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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
MAY 31, 2003
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 [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE ACT).
YES [X] NO [ ]
THE REGISTRANT HAD 34,111,101 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF MAY 31, 2003.
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EXPLANATORY NOTE
Intervoice, Inc. (the "Company") is amending its Quarterly Report on Form 10-Q
for the quarter ended May 31, 2003 to correct a printing error that caused the
dates shown in the column headings of its Consolidated Statements of Cash Flows
in Item 1 of Part I to be transposed. This correction does not change the
Company's published quarterly financial results, nor does it change any of the
explanatory notes or management's discussion and analysis of financial condition
and results of operations provided in the Quarterly Report on Form 10-Q as
originally filed. For ease of reference, the full text of the Company's
Quarterly Report for the quarter ended May 31, 2003 is repeated in its entirety
in this Form 10-Q/A.
ITEM 1 FINANCIAL STATEMENTS
InterVoice, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
ASSETS May 31, 2003 February 28, 2003
--------------------------------------------------------- ------------ -----------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 27,804 $ 26,211
Trade accounts receivable, net of allowance for
doubtful accounts of $2,744 in fiscal 2004 and
$2,527 in fiscal 2003 26,290 25,853
Inventory 7,827 8,895
Prepaid expenses and other current assets 5,689 5,277
-------- --------
67,610 66,236
-------- --------
Property and Equipment
Building 16,747 16,708
Computer equipment and software 34,171 32,660
Furniture, fixtures and other 2,761 2,667
Service equipment 9,293 8,744
-------- --------
62,972 60,779
Less allowance for depreciation 42,434 40,406
-------- --------
20,538 20,373
Other Assets
Intangible assets, net of amortization of $32,172 in
fiscal 2004 and $32,218 in fiscal 2003 8,624 9,326
Goodwill 3,401 3,401
Other assets 1,368 1,655
-------- --------
$101,541 $100,991
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 11,939 $ 12,513
Accrued expenses 12,404 12,705
Customer deposits 8,824 9,061
Deferred income 26,366 25,478
Current portion of long term borrowings 3,333 3,333
Income taxes payable 7,036 6,240
-------- --------
69,902 69,330
Long term borrowings 14,944 15,778
Other long term liabilities 585 856
Deferred income taxes 91 44
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: 34,111,101 issued and
outstanding in fiscal 2004 and fiscal 2003 17 17
Additional capital 65,144 65,144
Accumulated deficit (45,832) (46,768)
Accumulated other comprehensive loss (3,310) (3,410)
-------- --------
Stockholders' equity 16,019 14,983
-------- --------
$101,541 $100,991
======== ========
See notes to consolidated financial statements.
2
InterVoice, Inc.
Consolidated Statements of Operations
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------
May 31, 2003 May 31, 2002
----------------- ---------------
Sales
Systems $18,031 $ 21,635
Services 20,371 16,781
------- --------
38,402 38,416
------- --------
Cost of goods sold
Systems 11,213 16,118
Services 6,731 6,671
------- --------
17,944 22,789
------- --------
Gross margin
Systems 6,818 5,517
Services 13,640 10,110
------- --------
20,458 15,627
Research and development expenses 3,870 6,005
Selling, general and administrative expenses 13,471 17,693
Amortization of acquisition related intangible assets 705 1,776
------- --------
Income (loss) from operations 2,412 (9,847)
Other income (expense) (187) (48)
Interest expense (545) (1,465)
------- --------
Income (loss) before taxes 1,680 (11,360)
Income taxes (benefit) 744 (2,681)
------- --------
Income (loss) before the cumulative effect
of a change in accounting principle 936 (8,679)
Cumulative effect on prior years of a change
in accounting principle -- (15,791)
------- --------
Net income (loss) $ 936 (24,470)
======= ========
Per Basic Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ 0.03 $ (0.26)
Cumulative effect on prior years of a change
in accounting principle -- (0.46)
------- --------
Net income (loss) $ 0.03 $ (0.72)
======= ========
Per Diluted Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ 0.03 $ (0.26)
Cumulative effect on prior years of a change
in accounting principle -- (0.46)
------- --------
Net income (loss) $ 0.03 $ (0.72)
======= ========
See notes to consolidated financial statements.
3
InterVoice, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
Three Months Ended
------------------------------
May 31, 2003 May 31, 2002
------------ ------------
Operating activities
Income (loss) before the cumulative effect of a
change in accounting principle $ 936 $ (8,679)
Adjustments to reconcile income (loss) before the cumulative
effect of a change in accounting principle to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,382 4,176
Other changes in operating activities 284 2,841
------- --------
Net cash provided by (used in) operating activities 3,602 (1,662)
------- --------
Investing activities
Proceeds from sale of assets -- 1,852
Purchases of property and equipment (1,263) (601)
------- --------
Net cash provided by (used in) investing activities (1,263) 1,251
------- --------
Financing activities
Paydown of debt (834) (26,000)
Debt issuance costs -- (1,632)
Borrowings -- 24,000
Exercise of stock options -- 88
------- --------
Net cash used in financing activities (834) (3,544)
------- --------
Effect of exchange rates on cash 88 302
------- --------
Increase (decrease) in cash and cash equivalents 1,593 (3,653)
Cash and cash equivalents, beginning of period 26,211 17,646
------- --------
Cash and cash equivalents, end of period $27,804 $ 13,993
======= ========
See notes to consolidated financial statements.
4
InterVoice, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(In Thousands, Except Share Data)
Accumulated
Common Stock Other
----------------------------- Additional Accumulated Comprehensive
Shares Amount Capital Deficit Loss Total
---------- ---------- ----------- ------------- -------------- ----------
Balance at February 28, 2003 34,111,101 $ 17 $ 65,144 $ (46,768) $ (3,410) $ 14,983
Net income -- -- -- 936 -- 936
Foreign currency translation
adjustment -- -- -- -- 100 100
---------- ---------- ---------- ---------- ---------- ----------
Balance at May 31, 2003 34,111,101 $ 17 $ 65,144 $ (45,832) $ (3,310) $ 16,019
========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2003
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, 2003 has been
derived from audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the unaudited May 31, 2003 and 2002
consolidated financial statements have been included. Operating results for the
three-month period ended May 31, 2003 are not necessarily indicative of the
results that may be expected for the year ending February 29, 2004 as they may
be affected by a number of factors including the timing and ultimate receipt of
orders from significant customers which continue to constitute a large portion
of the Company's sales, the sales channel mix of products sold, and changes in
general economic conditions, any of which could have an adverse effect on
operations.
