================================================================================
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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 0-13616
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)
972-454-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
THE REGISTRANT HAD 34,077,307 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,
OUTSTANDING AS OF OCTOBER 11, 2002.
================================================================================
Intervoice, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
August 31, 2002 February 28, 2002
----------------- -----------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 20,131 $ 17,646
Trade accounts receivable, net of allowance for
doubtful accounts of $3,578 in fiscal 2003 and
$3,492 in fiscal 2002 32,543 40,783
Inventory 16,461 27,524
Prepaid expenses and other current assets 6,710 6,152
Deferred income taxes 1,063 819
----------------- -----------------
76,908 92,924
----------------- -----------------
Property and Equipment
Building 16,883 19,530
Computer equipment and software 31,123 30,379
Furniture, fixtures and other 2,747 2,328
Service equipment 8,963 7,902
----------------- -----------------
59,716 60,139
Less allowance for depreciation 37,324 33,787
----------------- -----------------
22,392 26,352
Other Assets
Intangible assets, net of amortization of $28,563 in
fiscal 2003 and $31,752 in fiscal 2002 29,940 37,439
Goodwill, net of accumulated amortization of
$7,672 in fiscal 2002 3,401 16,500
Other assets 1,754 2,153
----------------- -----------------
$ 134,395 $ 175,368
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 15,794 $ 22,661
Accrued expenses 18,205 14,988
Customer deposits 8,499 5,963
Deferred income 27,043 24,426
Current portion of long term borrowings 5,556 6,000
----------------- -----------------
75,097 74,038
Long term borrowings, net of current portion 17,741 23,980
Other long term liabilities 1,482 1,916
Stockholders' Equity
Preferred Stock, $100 par value--2,000,000
shares authorized: none issued
Common Stock, no par value, at nominal
assigned value--62,000,000 shares
authorized: 34,077,307 issued and
outstanding in fiscal 2003, 34,029,180
issued and outstanding in fiscal 2002 17 17
Additional capital 65,082 61,725
Retained earnings (accumulated deficit) (21,124) 19,618
Accumulated other comprehensive loss (3,900) (5,926)
----------------- -----------------
Stockholders' equity 40,075 75,434
----------------- -----------------
$ 134,395 $ 175,368
================= =================
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,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Sales
Systems $ 17,905 $ 42,455 $ 39,540 $ 80,897
Services 17,708 22,034 34,489 45,098
---------- ---------- ---------- ----------
35,613 64,489 74,029 125,995
---------- ---------- ---------- ----------
Cost of goods sold
Systems 17,099 21,287 33,217 39,429
Services 7,626 10,139 14,297 19,789
---------- ---------- ---------- ----------
24,725 31,426 47,514 59,218
---------- ---------- ---------- ----------
Gross margin
Systems 806 21,168 6,323 41,468
Services 10,082 11,895 20,192 25,309
---------- ---------- ---------- ----------
10,888 33,063 26,515 66,777
Research and development expenses 6,518 7,060 12,523 14,623
Selling, general and administrative expenses 18,401 18,919 36,094 38,534
Amortization of goodwill and acquisition
related intangible assets 1,776 3,435 3,552 6,788
---------- ---------- ---------- ----------
Income (loss) from operations (15,807) 3,649 (25,654) 6,832
Other income (expense) (716) 451 (764) 956
Interest expense (1,555) (1,224) (3,020) (2,565)
---------- ---------- ---------- ----------
Income (loss) before taxes and the cumulative
effect of a change in accounting principle (18,078) 2,876 (29,438) 5,223
Income taxes (benefit) (1,806) 1,151 (4,487) 2,090
---------- ---------- ---------- ----------
Income (loss) before the cumulative effect
of a change in accounting principle (16,272) 1,725 (24,951) 3,133
Cumulative effect on prior years of a
change in accounting principle -- -- (15,791) --
---------- ---------- ---------- ----------
Net income (loss) $ (16,272) $ 1,725 $ (40,742) $ 3,133
========== ========== ========== ==========
Per Basic Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ (0.48) $ 0.05 $ (0.73) $ 0.09
Cumulative effect on prior years of
a change in accounting principle -- -- (0.47) --
---------- ---------- ---------- ----------
Net income (loss) $ (0.48) $ 0.05 $ (1.20) $ 0.09
========== ========== ========== ==========
Per Diluted Share:
Income (loss) before the cumulative effect of
a change in accounting principle $ (0.48) $ 0.05 $ (0.73) $ 0.09
Cumulative effect on prior years of
a change in accounting principle -- -- (0.47) --
---------- ---------- ---------- ----------
Net income (loss) $ (0.48) $ 0.05 $ (1.20) $ 0.09
========== ========== ========== ==========
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,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Operating Activities
Income (loss) before the cumulative effect of a
change in accounting principle $ (16,272) $ 1,725 $ (24,951) $ 3,133
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 4,290 6,843 8,466 13,289
Other changes in operating activities 23,776 (611) 26,617 (5,412)
---------- ---------- ---------- ----------
Net cash provided by operating activities 11,794 7,957 10,132 11,010
Investing Activities
Purchases of property and equipment (1,847) (1,793) (2,448) (3,167)
Proceeds from sale of assets -- -- 1,852 --
---------- ---------- ---------- ----------
Net cash used in investing activities (1,847) (1,793) (596) (3,167)
Financing Activities
Paydown of debt (3,980) (3,783) (29,980) (9,567)
Debt issuance costs (386) -- (2,018) --
Borrowings -- -- 24,000 --
Exercise of stock options 42 1,551 130 2,117
---------- ---------- ---------- ----------
Net cash used in financing activities (4,324) (2,232) (7,868) (7,450)
Effect of exchange rates on cash 515 105 817 (4)
---------- ---------- ---------- ----------
Increase in cash and cash equivalents 6,138 4,037 2,485 389
Cash and cash equivalents, beginning of period 13,993 12,253 17,646 15,901
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 20,131 $ 16,290 $ 20,131 $ 16,290
========== ========== ========== ==========
See notes to consolidated financial statements.
