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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
NOVEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 1-15045
INTERVOICE, 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, WITH ZIP CODE)
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 34,111,101 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF JANUARY 9, 2003.
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Intervoice, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
ASSETS November 30, 2002 February 28, 2002
----------------- -----------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 16,478 $ 17,646
Trade accounts receivable, net of allowance for
doubtful accounts of $2,442 in fiscal 2003 and
$3,492 in fiscal 2002 32,797 40,783
Inventory 9,943 27,524
Prepaid expenses and other current assets 6,116 6,152
Deferred income taxes 1,578 819
--------- ---------
66,912 92,924
--------- ---------
Property and Equipment
Building 16,703 19,530
Computer equipment and software 31,469 30,379
Furniture, fixtures and other 2,064 2,328
Service equipment 9,214 7,902
--------- ---------
59,450 60,139
Less allowance for depreciation 38,439 33,787
--------- ---------
21,011 26,352
Other Assets
Intangible assets, net of amortization of $30,399 in
fiscal 2003 and $31,752 in fiscal 2002 27,854 37,439
Goodwill, net of accumulated amortization of
$7,672 in fiscal 2002 3,401 16,500
Other assets 2,185 2,153
--------- ---------
$ 121,363 $ 175,368
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 15,528 $ 22,661
Accrued expenses 20,724 14,988
Customer deposits 7,719 5,963
Deferred income 21,953 24,426
Current portion of long term borrowings 3,333 6,000
--------- ---------
69,257 74,038
Long term borrowings, net of current portion 18,611 23,980
Other long term liabilities 1,134 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: 34,077,307 issued and
outstanding in fiscal 2003, 34,029,180
issued and outstanding in fiscal 2002 17 17
Additional capital 65,082 61,725
Retained earnings (accumulated deficit) (28,956) 19,618
Accumulated other comprehensive loss (3,782) (5,926)
--------- ---------
Stockholders' equity 32,361 75,434
--------- ---------
$ 121,363 $ 175,368
========= =========
See notes to consolidated financial statements.
Intervoice, Inc.
Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
----------------------------- ------------------------------
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Sales
Systems $ 23,679 $ 36,777 $ 63,219 $ 117,673
Services 20,271 21,276 54,760 66,374
--------- --------- --------- ---------
43,950 58,053 117,979 184,047
--------- --------- --------- ---------
Cost of goods sold
Systems 15,488 18,761 48,706 58,190
Services 6,725 8,760 21,020 28,550
--------- --------- --------- ---------
22,213 27,521 69,726 86,740
--------- --------- --------- ---------
Gross margin
Systems 8,191 18,016 14,513 59,483
Services 13,546 12,516 33,740 37,824
--------- --------- --------- ---------
21,737 30,532 48,253 97,307
Research and development expenses 5,020 6,938 17,544 21,561
Selling, general and administrative expenses 15,787 18,964 51,880 57,498
Amortization of goodwill and acquisition
related intangible assets 1,775 3,359 5,325 10,147
--------- --------- --------- ---------
Income (loss) from operations (845) 1,271 (26,496) 8,101
Other income (expense) (89) 137 (858) 1,094
Interest expense (774) (1,355) (3,792) (3,919)
Loss on early extinguishment of debt (1,868) -- (1,868) --
--------- --------- --------- ---------
Income (loss) before taxes and the cumulative
effect of a change in accounting principle (3,576) 53 (33,014) 5,276
Income taxes (benefit) 4,256 21 (231) 2,111
--------- --------- --------- ---------
Income (loss) before the cumulative effect
of a change in accounting principle (7,832) 32 (32,783) 3,165
Cumulative effect on prior years of a
change in accounting principle -- -- (15,791) --
--------- --------- --------- ---------
Net income (loss) $ (7,832) $ 32 $ (48,574) $ 3,165
========= ========= ========= =========
Per Basic Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ (0.23) $ 0.00 $ (0.96) $ 0.09
Cumulative effect on prior years of
a change in accounting principle -- -- (0.47) --
--------- --------- --------- ---------
Net income (loss) $ (0.23) $ 0.00 $ (1.43) $ 0.09
========= ========= ========= =========
Per Diluted Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ (0.23) $ 0.00 $ (0.96) $ 0.09
Cumulative effect on prior years of
a change in accounting principle -- -- (.47) --
--------- --------- --------- ---------
Net income (loss) $ (0.23) $ 0.00 $ (1.43) $ 0.09
========= ========= ========= =========
See notes to consolidated financial statements.
Intervoice, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Operating Activities
Income (loss) before the cumulative effect of a
change in accounting principle $ (7,832) $ 32 $(32,783) $ 3,165
Adjustments to reconcile income (loss) before the
cumulative effect of a change in accounting
principle to net cash provided by operating
activities:
Depreciation and amortization 3,841 6,310 12,307 19,599
Other changes in operating activities 3,634 (6,385) 30,251 (11,797)
-------- -------- -------- --------
Net cash provided by (used in) operating activities (357) (43) 9,775 10,967
Investing Activities
Purchases of property and equipment (369) (1,511) (2,817) (4,678)
Proceeds from sale of assets 11 (81) 1,863 (81)
-------- -------- -------- --------
Net cash used in investing activities (358) (1,592) (954) (4,759)
Financing Activities
Paydown of debt (12,056) (5,045) (42,036) (14,612)
Debt issuance costs (497) -- (2,515) --
Premium on debt extinguishment (470) -- (470) --
Borrowings 10,000 -- 34,000 --
Exercise of stock options -- 2,199 130 4,316
-------- -------- -------- --------
Net cash used in financing activities (3,023) (2,846) (10,891) (10,296)
Effect of exchange rates on cash 85 (58) 902 (62)
-------- -------- -------- --------
Decrease in cash and cash equivalents (3,653) (4,539) (1,168) (4,150)
Cash and cash equivalents, beginning of period 20,131 16,290 17,646 15,901
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 16,478 $ 11,751 $ 16,478 $ 11,751
======== ======== ======== ========
See notes to consolidated financial statements.
Intervoice, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(In Thousands, Except Share Data)
Retained
Common Stock Earnings Accumulated Other
---------------------------- Additional (Accumulated Comprehensive
Shares Amount Capital Deficit) Loss Total
---------- ---------- ---------- ------------ ----------------- ----------
Balance at February 28, 2002 34,029,180 $ 17 $ 61,725 $ 19,618 $ (5,926) $ 75,434
Net loss -- -- -- (48,574) -- (48,574)
Foreign currency translation
adjustment -- -- -- -- 1,952 1,952
Valuation adjustment of
interest rate swap
hedge, net of tax effect
of $(118) -- -- -- -- 192 192
Exercise of stock options 48,127 -- 130 -- -- 130
Tax benefit from exercise of
stock options -- -- 2,171 -- -- 2,171
Issuance of warrants -- -- 1,056 -- -- 1,056
---------- ---------- ---------- ---------- ---------- ----------
Balance at November 30, 2002 34,077,307 $ 17 $ 65,082 $ (28,956) $ (3,782) $ 32,361
========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED NOVEMBER 30, 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
November 30, 2002 and 2001 consolidated financial statements have been
included. Operating results for the three and nine month periods ended
November 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending February 28, 2003, as such results may be affected
by a number of factors including the timing and ultimate receipt of orders from
significant customers which continue to constitute a large portion of the
Company's sales, the sales channel mix of products sold, and changes in general
economic conditions, any of which could have an adverse effect on operations.
In accordance with Statement of Financial Accounting Standards No. 130, the
following comprehensive income disclosures are provided. Total comprehensive
income (loss) for the third quarters of fiscal 2003 and 2002 was ($7.7) million
and ($1.6) million, respectively. For the nine month periods ended November 30,
2002 and 2001, comprehensive income (loss) was ($46.4) million and $1.3 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 impairment tests on at least an annual basis.
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 then existing 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.
Effective August 1, 2002, the Company combined its divisions into a single
unified organizational structure in order to address changing market demands and
global customer requirements. The Company will conduct its annual test of
goodwill impairment during its fourth fiscal quarter.