In accordance with Statement of Financial Accounting Standards No. 130, the
following comprehensive income disclosures are provided. Total comprehensive
income (loss) for the first quarter of fiscal 2004 and 2003 was $1.0 million and
$(23.4) million, respectively. Total comprehensive income (loss) is comprised of
net income (loss), foreign currency translation adjustments, and, in fiscal
2003, adjustments to the carrying value of certain derivative instruments.
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 in fiscal 2003, 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
Enterprise and Networks 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 Networks 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 Networks sales and profitability during the fourth
quarter of fiscal 2002 and related reduced forecasts for the division's sales
and profitability.
6
NOTE C - INVENTORIES
Inventories consist of the following (in thousands):
May 31, 2003 February 28, 2003
------------ -----------------
Purchased parts $3,884 $4,906
Work in progress 3,943 3,989
------ ------
$7,827 $8,895
====== ======
NOTE D - SPECIAL CHARGES
Accrued expenses and other long-term liabilities at February 28, 2003
included amounts associated with certain special charges incurred during fiscal
2003 and fiscal 2002. Activity during the first quarter of fiscal 2004 related
to such accruals was as follows (in thousands):
Accrued Balance Revisions Accrued Balance
February 28, 2003 Payments to Estimates May 31, 2003
----------------- -------- ------------ ---------------
Severance and related charges $ 466 $ (81) $ (27) $ 358
Future lease costs for properties
no longer being used $1,896 $ (229) $ -- $1,667
The Company expects to pay the balance of accrued severance and related charges
during fiscal 2004 and to pay the balance of future lease costs over the
remaining lease terms, which extend through June 2005.
During the quarter ended May 31, 2003, the Company reduced its workforce by
56 positions. In doing so, the Company incurred severance charges of
approximately $1.4 million, with approximately $0.6 million, $0.2 million, and
$0.6 million impacting cost of goods sold, research and development, and
selling, general and administrative expenses, respectively. At May 31, 2003,
approximately $0.7 million of the charges remained unpaid. The majority of such
remaining charges are expected to be paid during the second quarter of fiscal
2004.
In June 2003, the Company announced that its chief financial officer will
resign from the Company in July 2003 to pursue other opportunities. The Company
expects to record cash and non-cash charges totaling approximately $0.5 million
and $0.3 million, respectively, during the second quarter of fiscal 2004 under
the terms of a separation agreement executed in connection with the officer's
resignation.
During the first quarter of fiscal 2003, the Company incurred special
charges of approximately $2.8 million, including $2.4 million for severance
payments and related benefits, and $0.4 million for the closure of its leased
facility in Chicago, Illinois. The severance and related costs were associated
with a workforce reduction affecting 103 employees. During the first quarter of
fiscal 2003, the Company also revised its estimates of severance charges
originally recorded in the fourth quarter of fiscal 2002, reducing its accrual
for such charges by $0.2 million. The net effect of all special charges
activities for the quarter resulted in charges to cost of goods sold, research
and development and selling, general and administrative expenses of $1.4
million, $0.5 million and $0.7 million, respectively.
7
NOTE E - LONG-TERM BORROWINGS
At May 31, 2003 and February 28, 2003 the Company's long-term debt was
comprised of the following (in thousands):
May 31, 2003 February 28, 2003
------------ -----------------
Mortgage loan, bearing interest payable monthly at the greater of 10.5% or the
prime rate plus 2.0%; principal due May 28, 2005 $ 10,500 $ 10,500
Amortizing term loan, principal due in equal
monthly installments of approximately $0.3 million through July 2005 with
final payments totaling approximately $0.6 million in August 2005; interest
payable monthly, accruing at a rate equal to the prime rate plus 2.75%
(7.0% at May 31, 2003) 7,777 8,611
-------- --------
Total debt outstanding 18,277 19,111
Less: current portion (3,333) (3,333)
-------- --------
Long-term debt, net of current portion $ 14,944 $ 15,778
======== ========
MORTGAGE LOAN
The Company's mortgage loan is secured by a first lien on the Company's
Dallas headquarters and contains a covenant requiring the Company to have at
least $5.0 million in net equity at the end of each of its fiscal quarters
beginning with the quarter ending August 31, 2004. The mortgage loan also
contains cross-default provisions with respect to the Company's 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.
TERM LOAN AND REVOLVING CREDIT AGREEMENT
In August 2002, the Company entered into a credit facility agreement with a
lender which provided 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 ($17.2 million maximum at May 31, 2003) or a defined borrowing base
comprised primarily of eligible U.S. and U.K. accounts receivable ($0.4 million
maximum at May 31, 2003).
Any advances under the revolver loan will accrue interest at the prime rate
plus a margin of 0.5% to 1.5%, or at the 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 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.
Borrowings under the 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 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.
The 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 (as
defined in the credit facility) 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
8
cumulative EBITDA of $9.0 million for the twelve-month period ending 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 $4.0 million for any fiscal year
beginning on or after March 1, 2003 except in certain circumstances and with the
lender's prior approval. As of May 31, 2003, the Company was in compliance with
all financial and operating covenants.
NOTE F - INCOME TAXES
During the three-month periods ended May 31, 2003 and 2002, the Company
recognized current income tax expense on the pretax income of certain foreign
subsidiaries. During the same periods, the Company incurred domestic pretax
losses. The Company did not recognize current income tax benefits as a result of
such losses, however, because the existence of recent domestic losses prevented
it from concluding that it was more likely than not that such benefits would be
realized.
During the first quarter of fiscal 2003, United States tax law was amended
to allow companies which incurred net operating losses in 2001 and 2002 to carry
such losses back a maximum of five years instead of the maximum of two years
previously allowed. As a result of this change, the Company used $21.5 million
of its then existing net operating loss carryforwards and $0.4 million of its
then existing 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
of fiscal 2003, 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 reduction
in deferred tax liabilities, the Company increased the valuation allowance
associated with its net deferred tax asset by $1.4 million.