Intervoice, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
(In Thousands, Except Share Data)
Retained Accumulated
Common Stock Earnings Other
------------------- Additional (Accumulated Comprehensive
Shares Amount Capital Deficit) Loss Total
---------- ------ ---------- ------------ ------------- --------
Balance at February 28, 2002 34,029,180 $ 17 $ 61,725 $ 19,618 $ (5,926) $ 75,434
Net loss -- -- -- (40,742) -- (40,742)
Foreign currency translation
adjustment -- -- -- -- 1,834 1,834
Valuation adjustment of
interest rate swap
hedge, net of tax effect
of $(118) -- -- -- -- 192 192
Exercise of stock options 48,127 -- 130 -- -- 130
Tax benefit from exercise of
stock options -- -- 2,171 -- -- 2,171
Issuance of warrants -- -- 1,056 -- -- 1,056
---------- ------ ---------- ------------ ------------- --------
Balance at August 31, 2002 34,077,307 $ 17 $ 65,082 $ (21,124) $ (3,900) $ 40,075
========== ====== ========== ============ ============= ========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED AUGUST 31, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. The consolidated balance sheet at February 28, 2002 has been
derived from audited financial statements at that date. Certain prior year
balances have been reclassified to conform to the current year presentation. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the unaudited August
31, 2002 and 2001 consolidated financial statements have been included.
Operating results for the three and six month periods ended August 31, 2002 are
not necessarily indicative of the results that may be expected for the year
ending February 28, 2003, as such results may be affected by a number of factors
including the timing and ultimate receipt of orders from significant customers
which continue to constitute a large portion of the Company's sales, the sales
channel mix of products sold, and changes in general economic conditions, any of
which could have an adverse effect on operations.
In accordance with Statement of Financial Accounting Standards No. 130, the
following comprehensive income disclosures are provided. Total comprehensive
income (loss) for the second quarters of fiscal 2003 and 2002 was ($15.3)
million and $2.8 million, respectively. For the six month periods ended August
31, 2002 and 2001, comprehensive income (loss) was ($38.7) million and $3.0
million, respectively. Total comprehensive income (loss) is comprised of net
income (loss), foreign currency translation adjustments, the cumulative effect
of the adoption in fiscal 2002 of Statement of Financial Accounting Standards
No. 133 - Accounting for Derivative Instruments and Hedging Activities, as
amended, and the adjustment to the carrying value of certain derivative
instruments during each period.
Financial statements of the Company's foreign subsidiaries have been translated
into U. S. dollars at current and average exchange rates. Resulting translation
adjustments are recorded as a separate component of stockholders' equity. Any
transaction gains or losses are included in the accompanying consolidated
statements of operations.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE FOR GOODWILL AND OTHER INTANGIBLE ASSETS
Effective March 1, 2002, the Company adopted Statements of Financial Accounting
Standards No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets (the "Statements"). Statement No. 141 refines the definition
of what assets may be considered as separately identified intangible assets
apart from goodwill. Statement No. 142 provides that goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized, but will be
subject to impairment tests on at least an annual basis.
In adopting the Statements, the Company first reclassified $2.7 million of
intangible assets associated with its assembled workforce (net of related
deferred taxes of $1.4 million) to goodwill because such assets did not meet the
new criteria for separate identification. The Company then allocated its
adjusted goodwill balance of $19.2 million to its then existing ESD and NSD
divisions and completed the transitional impairment tests required by Statement
No. 142. The fair values of the reporting units were estimated using a
combination of the expected present values of future cash flows and an
assessment of comparable market values. As a result of these tests, the Company
determined that the goodwill associated with its NSD division was fully
impaired, and, accordingly, it recognized a non-cash, goodwill impairment charge
of $15.8 million as the cumulative effect on prior years of this change in
accounting principle. This impairment resulted primarily from the significant
decline in NSD's sales and profitability during the fourth quarter of fiscal
2002 and related reduced forecasts for the division's sales and profitability.