1
Intangible assets other than goodwill at November 30, 2002 and February 28, 2002
are comprised of the following (in thousands):
November 30, 2002
-----------------------------------------------
Gross
Amortization Carrying Accumulated Unamortized
Amortized Intangible Assets Period Amount Amortization Balance
--------------------------- ------------ ----------- ------------ -----------
Customer relations 10 years $ 32,800 $ 11,480 $ 21,320
Developed technology 5 years 22,727 16,997 5,730
Other intangibles 5-12 years 2,726 1,922 804
----------- ---------- ----------
Total $ 58,253 $ 30,399 $ 27,854
=========== ========== ==========
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 $ 1,834
Fiscal 2004 $ 7,307
Fiscal 2005 $ 4,420
Fiscal 2006 $ 3,431
Fiscal 2007 $ 3,363
The changes in the carrying amount of goodwill for the nine months ended
November 30, 2002 are as follows (in thousands):
Total
-----------
Balance as of February 28, 2002 $ 16,500
Reclassification of assembled workforce,
net of deferred income taxes, upon
adoption of SFAS No. 141 2,692
Transitional impairment loss upon
adoption of SFAS No. 142 (15,791)
-----------
Balance as of November 30, 2002 $ 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 quarter and
nine month periods ended November 30, 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 For the Nine Months Ended
----------------------------- -----------------------------
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income (loss) $ (7,832) $ 32 $(48,574) $ 3,165
Add back goodwill amortization -- 625 -- 1,933
Add back assembled workforce amortization -- 460 -- 1,380
-------- -------- -------- --------
Adjusted net income (loss) $ (7,832) $ 1,117 $(48,574) $ 6,478
======== ======== ======== ========
2
Basic earnings per share:
For the Quarter Ended For the Nine Months Ended
----------------------------- -----------------------------
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income (loss) $ (0.23) $ 0.00 $ (1.43) $ 0.09
Add back goodwill amortization -- 0.02 -- 0.06
Add back assembled workforce amortization -- 0.01 -- 0.04
-------- -------- -------- --------
Adjusted net income (loss) $ (0.23) $ 0.03 $ (1.43) $ 0.19
======== ======== ======== ========
Diluted earnings per share:
For the Quarter Ended For the Nine Months Ended
---------------------------- ------------------------------
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income (loss) $ (0.23) $ 0.00 $ (1.43) $ 0.09
Add back goodwill amortization -- 0.02 -- 0.06
Add back assembled workforce amortization -- 0.01 -- 0.04
-------- -------- -------- --------
Adjusted net income (loss) $ (0.23) $ 0.03 $ (1.43) $ 0.19
======== ======== ======== ========
If the Company had not been required to adopt the Statements effective March 1,
2002, 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 million per quarter in additional amortization relating to
goodwill and other intangible assets. In such circumstances, the Company's net
loss for the quarter and nine months ended November 30, 2002 would have been
approximately $8.8 million and $35.8 million, respectively, or $0.26 and $1.05
per share.
NOTE C - INVENTORIES
Inventories consist of the following (in thousands):
November 30, 2002 February 28, 2002
----------------- -----------------
Purchased parts $ 6,530 $ 18,043
Work in progress 879 6,870
Finished goods 2,534 2,611
---------- -----------
$ 9,943 $ 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 then existing
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 nine months of fiscal 2003
related to such accruals was as follows (in thousands):
Accrued Balance Revisions Accrued Balance
February 28, 2002 Payments to Estimates November 30, 2002
----------------- ---------- ------------ -----------------
Severance and related charges $ 3,047 $ (2,653) $ (213) $ 181
Future lease costs for properties
no longer being used $ 3,643 $ (1,403) $ (2) $ 2,238
The reduction in estimated severance and related charges of $0.2 million
occurred during the first quarter of fiscal 2003 and was recognized through a
reduction in selling, general and administrative expenses.
3
During the first three quarters of fiscal 2003, the Company continued to
implement actions designed to lower costs and improve operational efficiency.
During the quarter ended May 31, 2002, the Company incurred special charges of
approximately $2.8 million, including $2.4 million for severance payments and
related benefits associated with a workforce reduction affecting 103 employees,
and $0.4 million for the closure of its leased facility in Chicago, Illinois. At
November 30, 2002, approximately $0.3 million of the special charges incurred in
the first quarter of fiscal 2003 remained unpaid. The Company expects to pay the
majority of the remaining severance and related costs in the fourth quarter of
fiscal 2003. The remaining facility costs are expected to be paid out over the
next three fiscal quarters.
During the quarter ended August 31, 2002, the Company incurred special charges
of approximately $10.1 million, including $2.8 million for severance payments
and related benefits associated with a workforce reduction affecting
approximately 120 employees, $0.4 million associated with the closing of a
portion of its leased facilities in Manchester, United Kingdom, $2.2 million for
the write down of excess inventories and $4.7 million associated with two loss
contracts. The severance and related costs were associated with the Company's
consolidation of its separate Enterprise and Networks divisions into a single,
unified organizational structure. The downsizing of the leased space in
Manchester followed from the Company's decision to consolidate virtually all of
its manufacturing operations into its Dallas, Texas facilities. The inventory
adjustments reflected the Company's continuing assessment of its inventory
levels in light of short term sales projections, the decision to eliminate the
UK manufacturing operation and the consolidation of the business units discussed
above. The charges for loss contracts reflected the costs incurred during the
second quarter on two contracts which are expected to result in net losses to
the Company upon completion. The charges included costs actually incurred during
the quarter as well as an accrual of the amounts by which total contract costs
were expected to exceed total contract revenue. At November 30, 2002,
approximately $1.4 million of the special charges incurred in the second quarter
of fiscal 2003 remained unpaid. The Company expects to pay the majority of the
remaining costs during the balance of fiscal 2003.
During the quarter ended November 30, 2002, the Company incurred special charges
of approximately $4.9 million, including $1.2 million for severance payments and
related benefits associated with a workforce reduction affecting approximately
50 employees, $1.8 million for the write down of excess inventories and $1.9
million of charges incurred upon the early extinguishment of the Company's
convertible notes. The inventory adjustments reflect the Company's continuing
assessment of its inventory levels in light of short term sales projections. The
loss on early extinguishment of debt includes $1.4 million in non-cash charges
to write-off unamortized debt discount and unamortized debt issue costs and $0.5
million in prepayment premiums. At November 30, 2002, approximately $0.6 million
of the special charges incurred in the third quarter of fiscal 2003 remained
unpaid. The Company expects to pay the majority of such costs during the balance
of fiscal 2003.
4
The following table summarizes the effect on reported operating results by
financial statement category of all special charges activities for the quarter
and nine months ended November 30, 2002 (in thousands).
Selling,
Cost of Research General
Goods and and Other
Sold Development Administrative Expenses Total
------- ----------- -------------- -------- -------
Quarter ended November 30, 2002
Severance payments and related benefits $ 363 $ 25 $ 792 $ -- $ 1,180
Write down of excess inventories 1,840 -- -- -- 1,840
Loss on early extinguishment of debt -- -- -- 1,868 1,868
------- ------- ------- ------- -------
Total $ 2,203 $ 25 $ 792 $ 1,868 $ 4,888
======= ======= ======= ======= =======
Nine months ended November 30, 2002
Severance payments and related benefits $ 2,305 $ 826 $ 3,083 $ -- $ 6,214
Facility closures 244 125 388 -- 757
Write down of excess inventories 4,080 -- -- -- 4,080
Costs associated with loss contracts 4,672 -- -- -- 4,672
Loss on early extinguishment of debt -- -- -- 1,868 1,868
------- ------- ------- ------- -------
Total $11,301 $ 951 $ 3,471 $ 1,868 $17,591
======= ======= ======= ======= =======
NOTE F - LONG-TERM BORROWINGS
At November 30 and February 28, 2002, the Company's long-term debt was comprised
of the following (in thousands)
November 30, February 28,
2002 2002
------------ ------------
Mortgage loan, bearing interest payable monthly at the greater of 10.5%
or the prime rate plus 2.0%; principal
due May 28, 2005 $ 12,500 $ --
Amortizing term loan, principal due in 36 equal monthly installments with
interest payable monthly accruing at a rate equal to the then prevailing
prime rate plus 2.75% (7.0% at November 30, 2002) 9,444 --
Amortizing term loan, subsequently refinanced in full -- 22,480
Revolving credit; repaid in full during the second quarter of fiscal
2003; terminated by Company on August 29, 2002 in anticipation
of subsequent refinancing described below -- 7,500
-------- --------
Total debt outstanding 21,944 29,980
Less: current portion (3,333) (6,000)
-------- --------
Long-term debt, net of current portion $ 18,611 $ 23,980
======== ========
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
5
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 entered into a $14.0 million
mortgage loan and issued $10 million in convertible notes, both as further
discussed below. Using proceeds from these debt issuances, the Company retired
the term loan, repaid a portion of the amount outstanding under the revolver,
amended the revolving credit facility to provide 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 and
received a permanent waiver from the lending group for the past non-compliance
with the financial covenant. In June 2002, the Company repaid the remaining $4.0
million outstanding under the revolver, and in August 2002, in anticipation of
establishing alternative financing with a new lender, the Company terminated the
revolver.