NOTE G - EARNINGS PER SHARE AND STOCK COMPENSATION
(in thousands, except per share data) May 31, 2003 May 31, 2002
------------ ------------
Numerator:
Income (loss) before the cumulative effect
of a change in accounting principle $ 936 $ (8,679)
Cumulative effect on prior years of a
change in accounting principle -- (15,791)
------- --------
Net income (loss) $ 936 $(24,470)
------- --------
Denominator:
Denominator for basic earnings per share 34,111 34,039
Dilutive potential common shares --
Employee stock options 249 --
------- --------
Denominator for diluted earnings per share 34,360 34,039
------- --------
9
Basic:
Income (loss) before the cumulative effect of a
change in accounting principle $0.03 $(0.26)
Cumulative effect on prior years of a
change in accounting principle -- (0.46)
----- ------
Net income (loss) $0.03 $(0.72)
===== ======
Diluted:
Income (loss) before the cumulative effect
of a change in accounting principle $0.03 $(0.26)
Cumulative effect on prior years of a
change in accounting principle -- (0.46)
----- ------
Net income (loss) $0.03 $(0.72)
===== ======
Options to purchase 4,847,606 shares of common stock at an average exercise
price of $8.62 per share and warrants to purchase 621,304 shares at an exercise
price of $4.0238 per share were outstanding at May 31, 2003 but were not
included in the computation of diluted earnings per share for the first quarter
of fiscal 2004 because the options' prices were greater than the average market
price of the Company's common shares during such period and, therefore, the
effect would have been antidilutive. Options to purchase 4,378,654 shares of
common stock at an average exercise price of $10.17 per share and warrants to
purchase 621,304 shares at an exercise price of $4.0238 per share were
outstanding at May 31, 2002 but were not included in the computation of diluted
earnings per share for the first three months of fiscal 2003 because the effect
would have been antidilutive given the Company's loss for the quarter. In
addition, the Company's then outstanding convertible notes plus accrued interest
were convertible at the option of the note holders into 1,617,342 shares at an
exercise price of $6.184 per share as of May 31, 2002 but were similarly
excluded from the computation of diluted earnings per share for the quarter.
Such notes and accrued interest were subsequently repaid in full.
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations. Under APB 25, no compensation
expense is recognized for stock option grants if the exercise price of the
Company's stock option grants is at or above the fair market value of the
underlying stock on the date of grant. The Company has adopted the pro forma
disclosure features of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), as amended by Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". The following table illustrates the
effect on net income and net income per share amounts if the Company had applied
the fair value recognition provisions of SFAS 123 to stock-based employee
compensation (in thousands, except per share amounts):
Three Months Ended
May 31,
----------------------------
2003 2002
---------- ----------
Net income (loss), as reported $ 936 $ (24,470)
Less: Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of tax
(1) 585
---------- ----------
Pro forma net income (loss) $ 937 $ (25,055)
========== ==========
Net income (loss) per share:
Basic and diluted - as reported $ 0.03 $ (0.72)
Basic and diluted - pro forma $ 0.03 $ (0.74)
10
NOTE H - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company operates as a single, integrated business unit. The Company's chief
operating decision maker assesses performance and allocates resources on an
enterprise wide basis. The Company's product line includes IVR/portal systems,
messaging systems, payment systems, maintenance and related services, and
managed services provided for customers on an outsourced or application service
provider (ASP) basis. In prior years, the Company has identified its sales of
systems and related services as being sales to the Enterprise and Network
markets. Generally sales of IVR/portal systems and related services were made to
Enterprise customers, while sales of messaging and payment systems were made to
Network customers. Going forward, the Company believes that product line
distinction provides the most meaningful breakdown of quarterly and annual sales
activity. The Company is not able to provide the historical breakdown of Network
system sales into its messaging and payment systems components. The Company's
net sales by product line for the three months ended May 31, 2003 and 2002 were
as follows (in thousands):
MAY 31
----------------------
2003 2002
------- -------
IVR/portal system sales (Enterprise system
sales in fiscal 2003) $11,906 $12,310
Messaging system sales (included in
Network system sales in fiscal 2003) 4,600 --
Payment system sales (included in Network
(system sales in fiscal 2003) 1,525 --
Network system sales -- 9,325
------- -------
Total system sales 18,031 21,635
------- -------
Maintenance and related services sales 13,586 12,025
Managed service (ASP) sales 6,785 4,756
------- -------
Total services sales 20,371 16,781
------- -------
Total Company sales $38,402 $38,416
======= =======
GEOGRAPHIC OPERATIONS
Revenues are attributed to geographic locations based on locations of
customers. The Company's net sales by geographic area for the three-month
periods ended May 31, 2003 and 2002 were as follows (in thousands):
MAY 31
----------------------
2003 2002
------- -------
North America $24,245 $22,423
Europe, Middle East and Africa 13,194 13,974
Pacific Rim 396 520
Central and South America 567 1,499
------- -------
Total $38,402 $38,416
======= =======
CONCENTRATION OF REVENUE
One customer, O2, has purchased both systems and ASP managed services from
the Company. Such combined purchases accounted for approximately 11% of the
Company's total sales during the three-month periods ended May 31, 2003 and
2002. Under the terms of its managed services contract with O2 and at current
exchange rates, the Company will recognize revenues of $1.0 million per month
through July 2003 and $0.7 million per month from August 2003 through July 2005.
The amount received under
11
the agreement may vary based on future changes in the exchange rate between the
dollar and the British pound. There were no other customers accounting for 10%
or more of the Company's sales during the three months ended May 31, 2003 and
2002.
NOTE I - CONTINGENCIES
INTELLECTUAL PROPERTY MATTERS
The Company provides its customers a qualified indemnity against the
infringement of third party intellectual property rights. From time to time
various owners of patents and copyrighted works send the Company or its
customers letters alleging that the Company's products do or might infringe upon
the owners' intellectual property rights, and/or suggesting that the Company or
its customers should negotiate a license or cross-license agreement with the
owner. The Company's policy is to never knowingly infringe upon any third
party's intellectual property rights. Accordingly, the Company forwards any such
allegation or licensing request to its outside legal counsel for their review
and opinion. The Company generally attempts to resolve any such matter by
informing the owner of its position concerning non-infringement or invalidity,
and/or, if appropriate, negotiating a license or cross-license agreement. Even
though the Company attempts to resolve these matters without litigation, it is
always possible that the owner of the patent or copyrighted works will institute
litigation. Owners of patent(s) and/or copyrighted work(s) have previously
instituted litigation against the Company alleging infringement of their
intellectual property rights, although no such litigation is currently pending
against the Company. The Company currently has a portfolio of 62 patents, and it
has applied for and will continue to apply for and receive a number of
additional patents to reflect its technological innovations. The Company
believes that its patent portfolio could allow it to assert counterclaims for
infringement against certain owners of intellectual property rights if those
owners were to sue the Company for infringement.
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. An affiliate of Verizon Communications,
Inc., Cellco Partnership d/b/a Verizon Wireless, recently settled all claims of
patent infringement asserted against it in the matter of RAKTL v. Verizon
Communications, Inc. et al, No. 01-CV-5627, in U.S. District Court, Eastern
District of Pennsylvania. Verizon Wireless had previously notified the Company
of the lawsuit and referenced provisions in a contract for prepaid services
which required a wholly owned subsidiary of the Company, Brite Voice Systems
Inc., to indemnify Verizon Wireless against claims that its services infringe
patents. The claims in the lawsuit made general reference to prepaid services
and a variety of other services offered by Verizon
12
Wireless and its affiliates but did not refer to Brite's products or services.
