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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
AUGUST 31, 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 34,326,487 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF SEPTEMBER 30, 2003.
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INTERVOICE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AUGUST 31, 2003 FEBRUARY 28, 2003
--------------- -----------------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 37,014 $ 26,211
Trade accounts receivable, net of allowance for
doubtful accounts of $2,619 in fiscal 2004 and
$2,527 in fiscal 2003 22,568 25,853
Inventory 8,568 8,895
Prepaid expenses and other current assets 4,607 5,277
--------- ---------
72,757 66,236
--------- ---------
Property and Equipment
Building 16,830 16,708
Computer equipment and software 34,882 32,660
Furniture, fixtures and other 2,700 2,667
Service equipment 9,151 8,744
--------- ---------
63,563 60,779
Less allowance for depreciation 43,867 40,406
--------- ---------
19,696 20,373
Other Assets
Intangible assets, net of accumulated amortization
of $32,924 in fiscal 2004 and $32,218 in fiscal 2003 7,881 9,326
Goodwill 3,401 3,401
Other assets 1,174 1,655
--------- ---------
$ 104,909 $ 100,991
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 10,995 $ 12,513
Accrued expenses 12,288 12,705
Customer deposits 8,321 9,061
Deferred income 25,313 25,478
Current portion of long term borrowings 3,333 3,333
Income taxes payable 10,513 6,240
--------- ---------
70,763 69,330
Long term borrowings 13,111 15,778
Other long term liabilities 327 856
Deferred income taxes 62 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: 34,310,684 issued and
outstanding in fiscal 2004, 34,111,101
issued and outstanding in fiscal 2003 17 17
Additional capital 66,330 65,144
Accumulated deficit (42,236) (46,768)
Accumulated other comprehensive loss (3,465) (3,410)
--------- ---------
Stockholders' equity 20,646 14,983
--------- ---------
$ 104,909 $ 100,991
========= =========
See notes to consolidated financial statements.
INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
----------------------------------------------------
August 31, August 31, August 31, August 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Sales
Systems $ 20,625 $ 17,905 $ 38,655 $ 39,540
Services 20,982 17,708 41,353 34,489
-------- -------- -------- --------
41,607 35,613 80,008 74,029
-------- -------- -------- --------
Cost of goods sold
Systems 11,271 17,099 22,484 33,217
Services 7,472 7,626 14,202 14,297
-------- -------- -------- --------
18,743 24,725 36,686 47,514
-------- -------- -------- --------
Gross margin
Systems 9,354 806 16,171 6,323
Services 13,510 10,082 27,151 20,192
-------- -------- -------- --------
22,864 10,888 43,322 26,515
Research and development expenses 3,703 6,518 7,574 12,523
Selling, general and administrative expenses 13,091 18,401 26,562 36,094
Amortization of goodwill and acquisition
related intangible assets 705 1,776 1,410 3,552
-------- -------- -------- --------
Income (loss) from operations 5,365 (15,807) 7,776 (25,654)
Other income (expense) 139 (716) (47) (764)
Interest expense (536) (1,555) (1,081) (3,020)
-------- -------- -------- --------
Income (loss) before taxes and the cumulative
effect of a change in accounting principle 4,968 (18,078) 6,648 (29,438)
Income taxes (benefit) 1,372 (1,806) 2,116 (4,487)
-------- -------- -------- --------
Income (loss) before the cumulative effect
of a change in accounting principle 3,596 (16,272) 4,532 (24,951)
Cumulative effect on prior years of a
change in accounting principle --- --- --- (15,791)
-------- -------- -------- --------
Net income (loss) $ 3,596 $(16,272) $ 4,532 $(40,742)
======== ======== ======== ========
Per Basic Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ 0.11 $ (0.48) $ 0.13 $ (0.73)
Cumulative effect on prior years of
a change in accounting principle --- --- --- (0.47)
-------- -------- -------- --------
Net income (loss) $ 0.11 $ (0.48) $ 0.13 $ (1.20)
======== ======== ======== ========
Per Diluted Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ 0.10 $ (0.48) $ 0.13 $ (0.73)
Cumulative effect on prior years of
a change in accounting principle --- --- --- (0.47)
-------- -------- -------- --------
Net income (loss) $ 0.10 $ (0.48) $ 0.13 $ (1.20)
======== ======== ======== ========
See notes to consolidated financial statements.
INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Operating activities
Income (loss) before the cumulative effect of a
change in accounting principle $ 3,596 $(16,272) $ 4,532 $(24,951)
Adjustments to reconcile income (loss)
before the cumulative effect of a change
in accounting principle to net cash provided
by operating activities:
Depreciation and amortization 2,418 4,290 4,800 8,466
Other changes in operating activities 5,738 23,776 6,022 26,617
-------- -------- -------- --------
Net cash provided by operating activities 11,752 11,794 15,354 10,132
-------- -------- -------- --------
Investing activities
Purchases of property and equipment (1,210) (1,847) (2,473) (2,448)
Proceeds from sale of assets 14 --- 14 1,852
-------- -------- -------- --------
Net cash used in investing activities (1,196) (1,847) (2,459) (596)
-------- -------- -------- --------
Financing activities
Paydown of debt (1,833) (3,980) (2,667) (29,980)
Debt issuance costs --- (386) --- (2,018)
Borrowings --- --- --- 24,000
Exercise of stock options 907 42 907 130
-------- -------- -------- --------
Net cash used in financing activities (926) (4,324) (1,760) (7,868)
Effect of exchange rates on cash (420) 515 (332) 817
-------- -------- -------- --------
Increase in cash and cash equivalents 9,210 6,138 10,803 2,485
Cash and cash equivalents, beginning of period 27,804 13,993 26,211 17,646
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 37,014 $ 20,131 $ 37,014 $ 20,131
======== ======== ======== ========
See notes to consolidated financial statements.
INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ACCUMULATED 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 --- --- --- 4,532 --- 4,532
Foreign currency translation
adjustment --- --- --- --- (55) (55)
Extension of stock options --- --- 279 --- --- 279
Exercise of stock options 199,583 --- 907 --- --- 907
----------------------------------------------------------------------------------
Balance at August 31, 2003 34,310,684 $ 17 $ 66,330 $ (42,236) $ (3,465) $20,646
==================================================================================
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED AUGUST 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 August 31, 2003 and 2002
consolidated financial statements have been included. Operating results for the
three and six month periods ended August 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 second quarters of fiscal 2004 and 2003 was $3.4 million
and $(15.3) million, respectively. For the six month periods ended August 31,
2003 and 2002, total comprehensive income (loss) was $4.5 million and ($38.7)
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.
NOTE C - INVENTORIES
Inventories consist of the following (in thousands):
August 31, 2003 February 28, 2003
--------------- -----------------
Purchased parts $ 4,020 $ 4,906
Work in progress 4,548 3,989
------------- -------------
$ 8,568 $ 8,895
============= =============
NOTE D - 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. Virtually all such
charges were paid during the first and second quarter of fiscal 2004.
During the quarter ended August 31, 2003, the Company's chief financial
officer resigned to pursue other opportunities. The Company incurred cash and
non-cash charges totaling approximately $0.5 million and $0.3 million,
respectively, during the quarter under the terms of a separation agreement
executed in connection with the officer's resignation. Such charges are included
in selling, general and administrative expenses for the quarter. All cash
charges were paid as of August 31, 2003.
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.
During the quarter ended August 31, 2002, the Company incurred special
charges of approximately $10.1 million, including $2.8 million for severance
payments and related benefits associated with a workforce reduction affecting
approximately 120 employees, $0.4 million associated with the closing of a
portion of its leased facilities in Manchester, United Kingdom, $2.2 million for
the write down of excess inventories and $4.7 million associated with two loss
contracts. The severance and related costs were associated with the Company's
consolidation of its separate Enterprise and Networks divisions into a single,
unified organizational structure. The downsizing of the leased space in
Manchester followed from the Company's decision to consolidate virtually all of
its manufacturing operations into its Dallas, Texas facilities. The inventory
adjustments reflected the Company's continuing assessment of its inventory
levels in light of short term sales projections, the decision to eliminate the
UK manufacturing operation and the consolidation of the business units discussed
above. The charges for loss contracts reflected the costs incurred during the
second quarter on two contracts, which are expected to result in net losses to
the Company upon completion. The charges included costs actually incurred during
the quarter as well as an accrual of the amounts by which total contract costs
were expected to exceed total contract revenue.
Accrued expenses and other long-term liabilities at February 28, 2003
included amounts associated with certain special charges incurred during fiscal
2003, including those discussed above, and fiscal 2002. Activity during the
first six months of fiscal 2004 related to such accruals was as follows (in
thousands):
Accrued Balance Revisions Accrued Balance
February 28, 2003 Payments to Estimates August 31, 2003
----------------- ----------- ------------ ---------------
Severance and related charges $ 466 $ (177) $ (116) $ 173
Future lease costs for properties
no longer being used $ 1,896 $ (454) $ (13) $ 1,429
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.
NOTE E - LONG-TERM BORROWINGS
At August 31, 2003 and February 28, 2003 the Company's long-term debt
was comprised of the following (in thousands):
August 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 $ 9,500 $ 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%
(6.75% at August 31, 2003) 6,944 8,611
---------- ---------
Total debt outstanding 16,444 19,111
Less: current portion (3,333) (3,333)
---------- ---------
Long-term debt, net of current portion $ 13,111 $ 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. The Company made an elective principal payment of $1.0 million
during the quarter ended August 31, 2003.
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 ($18.1
million maximum at August 31, 2003) or a defined borrowing base comprised
primarily of eligible U.S. and U.K. accounts receivable ($1.2 million maximum at
August 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 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 was required to generate
cumulative earnings before interest, taxes, depreciation and amortization,
EBITDA, (as defined in the credit agreement) of at least $9.0 million for the
twelve-month period ended August 31, 2003, and is required to generate 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 except in certain circumstances and with the lender's prior
approval. As of August 31, 2003, the Company was in compliance with all
financial and operating covenants.
NOTE F - INCOME TAXES
For the six-months ended August 31, 2003, the Company recognized
current income tax expense on the pretax income of certain foreign subsidiaries.
The Company anticipates that any taxable income it earns during fiscal 2004 in
its U.S. operations will be offset by net operating losses carried forward from
prior years. Because the Company has provided a valuation reserve against all
such potential net operating loss carryforward benefit in prior years, the
Company does not expect and has not provided any net income tax expense or
benefit for the six months ended August 31, 2003 related to its U.S. operations.
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.
For the quarter ended August 31, 2002, the Company recognized a tax
benefit on the pretax losses of certain foreign subsidiaries because the Company
believed it would be able to realize the tax benefit of those losses by
offsetting them against taxable income of a prior year. The Company did not
recognize a current benefit associated with its domestic pretax losses, because
it had exhausted its ability to offset such losses against taxable income of
prior years, and the occurrence of losses prevented it from concluding that it
was more likely than not that such benefit would be realized.