In connection with this restructuring, the Company incurred approximately $1.5
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 first quarter of fiscal 2003 $0.4 million in
remaining debt issuance costs related to the retired term loan.
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
was recorded as a discount on the Convertible Notes.
The Securities Purchase Agreement obligated the Company to seek shareholder
approval 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
obtained such approval at its annual meeting in August 2002.
Amortization and Repayment of Convertible Notes
The Convertible Notes were scheduled to be repaid in monthly installments of
principal in the amount of $1.0 million, plus accrued interest on the applicable
installments at 6% per annum, commencing September 1, 2002. The terms of the
convertible notes allowed the Company, at its option, to make payment in cash
or, through a partial conversion of the Convertible Notes, through the Company's
issuance of common stock. The Convertible Notes also allowed the Company,
subject to certain conditions, to 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. In
September 2002, the Company made its first scheduled principal payment of $1.0
million under the Convertible Notes and then subsequently repaid the remaining
$9.0 million principal balance outstanding under the Convertible Notes along
with accrued interest and a repayment premium of approximately $0.5 million
using the proceeds of a new $10.0 million term loan discussed below.
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
6
average market price of the Company's common stock on the date of attempted
exercise and the applicable exercise price. The Company's obligations under the
warrants remain in force and are unaffected by the redemption in September 2002
of the Convertible Notes.
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 Warrant Shares. The registration statement became effective on
June 27, 2002.
New Term Loan and Revolving Credit Agreement
In August 2002, the Company entered into a new credit facility agreement with a
lender which provides for an amortizing term loan of $10.0 million and a
revolving credit commitment equal to the lesser of $25.0 million minus the
principal outstanding under the term loan and the balance of any letters of
credit ($15.0 million maximum at the loan's inception) or a defined borrowing
base comprised primarily of eligible US and UK accounts receivable ($0.7 million
maximum at November 30, 2002).
The term loan principal is due in 36 equal monthly installments of approximately
$0.3 million each. Such payments began October 1, 2002. Interest on the term
loan is also payable monthly and accrues at a rate equal to the then prevailing
prime rate of interest plus 2.75% (7.0% as of November 30, 2002). Proceeds from
the term loan were used to retire the Convertible Notes described above and to
provide additional working capital to the Company.
Advances under the revolver loan will accrue interest at a rate equal to the
then prevailing prime rate of interest plus a margin of 0.5% to 1.5%, or at a
rate equal to the then prevailing London Inter-bank Offering Rate plus a margin
of 3% to 4%. The Company may request an advance under the revolver loan at any
time during the term of the revolver agreement so long as the requested advance
does not exceed the then available borrowing base. The Company's available
funding based on its US accounts receivable at November 30, 2002 was
approximately $0.7 million. The initial availability of funding based on UK
accounts receivable is contingent on and will be determined in connection with
the lender's completion of a collateral audit of the Company's UK subsidiary.
The Company has not requested an advance under the revolver as of the date of
this filing. The term loan and the revolving credit agreement expire on
August 29, 2005.
The new credit facility contains terms, conditions and representations that are
generally customary for asset-based credit facilities, including requirements
that the Company comply with certain significant financial and operating
covenants. In particular, the Company is initially required to have EBITDA in
minimum cumulative amounts on a monthly basis through August 31, 2003. While
lower amounts are allowed within each fiscal quarter, the Company must generate
cumulative EBITDA of $0, $2.0 million, $5.0 million and $9.0 million,
respectively, for the three, six, nine and twelve month periods ended or ending
November 30, 2002, February 28, 2003, May 31, 2003 and August 31, 2003.
Thereafter, the Company is required to have minimum cumulative EBITDA of $15
million and $20 million for the 12-month periods ending November 30, 2003 and
February 29, 2004, respectively, and $25 million for the 12-month periods ending
each fiscal quarter thereafter. The Company is also required to maintain defined
levels of actual and projected service revenues and is prohibited from incurring
capital expenditures in excess of $1.6 million for the six months ending
February 28, 2003 and in excess of $4.0 million for any fiscal year thereafter
except in certain circumstances and with the lender's prior approval. Borrowings
under the new credit facility are secured by first liens on virtually all of the
Company's personal property and by a subordinated lien on the Company's Dallas
headquarters. The new credit facility contains cross-default provisions with
respect to the Company's mortgage loan, such that an event of default under the
mortgage loan which allows the mortgage lender to accelerate the mortgage loan
or terminate the agreement creates a default under the credit facility. As of
November 30, 2002, the Company was in compliance with all financial and
operating covenants.
7
Mortgage Loan
In October 2002, the Company amended its mortgage loan, secured by a first lien
on the Company's Dallas headquarters, to reduce a minimum net equity requirement
contained in the loan agreement from $35.0 million to $25.0 million and to
provide that compliance with the covenant would be measured on a quarterly
basis. In connection with this amendment, the Company prepaid $1.5 million of
the original principal amount outstanding under the loan. The mortgage loan
contains cross-default provisions with respect to the Company's new term loan
and revolving credit agreement, such that a default under the credit facility
which leads to the acceleration of amounts due under the facility and the
enforcement of liens against the mortgaged property also creates a default under
the mortgage loan.
Costs Associated with the Refinancings
In connection with the new term loan and revolving credit agreement, the Company
incurred a total of approximately $1.0 million in new debt issuance costs,
consisting primarily of investment banking and legal fees. Such costs were
capitalized and are being charged to interest expense over the life of the
related debt obligations. During the third quarter of fiscal 2003, the Company
recognized a loss of approximately $1.9 million on the early extinguishment of
the convertible notes. The loss includes the cost of the early conversion
premium discussed above as well as the non-cash costs to write off the
unamortized debt issuance costs and unamortized discount associated with the
convertible notes. In accordance with the early adoption provisions of recently
issued Statement of Financial Accounting Standards No. 145 ("SFAS 145")
governing the classification of gains and losses on the early extinguishment of
debt, the Company has presented the loss on the early extinguishment of its
convertible notes as an element of other operating expenses in its consolidated
statement of operations for the quarter ended November 30, 2002. Prior to the
enactment of SFAS 145, this loss would have been reflected, net of tax, as an
extraordinary item.
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 November 30, 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, during the first quarter of fiscal 2003, 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 first 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 Company's federal income tax returns for its fiscal years 2000 and 2001 are
currently being audited by the Internal Revenue Service. The Company has
received notices of proposed adjustment from the IRS challenging certain
positions taken by the Company on those returns. Although resolution of the
issues is still pending, it is possible the Company will lose the ability to
carry back certain net operating losses generated in its fiscal years 2000 and
2001. If this occurs, the Company will be required to repay a portion of certain
refunds previously received from the IRS. In recognition of this risk, the
Company has
8
recorded a tax charge of $2.7 million as part of its tax provision for the
quarter ended November 30, 2002. The IRS has not yet presented a final proposed
settlement to the Company, and, accordingly, the exact amount, if any, that may
be due the IRS and the timing of any associated payment to the IRS has not been
determined.
The effects of these first and third quarter events are included in the
Company's net tax benefit of $0.2 million in the consolidated statement of
operations for the nine months ended November 30, 2002. For the quarter ended
November 30, 2002, the Company recognized a tax expense of approximately $1.2
million on the pretax profit of certain foreign subsidiaries. This tax provision
largely offset a second quarter tax benefit recorded on pretax losses of those
subsidiaries. The Company has not recognized a current benefit associated with
its domestic pretax losses, because it has exhausted its ability to offset such
losses against taxable income of prior years, and the existence of recent losses
prevents it from concluding that it is more likely than not that such benefit
will be realized.