The Company had informed Verizon Wireless that it could find no basis for an
indemnity obligation under the expired contract and, accordingly, the Company
did not participate in the defense or settlement of the matter.
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 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, v. Sprint Corporation, et al, Cause
No. 99-CIV-11091 (SAS), pending in the United States District Court, Southern
District of New York, Aerotel, Ltd., has sued Sprint Corporation alleging that
certain prepaid services offered by Sprint are infringing Aerotel's U.S. Patent
No. 4,706,275 ("275 patent"). According to Sprint, the suit originally focused
on land-line prepaid services not provided by the Company. As part of an
unsuccessful mediation effort, Aerotel also sought compensation for certain
prepaid wireless services provided to Sprint PCS by the Company. As a result of
the mediation effort, Sprint 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 provided certain assistance to Sprint's counsel in
defending against such claims, to the extent they dealt with issues unique to
the system and services provided by the Company. Furthermore, the Company and
Sprint recently entered into an agreement to settle and release the Company from
any obligations to Sprint in connection with the Aerotel litigation. Under the
agreement, the Company will make certain payments, which are not significant to
the Company's consolidated financial position, to Sprint.
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, which were
consolidated into one proceeding, under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and 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
13
the Company. Plaintiffs have asserted that these alleged statements resulted in
artificially inflated stock prices.
The Company believes that it and its officers and directors complied with
their obligations under the securities laws, and intends to defend the lawsuit
vigorously. The Company responded to this complaint 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. At the direction of the Court,
the parties attended a mediation with a neutral third-party mediator during June
2003. The mediation did not result in a settlement. All discovery and other
proceedings not related to the dismissal have been stayed pending resolution of
the Company's request to dismiss the amended complaint.
TELEMAC ARBITRATION
On March 28, 2003 the Company announced a settlement of an arbitration
proceeding in the Los Angeles, California, office of JAMS initiated by Telemac
Corporation ("Telemac") against the Company, InterVoice Brite Ltd. and Brite
Voice Systems, Inc., JAMS Case No. 1220026278. Telemac's allegations arose out
of the negotiation of an Amended and Restated Prepaid Phone Processing Agreement
between Telemac and Brite Voice Systems Group, Ltd., and certain amendments
thereto, under which Telemac licensed prepaid wireless software for use in the
United Kingdom under agreement with O2, formerly BT Cellnet, a provider of
wireless telephony in the United Kingdom. The terms of the settlement included a
cash payment to Telemac, which was not significant to the Company's consolidated
financial condition.
OTHER MATTERS
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 lawsuits, 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.
The Company has employment agreements with two executive officers. Each
agreement requires the Company to make termination payments to the officer of
two times the officer's annual base compensation in the event the officer's
services are terminated without cause or payments of up to 2.99 times the
officer's annual compensation including bonuses in connection with a termination
of the officer's services following a change in ownership of the Company, as
defined in the agreement, prior to the expiration of the agreement. If both
officers were terminated for one of the preceding reasons during fiscal 2004,
the cost to the Company would range from $1.2 million to $1.8 million.
14
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY DISCLOSURES TO QUALIFY 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 Company cautions
current and potential investors that the following important risk factors, among
others, sometimes have affected, and in the future could affect, the Company's
actual results and could cause such results during fiscal 2004, 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 $66.4 million, $44.7 million and $2.3 million in fiscal
2003, 2002 and 2001, respectively. Although the Company generated net
income of $0.9 million for the quarter ended May 31, 2003, it may incur
additional losses in the future, 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 financing 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 revolving
credit facility. If the Company at any time defaults 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 any one of the financing 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. See "Liquidity and Capital Resources" in this Item 2
for a discussion of the Company's minimum EBITDA covenant.
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 over the last three
years, 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.
15
o The Company is prone to quarterly sales fluctuations. Some of the
Company's transactions are completed in the same fiscal quarter as
ordered. 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 from its
"pipeline" of sales opportunities during a quarter. No matter how
promising a pipeline opportunity may appear, there is no assurance it
will ever result in a sale. Accordingly, the Company's actual sales for
any fiscal reporting period may be significantly different from any
estimate of sales for such period. See the discussion entitled "Sales"
in this Item 2 for a discussion of the Company's system for estimating
sales and trends in its business.
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 of
this Quarterly Report on Form 10-Q and in Item 3 "Legal Proceedings" in
Part I of the Company's Annual Report on Form 10-K/A for the year ended
February 28, 2003. The Company believes that the pending lawsuit to
which it is a party is without merit and intends to defend such matter
vigorously. The Company may not prevail in the litigation. An adverse
judgment in the litigation or any other matter, 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, Aspect Communications,
Security First, Comverse Technology, 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 O2. The Company's
success depends substantially on retaining its significant customers.
The loss of one of the Company's significant customers could negatively
impact the Company's results of operations. The Company's installed base
of customers generally is not contractually obligated to place further
systems orders with the Company or to extend their services contracts
with the Company at the expiration of their current contracts. Sales to
O2, which purchases both systems and managed services from the Company,
accounted for approximately 11% of the Company's total sales during the
quarters ended May 31, 2003 and 2002. Under the terms of its recently
extended managed services contract with O2 and at current exchange
rates, the Company will recognize revenues of approximately $1.0 million
per month through July 2003, and $0.7 million per month from August 2003
through the end of the contract in July 2005. 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 may not be successful in transitioning its products and
services to an open, standards-based business model. The Company has
historically provided complete, bundled hardware and software systems
using internally developed components to address its customers' total
business needs. Increasingly, the markets for the Company's products are
requiring a shift to
16
the development of products and services based on an open,
standards-based architecture such as the J2EE and Microsoft's(R).NET
environments utilizing VoiceXML and/or SALT standards. Such an open,
standards-based approach allows customers to independently purchase and
combine hardware components, standardized software modules, and
customization, installation and integration services from individual
vendors deemed to offer the best value in the particular class of
product or service. In such an environment, the Company believes it may
sell less hardware and fewer bundled systems and may become increasingly
dependent on its development and sale of software application packages,
customized software and consulting and integration services. This shift
will place new challenges on the Company's management to transition its
products and to hire and retain the mix of personnel necessary to
respond to this business environment, to adapt to the changing expense
structure that the new environment may tend to foster, and to increase
sales of services, customized software and application packages to
offset reduced sales of hardware and bundled systems. If the Company is
unsuccessful in resolving one or more of these challenges, the Company's
revenues and profitability could decline.
o The Company will incur substantial expenses to transition its products
and services to an open, standards-based business model. The Company
anticipates that it will incur substantial research and development
expenses and other expenses to adapt its organization and product and
service offerings to an open, standards-based business model. If the
Company is unable to accurately estimate the future expenses associated
with these strategic initiatives, or if the Company must divert its
resources to fund other strategic or operational obligations, the
Company's ability to fund the strategic initiatives and to operate
profitably will be adversely affected.
