending merger or
acquisition. If the Company has fewer customers or its customers delay
purchases of the Company's products as a result of merger and
acquisition activity, the Company's revenues and profitability could
decline.
o Government action and, in particular, action with respect to the
Telecommunications Act of 1996 regulating the telecommunications
industry could have a negative impact on the Company's business.
Future growth in the markets for the Company's products will depend in
part on privatization and deregulation of certain telecommunication
markets worldwide. Any reversal or slowdown in the pace of this
privatization or deregulation could negatively impact the markets for
the Company's products. Moreover, the consequences of deregulation are
subject to many uncertainties, including judicial and administrative
proceedings that affect the pace at which the changes contemplated by
deregulation occur, and other regulatory, economic and political
factors. Any invalidation, repeal or modification of the requirements
imposed by the Telecommunications Act of 1996 could negatively impact
the Company's business, financial condition and results of operations.
Furthermore, the uncertainties associated with deregulation could
cause the Company's customers to delay purchasing decisions pending
the resolution of such uncertainties.
o Significant market fluctuations could affect the price of the
Company's common stock. Extreme price and volume trading volatility in
the U.S. stock market 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 Company's issuance of convertible notes and warrants could
substantially dilute the interests of the existing shareholders. The
$10 million in convertible notes issued by the Company in May 2002 are
convertible by the holders into common stock at any time prior to
their maturity in June 2003 at an initial conversion price of $6.184,
which was 200% of the weighted average price of the Company's common
stock on the date of issuance, subject to adjustment for stock splits,
stock dividends, stock combinations and similar transactions.
Moreover, the conversion price of the convertible notes could be
lowered, perhaps substantially, in a variety of circumstances,
including the Company's issuance of common stock below the holders'
conversion price (either directly or in connection with the issuance
of most securities convertible into, or exercisable for, common
stock), the Company's failure to comply with specific registration and
listing obligations applicable to the common stock into which the
convertible notes are convertible, and other breaches by the Company
of its obligations to the note holders. Correspondingly, the Company
issued to the note holders in May 2002 three-year warrants entitling
the warrant holders to purchase an aggregate of 621,304 shares of the
Company's common stock at an exercise price of $4.0238 per share. Both
the number of warrants and the exercise price are subject to
adjustments that could make them further dilutive to existing
shareholders. Neither the notes nor the warrants establish a "floor"
limiting reductions in, respectively, the conversion price of the
convertible notes or the exercise price of the warrants that may occur
under certain circumstances. Correspondingly, there is no "ceiling" on
the number of shares that may be issuable under certain circumstances
under the antidilution adjustments in the warrants.
o The Company is required to pay any outstanding loans under the credit
facility before any installment of principal on the convertible notes
can be paid in cash. Any required payments in stock could be dilutive
to the Company's shareholders, and such dilution could be made worse
by the note and warrant holders' hedging activities. The Company's
revolving credit facility prohibits the Company from paying any
installments on the convertible notes in cash at any time the Company
has indebtedness outstanding under the credit facility. On June 19,
2002, the Company repaid the approximately $4.0 million of
indebtedness then outstanding under the revolving credit facility. In
doing so, the Company has satisfied this covenant. Accordingly, and
for so long as no new borrowings are outstanding under the credit
facility, the Company may pay installments on the convertible notes in
cash instead of common stock. However, if at any time there are
borrowings outstanding under the credit facility, the Company will
effectively be required to "pay" installments
16
on the convertible notes through a partial conversion of the
convertible notes into common stock. The conversion price, subject to
certain antidilution adjustments, would be the lower of (i) $6.184 or
(ii) 95% of the average of the weighted average trading prices of the
Company's common stock during the time period to which the installment
relates. Since the Company's inability to pay installments in cash
would most likely occur when it is experiencing unsatisfactory
operating results and lower trading prices for its common stock, the
number of shares required to "pay" an installment in a partial
conversion of the convertible notes could increase significantly, with
the resultant dilution further depressing the Company's stock price.