9
NOTE H - EARNINGS PER SHARE
(in thousands except per share data)
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Numerator:
Income (loss) before the cumulative
effect of a change in accounting
principle $ (7,832) $ 32 $ (32,783) $ 3,165
Cumulative effect on prior years of
a change in accounting principle -- -- (15,791) --
---------- ---------- ---------- -------
Net Income (loss) $ (7,832) $ 32 $ (48,574) $ 3,165
---------- ---------- ---------- -------
Denominator:
Denominator for basic
earnings per share 34,077 33,557 34,061 33,295
Employee stock options -- 1,541 -- 1,401
Non-vested restricted shares -- 56 -- 55
---------- ---------- ---------- -------
Dilutive potential common shares -- 1,597 -- 1,456
---------- ---------- ---------- -------
Denominator for diluted
earnings per share 34,077 35,154 34,061 34,751
BASIC:
Income (loss) before the cumulative
Effect of a change in
Accounting principle $ (0.23) $ 0.00 $ (0.96) $ 0.09
Cumulative effect on prior years of
a change in accounting principle -- -- (0.47) --
---------- ---------- ---------- -------
Net Income (loss) $ (0.23) $ 0.00 $ (1.43) $ 0.09
========== ========== ========== =======
DILUTED:
Income (loss) before the cumulative
effect of a change in
accounting principle $ (0.23) $ 0.00 $ (0.96) $ 0.09
Cumulative effect on prior years of
a change in accounting principle -- -- (0.47) --
---------- ---------- ---------- -------
Net Income (loss) $ (0.23) $ 0.00 $ (1.43) $ 0.09
========== ========== ========== =======
Options to purchase 5,543,967 and 5,537,519 shares of common stock at an average
exercise prices of $9.02 and $9.03 and warrants to purchase 621,304 shares at an
exercise price of $4.0238 per share were outstanding during the three and nine
month periods ended November 30, 2002, respectively, but were not included in
the computation of diluted earnings per share for these periods because the
effect would have been antidilutive given the Company's loss for the quarter and
nine month period. Options to purchase 1,430,937 and 1,528,437 shares of common
stock at average exercise prices of $14.82 and $14.64, respectively, were
outstanding during the three and nine month periods ended November 30, 2001,
respectively, but were not included in the computation of diluted earnings per
share because the options' prices were greater than the average market price of
the Company's common stock during such periods and, therefore, the effect would
have been antidilutive.
10
NOTE I - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
Beginning with the second quarter of fiscal 2003, the Company reorganized into a
single, integrated business unit. This action was taken as part of the Company's
efforts to reduce its operating costs and to focus its activities and resources
on a streamlined product line. The Company continues to sell systems into its
two major markets, the Enterprise and Network markets, and to sell related
services. As a complement to its systems sales, the Company also provides and
manages applications on a managed service provider (MSP) basis for customers
preferring an outsourced solution. The information for all periods shown has
been restated to reflect this reorganization.
The Company's net sales by market and geographic area were as follows (in
thousands):
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Sales by Market:
Enterprise Systems $ 13,079 $ 20,421 $ 36,646 $ 65,666
Network Systems 10,600 16,356 26,573 52,007
Services 20,271 21,276 54,760 66,374
-------- -------- -------- --------
Total $ 43,950 $ 58,053 $117,979 $184,047
======== ======== ======== ========
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Geographic Area Net Sales:
United States $ 24,648 $ 30,726 $ 67,728 $ 96,678
The Americas (Excluding U.S.) 1,309 2,297 4,796 12,757
Pacific Rim 780 1,137 1,742 4,825
Europe, Middle East & Africa 17,213 23,893 43,713 69,787
-------- -------- -------- --------
Total $ 43,950 $ 58,053 $117,979 $184,047
======== ======== ======== ========
Concentration of Revenue
One customer, MMO2, formerly BT Cellnet, accounted for approximately 10% and 14%
of the Company's sales during the three-month periods ended November 30, 2002
and 2001, respectively. The same customer accounted for 11% and 14% of the
Company's sales during the nine-month periods ended November 30, 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.
No other customer accounted for 10% or more of the Company's sales during the
three and nine month periods ended November 30, 2002 and 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. As a result of the correspondence, an increasing
number of the Company's customers have had discussions, or are in discussions,
with RAKTL. Certain products offered by the Company can be programmed and
configured to provide enhanced services to network providers
11
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. Some of these customers have disagreed with the
Company and believe that the correspondence from RAKTL can be construed as
claim(s) against the Company's products. 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.
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 or unenforceable.
Furthermore, based on the reviews by outside counsel, the Company is not aware
of any valid and enforceable 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. An increasing 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
12
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.
Audiofax, which holds certain patents covering unified messaging products, has
advised the Company and other businesses that, if they provide unified
messaging, they are practicing Audiofax's patents. After reviewing the patents,
the Company recently entered into a license agreement with Audiofax to provide
for the licensing of the relevant patents. The license agreement will not have a
material effect on the Company's consolidated financial position.
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 responded to these complaints, which were consolidated into one
proceeding, by filing a motion to dismiss the complaint in the consolidated
proceeding. The Company asserted that the complaint lacked the degree of
specificity and factual support to meet the pleading standards applicable to
federal securities litigation. On this basis, the Company requested that the
United States District Court for the Northern District of Texas dismiss the
complaint in its entirety. Plaintiffs responded to the Company's request for
dismissal. On August 8, 2002, the Court entered an order granting the Company's
motion to dismiss the class action lawsuit. In the order dismissing the lawsuit,
the Court granted plaintiffs an opportunity to reinstate the lawsuit by filing
an amended complaint. Plaintiffs filed an amended complaint on September 23,
2002. The Company has filed a motion to dismiss the amended complaint, and
plaintiffs have filed a response in opposition to the Company's motion to
dismiss. All discovery and other proceedings not related to the dismissal will
be stayed pending resolution of the Company's request to dismiss the amended
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 the formation of and the performance under certain
agreements between the Company, and/or its alleged predecessors, and Telemac,
and seeking reformation, compensatory
13
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
MM02, formerly BT 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 and other matters. The
Company had also filed certain other counterclaims which were dismissed pursuant
to a motion for summary disposition.
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 Company acknowledges it may owe an immaterial amount for
certain software development services rendered by Telemac. With the exception of
this immaterial amount, the Company believes that the claims asserted by Telemac
are without merit. The Company further believes it has meritorious defenses and
counterclaims and, if the parties do not enter into a binding written settlement
agreement as further discussed below, the Company intends to vigorously defend
the claims of Telemac and assert the Company's claims in the arbitration.
The Company and Telemac recently agreed to stay discovery and all other
activities in the arbitration proceeding until April 2003, and continue the
hearing until June 2003, to afford the parties an opportunity to negotiate and
implement a settlement agreement. While the Company hopes to enter into a
mutually acceptable written settlement agreement with Telemac, the parties may
not ultimately consummate such an agreement. If a final settlement agreement is
not achieved by April 2003, the parties will recommence the arbitration
proceeding.
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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements" located elsewhere herein regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to
important factors described elsewhere in this report, the following significant
factors, among others, sometimes have affected, and in the future could affect,
the Company's actual results and could cause such results during fiscal 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 nine months of fiscal
2003, the Company incurred a net loss of $48.6 million. The Company may
continue to incur losses, which could hinder the Company's ability to
operate its current business. The Company may not be able to generate
sufficient revenues from its operations to achieve or sustain
profitability in the future.
o The Company is obligated to make periodic payments of principal and
interest under its financing agreements. The Company has material
indebtedness outstanding under a mortgage loan secured by the Company's
office facilities in Dallas, Texas and under a senior secured term loan
facility. The Company is required to make periodic payments of interest
under each of these financial agreements and, in the case of the term
loan, periodic payments of principal. The Company may, from time to
time, have additional indebtedness outstanding under its new revolving
credit facility. The Company is not in default under any of the
financing agreements 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 agreement, the creditors under the
applicable agreement will have all rights available under the agreement,
including acceleration, termination and enforcement of security
interests. The financing agreements also have certain qualified
cross-default provisions, particularly for acceleration of indebtedness
under one of the other agreements. 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.
o The Company's financing agreements include significant financial and
operating covenants and default provisions. In addition to the payment
obligations, the Company's senior secured term loan and revolving credit
facility and its mortgage loan facility contain significant financial
covenants, operating covenants and default provisions. If the Company
does not comply with any of these covenants and default provisions, the
Company's secured lenders can accelerate all indebtedness outstanding
under the facilities and foreclose on substantially all of the Company's
assets. In order for the Company to comply with the escalating minimum
EBITDA requirements in its senior secured credit facility, the Company
will have to continue to increase revenues and/or lower expenses in
future quarters. The Company has recognized approximately $17.6 million
in special charges for the nine months ended November 30, 2002,
including $4.9 million in its third fiscal quarter. While certain
special charges may be excluded from the Company's calculation of
minimum EBITDA under its credit facility, the effect on net income and
stockholders' equity of such charges, including any future impairment
charges associated with capitalized intangible assets that could be
subjected to impairment reviews in future quarters, is not similarly
excluded for purposes
15
of calculating compliance with the minimum net equity provisions of the
Company's mortgage loan. If the Company incurs significant special
charges in future quarters, it may be unable to meet the minimum equity
financial covenant under its mortgage loan. See the discussion of the
Company's financing facilities set forth in "Liquidity and Capital
Resources" in this Item 2.