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. As the Company
continues to migrate to open, standards-based systems, it will become
increasingly dependent on its component suppliers and software 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 or at historical prices. Consequently, the Company would be
unable to provide products and to service its customers or to generate
historical operating margins, 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. See Item 1 "Legal Proceedings" in
Part II of this Quarterly Report on Form 10-Q and Item 3 "Legal
Proceedings" in Part I of the Company's Annual Report on Form 10-K/A for
the year ended February 28, 2003 for a discussion of certain pending and
potential claims of infringement.
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 37%
and 42% in
17
fiscal quarters ended May 31, 2003 and 2002, 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.
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 may 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 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
o The occurrence of force majuere events could impact the Company's
results from operations. The occurrence of one or more of the following
events could potentially cause the Company to incur significant losses:
acts of God, war, riot, embargoes, acts of civil or military
authorities, acts of terrorism or sabotage, shortage of supply or delay
in delivery by Intervoice's vendors, the spread of SARS or other
diseases, fire, flood, explosion, earthquake, accident, strikes,
radiation, inability to secure transportation, failure of
communications, failure of utilities or similar events.
SALES. The Company's total sales for the first quarter of fiscal 2004 and
2003 were $38.4 million. The mix of sales varied between quarters, however, with
system sales totaling $18.0 million for the first quarter of fiscal 2004 as
compared to $21.6 million for the fiscal 2003 first quarter and services sales
totaling $20.4 million in fiscal 2004 as compared to $16.8 million for the first
quarter of fiscal 2003. Services sales during the first quarter of fiscal 2004
included $1.9 million relating to services performed in prior periods for an
international managed services customer for which the Company recognizes revenue
on a cash basis.
The Company operates as a single, integrated business unit. The Company's chief
operating decision maker assesses performance and allocates resources on an
enterprise wide basis. The Company's product line includes IVR/portal systems,
messaging systems, payment systems, maintenance and related services, and
managed services provided for customers on an outsourced or application service
provider (ASP) basis. In prior years, the Company has identified its sales of
systems and related services as being sales to the Enterprise and Network
markets. Generally sales of IVR/portal systems and related services were made to
Enterprise customers, while sales of messaging and payment systems were made to
Network customers. Going forward, the Company believes that product line
distinction provides the most meaningful breakdown of quarterly and annual sales
activity. The Company is not able to provide the historical breakdown of Network
system sales into its messaging and payment systems components. The Company's
net sales by product line for the three months ended May 31, 2003 and 2002 were
as follows (in thousands):
MAY 31
----------------------
2003 2002
------- -------
IVR/portal system sales (Enterprise system
sales in fiscal 2003) $11,906 $12,310
Messaging system sales (included in
Network system sales in fiscal 2003) 4,600 --
Payment system sales (included in Network
system sales in fiscal 2003) 1,525 --
Network system sales -- 9,325
------- -------
Total system sales 18,031 21,635
------- -------
Maintenance and related services sales 13,586 12,025
Managed service (ASP) sales 6,785 4,756
------- -------
Total services sales 20,371 16,781
------- -------
Total Company sales $38,402 $38,416
======= =======
As identified in the preceding chart, the decline in system sales from
fiscal 2003 levels is primarily attributable to the decline in the market for
telecommunication equipment, which the Company has experienced over the past two
years. The Company believes that the market for network products will remain
soft through fiscal 2004. The increase in services sales is a combination of
growth in the sale of maintenance and related services and the impact of the
cash basis managed services recognized during the first quarter of fiscal 2004
as compared to the same time frame for fiscal 2003.
One customer, O2, has purchased both systems and ASP managed services from
the Company. Such combined purchases accounted for approximately 11% of the
Company's total sales during the three-month periods ended May 31, 2003 and
2002. Under the terms of its managed services contract with O2
19
and at current exchange rates the Company will recognize revenues of $1.0
million per month through July 2003 and $0.7 million per month from August 2003
through July 2005. The amount received under the agreement may vary based on
future changes in the exchange rate between the dollar and the British pound.
There were no other customers accounting for 10% or more of the Company's sales
during the three months ended May 31, 2003 and 2002.
International sales comprised 37% of the Company's total sales during the
first quarter of fiscal 2004, down from 42% during the first quarter of fiscal
2003. The decline is primarily attributable to slightly lower sales volumes in
Latin American and the EMEA regions.
The Company uses a system combining estimated sales from its service and
support contracts, its backlog of committed systems orders and its "pipeline" of
systems sales opportunities to estimate sales and trends in its business. For
the quarter ended May 31, 2003, sales from service and support contracts,
including contracts for ASP managed services, comprised approximately 53% of the
Company's total sales, while sales from beginning systems backlog comprised
approximately 40% of total sales and sales from the quarter's pipeline activity
comprised approximately 7% of total sales. For the quarter ended May 31, 2002,
sales from service and support contracts, sales from beginning systems backlog
and sales from the quarter's pipeline activity comprised approximately 44%, 26%
and 30% of total sales, respectively.
The Company's service and support contracts range in original duration from
one month to five years, with most managed service contracts having initial
terms of two to three years and most maintenance and related contracts having
initial terms of one year. Because many of the longer duration contracts give
customers early cancellation privileges, the Company does not consider its book
of services contracts to be reportable backlog, and a portion of the potential
revenue reflected in the contract values may never be realized. Nevertheless, it
is easier for the Company to estimate service and support sales than to estimate
systems sales for the next quarter because the service and support contracts
generally span multiple quarters and revenues recognized under each contract are
generally similar from one quarter to the next.
The Company's backlog is made up of customer orders for systems for which it
has received complete purchase orders and which the Company expects to ship
within twelve months. At May 31, 2003, February 28, 2003, November 30, 2002 and
August 31, 2002, the Company's backlog of systems sales was approximately $29.5
million, $33.5 million, $29.5 million and $33.5 million, respectively.
The Company's pipeline of opportunities for systems sales is the aggregation
of its sales opportunities, with each opportunity evaluated for the date the
potential customer will make a purchase decision, competitive risks, and the
potential amount of any resulting sale. No matter how promising a pipeline
opportunity may appear, there is no assurance it will ever result in a sale.