In addition, to the extent the selling shareholders convert the
convertible notes and then sell the shares of common stock they
receive upon conversion, the Company's stock price may decrease due to
the additional amount of shares available in the market. The potential
or actual conversion of such convertible notes and subsequent sale of
shares could encourage short sales by the Company's shareholders and
others which could place further downward pressure on the Company's
stock price.
o Any failure by the Company to satisfy its registration, listing and
other obligations with respect to the common stock underlying the
convertible notes and the warrants could result in adverse
consequences, including acceleration of the convertible notes. Subject
to certain exceptions, the Company is required to maintain the
effectiveness of the registration statement that became effective June
27, 2002 covering the common stock underlying the convertible notes
and the warrants until the earlier of the date the underlying common
stock may be resold pursuant to rule 144(k) under the Securities Act
of 1933 or the date on which the sale of all the underlying common
stock is completed. The Company is subject to various penalties for
failure to meet its registration obligations and the related stock
exchange listing for the underlying common stock, including cash
penalties and forced redemption of the convertible notes at the
greater of (i) 125% of the principal amount plus accrued interest at
6% per annum or (ii) the product of the "conversion rate" (the amount
of principal and interest being redeemed divided by the conversion
price) multiplied by the weighted average price of the Company's
common stock on the trading day immediately preceding its registration
or listing default. If the Company is unable to issue common stock
under the convertible notes because the amount issuable would exceed
the number of shares that the Company is permitted to issue without
shareholder approval under Nasdaq National Market requirements
(aggregate shares equal to or in excess of 20% of the issued and
outstanding shares), then the Company may be required to redeem the
convertible notes at 100% of the principal plus accrued interest at
6.0%.
o The Company is obligated to make significant periodic payments of
principal and interest under its financing instruments. The Company
has material indebtedness outstanding under a mortgage loan with Beal
Bank, S.S.B., secured by the Company's office facilities in Dallas,
Texas and the convertible notes. The Company is required to make
periodic payments of interest on each of these financial instruments
and, in the case of the convertible notes, periodic payments of
principal. The Company may, from time to time, have additional
indebtedness outstanding under its revolving credit facility, which
provides for a revolving credit line of up to $12.0 million. The
Company is not in default under any of the financing instruments and
believes it will have the resources to make all required principal and
interest payments. If, however, the Company at any time does default
on any of its payment obligations or other obligations under any
financing instrument, the creditors under the applicable instrument
will have all rights available under the instrument, including
acceleration, termination and, with respect to the mortgage and credit
facility, enforcement of security interests. The financing instruments
also have certain qualified cross-default provisions, particularly for
acceleration of indebtedness under one of the other instruments. Under
such circumstances, the Company's cash position and liquidity would be
severely impacted, and it is possible the Company would not be able to
pay its debts as they come due.
SALES. The Company's total sales for the first quarter of fiscal 2003 were $38.4
million, a decrease of $23.1 million, or 38%, as compared to the same period of
fiscal 2002. The Company's Enterprise Solutions Division ("ESD") sales were down
$7.1 million, while its Network Solutions Division ("NSD") sales were down $16.0
million from the prior year's first quarter totals. The Company's system sales
across both divisions totaled $21.6 million for the first quarter of fiscal 2003
as compared to system sales of $38.4 million for the fiscal 2002 first quarter.
Company wide services sales totaled $16.8 million as
17
compared to $23.1 million for the first quarter of fiscal 2002. The decline in
system sales reflects the previously reported sharp decline in the Company's
primary markets, particularly the decline in the market for telecommunications
equipment, which the Company has experienced over the last two quarters. The
Company believes the market for telecommunications equipment will remain soft
through at least the Company's third quarter of fiscal 2003. The net decline in
services sales is comprised of increases in the Company's warranty and related
customer service revenue offset by declines in its managed service revenues as
further discussed below.
ESD system sales for the quarter totaled $12.3 million, down $8.5 million (40%)
from the same period of the previous year. ESD services sales totaled $8.7
million, an increase of $1.4 million (19%) over the first quarter of fiscal
2002. The increase was primarily attributable to continued growth in the
Company's sales of extended warranty services. ESD international sales
constituted 9% of the division's total sales during the first quarter of fiscal
2003, down from 17% in the first quarter of fiscal 2002, with the decrease in
activity primarily focused in the division's European operations.
NSD system sales for the first quarter of fiscal 2003 were $9.3 million, down
$8.3 million (47%) when compared to the same period of the previous fiscal year.