NOTE G - EARNINGS PER SHARE AND STOCK COMPENSATION
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
(in thousands except per share data) 2003 2002 2003 2002
---------- ----------- ---------- -----------
Numerator:
Income (loss) before the cumulative
effect of a change in accounting
principle $ 3,596 $ (16,272) $ 4,532 $ (24,951)
Cumulative effect on prior years of
a change in accounting principle --- --- --- (15,791)
------- ---------- ------- ----------
Net income (loss) $ 3,596 $ (16,272) $ 4,532 $ (40,742)
------- ---------- ------- ----------
Denominator:
Denominator for basic
earnings per share 34,195 34,067 34,153 34,053
Dilutive potential common shares
Employee stock options 554 --- 661 ---
Outstanding warrants 621 --- --- ---
------- ---------- ------- ----------
Denominator for diluted
earnings per share 35,370 34,067 34,814 34,053
------- ---------- ------- ----------
BASIC:
Income (loss) before the cumulative
effect of a change in
accounting principle $ 0.11 $ (0.48) $ 0.13 $ (0.73)
Cumulative effect on prior years of
a change in accounting principle --- --- --- (0.47)
------- ---------- ------- ----------
Net income (loss) $ 0.11 $ (0.48) $ 0.13 $ (1.20)
======= ========== ======= ==========
DILUTED:
Income (loss) before the cumulative
effect of a change in
accounting principle $ 0.10 $ (0.48) $ 0.13 $ (0.73)
Cumulative effect on prior years of
a change in accounting principle --- --- --- (0.47)
------- ---------- ------- ----------
Net income (loss) $ 0.10 $ (0.48) $ 0.13 $ (1.20)
======= ========== ======= ==========
Options to purchase 5,112,334 and 6,227,644 shares of common stock at
an average exercise price of $9.21 and $8.44 were outstanding during the three
and six month periods ended August 31, 2003, respectively, but were not included
in the computation of diluted earnings per share for these periods as the effect
would have been antidilutive because the options' exercise prices were greater
than the average price of the Company's common shares during such periods.
Warrants to purchase 621,304 shares at an exercise price of $4.0238 per share
were not included in the calculation for the six months ended August 31, 2003
because they would have been antidilutive for the same reason.
Options to purchase 5,538,165 and 5,537,517 shares of common stock at
an average exercise price of $9.03 and warrants to purchase 621,304 shares of
common stock at an exercise price of $4.0238 per share were outstanding during
the three and six month periods ended August 31, 2002, respectively, but were
not included in the computation of diluted earnings per share for these periods
because the effect would have been antidilutive given the Company's loss for the
quarter and six month period. In addition, the Company's convertible notes plus
accrued interest were convertible at the option of the note holders
into 1,617,342 shares at an exercise price of $6.184 per share during the three
and six month periods ended August 31, 2002 but were excluded from the
computation of diluted earnings per share for the quarter and six month period
given the Company's loss for such periods. The convertible notes and related
accrued interest were redeemed in full for cash in September 2002.
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 Six Months Ended
August 31, August 31, August 31, August 31,
2003 2002 2003 2002
---------- ----------- ---------- -----------
Net income (loss), as reported $ 3,596 $ (16,272) $ 4,532 $ (40,742)
Add stock compensation expense included
in net income 279 -- 279 --
Less total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of tax (911) (608) (910) (1,193)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 2,964 $ (16,880) $ 3,901 $ (41,935)
========== ========== ========== ==========
Net income (loss) per share:
Basic - as reported $ 0.11 $ (0.48) $ 0.13 $ (1.20)
Diluted - as reported $ 0.10 $ (0.48) $ 0.13 $ (1.20)
Basic - pro forma $ 0.09 $ (0.50) $ 0.11 $ (1.23)
Diluted - pro forma $ 0.08 $ (0.50) $ 0.11 $ (1.23)
The pro forma stock-based compensation expense and related per share
data shown above are estimated using a Black-Scholes option pricing model. The
Black-Scholes model was developed for use in estimating the fair value of
publicly traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different form those of publicly traded options, and because changes in the
subjective input assumptions can materially affect the estimate of the fair
value of stock-based compensation, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of such
compensation.
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 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 and
six month periods ended August 31, 2003 and 2002 were as follows (in thousands):
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
IVR/portal system sales
(Enterprise system
sales in fiscal 2003) $14,970 $11,258 $27,345 $23,568
Messaging system sales
(included in Network
system sales in fiscal 2003) 1,350 --- 3,143 ---
Payment system sales
(included in Network
system sales in fiscal 2003) 4,305 --- 8,167 ---
Network system sales --- 6,647 --- 15,972
------- ------- ------- -------
Total system sales 20,625 17,905 38,655 39,540
------- ------- ------- -------
Maintenance and related services sales 14,285 12,732 27,870 24,757
Managed service sales 6,697 4,976 13,483 9,732
------- ------- ------- -------
Total services sales 20,982 17,708 41,353 34,489
------- ------- ------- -------
Total Company sales $41,607 $35,613 $80,008 74,029
======= ======= ======= =======
Amounts shown for the six months ended August 31, 2003 for IVR/Portal
and Payment system sales reflect the reclassification of $0.5 million and $2.3
million, respectively, of sales originally classified as Messaging sales for the
quarter ended May 31, 2003.