Effective August 1, 2002, the Company combined its divisions into a single
unified organizational structure in order to address changing market demands and
global customer requirements. The Company expects to conduct its annual test of
goodwill impairment at the beginning of its fourth fiscal quarter (December
2002).
Intangible assets other than goodwill at August 31, 2002 and February 28, 2002
are comprised of the following (in thousands):
August 31, 2002
-------------------------------------
Gross
Amortization Carrying Accumulated Unamortized
Amortized Intangible Assets Period Amount Amortization Balance
--------------------------- ------------ -------- ------------ -----------
Customer relations 10 years $ 32,800 $ 10,660 $ 22,140
Developed technology 5 years 22,727 16,042 6,685
Other intangibles 5-12 years 2,976 1,861 1,115
-------- ------------ -----------
Total $ 58,503 $ 28,563 $ 29,940
======== ============ ===========
February 28, 2002
-------------------------------------
Gross
Amortization Carrying Accumulated Unamortized
Amortized Intangible Assets Period Amount Amortization Balance
--------------------------- ------------ -------- ------------ -----------
Customer relations 10 years $ 32,800 $ 9,020 $ 23,780
Developed technology 5 years 22,727 14,132 8,595
Assembled workforce 5 years 9,200 5,060 4,140
Trade name 10 years 1,760 1,760 --
Other intangibles 5-12 years 2,704 1,780 924
-------- ------------ -----------
Total $ 69,191 $ 31,752 $ 37,439
======== ============ ===========
The estimated amortization expense for the balance of fiscal 2003 and for each
of the next four years is as follows (in thousands):
Balance of fiscal year ending February 28, 2003 $3,682
Fiscal 2004 $7,357
Fiscal 2005 $4,470
Fiscal 2006 $3,481
Fiscal 2007 $3,413
The changes in the carrying amount of goodwill for the six months ended August
31, 2002 are as follows (in thousands):
ESD NSD Total
--------- --------- ---------
Balance as of February 28, 2002 $ 2,727 $ 13,773 $ 16,500
Reclassification of assembled workforce,
net of deferred income taxes, upon
adoption of SFAS No. 141 674 2,018 2,692
Transitional impairment loss upon
adoption of SFAS No. 142 -- (15,791) (15,791)
--------- --------- ---------
Balance as of August 31, 2002 $ 3,401 $ -- $ 3,401
========= ========= =========
As required by SFAS No. 142, the following table of proforma net income (in
thousands) and earnings per share presents summary results for the quarter and
six month period ended August 31, 2002 and 2001 adjusted to exclude amortization
expense related to goodwill and intangible assets that are no longer being
amortized as a result of the Company's adoption of SFAS No. 141 and 142.
For the Quarter Ended For the Six Months Ended
------------------------ ------------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss) $ (16,272) $ 1,725 $ (40,742) $ 3,133
Add back goodwill amortization -- 694 -- 1,308
Add back assembled workforce amortization -- 460 -- 920
---------- ---------- ---------- ----------
Adjusted net income (loss) $ (16,272) $ 2,879 $ (40,742) $ 5,361
========== ========== ========== ==========
Basic earnings per share:
For the Quarter Ended For the Six Months Ended
------------------------ ------------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss) $ (0.48) $ 0.05 $ (1.20) $ 0.09
Add back goodwill amortization -- 0.02 -- 0.04
Add back assembled workforce amortization -- 0.01 -- 0.03
---------- ---------- ---------- ----------
Adjusted net income (loss) $ (0.48) $ 0.08 $ (1.20) $ 0.16
========== ========== ========== ==========
Diluted earnings per share:
For the Quarter Ended For the Six Months Ended
------------------------ ------------------------
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income (loss) $ (0.48) $ 0.05 $ (1.20) $ 0.09
Add back goodwill amortization -- 0.02 -- 0.04
Add back assembled workforce amortization -- 0.01 -- 0.03
---------- ---------- ---------- ----------
Adjusted net income (loss) $ (0.48) $ 0.08 $ (1.20) $ 0.16
========== ========== ========== ==========
If the Company had not been required to adopt the Statements effective March 1,
2002, the Company would not have recognized the cumulative effect on prior years
of a change in accounting principle of $15.8 million but would have recognized
approximately $1 million per quarter in additional amortization relating to
goodwill and other intangible assets. In such circumstances, the Company's net
loss for the quarter and six months ended August 31, 2002 would have been
approximately $17.3 million and $26.9 million, respectively, or $0.51 and $0.79
per share.
