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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
MAY 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-13616
INTERVOICE-BRITE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1927578
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17811 WATERVIEW PARKWAY, DALLAS, TX 75252
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
972-454-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
THE REGISTRANT HAD 33,200,717 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT.
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INTERVOICE-BRITE, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
May 31, 2001 February 28, 2001
------------- -----------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 12,253 $ 15,901
Trade accounts receivable, net of allowance for
doubtful accounts of $3,613 in fiscal 2002 and
$3,642 in fiscal 2001 71,733 72,148
Income tax receivable 3,323 3,323
Inventory 34,653 40,184
Prepaid expenses and other current assets 7,346 5,238
Deferred income taxes 4,272 3,968
--------- ---------
133,580 140,762
--------- ---------
Property and Equipment
Building 20,267 20,228
Computer equipment and software 46,986 46,316
Furniture, fixtures and other 4,574 4,528
Service equipment 7,780 6,905
--------- ---------
79,607 77,977
Less allowance for depreciation 44,818 42,037
--------- ---------
34,789 35,940
Other Assets
Intangible assets, net of amortization of $30,153 in
fiscal 2002 and $26,702 in fiscal 2001 76,106 79,760
Other assets 299 299
--------- ---------
$ 244,774 $ 256,761
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 22,749 $ 22,952
Accrued expenses 11,577 16,863
Customer deposits 5,918 7,730
Deferred income 19,076 19,705
Current portion of long term borrowings 18,918 18,537
Income taxes payable 5,780 5,117
--------- ---------
84,018 90,904
Deferred income taxes 20,127 20,127
Long term borrowings 24,935 31,100
Stockholders' Equity
Preferred Stock, $100 par value--2,000,000
shares authorized: none issued
Common Stock, no par value, at nominal
assigned value--62,000,000 shares
authorized: 33,200,717 issued and
outstanding in fiscal 2002, 33,099,647
issued and outstanding in fiscal 2001 17 17
Additional capital 56,236 55,671
Unearned compensation (971) (1,311)
Retained earnings 65,716 64,308
Accumulated other comprehensive loss (5,304) (4,055)
--------- ---------
Stockholders' equity 115,694 114,630
--------- ---------
$ 244,774 $ 256,761
========= =========
See notes to consolidated financial statements.
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INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended
-------------------------------------
May 31, 2001 May 31, 2000
------------------ ----------------
Sales
Systems $ 38,442 $ 48,096
Services 23,064 23,372
-------- --------
61,506 71,468
-------- --------
Cost of goods sold
Systems 18,142 23,587
Services 9,650 11,314
-------- --------
27,792 34,901
-------- --------
Gross margin
Systems 20,300 24,509
Services 13,414 12,058
-------- --------
33,714 36,567
Research and development expenses 7,563 9,017
Selling, general and administrative expenses 19,615 21,897
Amortization of goodwill and acquisition
related intangible assets 3,354 3,474
-------- --------
Income from operations 3,182 2,179
Other income 506 191
Interest expense (1,341) (2,048)
-------- --------
Income before taxes and the cumulative effect
of a change in accounting principle 2,347 322
Income taxes 939 124
-------- --------
Income before the cumulative effect
of a change in accounting principle 1,408 198
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- (11,850)
-------- --------
Net income (loss) $ 1,408 $(11,652)
======== ========
Per Basic Share:
Income before the cumulative effect of
a change in accounting principle $ 0.04 $ 0.01
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- (0.37)
-------- --------
Net income (loss) $ 0.04 $ (0.36)
======== ========
Per Diluted Share:
Income before the cumulative effect of
a change in accounting principle $ 0.04 $ 0.01
Cumulative effect on prior years of adopting
SEC Staff Accounting Bulletin No. 101 -- (0.34)
-------- --------
Net income (loss) $ 0.04 $ (0.33)
======== ========
See notes to consolidated financial statements.
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INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Three Months Ended
----------------------------
May 31, 2001 May 31, 2000
------------ ------------
Operating Activities
Income before the cumulative effect of a
change in accounting principle $ 1,408 $ 198
Adjustments to reconcile income
before the cumulative effect of a change
in accounting principle to net cash provided
by operating activities:
Depreciation and amortization 6,446 8,240
Changes in operating assets and liabilities (4,801) 1,605
-------- --------
Net cash provided by operating activities 3,053 10,043
Investing Activities
Purchases of property and equipment (1,374) (1,517)
-------- --------
Net cash used in investing activities (1,374) (1,517)
Financing Activities
Paydown of debt (5,784) (20,000)
Exercise of stock options 565 1,015
-------- --------
Net cash used in financing activities (5,219) (18,985)
Effect of exchange rates on cash (108) (394)
-------- --------
Decrease in cash and cash equivalents (3,648) (10,853)
Cash and cash equivalents, beginning of period 15,901 23,263
-------- --------
Cash and cash equivalents, end of period $ 12,253 $ 12,410
======== ========
See notes to consolidated financial statements.