GEOGRAPHIC OPERATIONS
Revenues are attributed to geographic locations based on locations of
customers. The Company's net sales by geographic area for the three and six
month periods ended August 31, 2003 and 2002 were as follows (in thousands):
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
North America $ 24,774 $ 20,657 $ 49,018 $ 43,080
Europe, Middle East and Africa 13,975 12,526 27,169 26,500
Pacific Rim 764 442 1,160 962
Central and South America 2,094 1,988 2,661 3,487
-------- -------- -------- --------
Total $ 41,607 $ 35,613 $ 80,008 $ 74,029
======== ======== ======== ========
CONCENTRATION OF REVENUE
There were no customers accounting for 10% or more of the Company's
total sales during the three-month period ended August 31, 2003. Sales to one
customer, O2, which has purchased both systems and managed services from the
Company, accounted for approximately 11% of the Company's total sales for the
three-month period ended August 31, 2002 and for 10% and 11% of the Company's
total sales during the six-month periods ended August 31, 2003 and 2002,
respectively. There were no other customers accounting for 10% or more of the
Company's sales during the six month periods ended August 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, if appropriate, 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 assert claims of infringement against the
Company.
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 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.
LITIGATION
David Barrie, et al., on Behalf of Themselves and All Others Similarly
Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, originally filed
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 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
claimed 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
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 vigorously defended the
lawsuit. The Company responded to the 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 class action complaint on September 23,
2002. The Company filed a motion to dismiss the amended complaint, and
plaintiffs filed a response in opposition to the Company's
motion to dismiss. On September 15, 2003, the Court granted the Company's motion
to dismiss the amended class action complaint. Unlike the Court's prior order
dismissing the original class action complaint, the order dismissing the amended
complaint did not grant plaintiffs an opportunity to reinstate the lawsuit by
filing a new amended complaint. On October 9, 2003, the Plaintiffs filed a
notice of appeal to the Fifth Circuit Court of Appeals from the trial court's
order of dismissal entered on September 15, 2003.
OTHER MATTERS
The Company is a defendant from time to time in lawsuits incidental to
its business. Other than the matter discussed above, the Company is not a party
to any lawsuit that potentially could be considered material to the Company's
financial position or results of operations as of the date of this filing. There
can be no assurance that expenses, including any potential settlements or
judgments, related to any lawsuits that might arise in the future would not be
material to the Company's financial position or results of operations.
The Company has employment agreements with three executive officers.
Two of these agreements require 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 with such agreements 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. The third employment agreement requires that in the
event the officer's services are terminated without cause, the Company either
must make termination payments to the officer of one times the officer's annual
base compensation and accelerate vesting on 33,333 shares of Company common
stock covered by a stock option or make termination payments to the officer of
two times the officer's annual base compensation. If the officer covered by this
agreement were terminated during 2004, the Company would be required to make
payments ranging from $0.2 million to $0.5 million.
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:
- Prior to fiscal 2004, the Company experienced operating
losses, and it 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
$3.6 million and $4.5 million for the quarter and six months
ended August 31, 2003, respectively, 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.
- The Company has significant obligations 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 and revolving credit 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. In addition, the financing
agreements contain significant financial covenants, operating
covenants and default provisions. If the Company at any time
defaults on any of its payment or other obligations under any
financing agreement, the secured creditors can accelerate all
indebtedness outstanding under the facilities and foreclose on
substantially all of the Company's assets. 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. See "Liquidity and
Capital Resources" in this Item 2 for a discussion of the
Company's liquidity and ability to meet its obligations under
its financing agreements.
- The general economic climate remains uncertain. 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. While the Company enjoyed revenue
growth during its quarter ended August 31, 2003, there is
still concern that demand for the types of products offered by
the Company may remain soft for some period of time as a
result of domestic and global economic and political
conditions.
- 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.
- The Company is subject to potential lawsuits and other claims.
The Company is subject to certain potential lawsuits and other
claims as discussed in "Note I - Contingencies" in Item 1 of
Part I of this Quarterly Report on Form 10-Q. Except for the
litigation discussed in Note I, the Company is not a party to
any lawsuit that potentially could be considered material to
the Company's financial position or results of operations as
of the date of this filing. There can be no assurance that
expenses, including any potential settlements or judgments,
related to any lawsuits that might arise in the future would
not be material to the Company's financial position or results
of operations.
- 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.
- The Company may not be able to retain its customer base and,
in particular, its more significant customers. 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.
- 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 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.
- 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.
- 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, 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.
- 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.
- 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 40% and 42% in fiscal
quarters ended August 31, 2003 and 2002, respectively.
International sales are subject to certain risks, including:
- fluctuations in currency exchange rates;
- the difficulty and expense of maintaining foreign
offices and distribution channels;
- tariffs and other barriers to trade;
- greater difficulty in protecting and enforcing
intellectual property rights;
- general economic and political conditions in each
country;
- loss of revenue, property and equipment from
expropriation;
- import and export licensing requirements; and
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 second quarter and first six months of
fiscal 2004 were $41.6 million and $80.0 million, respectively, an increase of
$6.0 million (17%) and $6.0 million (8%), respectively, as compared to the same
periods of fiscal 2003. Total system sales increased $2.7 million (15%) for the
second quarter of fiscal 2004 as compared to the same period of fiscal 2003,
while service sales increased $3.3 million (18%) for the same time frames. For
the six-month period ended August 31, 2003, total system sales decreased $0.9
million (2%) as compared to the same period of fiscal 2003,
while services sales increased $6.9 million (20%) for the same time frames.