NSD services sales totaled $8.1 million, a decrease of $7.7 million (49%) over
the first quarter of fiscal 2002. The decline in services sales reflects a
reduction in the division's managed services revenues attributable to a decrease
in the volume of activity processed under certain of the division's ASP
contracts, including, particularly, its contract with MMO2 (formerly BT
Cellnet). Monthly managed service revenues under the MMO2 contract totaled
approximately $0.9 million for the first quarter of fiscal 2003, down
significantly from the first quarter of fiscal 2002 when such revenues totaled
approximately $2.6 million per month. The lower fee will continue through July
2003 when the contract expires. Total systems and services sales to British
Telecom, including the managed services revenues from its affiliate, MMO2,
accounted for approximately 11% and 14% of the Company's total sales during the
three month periods ended May 31, 2002 and 2001, respectively. NSD international
sales constituted 81% and 75% of the division's total sales for the quarters
ended May 31, 2002 and 2001, respectively.
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 from service
and support contracts, including contracts for ASP managed services, comprised
approximately 44% of the Company's sales for the first quarter of fiscal 2003,
up slightly from approximately 40% of sales in fiscal 2002. The pipeline of
opportunities for systems sales and backlog of systems sales comprised
approximately 30% and 26% of sales, respectively, during the first quarter of
fiscal 2003, and each comprised approximately 30% of sales during fiscal 2002.
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. 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. As described above,
however, a significant portion of the Company's services revenue is derived from
its contract with MM02. As a result of the significant reduction to quarterly
revenues under the managed services contract with MMO2, the Company will have to
increase its sales under other service and support contracts with new or
existing customers to maintain or increase service and support revenues in
future quarters.
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 May 31, 2002, February 28, 2002, November 30, 2001 and August
31, 2001, the Company's backlog of systems sales was approximately $32.0
million, $26.0 million, $21.0 million and $25.4 million, respectively. Backlog
increased for the second quarter in a row, and the backlog at May 31, 2002 was
the highest the Company has reported since February 2001 when backlog totaled
$35.0 million. 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
18
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 the next
fiscal quarter is, therefore, highly dependent upon its ability to successfully
estimate which pipeline opportunities will close during the quarter.
SPECIAL CHARGES. During the first quarter of fiscal 2003, the Company continued
to implement actions designed to lower costs. As a result, the Company incurred
special charges of approximately $2.8 million, including $2.4 million for
severance payments and related benefits, and $0.4 million for the closure of its
leased facility in Chicago, Illinois. The severance and related costs were
associated with a workforce reduction affecting 103 employees, including 63 and
18 in the Company's ESD and NSD divisions, respectively, and 22 in the Company's
administrative areas. The charges also included costs associated with the
resignation during the quarter of the NSD president. During the first quarter,
the Company also revised its estimates of severance charges originally recorded
in the fourth quarter of fiscal 2002, reducing its accrual for such charges by
$0.2 million. The net effect of all special charges activities for the first
quarter of fiscal 2003 was to increase cost of goods sold, research and
development and selling, general and administrative expenses by $1.4 million,
$0.5 million and $0.7 million, respectively.
On June 24, 2002, the Company announced that it had begun a process to effect an
internal reorganization and consolidation to reduce expenses and to more
efficiently and effectively manage the Company. The Company will be eliminating
the NSD/ESD divisional structure and reducing its workforce by approximately 80
to 130 additional positions. Robert Ritchey, the President and General Manager
of ESD, will transition to President of the Company. David W. Brandenburg will
continue as Chairman of the Board and Chief Executive Officer. The Company
estimates that it will incur charges of between $3.5 million and $4.5 million
during the second and third fiscal quarters in connection with the
restructuring. The Company anticipates that operating expenses will be reduced
approximately $2.0 million to $3.0 million per quarter from fiscal 2003 first
quarter levels once these restructuring activities are completed.