NOTE C - INVENTORIES
Inventories consist of the following (in thousands):
August 31, 2002 February 28, 2002
----------------- -----------------
Purchased parts $ 11,291 $ 18,043
Work in progress 1,823 6,870
Finished goods 3,347 2,611
----------------- -----------------
$ 16,461 $ 27,524
================= =================
NOTE D - SALE OF FIXED ASSETS
On May 31, 2002, the Company completed the previously announced sale of its
Wichita, Kansas office building. The Company used the $2.0 million in gross
proceeds from the sale to pay down amounts outstanding under its then existing
revolving credit facility.
NOTE E - ACCRUED EXPENSES AND SPECIAL CHARGES
Accrued expenses and other long-term liabilities at February 28, 2002 included
amounts associated with certain special charges incurred during the fourth
quarter of fiscal 2002. Activity during the first six months of fiscal 2003
related to such accruals was as follows (in thousands):
Accrued Balance Revisions Accrued Balance
February 28, 2002 Payments to Estimates August 31, 2002
----------------- -------- ------------ ---------------
Severance and related charges $ 3,047 $ (2,634) $ (213) $ 200
Future lease costs for properties
no longer being used $ 3,643 $ (1,091) $ (2) $ 2,550
The reduction in estimated severance and related charges of $0.2 million
occurred during the first quarter of fiscal 2003 and was recognized through a
reduction in selling, general and administrative expenses.
During the first and second quarters of fiscal 2003, the Company continued to
implement actions designed to lower costs and improve operational efficiency.
During the quarter ended May 31, 2002, the Company incurred special charges of
approximately $2.8 million, including $2.4 million for severance payments and
related benefits associated with a workforce reduction affecting 103 employees,
and $0.4 million for the closure of its leased facility in Chicago, Illinois. At
May 31, 2002 and August 31, 2002, approximately $1.1 million and $0.5 million,
respectively, of the special charges incurred in the first quarter of fiscal
2003 remained unpaid. The Company expects to pay the majority of the remaining
costs in the third quarter of fiscal 2003.
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 follows from the Company's decision to consolidate virtually all of
its manufacturing operations into its Dallas, Texas facilities. The inventory
adjustments reflect 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 reflect 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 include costs actually incurred during
the quarter as well as an accrual of the amounts by which total contract costs
are expected to exceed total contract revenue. At August 31, 2002, approximately
$4.0 million of the special charges incurred in the second quarter of fiscal
2003 remained unpaid. The Company expects to pay the majority of the remaining
costs during the balance of fiscal 2003.
The following table summarizes the net effect on reported operating results by
financial statement category of all special charges activities for the quarter
and six months ended August 31, 2002 (in millions).
Selling, General
Cost of Research and and
Goods Sold Development Administrative Total
---------- ------------ ---------------- -------
Quarter ended May 31, 2002
Severance payments and related benefits $ 1.1 $ 0.4 $ 0.9 $ 2.4
Adjustments to severance accruals from fiscal 2002 -- -- (0.2) (0.2)
Facility closure 0.3 0.1 -- 0.4
---------- ------------ ---------------- -------
Total $ 1.4 $ 0.5 $ 0.7 $ 2.6
---------- ------------ ---------------- -------
Quarter ended August 31, 2002
Severance payments and related benefits $ 0.8 $ 0.4 $ 1.6 $ 2.8
Facility closure -- -- 0.4 0.4
Write down of excess inventories 2.2 -- -- 2.2
Costs associated with loss contracts 4.7 -- -- 4.7
---------- ------------ ---------------- -------
Total $ 7.7 $ 0.4 $ 2.0 $ 10.1
---------- ------------ ---------------- -------
Total for six months ended August 31, 2002 $ 9.1 $ 0.9 $ 2.7 $ 12.7
========== ============ ================ =======
NOTE F - LONG-TERM BORROWINGS
At August 31 and February 28, 2002, the Company's long-term debt was comprised
of the following (in thousands, with balance sheet classifications in each case
reflecting the terms of subsequent refinancings as further discussed below)
August 31, February 28,
2002 2002
------------ ------------
Mortgage loan, bearing interest payable monthly at the greater of 10.5%
or the prime rate plus 2.0%; principal due May 28,
2005; subsequently modified as discussed below $ 14,000 $ --
Convertible notes, net of unamortized discount of $703,
subsequently refinanced in full as discussed below 9,297 --
Amortizing term loan, subsequently refinanced in full -- 22,480
Revolving credit, bearing interest payable monthly at the prime rate plus
a margin; repaid in full during the second quarter of fiscal 2003;
terminated by Company on August 29, 2002 in anticipation of
subsequent refinancing described below -- 7,500
------------ ------------
Total debt outstanding 23,297 29,980
Less: current portion (5,556) (6,000)
------------ ------------
Long-term debt, net of current portion $ 17,741 $ 23,980
============ ============
During fiscal 2000, the Company entered into a $125 million amortizing term loan
facility and a $25 million revolving credit facility to finance its merger with
Brite Voice Systems, Inc. ("Brite"). Initial borrowings under the facilities
were $135 million, and at February 28, 2002, the Company owed approximately
$22.5 million and $7.5 million under the term loan and revolving credit
facility, respectively.