Services sales during the second quarter and first six months of fiscal 2004
included $2.1 million and $4.0 million, respectively, relating to services
performed for an international managed services customer for which the Company
recognizes revenue on a cash basis. There were no revenues from this customer
during the first six months of fiscal 2003.
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 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 and six months ended August 31, 2003 and
2002 were as follows (in thousands):
Three Months Ended Six Months Ended
---------------------------- ---------------------------
August 31, August 31, August 31, August 31
2003 2002 2003 2002
----------- ----------- ----------- -----------
IVR/portal system sales
(Enterprise system sales in fiscal 2003) $ 14,970 $ 11,258 $ 27,345 $ 23,568
Messaging system sales (included in
Network system sales in fiscal 2003) 1,350 --- 3,143 ---
Payment system sales (included in Network
system sales in fiscal 2003) 4,305 --- 8,167 ---
Network system sales --- 6,647 --- 15,972
----------- ----------- ----------- -----------
Total system sales 20,625 17,905 38,655 39,540
----------- ----------- ----------- -----------
Maintenance and related services sales 14,285 12,732 27,870 24,757
Managed service sales 6,697 4,976 13,483 9,732
----------- ----------- ----------- -----------
Total services sales 20,982 17,708 41,353 34,489
----------- ----------- ----------- -----------
Total Company sales $ 41,607 $ 35,613 $ 80,008 $ 74,029
=========== =========== =========== ===========
Amounts shown for the six months ended August 31, 2003 for IVR/Portal
and Payment system sales reflect the reclassification of $0.5 million and $2.3
million, respectively, of sales originally classified as Messaging sales for the
quarter ended May 31, 2003.
As identified in the preceding chart, the Company's sale of IVR/portal
systems for the quarter and six months ended August 31, 2003 grew $3.7 million
(33%) and $3.8 million (16%), respectively, over corresponding periods for
fiscal 2003. These gains were offset, particularly for the six month period, by
softness in the sales of messaging and payment systems. The sale of such systems
continues to be affected by 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 results from a combination of growth in
the sale of maintenance and related services and the impact of the cash basis
managed services recognized during the second quarter and first six months of
fiscal 2004 as compared to the same periods for fiscal 2003. The Company
recognized revenues from the cash basis managed services customer referred to
above totaling $1.9 million and $2.1 million during the quarters ended May 31,
2003, and August 31, 2003, respectively. The Company anticipates earning up to
$1.8 million in additional managed service revenues from this customer under its
current contract, which expires November 30, 2003, but the timing
of any such revenue recognition remains uncertain. The Company has begun
negotiations with its customer regarding a potential extension of the contract,
but the Company cannot predict the outcome of such negotiations at this time.
Sales to one customer, O2, which has purchased both systems and ASP
managed services from the Company, accounted for approximately 9% and 11% of the
Company's total sales during the quarters ended August 31, 2003 and 2002,
respectively and for approximately 10% and 11% of the Company's total sales
during the six-month periods ended August 31, 2003 and 2002, respectively. There
were no other customers accounting for 10% or more of the Company's sales during
the three or six month periods ended August 31, 2003 and 2002.
International sales comprised 40% of the Company's total sales during
the second quarter of fiscal 2004, down slightly from 42% during the second
quarter of fiscal 2003. For the first six months of fiscal 2004, international
sales comprised 39% of the Company's total sales, down from 42% during the same
period of fiscal 2003. International sales for the second quarter of fiscal 2004
were up $1.9 million over fiscal 2003 second quarter amounts and were even with
prior year amounts for the six month period ended August 31, 2003, but declined
as a percentage of total sales as the Company's North American sales grew at a
faster rate.
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 August 31, 2003, sales from service and support
contracts, including contracts for managed services, comprised approximately 50%
of the Company's total sales, while sales from beginning systems backlog
comprised approximately 35% of total sales and sales from the quarter's pipeline
activity comprised approximately 15% of total sales. For the quarter ended
August 31, 2002, sales from service and support contracts, sales from beginning
systems backlog and sales from the quarter's pipeline activity comprised
approximately 50%, 32% and 18% 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 August 31, 2003, May 31, 2003, February 28, 2003
and November 30, 2002, the Company's backlog of systems sales was approximately
$30.1 million, $29.5 million, $33.5 million and $29.5 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 August 31, 2003, the Company's chief
financial officer resigned to pursue other opportunities. The Company recorded
cash and non-cash charges totaling approximately $0.5 million and $0.3 million,
respectively, during the quarter under the terms of a separation agreement
executed in connection with the resignation. The charges were included in
selling, general and administrative expenses for the quarter. All cash charges
were paid during the quarter.
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.
During the quarter ended August 31, 2002, the Company incurred special
charges of approximately $10.1 million, including $2.8 million for severance
payments and related benefits associated with a workforce reduction affecting
approximately 120 employees, $0.4 million associated with the closing of a
portion of its leased facilities in Manchester, United Kingdom, $2.2 million for
the write down of excess inventories and $4.7 million associated with two loss
contracts. The severance and related costs were associated with the Company's
consolidation of its separate Enterprise and Networks divisions into a single,
unified organizational structure. The downsizing of the leased space in
Manchester followed from the Company's decision to consolidate virtually all of
its manufacturing operations into its Dallas, Texas facilities. The inventory
adjustments reflected the Company's continuing assessment of its inventory
levels in light of short term sales projections, the decision to eliminate the
UK manufacturing operation and the consolidation of the business units discussed
above. The charges for loss contracts reflected the costs incurred during the
second quarter on two contracts, which were expected to result in net losses to
the Company upon completion. The charges included costs actually incurred during
the quarter as well as an accrual of the amounts by which total contract costs
were expected to exceed total contract revenue. The net effect of all special
charges for the second quarter of fiscal 2003 was to increase cost of goods
sold, research and development and selling, general and administrative expenses
by $7.7 million, $0.4 million and $2.0 million, respectively.