COST OF GOODS SOLD. Cost of goods sold for the first quarter of fiscal 2003 was
approximately $22.8 million or 59.3% of sales as compared to $27.8 million or
45.2% of sales for the first quarter of fiscal 2002. Net of the severance and
lease expenses discussed in "Special Charges," above, cost of goods sold for the
first quarter of fiscal 2003 was $21.4 million or 55.8% of sales. ESD systems
costs averaged 66.8% of sales for the quarter, up from 48.6% for the first
quarter of fiscal 2002. NSD systems costs averaged 84.7% of sales versus 45.6%
in the previous year's first quarter. In each case, the higher percentage
results, in part, from the special charges incurred as part of the fiscal 2003
reorganization and, in part, from the nature of the Company's cost structure. A
significant portion of the Company's cost of goods sold is comprised of labor
costs that are fixed over the near term as opposed to direct material and
license/royalty costs that vary directly with sales volume. ESD services cost of
sales was 22.0% of sales for the current quarter, down from 26.9% in the first
quarter of fiscal 2002. 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 58.8% of sales for the
quarter ended May 31, 2002, up from 48.7% for the same quarter of the prior year
primarily as a result of the decline in revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the
first quarter of fiscal 2003 were approximately $6.0 million, or 15.6% of the
Company's total sales. During the first quarter of the previous fiscal year,
research and development expenses were $7.6 million, or 12.3% of the Company's
total sales. Research and development expenses include the design of new
products and the enhancement of existing products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses during the first quarter of fiscal 2003 were
approximately $17.7 million, or 46.1% of the Company's total sales. Net of the
severance and related expenses discussed in "Special Charges," above, SG&A for
the quarter totaled $17.0 million or 44.2% of first quarter sales. SG&A expenses
during the first quarter of fiscal 2002 were $19.6 million, or 31.9% of the
Company's total sales. These expenses have dropped in absolute dollars over the
same period last year as a result of cost control initiatives implemented by the
Company and as a result of lower commissions and incentive bonuses being earned
on the lower sales volumes. They are up as a percent of the Company's total
sales because of the decline in sales.
19
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLE ASSETS AND CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE. Effective March 1, 2002, the Company adopted
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets (the "Statements"). Statement No.
141 refines the definition of what assets may be considered as separately
identified intangible assets apart from goodwill. Statement No. 142 provides
that goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized, but will be subject to annual impairment tests.
In adopting the Statements, the Company first reclassified $2.7 million of
intangible assets associated with its assembled workforce (net of related
deferred taxes of $1.4 million) to goodwill because such assets did not meet the
new criteria for separate identification. The Company then allocated its
adjusted goodwill balance of $19.2 million to its ESD and NSD divisions and
completed the transitional impairment tests required by Statement No. 142. The
fair values of the reporting units were estimated using a combination of the
expected present values of future cash flows and an assessment of comparable
market values. As a result of these tests, the Company determined that the
goodwill associated with its NSD division was fully impaired and, accordingly,
it recognized a non-cash, goodwill impairment charge of $15.8 million as the
cumulative effect on prior years of this change in accounting principle. This
impairment resulted primarily from the significant decline in NSD's sales and
profitability during the fourth quarter of fiscal 2002 and related reduced
forecasts for the division's sales and profitability.
The Company's intangible assets other than goodwill will continue to be
amortized over lives that primarily range from 5 to 10 years. Amortization of
these assets totaled $1.8 million for the first quarter of fiscal 2003.
Amortization in the first quarter of fiscal 2002 totaled $3.4 million but would
have totaled $2.2 million had the new rules been effective during that period.
The estimated amortization expense for the balance of fiscal 2003 and for each
of the next four years is as follows (in thousands):
Balance of fiscal year ending February 28, 2003 $ 6,614
Fiscal 2004 $ 7,439
Fiscal 2005 $ 4,552
Fiscal 2006 $ 3,485
Fiscal 2007 $ 3,377
INTEREST EXPENSE. Interest expense was approximately $1.5 million during the
first quarter of fiscal 2003, versus $1.3 million for the same period of fiscal
2002. The fiscal 2003 expense is comprised of approximately $0.6 million
incurred under the Company's term loan and revolving credit facility, $0.6
million for the amortization of debt issuance costs on those credit facilities
(including $0.4 million incurred in connection with the retirement of the term
loan as part of the Company's debt restructuring activities) and $0.3 million
relating to the final amortization under certain interest rate swap arrangements
terminated by the Company during fiscal 2002.
The Company restructured its long-term debt during the first quarter of fiscal
2003. See "Note F - Long-Term Borrowings" in Item 1 and "Liquidity and Capital
Resources" for a description of the Company's long term borrowings and the
impact of its recent debt restructuring on interest expense.
INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). The Company generated an
operating loss of $9.8 million, a loss before the cumulative effect of a change
in accounting principle of $8.7 million and a net loss of $24.5 million during
the first quarter of fiscal 2003. As described in Note B to the consolidated
financial statements in Item 1, the Company recorded a $15.8 million charge as
the cumulative effect on prior years of a change in accounting principle in
connection with its adoption of Statements of Financial Accounting Standards No.
141 and No. 142. During the first quarter of fiscal 2002, the Company generated
operating income of $3.2 million and net income of $1.4 million.
LIQUIDITY AND CAPITAL RESOURCES. The Company had approximately $14.0 million in
cash and cash equivalents at May 31, 2002, while borrowings under the Company's
restructured long-term debt facilities (See "Note F - Long-Term Borrowings" in
Item 1) totaled $26.9 million. The Company's cash reserves decreased $3.7
million during the three months ended May 31, 2002, with operating activities
using $1.7 million of cash, net investing activities providing $1.3 million of
cash and net financing activities using $3.5 million of cash.
20
Operating cash flow for the first quarter of fiscal 2003 was negatively impacted
by the Company's net loss before the cumulative effect of a change in accounting
principle of $8.7 million for the quarter and by approximately $4.1 million of
cash payments made in settlement of severance and other special charges
associated with the Company's cost control initiatives undertaken in the fourth
quarter of fiscal 2002 and the first quarter of fiscal 2003. Operating cash flow
was favorably impacted by the Company's ongoing initiatives to reduce accounts
receivable (down $4.5 million for the quarter) and inventories (down $4.2
million for the quarter). Days sales outstanding (DSO) of accounts receivable at
May 31, 2002, was 85 days, down significantly from 133 days at February 28,
2002.
While the Company continues to focus on reducing the level of its investment in
accounts receivable, it now generates a significant percentage of its sales,
particularly sales of enhanced telecommunications services systems, outside the
United States. 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 May 31, 2002 and 2001,
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 2003 and beyond.
Investing activities during the quarter were comprised of the purchase of
computer and test equipment, a use of approximately $0.6 million of cash, offset
by proceeds from the sale of the Company's Wichita office building, which
provided $1.9 million of cash. The proceeds from the sale were used to reduce
amounts outstanding under the Company's revolving credit facility.
The Company significantly restructured its long-term borrowings during the
quarter ended May 31, 2002. Major financing activities for the quarter included
the borrowing of $14.0 million from a bank under a mortgage loan secured by the
Company's Dallas headquarters and the issuance of $10.0 million of convertible
notes and related warrants. The proceeds of these new borrowings, along with the
gross proceeds of the Wichita sale discussed above, were used to retire the
$22.5 million balance outstanding under the Company's term loan facility and to
pay down $3.5 million of the $7.5 million balance outstanding under the
Company's revolving credit facility. As part of the restructuring, the Company
also incurred approximately $1.6 million in new debt issuance costs, consisting
primarily of legal and investment banking fees, which were capitalized and which
will be charged to interest expense over the life of the related debt
obligations. The Company also wrote off to interest expense in the quarter $0.4
million in remaining debt issuance costs related to the retired term loan. On
June 19, 2002, the Company repaid the approximately $4.0 million of remaining
indebtedness then outstanding under the revolving credit facility, and no
amounts are outstanding under that facility as of the date of this filing.
The financing transactions described above were required, in part, because from
February 28, 2002 through May 30, 2002 the Company operated under a temporary
waiver of one of four financial covenants required by its revolving credit
facility. In connection with the Company's repayment of indebtedness under the
term loan and revolving credit facility, the lenders agreed to permanently waive
the Company's previous non-compliance with the covenant. Additional information
regarding the convertible notes and warrants, the mortgage loan and the
revolving credit facility follows.
ISSUANCE OF NOTES AND WARRANTS
On May 29, 2002, the Company entered into a securities purchase agreement to
sell certain convertible notes, in an aggregate principal amount of $10.0
million, convertible into shares of the Company's common stock, and warrants to
purchase shares of the Company's common stock. The convertible notes were issued
on May 30, 2002. They have a term of 13 months and bear interest at the rate of
6% per year. The Company's obligation to pay principal and interest under the
convertible notes begins September 1, 2002 and ends June 30, 2003. The Company
may make payments on the convertible notes in either cash or, through a partial
conversion of the convertible notes into shares of the Company's common stock,
provided certain conditions are met. The Company currently plans to make the
monthly payments in cash. The Company also has the right under specified
circumstances to make voluntary cash prepayments of any portion or all of the
outstanding principal under the convertible notes.