Although it had made all required payments under the facilities as well as
certain discretionary prepayments of principal on the term loan during the life
of the facilities, at February 28, 2002, the Company was not in compliance with
a designated fixed charge coverage ratio, one of four financial covenants
required by the facilities. In response to this situation, during the quarter
ended May 31, 2002, the Company restructured its long-term debt. In connection
with this restructuring, the Company retired the term loan, repaid a portion of
the amount outstanding under the revolver, amended the revolving credit facility
to provide for a maximum revolving commitment equal to the lesser of $12.0
million or a defined borrowing base comprised of a percentage of eligible
domestic receivables and inventory and received a permanent waiver from the
lending group for the past non-compliance with the financial covenant. In June
2002, the Company repaid the remaining $4.0 million outstanding under the
revolver, and in August 2002, in anticipation of establishing alternative
financing with a new lender, the Company terminated the revolver.
In connection with the restructuring, the Company incurred approximately $1.6
million in new debt issuance costs, consisting primarily of legal and investment
banking fees, which were capitalized and which will be charged to interest
expense over the life of the related debt obligations. The Company also wrote
off to interest expense in the first quarter of fiscal 2003 $0.4 million in
remaining debt issuance costs related to the retired term loan.
Convertible Notes, Warrants and Registration Requirements
On May 29, 2002, the Company entered into a Securities Purchase Agreement, by
and among the Company and the buyers named therein (the "Buyers"), pursuant to
which the Buyers agreed to purchase convertible notes (the "Convertible Notes"),
in an aggregate principal amount of $10.0 million, convertible
into shares of the Company's common stock (the "Conversion Shares"), and
warrants (the "Warrants") initially exercisable for an aggregate of 621,304
shares of the Company's common stock (the "Warrant Shares") at an exercise price
of $4.0238 per share. The fair value ($1.1 million) of the Warrants issued by
the Company was recorded as a discount on the Convertible Notes.
The Securities Purchase Agreement obligated the Company to seek shareholder
approval of the potential issuance of common stock upon the conversion and
exercise, respectively, of the Convertible Notes and Warrants to the extent such
issuance equals or exceeds 20% of the Company's outstanding shares. The Company
obtained such approval at its annual meeting in August 2002.
Amortization and Repayment of Convertible Notes
The Convertible Notes were scheduled to be repaid in monthly installments of
principal in the amount of $1.0 million, plus accrued interest on the applicable
installments at 6% per annum, commencing September 1, 2002. The terms of the
convertible notes allowed the Company, at its option, to make payment in cash
or, through a partial conversion of the Convertible Notes, through the Company's
issuance of common stock. The Convertible Notes also allowed the Company,
subject to certain conditions, to redeem some or all of the principal amount of
the Convertible Notes in excess of current monthly installments for a cash
amount equal to the sum of 105% of the principal amount being redeemed plus
accrued interest at 6% per annum with respect to the principal amount. In
September 2002, the Company made its first scheduled principal payment of $1.0
million under the Convertible Notes and then subsequently repaid the remaining
$9.0 million principal balance outstanding under the Convertible Notes along
with accrued interest and a repayment premium of approximately $0.5 million
using the proceeds of a new $10.0 million term loan discussed below.
Warrants
In connection with the sale of the Convertible Notes, the Company issued
Warrants to the Buyers. The Warrants give the holders the right to purchase from
the Company, for a period of three years, an aggregate of 621,304 shares of the
Company's common stock for $4.0238 per share as of the date of issuance. Both
the number of Warrants and the exercise price of the Warrants are subject to
antidilution adjustments as set forth in the Warrants. If the Company is
prohibited from issuing Warrant Shares under the rules of the Nasdaq National
Market, the Company must redeem for cash those Warrant Shares which cannot be
issued at a price per Warrant Share equal to the difference between the weighted
average market price of the Company's common stock on the date of attempted
exercise and the applicable exercise price. The Company's obligations under the
warrants remain in force and are unaffected by the redemption in September 2002
of the Convertible Notes.
Registration Requirements
The Company and the Buyers also entered into a Registration Rights Agreement,
dated as of May 29, 2002 (the "Registration Rights Agreement"), pursuant to
which the Company has filed a registration statement on Form S-3 covering the
resale of the Warrant Shares. The registration statement became effective on
June 27, 2002.
New Term Loan and Revolving Credit Agreement
In August 2002, the Company entered into a new credit facility agreement with a
lender which provides for an amortizing term loan of $10.0 million and a
revolving credit commitment equal to the lesser of $25.0 million minus the
principal outstanding under the term loan and the balance of any letters of
credit ($15.0 million maximum at the loan's inception) or a defined borrowing
base comprised primarily of eligible US and UK accounts receivable ($0.7 million
maximum at the loan's inception).