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INTERVOICE-BRITE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(In Thousands, Except Share Data)
Common Stock Accumulated Other
----------------------- Additional Unearned Retained Comprehensive
Shares Amount Capital Compensation Earnings Loss Total
---------- ----------- ----------- ------------ ----------- ----------------- -----------
Balance at February 28, 2001 33,099,647 $ 17 $ 55,671 $ (1,311) $ 64,308 $ (4,055) $ 114,630
Net income -- -- -- -- 1,408 -- 1,408
Foreign currency translation
adjustment -- -- -- -- -- (650) (650)
Cumulative effect on prior
years of adopting
Statement of Financial
Accounting Standards
No. 133, as amended,
net of tax effect of $261 -- -- -- -- -- (425) (425)
Valuation adjustment of
interest rate swap
hedge, net of tax effect
of $106 -- -- -- -- -- (174) (174)
Exercise of stock options 101,070 -- 565 -- -- -- 565
Amortization of unearned
compensation -- -- -- 340 -- -- 340
---------- --------- ----------- ----------- ----------- ----------- -----------
Balance at May 31, 2001 33,200,717 $ 17 $ 56,236 $ (971) $ 65,716 $ (5,304) $ 115,694
========== ========= =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2001
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. The consolidated balance sheet at February 28, 2001 has been
derived from audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the unaudited May 31, 2001 and 2000
consolidated financial statements have been included. Operating results for the
three month period ended May 31, 2001 are not necessarily indicative of the
results that may be expected for the year ending February 28, 2002 as they may
be affected by a number of factors including the timing and ultimate receipt of
orders from significant customers which continue to constitute a large portion
of the Company's sales, the sales channel mix of products sold, and changes in
general economic conditions, any of which could have an adverse effect on
operations.
In accordance with Statement of Financial Accounting Standards No. 130, the
following comprehensive income disclosures are provided. Total comprehensive
income (loss) for the first quarter of fiscal 2002 and 2001 was $0.2 million and
($13.9) million, respectively. Total comprehensive income is comprised of net
income (loss), foreign currency translation adjustments, the cumulative effect
of the adoption in fiscal 2002 of Statement of Financial Accounting Standards
No. 133 - Accounting for Derivative Instruments and Hedging Activities, as
amended, and the adjustment to the carrying value of certain derivative
instruments as of May 31, 2001.
Financial statements of the Company's foreign subsidiaries have been translated
into U. S. dollars at current and average exchange rates. Resulting translation
adjustments are recorded as a separate component of stockholders' equity. Any
transaction gains or losses are included in the accompanying consolidated
statements of operations.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE FOR DERIVATIVES
The Company uses interest rate swap arrangements to hedge the variability of
interest payments on its variable rate credit facilities. The swap arrangements
effectively convert the Company's outstanding floating rate debt to a fixed rate
basis through June 2002. Amounts due under the debt facilities totaled $43.9
million and $49.6 million at May 31, 2001 and February 28, 2001, respectively.
Interest accrues at variable rates indexed to a combination of the London
Interbank Offering Rate, the prime rate and the federal funds rate. The average
annual interest rate under the facilities was 7.8% and 9.2% at May 31, 2001 and
February 28, 2001, respectively. Historically, the Company has not assigned a
value to the interest rate swaps, and gains and losses from the swaps were
included on the accrual basis in interest expense.
Effective March 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 -- Accounting for Derivative Instruments and Hedging
Activities, as amended, ("the Statement"). The Statement requires that the
Company record an asset or liability for the fair value of its derivatives and
that it mark such asset or liability to market on an ongoing basis. For
derivatives, such as the Company's interest rate swaps, which are defined as
cash flow hedges, changes to the derivative's market value are initially
reported at the adoption of the Statement as a component of other comprehensive
loss to the extent that the hedge is determined to be effective. Such changes
are subsequently reclassified into earnings when the related transaction (the
quarterly payment of variable rate interest) affects earnings. Changes in market
value attributable to the ineffective portion of a hedge are reported in
earnings immediately as incurred.
At March 1, 2001, the Company was a party to swap arrangements with a notional
amount of $50 million under which the Company pays interest at a fixed rate of
6.2% and receives interest at the LIBOR three-month rate (5.1% at March 1,
2001). Upon adoption of the Statement, the Company recorded an initial
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derivative liability included in accrued liabilities of approximately $0.7
million and incurred a charge to other comprehensive loss totaling approximately
$0.4 million (net of tax). The charge to other comprehensive income represents
the transition adjustment associated with the cumulative effect on prior years
of adopting the Statement. At May 31, 2001, the Company increased its derivative
liability by approximately $0.4 million to reflect changes in its fair value
attributable to a reduction in the LIBOR three-month rate to 3.9%. At the same
time, it recorded a net of tax charge to other comprehensive loss of
approximately $0.2 million and a charge to interest expense for the ineffective
portion of the derivative of approximately $0.1 million. The Company also
accrued interest expense during the quarter of approximately $0.1 million
related to its quarterly swap settlement.
The interest rate swap arrangements expire in June 2002. Based on current
interest rates and scheduled principal repayments, the Company expects to incur
interest expense of approximately $0.2 million to $0.3 million per quarter for
the next four quarters related to the settlement of its swap liability and the
reclassification of other comprehensive loss into earnings. The Company will
also continue to incur interest expense under the provisions of the credit
facilities.
NOTE C - CHANGE IN ACCOUNTING PRINCIPLE FOR REVENUE RECOGNITION
Effective March 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements". The cumulative effect of the
adoption of SAB 101 on prior years resulted in a charge to operations of $11.9
million (after reduction for income taxes of $6.4 million) which is included in
results of operations for the three months ended May 31, 2000. For the three
months ended May 31, 2000, the net effect of the change in accounting was to
increase income before the cumulative effect of the accounting change $4.2
million ($0.12 per share). For the three months ended May 31, 2000, the Company
recognized $15.8 million in revenue whose contribution to income is included in
the cumulative effect adjustment as of March 1, 2000.