21
The holders of the convertible notes have the right at any time to convert the
convertible notes into shares of the Company's common stock at a conversion
price of $6.184, representing 200% of the volume weighted average price of the
common stock at May 30, 2002, subject to adjustment. The convertible notes are
initially convertible into 1,617,077 shares of the Company's common stock,
excluding accrued and unpaid interest. This number of conversion shares is
subject to adjustment from time to time upon the occurrence of certain events
described in the convertible notes.
The warrants were also issued on May 30, 2002. They may be exercised for a term
of three years. The number of shares of common stock initially issuable upon
exercise of the warrants is 621,304 shares at an initial per share exercise
price of $4.0238. Both the number of warrant shares and the exercise price are
subject to adjustment from time to time upon the occurrence of certain events
described in the warrants.
In connection with the issuance of the convertible notes and the warrants, the
Company also entered into a registration rights agreement under which it is
required to register 150% of the number of shares of common stock issuable upon
conversion of the convertible notes and all of the common stock issuable upon
exercise of the warrants, pursuant to applicable securities laws. The
registration statement for the requisite shares became effective on June 27,
2002. The Company is further obligated to hold a meeting of shareholders on or
before August 28, 2002 to vote on a proposal to approve, as required by the
Nasdaq National Market, the potential issuance of shares, upon conversion of the
convertible notes and exercise of the warrants, equal to or in excess of 20% of
the Company's issued and outstanding shares.
MORTGAGE LOAN
On May 29, 2002, the Company entered into a three-year mortgage loan on its
Dallas, Texas office facilities for $14 million. Interest is payable monthly
under the mortgage and will be computed at the greater of the prime rate of
interest plus 2% or 10.5%. The entire principal amount is payable at the end of
the mortgage term.
CHANGES IN CREDIT FACILITY
In connection with the debt restructuring discussed above, the lender group
agreed to permanently waive the breach of the fixed charge coverage ratio
covenant under the credit agreement and agreed to continue to provide the
Company with a revolving credit line of up to $12.0 million. The amount the
Company may borrow under the revolving credit line at any point in time will be
determined by a borrowing base comprised of a percentage of the Company's
eligible U.S. accounts receivable plus its U.S. raw materials inventory, both as
defined in the agreement. The revolving credit facility is cross-defaulted with
the convertible notes, so that a default or the occurrence of certain other
events under the convertible notes will be a default under the credit facility.
Although the Company has no amount outstanding under the revolving credit
facility as of July 1, 2002, the Company intends to maintain the revolving
credit facility for liquidity and working capital purposes.
For an expanded discussion of the convertible notes, the warrants, the mortgage
loan and the amendment to the Company's credit facility, see the Current Report
on Form 8-K filed by the Company on May 30, 2002, and incorporated into this
Quarterly Report on Form 10-Q by this reference.
The Company believes the liquidity provided by these financing transactions
combined with cash generated from operations should be sufficient to sustain its
operations for the next twelve months.
22
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. The absence of such contracts reduces the
Company's exposure to inflationary effects.
23
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.
At May 31, 2002, the Company's outstanding long-term debt was comprised of the
following (in thousands):
MAY 31, 2002
------------
Mortgage loan with a bank, bearing interest payable monthly at the greater of
10.5% or the prime rate plus 2.0%; principal due May 28, 2005 $ 14,000
Convertible notes, net of discount of $1,056 8,944
Revolving credit, bearing interest payable monthly at the prime rate plus a
margin (combined rate of 6.5% at May 31, 2002) 3,980
------------
$ 26,924
------------
The Company's current revolving credit agreement provides for borrowings of up
to $12.0 million, subject to borrowing base limits, which bear interest at
variable rates based on the prime rate plus an applicable margin. The Company
repaid all amounts outstanding under the agreement in June 2002. The credit
agreement matures June 1, 2003. The fair value of the borrowings approximated
their carrying value at May 31, 2002.