The term loan principal is due in 36 equal monthly installments of approximately
$0.3 million each beginning October 1, 2002. Interest on the term loan is also
payable monthly and accrues at a rate equal to the then prevailing prime rate of
interest plus 2.75% (7.5% as of the closing date of the loan). Proceeds
from the term loan were used to retire the Convertible Notes described above and
to provide additional working capital to the Company.
Advances under the revolver loan will accrue interest at a rate equal to the
then prevailing prime rate of interest plus a margin of 0.5% to 1.5%, or at a
rate equal to the then prevailing London Inter-bank Offering Rate plus a margin
of 3% to 4%. The Company may request an advance under the revolver loan at any
time during the term of the revolver agreement so long as the requested advance
does not exceed the then available borrowing base. The Company's available
funding based on its US accounts receivable at the date of closing of the new
credit facility was approximately $0.7 million. The initial availability of
funding based on UK accounts receivable is contingent on and will be determined
in connection with the lender's completion of a collateral audit of the
Company's UK subsidiary. The Company has not requested an advance under the
revolver as of the date of this filing. The term loan and the revolving credit
agreement expire on August 29, 2005.
The new credit facility contains terms, conditions and representations that are
generally customary for asset-based credit facilities, including requirements
that the Company comply with certain significant financial and operating
covenants. In particular, the Company is initially required to have EBITDA in
minimum cumulative amounts on a monthly basis through August 31, 2003. While
lower amounts are allowed within each fiscal quarter, the Company must generate
cumulative EBITDA of $0, $2.0 million, $5.0 million and $9.0 million,
respectively, for the three, six, nine and twelve month periods ending November
30, 2002, February 28, 2003, May 31, 2003 and August 31, 2003. Thereafter, the
Company is required to have minimum cumulative EBITDA of $15 million and $20
million for the 12-month periods ending November 30, 2003 and February 28, 2004,
respectively, and $25 million for the 12-month periods ending each fiscal
quarter thereafter. The Company is also required to maintain defined levels of
actual and projected service revenues and is prohibited from incurring capital
expenditures in excess of $1.6 million for the six months ending February 28,
2003 and in excess of $4.0 million for any fiscal year thereafter except in
certain circumstances and with the lender's prior approval. Borrowings under the
new credit facility are secured by first liens on virtually all of the Company's
personal property and by a subordinated lien on the Company's Dallas
headquarters. The new credit facility contains certain qualified cross-default
provisions with respect to the Company's mortgage loan.
Mortgage Loan
In October 2002, the Company amended its mortgage loan, secured by a first lien
on the Company's Dallas headquarters, to reduce a minimum net equity requirement
contained in the loan agreement from $35.0 million to $25.0 million and to
provide that compliance with the covenant would be measured on a quarterly
basis. In connection with this amendment, the Company prepaid $1.5 million of
the principal amount outstanding under the loan. The mortgage loan contains
certain qualified cross-default provisions with respect to the Company's new
term loan and revolving credit agreement.
Costs Associated with the Refinancings
In connection with the new term loan and revolving credit agreement, the Company
will incur a total of approximately $1.0 million in new debt issuance costs,
consisting primarily of investment banking and legal fees, which will be
capitalized and charged to interest expense over the life of the related debt
obligations. Of this amount, the Company had paid approximately $0.4 million as
of August 31, 2002. During the third quarter of fiscal 2003, the Company will
recognize a loss of approximately $1.9 million on the early extinguishment of
the convertible notes. The loss will include the cost of the early conversion
premium discussed above as well as the non-cash costs to write off the
unamortized debt issuance costs and to write off the unamortized discount
associated with the convertible notes.
Use of Interest Rate Swap Arrangements in Fiscal 2002
From July 1999 through October 2001, the Company used interest rate swap
arrangements to hedge the variability of interest payments on its variable rate
credit facilities. While in effect, the swap arrangements essentially converted
the Company's then outstanding floating rate debt to a fixed rate basis. The
Company terminated its swap arrangements in October 2001 in response to the
continued downward movement in interest rates during fiscal 2002 and had no
derivative contracts in place as of August 31, 2002 or February 28, 2002.
NOTE G - INCOME TAXES
On March 7, 2002, United States tax law was amended to allow companies which
incurred net operating losses in 2001 and 2002 to carry such losses back a
maximum of five years instead of the maximum of two years previously allowed. As
a result of this change, during the first quarter of fiscal 2003, the Company
used $21.5 million of its previously reported net operating loss carryforwards
and $0.4 million of its previously reported tax credit carryforwards and
recognized a one-time tax benefit of $7.9 million, of which $2.2 million was
recognized as additional capital associated with previous stock option
exercises.