NOTE D - INVENTORIES
Inventories consist of the following (in thousands):
May 31, 2001 February 28, 2001
------------ -----------------
Purchased parts $27,764 $33,103
Work in progress 5,197 5,961
Finished goods 1,692 1,120
------- -------
$34,653 $40,184
======= =======
NOTE E - ACCRUED EXPENSES
Accrued expenses at February 28, 2001 included $1.8 million of severance and
related special charges incurred by the Company in the fourth quarter of fiscal
2001. The Company charged payments of $1.2 million against this accrual during
the first quarter of fiscal 2002, and $0.6 million remains accrued at May 31,
2001. In addition, $0.9 million of accrued customer settlement expenses recorded
in the fourth quarter of fiscal 2001 in connection with the Company's
discontinuance of its Agent Connect product line remain accrued at May 31, 2001.
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NOTE F - EARNINGS PER SHARE
(in thousands, except per share data) May 31, 2001 May 31, 2000
------------ ------------
Numerator:
Income before the cumulative effect
of a change in accounting principle $ 1,408 $ 198
Cumulative effect on prior years of
adopting SEC SAB No. 101 -- (11,850)
-------- --------
Net income (loss) $ 1,408 $(11,652)
-------- --------
Denominator:
DENOMINATOR FOR BASIC EARNINGS PER SHARE 33,058 32,539
Effect of dilutive securities:
Employee stock options 1,153 2,293
Non-vested restricted stock 23 61
-------- --------
Dilutive potential common shares 1,176 2,354
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 34,234 34,893
Basic:
Income before the cumulative effect
of a change in accounting principle $ 0.04 $ 0.01
Cumulative effect on prior years of
adopting SEC SAB No. 101 -- (0.37)
-------- --------
Net Income (Loss) $ 0.04 $ (0.36)
======== ========
Diluted:
Income before the cumulative effect
of a change in accounting principle $ 0.04 $ 0.01
Cumulative effect on prior years of
adopting SEC SAB No. 101 -- (0.34)
-------- --------
Net Income (Loss) $ 0.04 $ (0.33)
======== ========
Options to purchase 2,009,553 and 2,500 shares of common stock at average prices
of $13.59 and $29.19, respectively, were outstanding during the first three
months of fiscal 2002 and 2001, respectively, but were not included in the
computation of diluted earnings per share because the options' prices were
greater than the average market price of the Company's common shares during such
periods and, therefore, the effect would have been anti-dilutive.
NOTE G - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
Beginning in fiscal 2002, the Company has defined two reportable segments: the
Enterprise Solutions Division ("ESD") and the Network Solutions Division
("NSD"). The ESD focuses on the interactive voice response (IVR) market in which
the Company provides automated customer service and self-help solutions to
enterprises and institutions. The NSD focuses on the enhanced telecommunications
market in which the Company provides value-added solutions to network service
providers. Each division sells integrated systems and related services including
system maintenance and software licensing fees. As a complement to the Company's
systems sales, the NSD also provides and manages enhanced network services and
IVR applications for customers on an application service provider (ASP) basis.
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The Company's reportable segments are strategic business units that focus on
separate customer groups. They are managed separately to enable the Company to
target its product development and marketing efforts to meet the unique needs of
the Company's target markets.
The accounting policies of the segments are the same as those of the Company.
The Company evaluates performance based on profit or loss from operations before
income taxes, excluding the amortization of goodwill and acquisition related
intangible assets. Corporate operating expenses are allocated to the segments
based on budgeted and historical percentages of revenue. The Company does not
have material intersegment sales and does not allocate Company assets to
individual segments.
The operating results of the Company's segments for the three months ended May
31, 2001 and 2000 are as follows (in thousands).
Three Months Ended May 31, 2001
-------------------------------------------------
Enterprise Network Segment
Solutions Solutions Totals
------------ ------------ ------------
Systems $ 20,819 $ 17,623 $ 38,442
Services 7,271 15,793 23,064
------------ ------------ ------------
Total sales to external customers 28,090 33,416 61,506
------------ ------------ ------------
Systems 10,711 9,589 20,300
Services 5,313 8,101 13,414
------------ ------------ ------------
Total gross margin 16,024 17,690 33,714
------------ ------------ ------------
Segment operating expenses 13,171 14,007 27,178
------------ ------------ ------------
Segment operating income* $ 2,853 $ 3,683 $ 6,536
============ ============ ============
Three Months Ended May 31, 2000
-------------------------------------------------
Enterprise Network Segment
Solutions Solutions Totals
------------ ------------ ------------
Systems $ 23,812 $ 24,284 $ 48,096
Services 5,853 17,519 23,372
------------ ------------ ------------
Total sales to external customers 29,665 41,803 71,468
------------ ------------ ------------
Systems 12,469 12,040 24,509
Services 3,001 9,057 12,058
------------ ------------ ------------
Total gross margin 15,470 21,097 36,567
------------ ------------ ------------
Segment operating expenses 15,834 15,080 30,914
------------ ------------ ------------
Segment operating income (loss)* $ (364) $ 6,017 $ 5,653
============ ============ ============
* Consolidated income from operations includes amortization of goodwill and
acquisition related intangible assets of $3,354 and $3,474 for the quarters
ended May 31, 2001 and 2000, respectively, that is not allocated by the
Company to individual segments.