While this pipeline may provide the Company some sales guidelines in its
business planning and budgeting, pipeline estimates are necessarily speculative
and may not consistently correlate to revenues in a particular quarter or over a
longer period of time. While the Company knows the amount of systems backlog
available at the beginning of a quarter, it must speculate on its pipeline of
systems opportunities for the quarter. The Company's accuracy in estimating
total systems sales for 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 quarter ended May 31, 2003, the Company reduced
its workforce by 56 positions. In doing so, the Company incurred severance
charges of approximately $1.4 million, with approximately $0.6 million, $0.2
million, and $0.6 million impacting cost of goods sold, research and
development, and selling, general and administrative expenses, respectively.
In June 2003, the Company announced that its chief financial officer will
resign from the Company in July 2003 to pursue other opportunities. The Company
expects to record cash and non-cash charges totaling approximately $0.5 million
and $0.3 million, respectively, during the second quarter of fiscal 2004 under
the terms of a separation agreement executed in connection with the resignation.
20
During the first quarter of fiscal 2003, the Company incurred special
charges of approximately $2.8 million, including $2.4 million for severance
payments and related benefits, and $0.4 million for the closure of its leased
facility in Chicago, Illinois. The severance and related costs were associated
with a workforce reduction affecting 103 employees. During the first quarter of
fiscal 2003, the Company also revised its estimates of severance charges
originally recorded in the fourth quarter of fiscal 2002, reducing its accrual
for such charges by $0.2 million. The net effect of all special charges
activities for the first quarter of fiscal 2003 was to increase cost of goods
sold, research and development and selling, general and administrative expenses
by $1.4 million, $0.5 million and $0.7 million, respectively.
COST OF GOODS SOLD. Cost of goods sold for the first quarter of fiscal 2004
was approximately $17.9 million or 46.7% of sales as compared to $22.8 million
or 59.3% of sales for the first quarter of fiscal 2003. As described above, the
Company incurred special charges to cost of goods sold totaling $0.6 million
(1.6%) and $1.4 million (3.6%) in the first quarter of fiscal 2004 and 2003,
respectively. Cost of goods sold on systems sales was $11.2 million, or 62.2% of
system sales, versus $16.1 million, or 74.5% of system sales, for the first
quarters of fiscal 2004 and 2003, respectively. This decrease results from the
Company's cost cutting initiatives as well as from differences in the sales
channel mix from quarter to quarter. Cost of goods sold on services sales was
$6.7 million, or 33.0% of services sales, for the first quarter of fiscal 2004
versus $6.7 million, or 40.0% of services sales, for the same period of fiscal
2003. This improvement resulted from a combination of efficiency gains, as the
Company served a larger customer base without increasing costs at the same rate
as sales increased, and the effect on the calculation of the cash basis managed
service revenues recognized in the quarter.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during
the first quarter of fiscal 2004 were approximately $3.9 million, or 10.0% of
the Company's total sales. During the first quarter of the previous fiscal year,
research and development expenses were $6.0 million, or 15.6% of the Company's
total sales. The Company incurred R&D charges described above in "Special
Charges" totaling $0.2 million (0.5%) and $0.5 million (1.3%) in the first
quarter of fiscal 2004 and 2003, respectively. Expenses were down from fiscal
2003 as a result of the Company's cost reduction initiatives.
Research and development expenses include the design of new products and the
enhancement of existing products. The Company's research and development
spending is focused in four key areas. First, software tools are being developed
to aid in the development, deployment and management of customer applications
incorporating speech recognition and text to speech technologies. Next, hardware
and software platforms are being developed which interface with telephony
networks and an enterprise's internal data network. Such platforms are being
developed to operate in traditional enterprise networks as well as newer network
environments such as J2EE and Microsoft's .NET. Third, "voice browsers" based on
open standards such as SALT and VoiceXML are being developed. Voice browsers
incorporate speech recognition technologies and perform the task of formatting a
user's verbal query into an inquiry that can be acted upon and/or responded to
by an enterprise system. Finally, research and development activities are
focusing on modularization of key hardware and software elements. This is
increasingly important in a standards-based, open systems architecture as
modularization will allow for interchange of commodity elements to reduce
overall systems cost and for the Company's best of breed and core technology
strengths to be leveraged into new applications and vertical markets.
The Company expects to maintain a strong commitment to research and
development to remain at the forefront of technology development in its markets,
which is essential to the continued improvement of the Company's position in the
industry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses during the first quarter of fiscal 2004 were
approximately $13.5 million, or 35.1% of the Company's total sales. SG&A
expenses during the first quarter of fiscal 2003 were $17.7 million, or 46.1% of
the Company's total sales. The Company incurred SG&A charges described above in
"Special Charges" totaling $0.6 million (1.6%) and $0.7 million (1.8%) in the
first quarter of fiscal 2004 and 2003, respectively. SG&A expenses have dropped
in absolute dollars from the same period last year primarily as a result of cost
control initiatives implemented by the Company during fiscal 2003.
21
AMORTIZATION OF 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 in fiscal 2003, 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
Enterprise and Networks 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 Networks 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 Networks 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 integrated organizational structure in order to address changing
market demands and global customer requirements.
During the fourth quarter of fiscal 2003, and as described in the Company's
Annual Report on Form 10-K/A for the year ended February 28, 2003, the Company
recognized impairment charges of $16.7 million to reduce the carrying value of
its intangible assets other than goodwill to their fair value. As a result of
the reduction in carrying value, amortization expense related to these assets
totaled $0.7 million for the first quarter of fiscal 2004, down from $1.8
million for the first quarter of fiscal 2003. The estimated amortization expense
for the balance of fiscal 2004 and for each of the next four fiscal years is as
follows (in thousands):
Balance of fiscal year ending February 29, 2004 $2,270
Fiscal 2005 $1,654
Fiscal 2006 $1,168
Fiscal 2007 $1,099
Fiscal 2008 $1,099
INTEREST EXPENSE. Interest expense was $0.5 million during the first quarter
of fiscal 2004, versus $1.5 million for the same period of fiscal 2003. The
reduction relates to two factors. First, the Company's outstanding debt as of
the beginning of the first quarter of fiscal 2004 totaled $19.1 million, a 36%
reduction from the $30.0 million balance outstanding at the beginning of fiscal
2003. Second, the fiscal 2003 expense included $0.3 million relating to the
final amortization of costs under certain interest rate swap arrangements
terminated by the Company during fiscal 2002 and $0.4 million for the write off
of debt issuance costs associated with a term loan retired during the quarter as
part of the Company's fiscal 2003 debt restructuring activities. There were no
such expenses during the first quarter of fiscal 2004.
INCOME TAXES (BENEFIT). During the three-month periods ended May 31, 2003
and 2002, the Company recognized current income tax expense on the pretax income
of certain foreign subsidiaries. During the same periods, the Company incurred
domestic pretax losses. The Company did not recognize current income tax
benefits as a result of such losses, however, because the existence of recent
domestic losses prevented it from concluding that it was more likely than not
that such benefits would be realized.