Also during the first quarter, and as discussed in Note B, the Company reduced
its deferred tax liabilities by $1.4 million in connection with the
reclassification of its assembled workforce intangible asset to goodwill. As a
result of this transaction, the Company increased the valuation allowance
associated with its net deferred tax asset by $1.4 million.
The effects of both of these first quarter events are included in the Company's
net tax benefit of $4.5 million in the consolidated statement of operations for
the six months ended August 31, 2002. For the quarter ended August 31, 2002, the
Company recognized a tax benefit on the pretax losses of certain foreign
subsidiaries, because the Company believes it will be able to realize the tax
benefit of those losses by offsetting them against taxable income of a prior
year. The Company has not recognized a current benefit associated with its
domestic pretax losses, because it has exhausted its ability to offset such
losses against taxable income of prior years, and the existence of recent losses
prevents it from concluding that it is more likely than not that such benefit
will be realized.
NOTE H - EARNINGS PER SHARE
(in thousands except per share data)
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Income (loss) before the cumulative
effect of a change in accounting
principle $ (16,272) $ 1,725 $ (24,951) $ 3,133
Cumulative effect on prior years of
a change in accounting principle -- -- (15,791) --
---------- ---------- ---------- ----------
Net Income (loss) $ (16,272) $ 1,725 $ (40,742) $ 3,133
---------- ---------- ---------- ----------
Denominator:
Denominator for basic
earnings per share 34,067 33,245 34,053 33,152
Employee stock options -- 1,509 -- 1,326
Non-vested restricted shares -- 39 -- 36
---------- ---------- ---------- ----------
Dilutive potential common shares -- 1,548 -- 1,362
---------- ---------- ---------- ----------
Denominator for diluted
earnings per share 34,067 34,793 34,053 34,514
BASIC:
Income (loss) before the cumulative
Effect of a change in
Accounting principle $ (0.48) $ 0.05 $ (0.73) $ 0.09
Cumulative effect on prior years of
a change in accounting principle -- -- (0.47) --
---------- ---------- ---------- ----------
Net Income (loss) $ (0.48) $ 0.05 $ (1.20) $ 0.09
========== ========== ========== ==========
DILUTED:
Income (loss) before the cumulative
effect of a change in
accounting principle $ (0.48) $ 0.05 $ (0.73) $ 0.09
Cumulative effect on prior years of
a change in accounting principle -- -- (0.47) --
---------- ---------- ---------- ----------
Net Income (loss) $ (0.48) $ 0.05 $ (1.20) $ 0.09
========== ========== ========== ==========
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 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 similarly excluded from the computation of diluted
earnings per share for the quarter and six month period. As described in Note F
above, the convertible notes and related accrued interest were redeemed in full
for cash in September 2002. Options to purchase 1,515,937 and 1,595,437 shares
of common stock at average exercise prices of $14.67 and $14.49, respectively,
were outstanding during the three and six month periods ended August 31, 2001,
respectively, but were not included in the computation of diluted earnings per
share because the options' prices were greater than
the average market price of the Company's common stock during such periods and,
therefore, the effect would have been antidilutive.
NOTE I - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
Beginning with the second quarter of fiscal 2003, the Company reorganized into a
single, integrated business unit, focusing on a streamlined product line. The
Company will continue to sell integrated systems as well as related services. As
a complement to the Company's systems sales, it also provides and manages
applications for customers on a managed service provider (MSP) basis. The
information for all periods shown has been restated to reflect this
reorganization.
The Company's net sales by market and geographic area were as follows (in
thousands):
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Sales by Market:
Enterprise Systems $ 11,258 $ 24,427 $ 23,568 $ 45,246
Network Systems 6,647 18,028 15,972 35,651
Services 17,708 22,034 34,489 45,098
---------- ---------- ---------- ----------
Total $ 35,613 $ 64,489 $ 74,029 $ 125,995
========== ========== ========== ==========
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
---------- ---------- ---------- ----------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Geographic Area Net Sales:
United States $ 20,657 $ 34,047 $ 43,080 $ 65,953
The Americas (Excluding U.S.) 1,988 6,898 3,487 10,460
Pacific Rim 442 2,651 962 3,688
Europe, Middle East & Africa 12,526 20,893 26,500 45,894
---------- ---------- ---------- ----------
Total $ 35,613 $ 64,489 $ 74,029 $ 125,995
========== ========== ========== ==========
Concentration of Revenue
One customer, MMO2, formerly BT Cellnet, accounted for approximately 11% and 14%
of the Company's sales during the three-month periods ended August 31, 2002 and
2001, respectively. The same customer accounted for 11% and 15% of the Company's
sales during the six-month periods ended August 31, 2002 and 2001, respectively.
Under the terms of its managed services contract with MMO2 and at current
exchange rates, the Company will recognize revenues of $0.9 million per month
through July, 2003. The amount received under the agreement may vary based on
future changes in the exchange rate between the dollar and the British pound. No
other customer accounted for 10% or more of the Company's sales during the three
and six month periods ended August 31, 2002 and 2001.