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 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.
o In recent quarters, the Company has become increasingly prone to
quarterly sales fluctuations. 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 telecommunications 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 dependent on its ability to successfully qualify, estimate and
close system sales during a quarter. Based on these difficulties, the
Company has not disclosed forecasts of revenues or earnings for any
future reporting period. See the discussion entitled "Sales" in this
Item 2 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 pending lawsuits to which it is subject is without merit and intends
to defend each matter vigorously. The Company may not 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.
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 systems include AVAYA, IBM, Nortel Networks, 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, it may not be successful.
o The Company may not be able to retain its customer base and, in
particular, its more significant customers, such as MMO2. 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
16
is not contractually obligated to place further systems orders with the
Company or to extend their services contracts with the Company at the
expiration of their current contracts.
Sales to MMO2, formerly BT Cellnet, which purchases both systems and
managed services from the Company, accounted for approximately 10% and
14% of the Company's total sales during the three month periods ended
November 30, 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, when, unless renewed, the contract will terminate. 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 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 44%
and 47% in the three months ended November 30, 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 and political 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.
17
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 customized
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. The
Company has realized significant losses under certain customer contracts
in the past and may experience similar significant losses in the future.
o The Company's inability to meet contracted performance targets could
subject it to significant penalties. 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 project completion and/or for the
Company's failure to achieve certain minimum service levels. 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. The
majority of the Company's significant customers are in the
telecommunications and financial industries, which are undergoing
increasing consolidation as a 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 Any failure by the Company to satisfy its registration, listing and
other obligations with respect to the common stock underlying certain
warrants could result in adverse consequences. 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 certain warrants to purchase up to 621,304
shares of the Company's common stock at a price of $4.0238 per share
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. The warrants are also
subject to anti-dilution adjustments.
18
RESULTS OF OPERATIONS
SALES. Beginning with the second quarter of fiscal 2003, the Company reorganized
into a single, integrated business unit. This action was taken as part of the
Company's efforts to reduce its operating costs and to focus its activities and
resources on a streamlined product line. The Company continues to sell systems
into its two major markets, the Enterprise and Network markets, and to sell
related services. As a complement to its systems sales, the Company also
provides and manages applications on a managed service provider (MSP) basis for
customers preferring an outsourced solution.
The Company's total sales for the third quarter and first nine months of fiscal
2003 were $43.9 million and $118.0 million, respectively, a decrease of $14.1
million (24%) and $66.1 million (36%), respectively, as compared to the same
periods of fiscal 2002. The Company's enterprise systems, networks systems and
services sales totaled $13.1 million, $10.6 million and $20.2 million,
respectively, for the third quarter of fiscal 2003, down 36%, 35% and 5%,
respectively, from the third quarter of fiscal 2002. Services sales during the
quarter included $2.9 million relating to services performed in prior periods
for an international managed services customer for which the Company recognizes
revenue on a cash basis. Quarterly revenue under this contract, if calculated on
a straight accrual basis, would total approximately $1.1 million. Total systems
sales increased $5.8 million (32%) from the second quarter of fiscal 2003, while
services sales increased $2.6 million (14%). The decline in system sales from
fiscal 2002 levels 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
year. The Company believes the market for telecommunications equipment will
remain soft through fiscal 2004.
The net decline in services sales compared to fiscal 2002 levels is comprised of
decreases in the Company's managed service revenues partially offset by
increases in its warranty and related customer service revenue. The decline in
managed services revenues is attributable to a decrease in the volume of
activity processed under certain of the Company's MSP contracts, including,
particularly, its contract with MMO2 (formerly BT Cellnet). Managed service
revenues under the MMO2 contract totaled approximately $0.9 million per month
for the nine months ended November 30, 2002, down significantly from the same
period of fiscal 2002 when such revenues totaled approximately $2.4 million per
month. The lower fee will continue through July 2003 when, unless renewed, the
contract expires. Total systems and services sales to MMO2 accounted for
approximately 10% and 11% of the Company's total sales during the three and nine
month periods ended November 30, 2002, and 14% for corresponding periods in
fiscal 2002.
International sales comprised 44% of the Company's total sales during the third
quarter and 43% for the first nine months of fiscal 2003, down slightly from
approximately 47% of sales during similar periods for fiscal 2002. The decline
is primarily attributable to lower sales volumes in Latin American and the
Pacific Rim in fiscal 2003 as compared to fiscal 2002.
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 MSP managed services, comprised
approximately 46% of the Company's sales for the third quarter of fiscal 2003,
down from 50% in the second quarter of 2003. The pipeline of opportunities for
systems sales and backlog of systems sales comprised approximately 22% and 32%
of sales, respectively, during the third quarter of fiscal 2003 and 18% and 32%
of sales, respectively, during the second quarter of fiscal 2003. Each comprised
approximately 30% of sales during fiscal 2002.
The Company's service and support contracts generally 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 estimate 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
19
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. Backlog at November 30, 2002 was down slightly from August 2002
but up significantly over the backlog at November 30, 2001. Backlog (in
millions) as of the end of the Company's fiscal quarters during fiscal 2003 and
2002 is as follows:
Fiscal Fiscal
Backlog as of 2003 2002
------------- ------ ------
May 31 32.0 31.0
August 31 31.1 25.4
November 30 30.1 21.0
February 28 26.0
The Company's pipeline of opportunities for systems sales is the aggregation of
its sales opportunities, with each opportunity evaluated for the date the
potential customer will make a purchase decision, competitive risks, and the
potential amount of any resulting sale. No matter how promising a pipeline
opportunity may appear, there is no assurance it will ever result in a sale.
While this pipeline may provide the Company some sales guidelines in its
business planning and budgeting, pipeline estimates are necessarily speculative
and may not consistently correlate to revenues in a particular quarter or over a
longer period of time. While the Company knows the amount of systems backlog
available at the beginning of a quarter, it must speculate on its pipeline of
systems opportunities for the quarter. The Company's accuracy in estimating
total systems sales for 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 three quarters of fiscal 2003, the Company
continued to implement actions designed to lower costs and improve operational
efficiency. During the quarter ended May 31, 2002, the Company incurred special
charges of approximately $2.8 million, including $2.4 million for severance
payments and related benefits associated with a workforce reduction affecting
103 employees, and $0.4 million for the closure of its leased facility in
Chicago, Illinois. At November 30, 2002, approximately $0.3 million of the
special charges incurred in the first quarter of fiscal 2003 remained unpaid.
The Company expects to pay the majority of the remaining severance and related
costs in the fourth quarter of fiscal 2003. The remaining facility costs are
expected to be paid out over the next three fiscal quarters.