During the quarter ended May 31, 2002, the Company incurred special
charges of approximately $2.8 million, including $2.4 million for severance
payments and related benefits, 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 second quarter and first six
months of fiscal 2004 was approximately $18.7 million or 45.0% of sales and
$36.7 million or 45.9% of sales, respectively. This compares to $24.7 million or
69.4% of sales and $47.5 million or 64.2% of sales for the second quarter and
first six months of fiscal 2003. As described above, the Company incurred
special charges to cost of goods sold during the first six months of fiscal 2004
totaling $0.6 million or 0.8% of sales. It incurred special charges to cost of
goods sold totaling $7.7 million or 21.6% of sales during the second quarter of
fiscal 2003 and $9.1 million or 12.3% of sales during the first six months of
fiscal 2003. Cost of goods sold on system sales was $11.3 million (54.6%) and
$22.5 million (58.1%) for the second quarter and first six months of fiscal
2004, respectively, as compared to $17.1 million (95.5%) and $33.2 million
(84.0%) for the same periods of fiscal 2003. This decrease results from the
Company's cost cutting initiatives as well as from differences in the sales
channel mix over the time frames. In addition, the second quarter fiscal 2003
Special Charges related to loss contracts and inventory writedowns, discussed in
Special Charges above, adversely affected systems cost of goods sold in fiscal
2003. Cost of goods sold on service sales was $7.5 million (35.6%) and $14.2
million (34.3%) for the second quarter and first six months of fiscal 2004,
respectively, as compared to $7.6 million (43.1%) and $14.3 million (41.4%) for
the same periods of fiscal 2003. This improvement resulted from a combination of
efficiency gains, as the Company served a larger customer base while holding
costs in fiscal 2004 to fiscal 2003 levels, and the
effect on the calculation of the cash basis managed services revenue recognized
during the second quarter and first six months of fiscal 2004.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the
second quarter and first six months of fiscal 2004 were approximately $3.7
million, or 8.9% of total Company sales, and $7.6 million, or 9.5% of sales,
respectively. During the second quarter and first six months of the previous
fiscal year, research and development expenses were $6.5 million, or 18.3% and
$12.5 million or 16.9%, respectively, of the Company's total sales. The Company
incurred R&D charges described above in "Special Charges" totaling $0.4 million
(1.1% of total sales) during the second quarter of fiscal 2003, and $0.2 million
(0.3%) and $0.9 million (1.2%) during the first six months of fiscal 2004 and
fiscal 2003, respectively. Expenses were down from fiscal 2003 as a result of
the Company's cost reduction initiatives and the reassignment of certain
resources from R&D to direct customer service activities (cost of goods sold) in
connection with the Company's fiscal 2003 reorganization.
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 second quarter and first six months of fiscal
2004 were approximately $13.1 million, or 31.5% of total Company sales, and
$26.6 million, or 33.2% of sales, respectively. SG&A expenses during the second
quarter and first six months of fiscal 2003 were $18.4 million, or 51.7% and
$36.1 million or 48.8%, respectively, of the Company's total sales. The Company
incurred SG&A charges described above in "Special Charges" totaling $0.8 million
(1.9%) and $2.0 million (5.6%) during the second quarter of fiscal 2004 and
2003, respectively, and $1.4 million (1.8%) and $2.7 million (3.6%) during the
first six months of fiscal 2004 and 2003, respectively. SG&A expenses have
decreased from the same periods last year primarily as a result of cost control
initiatives implemented by the Company.
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 and $1.4 million for the second quarter and first
six months of fiscal 2004, down from $1.8 million and $3.6 million for the
second quarter and first six months 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 $ 1,519
Fiscal 2005 $ 1,656
Fiscal 2006 $ 1,170
Fiscal 2007 $ 1,101
Fiscal 2008 $ 1,101
INTEREST EXPENSE. Interest expense was $0.5 million and $1.1 million during the
second quarter and first six months of fiscal 2004, versus $1.6 and $3.0 million
for the same periods of fiscal 2003. The reduction relates to two factors.
First, the Company's outstanding debt as of the beginning 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 $0.7 million for
the write off of debt issuance costs associated with a term loan and revolving
credit agreement retired as part of the Company's fiscal 2003 debt restructuring
activities. There were no such expenses during the first six months of fiscal
2004.
INCOME TAXES (BENEFIT). For the six-months ended August 31, 2003, the Company
recognized current income tax expense on the pretax income of certain foreign
subsidiaries. The Company anticipates that any taxable income it earns during
fiscal 2004 in its U.S. operations will be offset by net operating losses
carried forward from prior years. Because the Company has provided a valuation
reserve against all such potential net operating loss carryforward benefit in
prior years, the Company does not expect and has not provided any net income tax
expense or benefit for the six months ended August 31, 2003 related to its U.S.
operations.
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 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.
For the quarter ended August 31, 2002, the Company recognized a tax
benefit on the pretax losses of certain foreign subsidiaries because the Company
believed it would be able to realize the tax benefit of
those losses by offsetting them against taxable income of a prior year. The
Company did not recognize a current benefit associated with its domestic pretax
losses, because it had exhausted its ability to offset such losses against
taxable income of prior years, and the occurrence of losses prevented it from
concluding that it was more likely than not that such benefit would be realized.
INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). The Company generated
operating income of $5.4 million and net income of $3.6 million during the
second quarter of fiscal 2004. During the second quarter of fiscal 2003, the
Company generated an operating loss of $15.8 million and a net loss of $16.3
million. For the six months ended August 31, 2003, the Company generated
operating income of $7.8 million and net income of $4.5 million compared to an
operating loss of $25.7 million, a loss before the cumulative effect of a change
in accounting principle of $25.0 million and a net loss of $40.7 million for the
six month period ended August 31, 2002. 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. The Company's improved financial performance for
the quarter and six months ended August 31, 2003 over similar periods for fiscal
2003 reflects the significant reduction in special charges, which in fiscal 2003
included the Company's extensive restructuring activities, a reduction in the
level of ongoing operating expenses as a result of such restructuring and the
growth in the Company's services revenues in fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES. The Company had approximately $37.0 million in
cash and cash equivalents at August 31, 2003, while borrowings under the
Company's long-term debt facilities totaled $16.4 million. The Company's cash
balances increased $9.2 million during the three months ended August 31, 2003,
with operating activities providing $11.8 million of cash, net investing
activities using $1.2 million of cash and net financing activities using $0.9
million of cash.
Operating cash flow for the quarter ended August 31, 2003 was favorably
impacted by the Company's continued profitability in the quarter, including its
collection of $2.1 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 improved its days sales outstanding (DSOs) of accounts receivable to 49
days, down significantly from the May 31, 2003 level of 62 days. Inventories
were up $0.7 million from ending first quarter balances but were still $0.3
million below ending fiscal 2003 levels. Operating cash flow for the second
quarter also benefited from the receipt of $2.2 million in fiscal 2002 tax
refunds relating to the Company's UK subsidiary.
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 $5.1 million (22.6% of total net receivables) at
August 31, 2003, up $0.2 million from February 28, 2003. The Company expects to
bill and collect unbilled receivables as of August 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 $2.1 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 half 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.
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 third quarter of fiscal 2004.
The Company used $1.2 million of cash to purchase additional equipment
during the quarter ended August 31, 2003 and used $0.8 million of cash to make
scheduled principal payments under its term loan. It also used $1.0 million to
make a discretionary principal payment of a portion of its mortgage loan.
At August 31, 2003, the Company had $16.4 million in outstanding debt,
including $9.5 million under a mortgage loan and $6.9 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 ($18.1 million maximum at August 31, 2003) or a
defined borrowing base comprised primarily of eligible U.S. and U.K. accounts
receivable ($1.2 million maximum at August 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% (6.75% as of August 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 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 was required to generate
cumulative earnings before interest, taxes, depreciation and amortization,
EBITDA, (as defined in the credit facilities) of at least $9.0 million for the
twelve-month period ended August 31, 2003, and is required to generate 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 except in certain circumstances and with the lender's prior
approval. As of August 31, 2003, the Company was in compliance with all
financial and operating covenants.
The Company is considering the refinancing or early retirement of some
or all of the amounts outstanding under its mortgage loan and/or its term loan
and revolving credit agreement. Under its existing agreements, the Company must
pay a 1% prepayment fee in connection with any retirement of amounts outstanding
under its mortgage loan that occur prior to May 30, 2004. The Company may prepay
amounts outstanding under its term loan without penalty, but the Company is
subject to fees of up to $0.5 million should it terminate its revolving credit
facility prior to August 2005. The Company has $0.9 million in unamortized debt
issue costs included in prepaid expenses and other noncurrent assets as of
August 31, 2003 which it expects to expense over the term of the related
indebtedness. The non-cash amortization of such costs may be accelerated in the
event the Company completes a refinancing or early repayment of its debt. The
Company is under no obligation to amend its debt agreements and has made no
formal decisions regarding any such amendment as of the date of this filing.
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 sustain the average operating results
it has achieved for the six months ended August 31, 2003. To comply with the
minimum cumulative EBITDA covenant for the next twelve months, the Company may
not incur a loss before interest, taxes, depreciation and amortization in excess
of $0.5 million for the quarter ending November 30, 2003, and it must generate
average EBITDA of at least $3.7 million per quarter for the two-quarter period
ending February 29, 2004, average EBITDA of at least $5.7 million per quarter
for the three-quarter period ending May 31, 2004, and average EBITDA of at least
$6.3 million for the four-quarter period ending August 31, 2004. The Company
generated EBITDA of $7.9 million and $12.5 million for the quarter and
six months ended August 31, 2003, respectively. A reconciliation of net income
to EBITDA for the quarter and six months ended August 31, 2003 follows (in
thousands):
Quarter Six Months
Ended Ended
August 31, 2003 August 31,2003
--------------- --------------
Net income $ 3,596 $ 4,532
Add back EBITDA elements
Interest 536 1,081
Taxes 1,372 2,116
Depreciation and amortization 2,418 4,800
------------ ------------
EBITDA $ 7,922 $ 12,529
============ ============
If the Company is not able to achieve the required 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.
At August 31, 2003, the Company's outstanding long-term debt was comprised of
the following (in thousands):
August 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 $ 9,500
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% (6.75% at August 31, 2003) 6,944
--------
$ 16,444
========
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 August 31,
2003.
Fiscal
-------------------------------
2004 2005 2006
------ ------ -------
(Dollars in thousands)
Long-term debt-variable rate U.S. $1,667 $3,333 $11,444
Projected weighted average
interest rate 9.1% 9.5% 9.9%
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 August
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 August 31, 2003, the Company had an intercompany balance payable to
its U.K. subsidiary totaling approximately $32.9 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.