During the first quarter of fiscal 2003, United States tax law was amended
to allow companies which incurred net operating losses in 2001 and 2002 to carry
such losses back a maximum of five years instead of the maximum of two years
previously allowed. As a result of this change, the Company used $21.5 million
of its then existing net operating loss carryforwards and $0.4 million of its
then existing tax credit carryforwards and recognized a one-time tax benefit of
$7.9 million, of which $2.2 million was
22
recognized as additional capital associated with previous stock option
exercises. Also during the first quarter of fiscal 2003, and as discussed above
in "Amortization of Acquired Intangible Assets and Cumulative Effect of a Change
in Accounting Principle", 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 reduction in deferred tax
liabilities, the Company increased the valuation allowance associated with its
net deferred tax asset by $1.4 million.
INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). The Company generated
operating income of $2.4 million and net income of $0.9 million during the first
quarter of fiscal 2004. During the first quarter of fiscal 2003, the Company
generated an operating loss of $9.8 million, a loss before the cumulative effect
of a change in accounting principle of $8.7 million and a net loss of $24.5
million. As described above in "Amortization of Acquired Intangible Assets and
Cumulative Effect of a Change in Accounting Principle", the Company recorded a
$15.8 million charge during 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.
LIQUIDITY AND CAPITAL RESOURCES. The Company had approximately $27.8 million
in cash and cash equivalents at May 31, 2003, while borrowings under the
Company's long-term debt facilities totaled $18.3 million. The Company's cash
reserves increased $1.6 million during the three months ended May 31, 2003, with
operating activities providing $3.6 million of cash, net investing activities
using $1.3 million of cash and net financing activities using $0.8 million of
cash.
Operating cash flow for the quarter ended May 31, 2003 was favorably
impacted by the Company's return to profitability in the quarter, including its
collection of $1.9 million from an international managed services customer for
which the Company recognizes revenue on a cash basis, and by its related
continuing focus on operating expense control and balance sheet management. The
Company reduced its inventory holdings by $1.1 million from fiscal 2003 ending
levels, and held its days sales outstanding (DSOs) of accounts receivable to 62
days, virtually unchanged from February 28, 2003.
For sales of certain of its more complex, customized systems (generally ones
with a sales price of $0.5 million or more), the Company recognizes revenue
based on a percentage of completion methodology. Unbilled receivables accrued
under this methodology totaled $4.5 million (17.0% of total net receivables) at
May 31, 2003, down $0.4 million from February 28, 2003. The Company expects to
bill and collect unbilled receivables as of May 31, 2003 within the next twelve
months.
While the Company continues to focus on 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 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 of systems and/or services 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
tentatively agreed to proposed adjustments from the IRS challenging certain
positions taken by the Company on those returns. Although resolution of the
issues is still pending, it is probable that as a result of these proposed
adjustments, the Company will lose the ability to carry back approximately $5.4
million in net operating losses generated in fiscal 2001. If this occurs, the
Company will be required to repay up to $2.0 million of refunds previously
received from the IRS plus accrued interest. The Company recorded a charge for
these probable adjustments as part of its fiscal 2003 net tax provision. The
Company expects final resolution of the issue and cash settlement with the IRS
to occur during the second or third quarter of fiscal 2004. Any net operating
losses which ultimately cannot be carried back to prior years under the
settlement with the IRS may be carried forward to future years.
23
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 Company
and the IRS have reached a tentative agreement that eliminates the proposed
deficiency and, in fact, results in the Company receiving a small net refund.
The Company expects final resolution of this matter to occur during the second
quarter of fiscal 2004.
The Company used $1.3 million of cash to purchase additional equipment
during the quarter ended May 31, 2003 and used $0.8 million of cash to make
scheduled principal payments under its term loan.
At May 31, 2003, the Company had $18.3 million in outstanding debt,
including $10.5 million under a mortgage loan and $7.8 million under a term note
and related revolving credit facility. The Company is required to make periodic
payments under these financing agreements and is also subject to significant
financial and operating covenants contained in these debt agreements as further
described below.
MORTGAGE LOAN
Interest on the Company's mortgage loan accrues at the greater of 10.5% or
the prime rate plus 2.0% and is payable monthly. The outstanding principal under
this loan is due in May 2005. The mortgage loan is secured by a first lien on
the Company's Dallas headquarters and contains a covenant requiring the Company
to have at least $5.0 million in net equity at the end of each of its fiscal
quarters beginning with the quarter ending August 31, 2004. The mortgage loan
also contains cross-default provisions with respect to the Company's 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.
TERM LOAN AND REVOLVING CREDIT AGREEMENT
The Company's credit facility agreement 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 ($17.2 million maximum at May 31, 2003) or a defined
borrowing base comprised primarily of eligible U.S. and U.K. accounts receivable
($0.4 million maximum at May 31, 2003).
The term loan principal is due in equal monthly installments of
approximately $0.3 million through July 2005 with final payments totaling
approximately $0.6 million due in August 2005. 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 May 31, 2003).
Any advances under the revolver loan will accrue interest at the prime rate
plus a margin of 0.5% to 1.5%, or at the 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 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.
Borrowings under the 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 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.
The 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 (as
defined in the credit facilities) in minimum cumulative amounts on a monthly
basis through August 31,
24
2003. While lower amounts are allowed within each fiscal quarter, the Company
must generate cumulative EBITDA of $9.0 million for the twelve-month period
ending 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 $4.0 million for
any fiscal year beginning on or after March 1, 2003 except in certain
circumstances and with the lender's prior approval. As of May 31, 2003, the
Company was in compliance with all financial and operating covenants.
FUTURE COMPLIANCE WITH COVENANTS
The Company believes its cash reserves and internally generated cash flow
along with any cash availability under its revolver loan will be sufficient to
meet its operating cash requirements for the next twelve months. In order to
meet the increasing EBITDA requirements in its credit agreements as described
above, however, the Company will have to continue to increase its revenues
and/or lower its expenses in future quarters as compared to the quarter
completed on May 31, 2003. To comply with the minimum cumulative EBITDA covenant
for the remainder of fiscal 2004, the Company may not incur a loss before
interest, taxes, depreciation and amortization in excess of $4.3 million for the
quarter ending August 31, 2003, and it must generate average EBITDA of at least
$3.7 million per quarter for the two-quarter period ending November 30, 2003 and
average EBITDA of at least $5.1 million per quarter for the three-quarter period
ending February 29, 2004. The Company generated EBITDA of $4.6 million for the
quarter ended May 31, 2003. A reconciliation of net income for the quarter to
EBITDA follows:
($000s)
-------
Net income $ 936
Add back EBITDA elements
Interest 545
Taxes 744
Depreciation and amortization 2,382
------
EBITDA 4,607
======
If the Company is not able to achieve these EBITDA levels and maintain
compliance with its other 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
and to enforce security interests. 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.