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Geographic Operations
The Company's net sales by geographic area were as follows (in thousands):
Three Months Ended
----------------------------
May 31, 2001 May 31, 2000
------------ ------------
Geographic Area Net Sales:
United States $31,906 $34,443
The Americas (Excluding U.S.) 3,562 7,398
Pacific Rim 1,037 3,607
Europe, Middle East & Africa 25,001 26,020
------- -------
Total $61,506 $71,468
======= =======
Concentration of Revenue
One Network Solutions Division customer, British Telecom (together with its
affiliate BT Cellnet), accounted for approximately 14% and 21% of the Company's
sales during the three-month periods ended May 31, 2001 and 2000, respectively.
During the three months ended May 31, 2001, the Company extended its managed
services contract with British Telecom through July 2003. Under the terms of the
extended contract and current exchange rates, BT Cellnet will continue to
purchase managed services totaling at least $2.6 million per month through July
2001 and will purchase services totaling at least $2.1 million per month for the
six month period ending January 2002 and totaling $0.9 million per month
thereafter for the remaining term of the contract.
NOTE H - CONTINGENCIES
Customer Dispute
The Company provides certain automated call processing services on a managed
services basis for a large domestic telecommunications company. The
telecommunications company has asserted that the Company should pay monetary
penalties under the managed services contract for failing to achieve certain
representations, covenants and specified levels of service. The
telecommunications company is also in the process of performing an audit of the
Company's records relating to the managed services, as expressly contemplated by
the contract. While the Company does not believe that the audit will result in
any claims for material amounts, it is possible that the telecommunications
company could make such claims and such claims could be material. The Company
has acknowledged that it may owe an immaterial amount as a monetary penalty for
failing to adhere to a specific service level, and has denied all other asserted
failures under the contract. A reserve has been established to cover the
immaterial amount the Company has acknowledged it might owe. The parties are in
the process of attempting to negotiate mutually satisfactory agreements to
resolve their dispute and to extend the managed services contract. There is no
assurance that the parties will negotiate mutually acceptable agreements. The
telecommunications company has not threatened litigation against the Company in
connection with this matter. In the event litigation is instituted against the
Company concerning the dispute under the contract, the Company intends to
vigorously contest the claims and to assert appropriate defenses. As with any
legal proceeding, there is no guarantee that the Company would prevail in any
litigation that might be asserted against the Company in connection with the
managed services contract.
Intellectual Property Matters
From time to time Ronald A. Katz Technology Licensing L.P. ("RAKTL") has sent
letters to certain customers of the Company suggesting that the customer should
negotiate a license agreement to cover the practice of certain patents owned by
RAKTL. In the letters, RAKTL has alleged that certain of its patents pertain to
certain enhanced services offered by network providers, including prepaid card
and wireless services and postpaid card services. RAKTL has further alleged that
certain of its patents pertain to certain call processing applications,
including applications for call centers that route calls using a called party's
DNIS identification number. Certain products offered by the Company can be
programmed and configured to provide enhanced services to network providers and
call processing applications for call centers. The Company's contracts with
customers usually include a qualified obligation to indemnify and
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defend customers against claims that products as delivered by the Company
infringe a third party's patent.
To the Company's knowledge, RAKTL has not initiated litigation against any of
the Company's customers. Moreover, none of the customers have notified the
Company that RAKTL has claimed that any product provided by the Company
infringes any claims of any RAKTL patent. Accordingly, the Company has not been
required to defend any customers against a claim of infringement under a RAKTL
patent. The Company has, however, received letters from customers notifying the
Company of the efforts by RAKTL to license its patent portfolio and reminding
the Company of its potential obligations under the indemnification provisions of
the applicable agreements in the event that a claim is asserted. In response to
correspondence from RAKTL, a few customers have attempted to tender to the
Company the defense of its products under contractual indemnity provisions. The
Company has informed these customers that while it fully intends to honor any
contractual indemnity provisions, it does not believe it currently has any
obligation to provide such a defense because RAKTL does not appear to have made
a claim that a Company product infringes a patent. Even though RAKTL has not
instituted litigation against any customers, it is always possible that RAKTL
may do so. In the event of such litigation, a customer could attempt to invoke
the Company's indemnity obligations under the applicable agreement. As with most
sales contracts with suppliers of computerized equipment, the Company's
contractual indemnity obligations are generally limited to the products provided
by the Company, and generally require the customer to allow the Company to have
sole control over any litigation and settlement negotiations with the patent
holder. The customers who have received letters from RAKTL generally have
multiple suppliers of the types of products that might potentially be subject to
claims by RAKTL.
Even though no claims have been made that a specific product offered by the
Company infringes any claim under the RAKTL patent portfolio, the Company has
received opinions from its outside patent counsel that certain products and
applications offered by the Company do not infringe certain claims of the RAKTL
patents. The Company has also received opinions from its outside counsel that
certain claims under the RAKTL patent portfolio are invalid. Furthermore, based
on the reviews by outside counsel, the Company is not aware of any claims under
the RAKTL portfolio that are infringed by the Company's products. If the Company
does become involved in litigation in connection with the RAKTL patent
portfolio, under a contractual indemnity or any other legal theory, the Company
intends to vigorously contest the claims and to assert appropriate defenses. A
number of companies, including some large, well known companies and some
customers of the Company, have already licensed certain rights under the RAKTL
patent portfolio. During November 2000, RAKTL announced license agreements with,
among others, AT&T Corp., Microsoft Corporation and International Business
Machines Corporation.
In the matter of Aerotel, Ltd. et al, vs. Sprint Corporation, et al, Cause No.