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-15(e) and 15d-15(e) promulgated
under the Securities Exchange Act of 1934) as of August 31, 2003. Based on that
review and evaluation, which included inquiries made to certain other employees
of the Company, the chief executive officer and chief financial officer have
concluded that the Company's current disclosure controls and procedures, as
designed and implemented, are reasonably adequate to ensure that they are
provided with material information relating to the Company required to be
disclosed in the reports the Company files or submits under the Securities
Exchange Act of 1934. There has been no change in the Company's internal control
over financial reporting identified in connection with that evaluation that
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
David Barrie, et al., on Behalf of Themselves and All Others Similarly
Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, originally filed
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 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
claimed 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
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 vigorously defended the
lawsuit. The Company responded to the 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 class action complaint on September 23,
2002. The Company filed a motion to dismiss the amended complaint, and
plaintiffs filed a response in opposition to the Company's motion to dismiss. On
September 15, 2003, the Court granted the Company's motion to dismiss the
amended class action complaint. Unlike the Court's prior order dismissing the
original class action complaint, the order dismissing the amended complaint did
not grant plaintiffs an opportunity to reinstate the lawsuit by filing a new
amended complaint. On October 9, 2003, the Plaintiffs filed a notice of appeal
to the Fifth Circuit Court of Appeals from the trial court's order of dismissal
entered on September 15, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held at 10:00
a.m., local time, on Wednesday, August 20, 2003 in Richardson, Texas.
Proxies were solicited by the Board of Directors of the Company
pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was
no solicitation in opposition to the Board of Directors nominees as listed in
the proxy statement and all such nominees were duly elected. The following
persons are the nominees of the Board of Directors who were elected as directors
at the annual meeting: David W. Brandenburg, Joseph J. Pietropaolo, George C.
Platt, Grant A. Dove, Jack P. Reily and Gerald F. Montry. The number of votes
cast for the election of each of the nominees for director, and the number of
abstentions, were as follows: 31,292,627 votes for the election of David W.
Brandenburg, with 148,818 abstentions; 30,853,920 votes for the election of
Joseph J. Pietropaolo, with 587,525 abstentions; 28,074,065 votes for the
election of George C. Platt, with 3,367,380 abstentions; 30,820,579 votes for
the election of Grant A. Dove, with 620,866 abstentions; 30,923,340 votes for
the election of Jack P. Reily,
with 518,105 abstentions; and 31,300,485 votes for the election of Gerald F.
Montry, with 140,960 abstentions. No votes were cast against the election of any
nominee for director.
The second matter voted on and approved by the shareholders, was a
resolution to approve an amendment to the Company's Employee Stock Purchase Plan
(the "Plan") to increase from 1,500,000 to 2,000,000 the aggregate number of
shares authorized for issuance under the Plan. The number of votes cast for the
adoption of the resolution to amend the Plan was 18,094,961, the number of votes
cast against the adoption of the resolution to amend the Plan was 1,168,874 and
the number of abstentions was 76,392.
The last matter voted on and approved by the shareholders, was a
resolution to approve the Company's 2003 Stock Option Plan. The number of votes
cast for the adoption of the resolution to approve the 2003 Stock Option Plan
was 17,029,724, the number of votes cast against the adoption of the resolution
to approve the 2003 Stock Option Plan was 2,109,063 and the number of
abstentions was 201,440.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Intervoice, Inc. Employee Stock Purchase Plan, as amended
and restated effective June 24, 2003 (1).
10.2 Intervoice, Inc. 2003 Stock Option Plan. (1)
10.3 Employment Agreement with Craig E. Holmes effective August
27, 2003. (1)
31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1)
32.1 Certification by Chief Executive Officer of Periodic Report
Pursuant to 18 U.S.C. Section 1350. (1)
32.2 Certification by Chief Financial Officer of Periodic Report
Pursuant to 18 U.S.C. Section 1350. (1)
(b) Reports on Form 8-K
1. A report on Form 8-K was filed on June 10, 2003 to update
first quarter fiscal 2004 revenue outlook and to announce
intention to file a Form 10-K/A for the year ended February
28, 2003 and a separate Form 10- Q/A for the quarter ended
November 30, 2002.
2. A report on Form 8-K was filed on June 26, 2003 to announce
the upcoming resignation of Chief Financial Officer,
Rob-Roy J. Graham, and to disclose terms of the related
separation agreement.
3. A report on Form 8-K was filed on June 26, 2003 to announce
the Company's first quarter fiscal 2004 earnings release.
---------------
(1) Filed herewith.
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: October 14, 2003 By: /s/ MARK C. FALKENBERG
----------------------
Mark C. Falkenberg
Chief Accounting Officer
INDEX TO EXHIBITS
EXHIBITS
NO. DESCRIPTION
-------- -----------
10.1 Intervoice, Inc. Employee Stock Purchase Plan, as amended and
restated effective June 24, 2003 (1).
10.2 Intervoice, Inc. 2003 Stock Option Plan. (1)
10.3 Employment Agreement with Craig E. Holmes effective August 27, 2003.(1)
31.1 Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (1)
31.2 Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (1)
32.1 Certification by Chief Executive Officer of Periodic Report Pursuant
to 18 U.S.C. Section 1350. (1)
32.2 Certification by Chief Financial Officer of Periodic Report Pursuant
to 18 U.S.C. Section 1350. (1)
----------------------
(1) Filed herewith.