The following table provides information about the Company's credit agreements
that are sensitive to changes in interest rates. For the credit agreements, 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 July 1, 2002.
FISCAL
FAIR VALUE -----------------------------------------
MAY 31, 2002 2003 2004 2005 2006
------------ -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
Long-term debt $ 26,924
Fixed rate US $ $ 6,000 $ 4,000 -- --
Projected weighted average
interest rate 6.0% 6.0%
Variable rate US $ $ 3,980 $ -- $ -- $ 14,000
Projected weighted average
interest rate 10.5% 10.5% 10.5% 10.5%
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
24
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.
25
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
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:
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." 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 and the alleged future business projections of
the Company. Plaintiffs have asserted that these alleged statements resulted in
artificially inflated stock prices.
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 has responded to these complaints, which have now been consolidated into
one proceeding, by filing a motion to dismiss the complaint in the consolidated
proceeding. The Company has asserted that the complaint lacks the degree of
specificity and factual support to meet the pleading standards applicable to
federal securities litigation. On this basis, the Company has requested that the
United States District Court for the Northern District of Texas dismiss the
complaint in its entirety. Plaintiffs have responded to the Company's request
for dismissal, and the Company has filed a supplemental brief to support its
position that the complaint should be dismissed. The Company is awaiting a
ruling by the Court. All discovery and other proceedings not related to the
dismissal have been stayed pending resolution of the Company's request to
dismiss the complaint.
On or about April 26, 2002, Telemac Corporation ("Telemac") commenced an
arbitration proceeding in the Los Angeles, California, office of JAMS against
the Company and InterVoice Brite Ltd. and Brite Voice Systems, Inc., JAMS Case
No. 1220026278, claiming fraud, negligent misrepresentation and breach of
contract in connection with formation of and the performance under certain
agreements between the Company, and/or its alleged predecessors, and Telemac,
and seeking compensatory damages of approximately $58 million, punitive damages
and attorneys' fees and other costs and fees. Telemac's allegations arise out of
the negotiations and terms of the Amended and Restated Prepaid Phone Processing
Agreement between Telemac and Brite Voice Systems Group, Ltd., dated November 1,
1998, and certain amendments thereto under which Telemac licensed prepaid
wireless software for use in various markets and exploited in the United Kingdom
under agreement with Cellnet, a provider of wireless telephony in the United
Kingdom.
The Company has asserted counterclaims against Telemac for breach of contract,
breach of warranty and breach of the implied covenant of good faith and fair
dealing with respect to the capabilities of software supplied by Telemac and
handsets provided by parties contracting with Telemac.
The Company and Telemac have selected as arbitrator Justice William A. Masterson
(Ret.) formerly of the California Court of Appeal and the Los Angeles County
Superior Court,. The arbitration hearing is set to commence January 13, 2003, in
Los Angeles, California. The Company acknowledges it may owe an immaterial
amount for certain software development services rendered by Telemac. With the
exception of these immaterial amounts, the Company believes that the claims
asserted by Telemac are without merit. The Company further believes it has
meritorious defenses and counterclaims and intends to vigorously defend the
claims of Telemac and assert the Company's claims in the arbitration.
26
Item 2 Changes in Securities and Use of Proceeds.
On May 30, 2002 the Company sold convertible notes and associated
warrants for cash in the amount of $10 million in a private placement
transaction under Rule 506 of Regulation D under the Securities Act of 1933.