99-CIV-11091 (SAS), pending in the United States District Court Southern
District of New York, Aerotel, Ltd., has sued Sprint Corporation alleging that
certain prepaid services offered by Sprint are infringing Aerotel's U.S. Patent
No. 4,706,275 ("275 patent"). According to Sprint, the suit originally focused
on land-line prepaid services not provided by the Company. Recently, as part of
an unsuccessful mediation effort, Aerotel also sought compensation for certain
prepaid wireless services provided to Sprint PCS by the Company. As a result of
the mediation effort, Sprint has requested that InterVoice-Brite provide a
defense and indemnification to Aerotel's infringement claims, to the extent that
they pertain to any wireless prepaid services offered by InterVoice-Brite. In
response to this request, the Company has offered to assist Sprint's counsel in
defending against such claims, to the extent they deal with issues unique to the
system and services provided by InterVoice-Brite, and to reimburse Sprint for
the reasonable attorneys' fees associated therewith. The trial court has stayed
the lawsuit pending certain rulings from the United States Patent and Trademark
Office. The Company has received opinions from its outside patent counsel that
the wireless prepaid services offered by the Company do not infringe the "275
patent". If the Company does become involved in litigation in connection with
the "275 patent", under a contractual indemnity or any other legal theory, the
Company intends to vigorously contest any claims that its prepaid wireless
services infringe the "275 patent" and to assert appropriate defenses.
Pending Litigation
Several related class action lawsuits have been filed in the United States
District Court for the Northern District of Texas on behalf of purchasers of
common stock of the Company during October 12, 1999
12
through June 6, 2000, the "Class Period." Plaintiffs have filed claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and the
Securities and Exchange Commission Rule 10b-5 against the Company as well as
certain named current and former officers and directors of the Company on behalf
of the alleged class members. In the Petition, Plaintiffs claim that the Company
and the named current and former officers and directors issued false and
misleading statements during the Class Period concerning the financial condition
of the Company, the results of the Company's merger with Brite Voice Systems,
Inc., and the alleged future business projections of the Company. Plaintiffs
have asserted that these alleged statements resulted in artificially inflated
stock prices.
The Company has not been served with any of the Complaints. However, the Company
believes that it and its officers complied with their obligations under the
securities laws, and intends to defend the lawsuits vigorously.
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements" located elsewhere herein regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to
important factors described elsewhere in this report, the following significant
factors, among others, sometimes have affected, and in the future could affect,
the Company's actual results and could cause such results during fiscal 2002,
and beyond, to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company:
o The Company faces intense competition based on product capabilities and
experiences ever increasing demands from its actual and prospective
customers for its products to be compatible with a variety of rapidly
proliferating computing, telephony and computer networking technologies
and standards. The ultimate success of the Company's products is
dependent, to a large degree, on the Company allocating its resources
to developing and improving products compatible with those
technologies, standards and functionalities that ultimately become
widely accepted by the Company's actual and prospective customers. The
Company's success is also dependent, to a large degree, on the
Company's ability to implement arrangements with other vendors with
complementary product offerings to provide actual and prospective
customers greater functionality and to ensure that the Company's
products are compatible with the increased variety of technologies and
standards.
o Continued availability of suitable non-proprietary computing platforms
and system operating software that are compatible with the Company's
products.
o Certain components for the Company's products are available from select
suppliers and, as a result, the Company's operating results could be
adversely affected if the Company were unable to obtain such components
in the future.
o Increasing litigation with respect to the enforcement of patents,
copyrights and other intellectual property.
o The ability of the Company to retain its customer base and, in
particular, its more significant customers such as British Telecom,
which purchases both systems and managed services from the Company.
Sales to British Telecom accounted for approximately 14% and 21% of the
Company's total sales during the three month periods ended May 31, 2001
and 2000, respectively. 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. British Telecom's
managed services contract with the Company was recently extended by
eighteen months through July 17, 2003. Under the managed services
agreement at current exchange rates, BT Cellnet is currently purchasing
services in a minimum amount of approximately $2.6 million per month,
and the minimum amount will be reduced to $2.1 million per month for
the six month period commencing July 18, 2001, and further reduced to a
flat fee of $900,000 per month for the eighteen month period commencing
on January 18, 2002. The amounts received under the agreement may vary
based on future changes in the exchange rate between the dollar and the
British pound.
14
o The Company's ability to successfully qualify, estimate and close
"pipeline" opportunities for systems sales during a quarter. See the
discussion entitled "Sales" in this "Item 2 Management Discussion and
Analysis of Financial Condition and Results of Operations" for a
discussion of the Company's "pipeline" of systems sales opportunities.
o Legislative and administrative changes and, in particular, changes
affecting the telecommunications industry, such as the
Telecommunications Act of 1996.
o Risks involved in the Company's international distribution and sales of
its products, including unexpected and adverse changes in regulatory
requirements, unexpected changes in exchange rates, the difficulty and
expense of maintaining foreign offices and distribution channels,
tariffs and other barriers to trade, difficulty in protecting
intellectual property rights, and foreign governmental regulations that
may limit or restrict the sales of call automation systems.
Additionally, changes in foreign credit markets and currency exchange
rates may result in requests by many international customers for
extended payment terms and may have an adverse impact on the Company's
cash flow and its level of accounts receivable.
o The quantity and size of large sales (sales valued at approximately $4
million or more) during any fiscal quarter, which can cause wide
variations in the Company's sales and earnings on a quarterly basis.
o Many of the Company's contracts, particularly for managed services,
foreign contracts and contracts with telecommunication companies,
include provisions for the assessment of liquidated damages for delayed
performance by the Company or for system down time under ASP contracts.