During the quarter ended August 31, 2002, the Company incurred special charges
of approximately $10.1 million, including $2.8 million for severance payments
and related benefits associated with a workforce reduction affecting
approximately 120 employees, $0.4 million associated with the closing of a
portion of its leased facilities in Manchester, United Kingdom, $2.2 million for
the write down of excess inventories and $4.7 million associated with two loss
contracts. The severance and related costs were associated with the Company's
consolidation of its separate Enterprise and Networks divisions into a single,
unified organizational structure. The downsizing of the leased space in
Manchester followed from the Company's decision to consolidate virtually all of
its manufacturing operations into its Dallas, Texas facilities. The inventory
adjustments reflected the Company's continuing assessment of its inventory
levels in light of short term sales projections, the decision to eliminate the
UK manufacturing operation and the consolidation of the business units discussed
above. The charges for loss contracts reflected the costs incurred during the
second quarter on two contracts which are expected to result in net losses to
the Company upon completion. The charges included costs actually incurred during
the quarter as well as an accrual of the amounts by which total contract costs
were expected to exceed total contract revenue. At November 30, 2002,
approximately $1.4 million of the special charges incurred in the second quarter
of fiscal 2003 remained unpaid. The Company expects to pay the majority of the
remaining costs during the balance of fiscal 2003.
20
During the quarter ended November 30, 2002, the Company incurred special charges
of approximately $4.9 million, including $1.2 million for severance payments and
related benefits associated with a workforce reduction affecting approximately
50 employees, $1.8 million for the write down of excess inventories and $1.9
million of charges incurred upon the early extinguishment of the Company's
convertible notes. The inventory adjustments reflect the Company's continuing
assessment of its inventory levels in light of short term sales projections. The
loss on early extinguishment of debt includes $1.4 million in non-cash charges
to write-off unamortized debt discount and unamortized debt issue costs and $0.5
million in prepayment premiums. At November 30, 2002, approximately $0.6 million
of the special charges incurred in the third quarter of fiscal 2003 remained
unpaid. The Company expects to pay the majority of such costs during the balance
of fiscal 2003.
The following table summarizes the effect on reported operating results by
financial statement category of all special charges activities for the quarter
and nine months ended November 30, 2002 (in thousands).
Selling,
Cost of Research General
Goods and and Other
Sold Development Administrative Expenses Total
------- ----------- -------------- -------- -------
Quarter ended November 30, 2002
Severance payments and related benefits $ 363 $ 25 $ 792 $ -- $ 1,180
Write down of excess inventories 1,840 -- -- -- 1,840
Loss on early extinguishment of debt -- -- -- 1,868 1,868
------- ------- ------- ------- -------
Total $ 2,203 $ 25 $ 792 $ 1,868 $ 4,888
======= ======= ======= ======= =======
Nine months ended November 30, 2002
Severance payments and related benefits $ 2,305 $ 826 $ 3,083 $ -- $ 6,214
Facility closures 244 125 388 -- 757
Write down of excess inventories 4,080 -- -- -- 4,080
Costs associated with loss contracts 4,672 -- -- -- 4,672
Loss on early extinguishment of debt -- -- -- 1,868 1,868
------- ------- ------- ------- -------
Total $11,301 $ 951 $ 3,471 $ 1,868 $17,591
======= ======= ======= ======= =======
As a result, in part, of the Company's workforce reductions and consolidation of
facilities reflected in these special charges, SG&A expenses, net of such
charges for the quarter ended November 30, 2002 are down approximately $3.8
million from similarly adjusted fiscal 2002 third quarter levels.
COST OF GOODS SOLD. Cost of goods sold for the third quarter and first nine
months of fiscal 2003 was approximately $22.2 million (50.5% of total sales) and
$69.7 million (59.1% of sales) as compared to $27.5 million (47.4% of sales) and
$86.7 million (47.1% of sales) for the third quarter and first nine months of
fiscal 2002. Net of the cost of goods sold "Special Charges," summarized in the
preceding section, cost of goods sold for the third quarter and first nine
months of fiscal 2003 was $20.0 million (45.6% of sales) and $58.4 million
(49.6% of sales). Systems cost averaged 65.4% of sales for the quarter, up from
51.0% in the third quarter of fiscal 2002. The higher percentage results, in
part, from the special charges incurred during fiscal 2003 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. Services cost of sales was 33.2% of sales for the
current quarter, down from 41.2% in the third quarter of fiscal 2002. Services
cost of sales was 38.7% when calculated as a percentage of service revenues
adjusted to exclude the $2.9 million of third quarter revenue recognized on a
cash basis.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the
third quarter and first nine months of fiscal 2003 were approximately $5.0
million (11.4% of the Company's total sales) and $17.5 million (14.9% of sales),
respectively. During comparable periods of the previous fiscal year, research
and development expenses were $6.9 million (12.0% of sales) and $21.6 million
(11.7% of sales), respectively. Expenses were down from fiscal 2002 in dollars
as a result of the Company's prior quarters' cost reduction initiatives.
Expenses were higher as a percent of sales in fiscal 2003 because of
21
the significantly lower sales levels in fiscal 2003. Research and development
expenses include the design of new products and the enhancement of existing
products. A primary focus of the Company's current research and development
efforts is enhancing speech recognition and text to speech capabilities,
including enhancing the Company's natural language speech capabilities and
incorporating VoiceXML and Microsoft's Salt standards for speech based
applications into the Company's products. Research and development efforts are
also focused on enhancing speech portal capabilities, system management and
integration technologies, and customer application development and management
tools.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses during the third quarter and first nine months of fiscal
2003 were approximately $15.8 million (35.9% of the Company's total sales) and
$51.9 million (44.0% of sales), respectively. Net of the severance and related
expenses discussed in "Special Charges," above, SG&A for the same periods
totaled $15.0 million (34.1% of sales) and $48.4 million (41.0% of sales). SG&A
expenses during the comparable periods of fiscal 2002 were $19.0 million (32.7%
of sales) and $57.5 million (31.2% of sales). SG&A expenses in the third quarter
of fiscal 2003 also benefited from a reduction in the Company's bad debt reserve
of approximately $1.1 million which resulted from the collection of previously
reserved accounts receivable. SG&A expenses in the third quarter of fiscal 2002
were reduced by $0.9 million as the result of the favorable settlement of
certain fiscal 2001 restructuring charges. As with the research and development
expenses discussed above, SG&A expenses have declined in absolute dollars over
the same periods 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 lower sales volumes. SG&A expenses have increased as a percent of the
Company's total sales because of the decline in sales.
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 impairment tests on at least an
annual basis.
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 then existing 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.
As previously noted, effective August 1, 2002, the Company combined its
divisions into a single unified organizational structure in order to address
changing market demands and global customer requirements. The Company will
conduct its annual test of goodwill impairment during its fourth fiscal quarter.
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 each of the first three quarters of fiscal
2003. Amortization in each of the first three quarters of fiscal 2002 totaled
$3.4 million and but would have totaled $2.3 million had the new rules been
effective during those periods. The estimated amortization expense for the
balance of fiscal 2003 and for each of the next four years is as follows (in
thousands):
22
Balance of fiscal year ending February 28, 2003 $ 1,834
Fiscal 2004 $ 7,307
Fiscal 2005 $ 4,420
Fiscal 2006 $ 3,431
Fiscal 2007 $ 3,363
INTEREST EXPENSE. Interest expense was approximately $0.8 million and $3.8
million during the third quarter and first nine months of fiscal 2003, versus
$1.4 million and $3.9 million for the same periods of fiscal 2002. Average debt
outstanding for the three months ended November 30, 2002 was $22.7 million, down
from $38.4 million for the same period in fiscal 2002. Fiscal 2003 third quarter
interest included $0.6 million in interest accrued under the Company's various
debt agreements and $0.2 million in non-cash amortization of debt issue costs.
Interest for the nine months ended November 30, 2002 included $1.8 million in
interest accrued under the Company's various debt agreements, $1.7 million in
non-cash amortization of debt issue costs and $0.3 million relating to the final
amortization under certain interest rate swap arrangements terminated by the
Company during fiscal 2002.
INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). The Company generated an
operating loss of $0.8 million, a loss before the cumulative effect of a change
in accounting principle of $7.8 million and a net loss of $7.8 million during
the third quarter of fiscal 2003. For the nine months ended November 30, 2002,
the Company generated an operating loss of $26.5 million, a loss before the
cumulative effect of a change in accounting principle of $32.8 million and a net
loss of $48.6 million. As described in Note B to the consolidated financial
statements in Item 1, the Company recorded a $15.8 million charge in the first
quarter of fiscal 2003 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 third quarter and first
nine months of fiscal 2002, the Company generated operating income of $1.3
million and $8.1 million, respectively, and net income of $0.0 million and $3.1
million, respectively. The decline in operating income is primarily attributable
to the significant decline in sales from fiscal 2002 to fiscal 2003 as discussed
in Sales above.