Shares of the Company's common stock that might be issued in connection with a
conversion of the convertible notes, or upon exercise of the warrants, were
registered on a Form S-3 that became effective June 27, 2002. The purchasers of
the convertible notes and warrants, and any broker-dealer acting in connection
with the sale of the common stock underlying the convertible notes and warrants,
may be deemed to be "underwriters" within the meaning of the Securities Act of
1933. The purchasers of the convertible notes and warrants are HFTP Investment
L.L.C., Gaia Offshore Master Fund, Ltd. and Caerus Fund Ltd. See Item 2
"Liquidity and Capital Resources" in Part I for a discussion of the convertible
notes, the warrants, the registration of shares of common stock underlying the
convertible notes and warrants, and the use of proceeds from the sale of
convertible notes and associated warrants.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Securities Purchase Agreement, dated as of May 29, 2002,
between the Company and each of the Buyers(1)
4.2 Form of Convertible Note between the Company and each of the
Buyers(1)
4.3 Form of Warrant between the Company and each of the
Buyers(1)
4.4 Registration Rights Agreement, dated as of May 29, 2002,
between the Company and each of the Buyers(1)
4.5 First Amendment to Third Amended and Restated Rights
Agreement dated as of May 29, 2002, between the Company and
Computershare Investor Services, LLC(1)
10.1 Deed of Trust, Security Agreement and Assignment of Leases
and Rents dated May 29, 2002, executed by the Company for
the benefit of Beal Bank S.S.B.(1)
10.2 Promissory Note dated May 29, 2002, executed by the Company
in favor of Beal Bank S.S.B.(1)
10.3 Subordination and Intercreditor Agreement effective as of
May 29, 2002, among the Company, the buyers under the
Securities Purchase Agreement, and the Company's senior
secured lenders.(1)
10.4 Agreement executed as of May 31, 2002 between the Company
and Ray S. Naeini.(3)
99.1 Letter of Agreement dated April 2, 2002 between the Company
and a prospective purchaser of the Company's facilities in
Wichita, Kansas. Portions of this exhibit have been excluded
pursuant to a request for confidentiality treatment.(2)
----------
(1) Incorporated by reference to exhibits to the Company's Current Report on
Form 8-K, filed with the SEC on May 30, 2002.
(2) Incorporated by reference to exhibits to the Company's Current Report on
Form 8-K, filed with the SEC on April 18, 2002.
(3) Filed herewith.
27
(b) Reports on Form 8-K
1. A report on Form 8-K was filed March 13, 2002 to
announce the completion of a Forebearance Agreement
dated March 7, 2002 between the Company and its
lending group.
2. A report on Form 8-K was filed April 18, 2002 to
announce the Consent and Amendment to the
Forebearance Agreement, dated as of March 31, 2002
between the Company and its lending group.
3. A report on Form 8-K was filed May 30, 2002 to
announce a letter agreement between the Company and a
prospective purchaser of the Company's facilities in
Wichita, Kansas and to announce the Consent, Waiver
and Third Amendment to Credit Agreement effective as
of May 29, 2002 between the Company and its lending
group.
4. A report on Form 8-K was filed May 31, 2002 to
announce that the three previously announced
financing transactions had been completed and funded.
28
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: 07/03/01 By: /s/ MARK C. FALKENBERG
------------------------
Mark C. Falkenberg
Chief Accounting Officer
29
EXHIBIT INDEX
EXHIBIT
INDEX DESCRIPTION
------ -----------
4.1 Securities Purchase Agreement, dated as of May 29, 2002, between
the Company and each of the Buyers(1)
4.2 Form of Convertible Note between the Company and each of the
Buyers(1)
4.3 Form of Warrant between the Company and each of the Buyers(1)
4.4 Registration Rights Agreement, dated as of May 29, 2002, between
the Company and each of the Buyers(1)
4.5 First Amendment to Third Amended and Restated Rights Agreement
dated as of May 29, 2002, between the Company and Computershare
Investor Services, LLC(1)
10.1 Deed of Trust, Security Agreement and Assignment of Leases and
Rents dated May 29, 2002, executed by the Company for the benefit
of Beal Bank S.S.B.(1)
10.2 Promissory Note dated May 29, 2002, executed by the Company in
favor of Beal Bank S.S.B.(1)
10.3 Subordination and Intercreditor Agreement effective as of May 29,
2002, among the Company, the buyers under the Securities Purchase
Agreement, and the Company's senior secured lenders.(1)
10.4 Agreement executed as of May 31, 2002 between the Company and
Ray S. Naeini.(3)
99.1 Letter of Agreement dated April 2, 2002 between the Company and a
prospective purchaser of the Company's facilities in Wichita,
Kansas. Portions of this exhibit have been excluded pursuant to a
request for confidentiality treatment.(2)
----------
(1) Incorporated by reference to exhibits to the Company's Current Report on
Form 8-K, filed with the SEC on May 30, 2002.
(2) Incorporated by reference to exhibits to the Company's Current Report on
Form 8-K, filed with the SEC on April 18, 2002.
(3) Filed herewith.