Since the Company's projects frequently require a significant degree of
customization, it is difficult for the Company to predict when it will
complete such projects. Accordingly, the Company has had to pay
liquidated damages in the past and may have to pay additional
liquidated damages in the future. Any such future liquidated damages
could be significant.
o The Company's ability to properly estimate costs under fixed price
contracts in developing application software and otherwise tailoring
its systems to customer-specific requests.
o The Company's ability to hire and retain, within the Company's
compensation parameters, qualified sales, administrative and technical
talent and outside contractors in highly competitive markets for the
services of such personnel.
o Mergers and acquisitions between companies in the telecommunications
and financial industries which could result in fewer companies
purchasing the Company's products for telecommunications and financial
applications, and/or delay such purchases by companies that are in the
process of reviewing their strategic alternatives in light of a merger
or acquisition.
o Extreme price and volume trading volatility in the U.S. stock market,
which has had a substantial effect on the market prices of securities
of many high technology companies, frequently for reasons other than
the operating performance of such companies. These broad market
fluctuations could adversely affect the market price of the Company's
common stock.
o The ability of the Company to successfully integrate the products,
customers, employees and other business components of the former
InterVoice and the former Brite in an efficient fashion.
o The ability of the Company to retain certain customers of the former
Brite in light of the Company's decision to phase out certain Brite
products and its ability to persuade such customers to purchase similar
products offered by the Company.
15
o The Company's business transactions in foreign currencies are subject
to adverse movements in foreign currency exchange rates.
o The effect of class action lawsuits alleging securities law violations
and other litigation filed against the Company which could negatively
affect the Company and its financial condition if adversely determined.
See "Item 1 Legal Proceedings" in Part II for a discussion of these
lawsuits.
SALES. The Company's total sales in the first quarter of fiscal 2002 were $61.5
million, a decrease of $10 million, or 14%, as compared to the same period of
fiscal 2001. The Company's Enterprise Solutions Division ("ESD") sales were down
$1.6 million, while its Network Solutions Division ("NSD") sales were down $8.4
million from the prior year's first quarter totals.
ESD system sales for the quarter totaled $20.8 million, down $3 million (13%)
from the same period of the previous year. Contributing factors for the sales
decrease include a lengthening of the overall sales cycle resulting from the
transition in customer demand from simpler, touch-tone to complex, speech
enabled applications and softness, at least in the short term, in the markets
for technology products and telecommunications equipment. ESD services sales
totaled $7.3 million, an increase of $1.4 million (24%) over the first quarter
of fiscal 2001. The increase was primarily attributable to growth in the
Company's sales of extended warranty services. ESD international sales
constituted 17% of the division's total sales during the first quarter of fiscal
2002, up from 14% in the first quarter of fiscal 2001.
NSD system sales for the first quarter of fiscal 2002 were $17.6 million, down
$6.7 million (27%) when compared to the same period of the previous fiscal year.
Contributing factors to the decline in systems sales are sales force attrition
and softness, at least in the short term, in the markets for network-based
telecommunication systems. NSD services sales totaled $15.8 million, a decrease
of $1.7 million (10%) over the first quarter of fiscal 2001. The decline in
services sales is comprised of a reduction of $3.2 million in managed services
(ASP) revenues attributable to a decrease in the volume of activity processed
under certain of the division's ASP contracts, and an increase totaling $1.5
million in the division's customer service sales. NSD international sales
constituted 75% and 78% of the division's total sales for the quarters ended May
31, 2001 and 2000, respectively. Sales to one NSD client, BT Cellnet, accounted
for approximately 14% and 21% of the Company's total sales during the three
month periods ended May 31, 2001 and 2000, respectively. Third-party surveys
indicate good long term prospects for growth in the market addressed by the NSD
products.
The Company continues to believe the long-term prospects in its current markets
remain strong. At the same time, the Company realizes its markets are being
transformed by the ongoing convergence of voice, data and internet technologies.
As a result, the Company continues to investigate alternate methods of combining
its products and services and is focusing on new, strategic partnerships to
profit from this transformation. The result of such investigations may lead the
Company to redirect its marketing efforts and/or increase its investments in
application engineering, customer service, research and development, sales,
sales support, marketing and administrative personnel and resources to pursue
new opportunities.
The Company uses a system combining estimated sales from its service and support
contracts, "pipeline" of systems sales opportunities, and backlog of committed
systems orders to estimate sales and trends in its business. During the last two
quarters, sales from service and support contracts, including contracts for ASP
managed services, averaged approximately 35% of the Company's quarterly sales.
The pipeline of opportunities for systems sales and backlog of systems sales
during the same period contributed approximately 35% and 30% of quarterly
revenues, respectively.
The Company's service and support contracts range in duration from one month to
three years, with many longer duration contracts allowing customer cancellation
privileges. The Company's largest services customer is BT Cellnet which
accounted for 34% of service and support sales during the first quarter of
fiscal 2002 - see "Disclosures Regarding Forward Looking Statements" for a
discussion of BT Cellnet's monthly contractual revenue commitments through July
2003, including reductions in monthly revenue commitments beginning in July 2001
and again in January 2002. It is easier for the Company to estimate service and
support sales than to measure systems sales for the next quarter because service
16
and support contracts generally span multiple quarters and revenues recognized
under each contract are generally similar from one quarter to the next.
The Company's backlog is made up of customer orders for systems for which it has
received complete purchase orders and which the Company expects to ship within
twelve months. At May 31, 2001 and February 28, 2001 the Company's backlog of
systems sales was approximately $31.0 million and $35.0 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.