LIQUIDITY AND CAPITAL RESOURCES. The Company had approximately $16.5 million in
cash and cash equivalents at November 30, 2002, while borrowings under the
Company's restructured long-term debt facilities totaled $21.9 million. The
Company's cash reserves decreased $3.7 million during the three months ended
November 30, 2002, with operating activities using $0.4 million of cash, net
investing activities using $0.4 million of cash and net financing activities
using $3.0 million of cash.
Operating cash flow for the third quarter of fiscal 2003 was negatively impacted
by the Company's pretax loss of $3.6 million for the quarter and by
approximately $1.9 million of cash payments made in settlement of severance and
other special charges associated with the Company's cost control initiatives
undertaken in previous quarters. Operating cash flow was favorably impacted by
the Company's ongoing initiatives to reduce accounts receivable (which rose only
$0.3 million for the quarter on a sales increase of $8.3 million from the second
fiscal quarter) and inventories (down $6.5 million for the quarter). Days sales
outstanding (DSO) of accounts receivable at November 30, 2002, was 67 days, down
from 82 days at August 31, 2002 and 133 days at February 28, 2002.
For sales of certain of its more complex, customized systems (generally ones
with a sales price of $500,000 or more), the Company recognizes revenue based on
a percentage of completion methodology. Unbilled receivables accrued under the
methodology totaled $7.8 million at November 30, 2002. The Company expects to
bill and collect unbilled receivables as of November 30, 2002 within the next
twelve months.
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 in certain countries are subject to significant
economic and political challenges that affect their cash flow, and many
customers outside the United States are generally accustomed to vendor financing
in the form of extended payment terms. To remain
23
competitive in markets outside the United States, the Company may offer selected
customers such payment terms. In all cases, however, the Company only recognizes
revenue at such time as its system or service fee is fixed or determinable,
collectibility is probable and all other criteria for revenue recognition have
been met. In some limited cases, this policy may result in the Company
recognizing revenue on a "cash basis", limiting revenue recognition on certain
sales to the actual cash received to date from the customer, provided that all
other revenue recognition criteria have been satisfied.
The Company's federal income tax returns for its fiscal years 2000 and 2001 are
currently being audited by the Internal Revenue Service. The Company has
received notices of proposed adjustment from the IRS challenging certain
positions taken by the Company on those returns. Although resolution of the
issues is still pending, it is possible the Company will lose the ability to
carry back certain net operating losses generated in its fiscal years 2000 and
2001. If this occurs, the Company will be required to repay a portion of certain
refunds previously received from the IRS. In recognition of this risk, the
Company has recorded a tax charge of $2.7 million as part of its tax provision
for the quarter ended November 30, 2002. The IRS has not yet presented a final
proposed settlement to the Company, and, accordingly, the exact amount, if any,
that may be due the IRS and the timing of any associated payment to the IRS has
not been determined. If the IRS prevails in this case, however, the payment of
the claim could require the use of cash in fiscal 2004.
The Company's wholly owned subsidiary, Brite Voice Systems, Inc. ("Brite") has
filed a petition in the United States Tax Court seeking a redetermination of a
Notice of Deficiency issued by the IRS to Brite. The amount of the proposed
deficiency is $2.4 million before interest or penalties and relates primarily to
a disputed item in Brite's August 1999 federal income tax return. The case is
scheduled for trial in February 2003. The Company has recorded a charge to its
tax provision in prior periods related to this claim and does not expect the
outcome of the case to have a material effect on its fiscal 2003 net income. If
the IRS prevails in this case, however, the payment of the claim could require
the use of cash in fiscal 2004.
Investing activities during the quarter were comprised of the purchase of
computer and test equipment, a use of approximately $0.4 million of cash.
Financing activities included the repayment of $1.5 million of mortgage loan
principal, the borrowing of $10.0 million under a new term loan and revolving
credit agreement as further discussed below, the payment of $10.0 million in
principal plus a $0.5 million prepayment premium to retire all outstanding
convertible notes, the repayment of $0.6 million of new term loan principal and
the payment of $0.5 million in debt issue costs related to the new credit
agreement.
New Term Loan and Revolving Credit Agreement
In August 2002, the Company entered into a new credit facility agreement with a
lender which provides for an amortizing term loan of $10.0 million and a
revolving credit commitment equal to the lesser of $25.0 million minus the
principal outstanding under the term loan and the balance of any letters of
credit ($15.0 million maximum at the loan's inception) or a defined borrowing
base comprised primarily of eligible US and UK accounts receivable ($0.7 million
maximum at November 30, 2002).
The term loan principal is due in 36 equal monthly installments of approximately
$0.3 million each which began in October 2002. Interest on the term loan is also
payable monthly and accrues at a rate equal to the then prevailing prime rate of
interest plus 2.75% (7.0% as of November 30, 2002). Proceeds from the term loan
were used to retire the Company's outstanding convertible notes and to provide
additional working capital to the Company.
Advances under the revolver loan will accrue interest at a rate equal to the
then prevailing prime rate of interest plus a margin of 0.5% to 1.5%, or at a
rate equal to the then prevailing London Inter-bank Offering Rate plus a margin
of 3% to 4%. The Company may request an advance under the revolver loan at any
time during the term of the revolver agreement so long as the requested advance
does not exceed the then available borrowing base. The Company's available
funding based on its US accounts receivable at November 30, 2002 was
approximately $0.7 million. The initial availability of funding based on UK
accounts receivable is contingent on and will be determined in connection with
the lender's completion of
24
a collateral audit of the Company's UK subsidiary. The Company has not requested
an advance under the revolver as of the date of this filing. The term loan and
the revolving credit agreement expire on August 29, 2005.
The new credit facility contains terms, conditions and representations that are
generally customary for asset-based credit facilities, including requirements
that the Company comply with certain significant financial and operating
covenants. In particular, the Company is initially required to have EBITDA in
minimum cumulative amounts on a monthly basis through August 31, 2003. While
lower amounts are allowed within each fiscal quarter, the Company must generate
cumulative EBITDA of $0, $2.0 million, $5.0 million and $9.0 million,
respectively, for the three month period ended November 30, 2002, and for the
six, nine and twelve month periods ending February 28, 2003, May 31, 2003 and
August 31, 2003. Thereafter, the Company is required to have minimum cumulative
EBITDA of $15 million and $20 million for the 12-month periods ending
November 30, 2003 and February 28, 2004, respectively, and $25 million for the
12-month periods ending each fiscal quarter thereafter. The Company is also
required to maintain defined levels of actual and projected service revenues and
is prohibited from incurring capital expenditures in excess of $1.6 million for
the six months ending February 28, 2003 and in excess of $4.0 million for any
fiscal year thereafter except in certain circumstances and with the lender's
prior approval. Borrowings under the new credit facility are secured by first
liens on virtually all of the Company's personal property and by a subordinated
lien on the Company's Dallas headquarters. The new credit facility also contains
cross-default provisions with respect to the Company's mortgage loan. As of
November 30, 2002, the Company is in compliance with all financial and operating
covenants.
Mortgage Loan
At November 30, 2002, the Company had $12.5 million in principal outstanding
under its mortgage loan. Interest on this loan accrues at the greater of 10.5%
or the prime rate plus 2.0% and is payable monthly. The loan is secured by a
first lien on the Company's Dallas headquarters facility and contains
cross-default provisions with respect to the Company's new term loan and
revolving credit facility. In October 2002, the Company amended the mortgage
loan to reduce a minimum net equity requirement contained in the loan agreement
from $35.0 million to $25.0 million and to provide that compliance with the
covenant would be measured on a quarterly basis. In connection with this
amendment, the Company prepaid $1.5 million of the $14.0 million principal
amount then outstanding under the loan. The remaining principal under this loan
is due in May 2005.
Future Compliance with Covenants
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. In order to meet the EBITDA, minimum net
equity and other terms of its credit agreements, however, the Company will have
to continue to increase its revenues and/or lower its expenses as compared to
the quarter completed on November 30, 2002. If it is not able to achieve these
objectives and maintain compliance with its various debt covenants, the lenders
have all remedies available to them under the terms of the various loan
agreements, including, without limitation, the ability to declare all debt
immediately due and payable. 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 continue its business.