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.
25
At May 31, 2003, the Company's outstanding long-term debt was comprised
of the following (in thousands):
May 31, 2003
------------
Mortgage loan, bearing interest payable monthly at the greater
of 10.5% or the prime rate plus 2.0%; principal due May 28, 2005 $10,500
Amortizing term loan, principal due in equal monthly installments of
approximately $0.3 million through July 2005 with final payments totaling
approximately $0.6 million in August 2005; interest payable monthly,
accruing at a rate equal to the prime rate plus 2.75% (7.0% at May 31, 2003) 7,777
-------
$18,277
=======
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 May 31, 2003.
Fiscal
----------------------------------------------
2004 2005 2006
---------- ---------- ----------
(Dollars in thousands)
Long-term debt
variable rate U.S. $ $ 2,500 $ 3,333 $ 12,444
Projected weighted average
interest rate 9.2% 9.6% 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 fiscal year ended February 28, 2003, sales originating from the
Company's U.K. subsidiary represented approximately 34% of consolidated sales.
This percentage is expected to remain materially unchanged for fiscal 2004. 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 variability in the timing of cash flows
associated with its larger contracts where payments are tied to the achievement
of project milestones, and it did not have any such hedge instruments in place
at May 31, 2003. 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.
At May 31, 2003, the Company had an intercompany balance payable to its U.K.
subsidiary totaling approximately $25.7 million. The Company considers such
intercompany balance to be a long-term investment, as defined under the
guidance of Statement of Financial Accounting Standards No. 52 - Foreign
Currency Translation, and management has no plans within the foreseeable future
to pay amounts owed to its U.K. subsidiary. Accordingly, foreign exchange
fluctuations on the balance are recorded as a component of accumulated other
comprehensive loss in the statement of stockholders' equity.
26
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 fiscal year ended February 28, 2003, 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 $3.4 million and a reduction in the net loss of approximately $1.3
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.
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.
While the Company recently implemented certain enhancements to its procedures
and controls for determining and disclosing system backlog, the Company does not
consider such enhancements to be significant changes to its disclosure
procedures and controls. 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
In the matter of Aerotel, Ltd. et al, v. Sprint Corporation, et al, Cause
No. 99-CIV-11091 (SAS), pending in the United States District Court, Southern
District of New York, Aerotel, Ltd., has sued Sprint Corporation alleging that
certain prepaid services offered by Sprint are infringing Aerotel's U.S. Patent
No. 4,706,275 ("275 patent"). According to Sprint, the suit originally focused
on land-line prepaid services not provided by the Company. As part of an
unsuccessful mediation effort, Aerotel also sought compensation for certain
prepaid wireless services provided to Sprint PCS by the Company. As a result of
the mediation effort, Sprint 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 provided certain assistance to Sprint's counsel in
defending against such claims, to the extent they dealt with issues unique to
the system and services provided by the Company. Furthermore, the Company and
Sprint recently entered into an agreement to settle and release the Company from
any obligations to Sprint in connection with the Aerotel litigation. Under the
agreement, the Company will make certain payments, which are not significant to
the Company's consolidated financial position, to Sprint.
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, which were
consolidated into one proceeding, under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and 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 and directors complied with
their obligations under the securities laws, and intends to defend the lawsuit
vigorously. The Company responded to this complaint 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. At the direction of the Court,
the parties attended a mediation with a neutral third-party mediator during June
2003. The mediation did not result in a settlement. All discovery and other
proceedings not related to the dismissal have been stayed pending resolution of
the Company's request to dismiss the amended complaint.
28
Telemac Arbitration
On March 28, 2003 the Company announced a settlement of an arbitration
proceeding in the Los Angeles, California, office of JAMS initiated by Telemac
Corporation ("Telemac") against the Company, InterVoice Brite Ltd. and Brite
Voice Systems, Inc., JAMS Case No. 1220026278. Telemac's allegations arose out
of the negotiation of an Amended and Restated Prepaid Phone Processing Agreement
between Telemac and Brite Voice Systems Group, Ltd., and certain amendments
thereto, under which Telemac licensed prepaid wireless software for use in the
United Kingdom under agreement with O2, formerly BT Cellnet, a provider of
wireless telephony in the United Kingdom. The terms of the settlement included a
cash payment to Telemac, which was not significant to the Company's consolidated
financial condition.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Separation Agreement with Rob-Roy J. Graham dated June 25,
2003(1)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, signed by
David W. Brandenburg(2)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, signed by
Rob-Roy J. Graham(2)
----------
(1) Incorporated by reference to exhibits to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 31, 2003, filed with the SEC on
July 15, 2003.
(2) Filed herewith.
(b) Reports on Form 8-K
1. A report on Form 8-K was filed March 12, 2003 to announce
the Company's intention to review certain intangible assets
for impairment and to announce preliminary sales and other
financial data relating to its fiscal quarter ended
February 28, 2003.
2. A report on Form 8-K was filed March 31, 2003 to announce a
modification and extension of its license and managed
services agreement with Telemac, the settlement of the
Telemac arbitration and the extension of its existing
contract with O2.
3. A report on Form 8-K was filed May 6, 2003 to announce the
Company's financial results for the quarter ended February
28, 2003 and the Company's outlook for the future.
29
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: July 22, 2003 By: /s/ MARK C. FALKENBERG
----------------------
Mark C. Falkenberg
Chief Accounting Officer
30
CERTIFICATIONS
I, David W. Brandenburg, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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: July 22, 2003
/s/ David W. Brandenburg
------------------------------------------
David W. Brandenburg
Chief Executive Officer and Chairman
31
CERTIFICATIONS
I, Rob-Roy J. Graham, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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: July 22, 2003
/s/ Rob-Roy J. Graham
------------------------------------------
Rob-Roy J. Graham
Executive Vice President and
Chief Financial Officer
32
INDEX TO EXHIBITS
EXHIBITS
NO. DESCRIPTION
-------- -----------
10.1 Separation Agreement with Rob-Roy J. Graham dated June 25, 2003.(1)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, signed by
David W. Brandenburg(2)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, signed by
Rob-Roy J. Graham(2)
----------
(1) Incorporated by reference to exhibits to the Company's Quarterly Report
on Form 10-Q for the quarter ended May 31, 2003, filed with the SEC on
July 15, 2003.
(2) Filed herewith.
33