COST OF GOODS SOLD. Cost of goods sold for the first quarter of fiscal 2002 was
approximately $27.8 million or 45.2% of sales as compared to 48.8% of sales for
the first quarter of fiscal 2001. ESD systems costs averaged 48.5% of sales for
the quarter, up one percentage point from the first quarter of fiscal 2001. NSD
systems costs averaged 45.6% of sales versus 50.4% in the previous year's first
quarter as the Company benefited from a better than expected software to
hardware mix. ESD services cost of sales was 26.9% of sales for the current
quarter, significantly down from 48.7% in the first quarter of fiscal 2001.
Costs in fiscal 2001 included a charge of $0.5 million (8.5% of services sales)
to increase the obsolescence reserve on the division's customer service
inventory. The remainder of the improvement resulted primarily from efficiency
gains as the division was able to reduce its absolute support costs while
serving a larger customer base. NSD services costs were 48.7% of sales for the
quarter, essentially unchanged from the prior year's first quarter.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the
first quarter of fiscal 2002 were approximately $7.6 million, or 12.3% of the
Company's total sales. During the first quarter of the previous fiscal year,
research and development expenses were $9.0 million, or 12.6% of the Company's
total sales. Research and development expenses include the design of new
products and the enhancement of existing products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses during the first quarter of fiscal 2002 were
approximately $19.6 million, or 31.9% of the Company's total sales. Such
expenses during the first quarter of the previous year were $21.9 million, or
30.6% of the Company's total sales. These expenses have dropped in absolute
dollars over the same period last year as a result of cost control initiatives
implemented by the Company in the fourth quarter of fiscal 2001. They are up as
a percent of the Company's total sales because of the decline in sales described
above and because of the Company's decision to continue to hire and train new
and existing sales and sales support personnel and expand its marketing and
advertising programs worldwide.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLE ASSETS. Goodwill and intangible
assets acquired in the fiscal 2000 merger with Brite Voice Systems, Inc.
("Brite") totaled approximately $104 million with useful lives averaging seven
years. Amortization of these assets totaled $3.4 million for the first quarter
of fiscal 2002, essentially unchanged from the same period of the previous
fiscal year.
OTHER INCOME. Other income of approximately $0.5 million during the first
quarter of fiscal 2002 was comprised primarily of interest income.
INTEREST EXPENSE. Interest expense was approximately $1.3 million during the
first quarter of fiscal 2002, versus $2.0 million for the same period of fiscal
2001. The Company reduced its outstanding long term debt by approximately $36.1
million from May 31, 2000 to May 31, 2001. See "Liquidity and Capital Resources"
for a description of the Company's long term borrowings and related interest
rate swap arrangements.
17
INCOME (LOSS) FROM OPERATIONS. The Company generated operating income of $3.2
million and net income of $1.4 million during the first quarter of fiscal 2002.
During the first quarter of fiscal 2001, the Company generated operating income
of $2.2 million, income before the cumulative effect of the adoption of SAB 101
as described in Note C to the consolidated financial statements of $0.2 million,
and a net loss of $11.7 million. As noted above, the Company's results reflect
the benefits from cost reduction initiatives implemented by the Company during
the fourth quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES. At May 31, 2001, the Company had cash reserves
of approximately $12.3 million and borrowings under the Company's long-term debt
facilities of $43.9 million. Operating cash flow for the first quarter of fiscal
2002 was approximately $3.1 million. Income plus non-cash expense items provided
$7.9 million of operating cash while increases in net operating assets used $4.8
million. Investing activities during the quarter, primarily the purchase of
computer and test equipment, used cash of approximately $1.4 million. Financing
activities included the pay down of debt, which used $5.8 million of cash during
the first quarter, and the receipt of net proceeds from the exercise of employee
stock options, which provided $0.6 million. Net cash flow during the first
quarter was a negative $3.6 million.
Days sales outstanding (DSO) of accounts receivable continues to be a focus for
the Company. At May 31, 2001, DSO was 105 days, essentially unchanged from
February 28, 2001. For sales of certain of its more complex, customized systems
(generally ones with a sales price of $500,000 or more), the Company recognizes
revenue based on a percentage of completion methodology. Unbilled receivables
accrued under the methodology totaled $29.5 million and $24.1 million at May 31,
2001 and February 28, 2001, respectively. The Company expects to bill and
collect unbilled receivables as of May 31, 2001 during the next twelve months.
With the merger with Brite in fiscal 2000, the Company now generates a
significant percentage of its sales, particularly sales of enhanced
telecommunications services systems, outside the United States. Customers
outside the United States are accustomed to vendor financing in the form of
extended payment terms. To remain competitive in markets outside the United
States, the Company may offer its most creditworthy customers such payment
terms. For the quarters ended May 31, 2001 and 2000, customer extended payment
terms had no material adverse impact on the Company's DSO. However, there is no
assurance such extended payment terms will not adversely impact DSO for the
remainder of fiscal 2002 and beyond.
The Company believes its cash reserves and internally generated cash flow will
be sufficient to meet its operating cash requirements for the foreseeable
future. In addition, the Company has $17.5 million available under its $25
million revolving credit facility. The Company reviews share repurchase and
acquisition opportunities from time to time and believes it has access to the
financial resources necessary to pursue attractive repurchase and/or acquisition
opportunities as they arise. The term loan and revolving credit agreement
discussed below, however, includes normal and customary provisions which limit
the Company's ability to make such repurchases and acquisitions.