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.
25
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 November 30, 2002, the Company's outstanding long-term debt was comprised of
the following (in thousands):
November 30, 2002
-----------------
Mortgage loan, bearing interest payable monthly at the greater
of 10.5% or the prime rate plus 2.0%; principal due May 28, 2005 $ 12,500
Amortizing term loan, principal due in 36 equal monthly installments with
interest payable monthly accruing at a rate equal to the prime
rate of interest plus 2.75% (7.0% at November 30, 2002) 9,444
--------------
$ 21,944
==============
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 November 30, 2002.
Fiscal
-----------------------------------------
2003 2004 2005 2006
-------- -------- -------- --------
(Dollars in thousands)
Long-term debt
Variable rate US $ $ 833 $ 3,333 $ 3,333 $ 14,445
Projected weighted average
interest rate 9.0% 9.3% 9.7% 10.0%
Foreign Currency Risks
The Company transacts business in certain foreign currencies including,
particularly, the British pound and the Euro. The Company's primary software
application development, research and development and other administrative
activities are conducted from offices in the United States and the United
Kingdom, and its primary manufacturing operations are conducted in the United
States. Virtually all sales arranged through the Company's U.S. offices are
denominated in U.S. dollars, which is the functional and reporting currency of
the U.S. entity. Sales arranged through the Company's U.K. subsidiary are
denominated in various currencies, including the British pound, the U.S. dollar
and the Euro; however, the U.K. subsidiary's functional currency is the British
pound. For the three and nine months ended November 30, 2002, sales originating
from the Company's U.K. subsidiary represented approximately 38% and 36% of
consolidated sales, respectively. As a result of its international operations,
the Company is subject to exposure from adverse movements in certain foreign
currency exchange rates. The Company has not historically used foreign currency
options or forward contracts to hedge its currency exposures because of
uncertainty in the timing of cash flows on its larger contracts accounted for
under the percentage-of-completion method of accounting, and it did not have
any such hedge instruments in place at November 30, 2002. Rather, the Company
attempts to mitigate its foreign currency risk by transacting business in the
functional currency of each of its major subsidiaries, thus creating natural
hedges by paying expenses incurred in the local currency in which revenues will
be received.
As noted above, the Company's operating results are exposed to changes in
certain exchange rates including, particularly, those between the U.S. dollar,
the British pound and the Euro. When the U.S. dollar strengthens against the
other currencies, the Company's sales are negatively affected upon the
translation of U.K. operating results to the reporting currency. The effect of
these changes on the Company's operating profits varies depending on the level
of British pound denominated expenses and the U.K. subsidiary's overall
profitability. For the nine months ended November 30, 2002, the result of a
hypothetical, uniform 10% strengthening in the value of the U.S. dollar
relative to the British pound and the Euro would have been a decrease in sales
of approximately $2.6 million and a reduction in the net loss of approximately
$1.0 million. In addition to the direct effects of changes in exchange rates,
which are a changed dollar value of the resulting sales and/or operating
expenses, changes in exchange rates also could affect the volume of sales or
the foreign currency sales price as competitors' products become more or less
attractive. The Company's sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in sales
levels or local currency prices.
26
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have reviewed
and evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 240.13a-14(c) and 15d-14(c) promulgated under
the Securities Exchange Act of 1934) as of a date within ninety days before the
filing date of this quarterly report. Based on that review and evaluation, which
included inquiries made to certain other employees of the Company, the chief
executive officer and chief financial officer have concluded that the Company's
current disclosure controls and procedures, as designed and implemented, are
reasonably adequate to ensure that they are provided with material information
relating to the Company required to be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934. There have not been
any significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation. There were no significant deficiencies or material weaknesses, and
therefore no corrective actions were taken.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. As a result of the correspondence, an increasing
number of the Company's customers have had discussions, or are in discussions,
with RAKTL. 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. Some of these customers have disagreed with the
Company and believe that the correspondence from RAKTL can be construed as
claim(s) against the Company's products. 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.
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
28
the RAKTL patents. The Company has also received opinions from its outside
counsel that certain claims under the RAKTL patent portfolio are invalid or
unenforceable. Furthermore, based on the reviews by outside counsel, the Company
is not aware of any valid and enforceable 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. An increasing 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.
Audiofax, which holds certain patents covering unified messaging products, has
advised the Company and other businesses that, if they provide unified
messaging, they are practicing Audiofax's patents. After reviewing the patents,
the Company recently entered into a license agreement with Audiofax to provide
for the licensing of the relevant patents. The license agreement will not have a
material effect on the Company's consolidated financial position.
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 responded to these complaints, which were consolidated into one
proceeding, by filing a motion to dismiss the complaint in the consolidated
proceeding. The Company asserted that the complaint lacked the degree of
specificity and factual support to meet the pleading standards applicable to
federal securities litigation. On this basis, the Company requested that the
United States District Court for the Northern District of Texas dismiss the
complaint in its entirety. Plaintiffs responded to the Company's request for
dismissal. On August 8, 2002, the Court entered an order granting the Company's
motion to dismiss the class action lawsuit. In the order dismissing the lawsuit,
the Court granted plaintiffs an opportunity to reinstate the lawsuit by filing
an amended complaint. Plaintiffs filed an amended complaint on September 23,
2002. The Company has filed a motion to dismiss the amended complaint, and
plaintiffs have filed a response in opposition to the Company's motion to
dismiss. All discovery and other proceedings not related to the dismissal will
be stayed pending resolution of the Company's request to dismiss the amended
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 the formation of and the performance under certain
agreements between the Company, and/or its alleged predecessors, and Telemac,
and seeking reformation, 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,
29
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 MM02, formerly BT 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 and other matters. The
Company had also filed certain other counterclaims which were dismissed pursuant
to a motion for summary disposition.
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 Company acknowledges it may owe an immaterial amount for
certain software development services rendered by Telemac. With the exception of
this immaterial amount, the Company believes that the claims asserted by Telemac
are without merit. The Company further believes it has meritorious defenses and
counterclaims and, if the parties do not enter into a binding written settlement
agreement as further discussed below, the Company intends to vigorously defend
the claims of Telemac and assert the Company's claims in the arbitration.
The Company and Telemac recently agreed to stay discovery and all other
activities in the arbitration proceeding until April 2003, and continue the
hearing until June 2003, to afford the parties an opportunity to negotiate and
implement a settlement agreement. While the Company hopes to enter into a
mutually acceptable written settlement agreement with Telemac, the parties may
not ultimately consummate such an agreement. If a final settlement agreement is
not achieved by April 2003, the parties will recommence the arbitration
proceeding.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Intervoice, Inc. Employee Stock Purchase Plan. (2)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, signed by
David W. Brandenburg.(1)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, signed by
Rob-Roy J. Graham.(1)
(b) Reports on Form 8-K
1. A report on Form 8-K was filed September 19, 2002 to announce
the closing and funding of the new three-year credit facility
previously announced in a Form 8-K filed August 29, 2002.
2. A report on Form 8-K was filed September 19, 2002 to announce
the dismissal of the pending class action lawsuit.
3. A report on Form 8-K was filed September 26, 2002 to announce
that the plaintiffs had reinstated the class action lawsuit by
filing an amended complaint.
4. A report on Form 8-K was filed October 4, 2002 to announce the
Company's second quarter earnings release.
----------
1. Filed herewith
2. Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 filed with the SEC on November 20, 2002,
Registration Number 333-101328.
31
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, INC.
Date: January 14, 2003 By: /s/ MARK C. FALKENBERG
----------------------------
Mark C. Falkenberg
Chief Accounting Officer
CERTIFICATIONS
I, David W. Brandenburg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Intervoice,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrants'
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 14, 2003
/s/ David W. Brandenburg
--------------------------------------
David W. Brandenburg
Chief Executive Officer and Chairman
CERTIFICATIONS
I, Rob-Roy J. Graham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Intervoice, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrants' disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Rob-Roy J. Graham
-------------------------------------
Rob-Roy J. Graham
Executive Vice President and Chief
Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1 Intervoice, Inc. Employee Stock Purchase Plan. (2)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, signed
by David W. Brandenburg.(1)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, signed
by Rob-Roy J. Graham.(1)
----------
1. Filed herewith
2. Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-8 filed with the SEC on November 20, 2002,
Registration Number 333-101328.