In connection with the merger with Brite, the Company entered into a loan
agreement with Bank of America and nine other banks to provide a senior secured
credit facility amounting to $150 million, including a $125 million term loan
(subsequently reduced to $36.4 million as a result of principal repayments) and
a $25 million revolving credit agreement. The term loan agreement is subject to
future scheduled repayments of $13.9 million, $20.2 million and $2.3 million
during fiscal 2002, 2003 and 2004, respectively. The revolving credit agreement
will expire upon the earlier of the termination of the term loan or August 31,
2003. The cash required to service the facilities could have a material impact
upon the operating cash requirements of the Company for the foreseeable future.
At May 31, 2001, the Company had $43.9 million of borrowings outstanding under
the agreement at an average annual interest rate of 7.8%. Interest under the
credit facility accrues at variable rates indexed to a combination of the
adjusted London Interbank Offering Rate, the prime rate and the federal funds
rate. The Company's annual interest cost is also impacted by its interest rate
swap contracts which are discussed below.
The Company is a party to interest rate swap arrangements with a notional amount
of $50 million under which the Company pays interest at a fixed rate of 6.2% and
receives interest at the LIBOR three month rate (3.9% at May 31, 2001). The
arrangements expire in June 2002. Based on current interest rates,
18
the Company expects to pay approximately $0.3 million per quarter for the
remaining term of the interest rate swap arrangements related to the settlement
of such arrangements.
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.
The Company's debt facilities financing is considered to be a material long term
debt obligation, which may expose the Company to inflationary effects associated
with such variable rate loans; however, the Company has entered into interest
rate swap agreements to partially hedge such exposure.
19
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risks
The Company invests cash balances in excess of operating requirements in
short-term securities that generally have maturities of 90 days or less. The
carrying value of these securities approximates market value, and there is no
long-term interest rate risk associated with this investment.
The Company's current term loan and revolving credit agreement provides for
borrowings of up to $61.4 million which bear interest at variable rates based on
the London Interbank Offering Rate, a prime rate or the federal funds rate plus
an applicable margin. As of May 31, 2001, the Company had $43.9 million
outstanding under the credit agreement. The fair value of the borrowings
approximate their carrying value at May 31, 2001.
The credit agreement matures on August 31, 2003, and the term loan facility is
subject to quarterly principal amortization. Due to the magnitude of this credit
facility, the Company believes that the effect of any reasonably possible
near-term changes in interest rates on the Company's financial position, results
of operations, and cash flows may be material. To mitigate the potentially
adverse effect of interest rate increases, the Company has entered into interest
rate swap arrangements which effectively convert the Company's outstanding
floating rate debt to a fixed rate basis through June 2002.
The following table provides information about the Company's credit agreement
and its interest rate swap arrangements that are sensitive to changes in
interest rates. For the credit agreement, the table presents cash flows for
scheduled principal payments and related weighted-average interest rates by
expected maturity dates. Weighted-average variable rates are based on rates in
effect as of June 27, 2001. For interest rate swaps, the table presents the
notional amount of the swap arrangements and the weighted-average interest rates
anticipated to be in effect on the quarterly settlement dates of the
arrangements. Notional amounts are used to calculate the contractual cash flows
to be exchanged under the contract.
Fair Value Fiscal
(dollars in millions) May 31, 2001 2002 2003 2004 Total
------------ ----- ----- ----- -----
LIABILITIES
Long-term borrowings, including current portion $43.9
Maturities by fiscal year $13.9 $20.2 $ 9.8 $43.9
Projected weighted average interest rate 6.7% 6.7% 6.7%
Interest rate swap arrangements (pay fixed/receive
variable) related to long-term borrowings
Notional amount $50.0 $50.0
Fixed pay rate 6.2% 6.2%
Projected average receive rate 3.9% 3.9%
The interest rate swap arrangements settle quarterly and expire in June 2002.
Based on the notional amounts and interest rates shown above, the Company
expects to pay approximately $0.3 million per quarter for the remaining term of
the interest rate swap arrangements related to the settlement of such
arrangements.
Foreign Currency Risks
The Company transacts business in certain foreign currencies including the
British pound. Accordingly, the Company is subject to exposure from adverse
movements in foreign currency exchange rates. The Company attempts to mitigate
this risk by transacting business in the functional currency of each of its
subsidiaries, thus creating a natural hedge by paying expenses incurred in the
local currency in which revenues will be received. However, the Company's major
foreign subsidiary procures much of its raw
20
materials inventory from its US parent. Such transactions are denominated in
dollars, limiting the Company's ability to hedge against adverse movements in
foreign currency exchange rates.
21
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Several related class action lawsuits have been filed in the United States
District Court for the Northern District of Texas on behalf of purchasers of
common stock of the Company during October 12, 1999 through June 6, 2000, the
"Class Period." Plaintiffs have filed claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and the Securities and Exchange Commission
Rule 10b-5 against the Company as well as certain named current and former
officers and directors of the Company on behalf of the alleged class members. In
the Petition, Plaintiffs claim that the Company and the named current and former
officers and directors issued false and misleading statements during the Class
Period concerning the financial condition of the Company, the results of the
Company's merger with Brite Voice Systems, Inc., and the alleged future business
projections of the Company. Plaintiffs have asserted that these alleged
statements resulted in artificially inflated stock prices.
The Company has not been served with any of the Complaints. However, the Company
believes that it and its officers complied with their obligations under the
securities laws, and intends to defend the lawsuits vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three
month period ended May 31, 2001.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERVOICE-BRITE, INC.
Date: 06/29/01 By: /s/ MARK C. FALKENBERG
------------------------
Mark C. Falkenberg
Chief Accounting Officer