NOTE J - CONTINGENCIES
Intellectual Property Matters
From time to time Ronald A. Katz Technology Licensing L.P. ("RAKTL") has sent
letters to certain customers of the Company suggesting that the customer should
negotiate a license agreement to cover the practice of certain patents owned by
RAKTL. In the letters, RAKTL has alleged that certain of its patents pertain to
certain enhanced services offered by network providers, including prepaid card
and wireless services and postpaid card services. RAKTL has further alleged that
certain of its patents pertain to certain call processing applications,
including applications for call centers that route calls using a called party's
DNIS identification number. As a result of the correspondence, an increasing
number of the Company's customers have had discussions, or are in discussions,
with RAKTL. Certain products offered by the Company can be programmed and
configured to provide enhanced services to network providers
and call processing applications for call centers. The Company's contracts with
customers usually include a qualified obligation to indemnify and defend
customers against claims that products as delivered by the Company infringe a
third party's patent.
None of the Company's customers have notified the Company that RAKTL has claimed
that any product provided by the Company infringes any claims of any RAKTL
patent. Accordingly, the Company has not been required to defend any customers
against a claim of infringement under a RAKTL patent. The Company has, however,
received letters from customers notifying the Company of the efforts by RAKTL to
license its patent portfolio and reminding the Company of its potential
obligations under the indemnification provisions of the applicable agreements in
the event that a claim is asserted. In response to correspondence from RAKTL, a
few customers have attempted to tender to the Company the defense of its
products under contractual indemnity provisions. The Company has informed these
customers that while it fully intends to honor any contractual indemnity
provisions, it does not believe it currently has any obligation to provide such
a defense because RAKTL does not appear to have made a claim that a Company
product infringes a patent. Some of these customers have disagreed with the
Company and believe that the correspondence from RAKTL can be construed as
claim(s) against the Company's products. In the matter of Katz Technology
Licensing, LP v. Verizon Communications Inc., et al, No. 01-CV-5627, pending in
U.S. District Court, Eastern District of Pennsylvania, RAKTL has alleged that
Verizon Communications, Inc. ("Verizon") and certain of its affiliates infringe
patents held by RAKTL. From 1997 until November 2001 the Company's wholly owned
subsidiary, Brite, provided prepaid services to an affiliate of Verizon under a
managed services contract. The affiliate, which is named as a defendant in the
lawsuit, recently notified Brite of the pendency of the lawsuit and referenced
provisions of the managed services contract which require Brite to indemnify the
affiliate against claims that its services infringe a patent. The claims in the
lawsuit make general references to prepaid services and a variety of other
services offered by Verizon and the affiliate but do not refer to Brite's
products or services. The Company has informed the affiliate that it can find no
basis for an indemnity obligation under the expired contract.
Even though RAKTL has not alleged that a product provided by the Company
infringes a RAKTL patent, it is always possible that RAKTL may do so. In the
event that a Company product becomes the subject of litigation, a customer could
attempt to invoke the Company's indemnity obligations under the applicable
agreement. As with most sales contracts with suppliers of computerized
equipment, the Company's contractual indemnity obligations are generally limited
to the products and services provided by the Company, and generally require the
customer to allow the Company to have sole control over any litigation and
settlement negotiations with the patent holder. The customers who have received
letters from RAKTL generally have multiple suppliers of the types of products
that might potentially be subject to claims by RAKTL.
Even though no claims have been made that a specific product offered by the
Company infringes any claim under the RAKTL patent portfolio, the Company has
received opinions from its outside patent counsel that certain products and
applications offered by the Company do not infringe certain claims of the RAKTL
patents. The Company has also received opinions from its outside counsel that
certain claims under the RAKTL patent portfolio are invalid or unenforceable.
Furthermore, based on the reviews by outside counsel, the Company is not aware
of any valid and enforceable claims under the RAKTL portfolio that are infringed
by the Company's products. If the Company does become involved in litigation in
connection with the RAKTL patent portfolio, under a contractual indemnity or any
other legal theory, the Company intends to vigorously contest the claims and to
assert appropriate defenses. An increasing number of companies, including some
large, well known companies and some customers of the Company, have already
licensed certain rights under the RAKTL patent portfolio. RAKTL has previously
announced license agreements with, among others, AT&T Corp., Microsoft
Corporation and International Business Machines Corporation.
In the matter of Aerotel, Ltd. et al, vs. Sprint Corporation, et al, Cause No.
99-CIV-11091 (SAS), pending in the United States District Court, Southern
District of New York, Aerotel, Ltd., has sued Sprint Corporation alleging that
certain prepaid services offered by Sprint are infringing Aerotel's U.S. Patent
No. 4,706,275 ("275 patent"). According to Sprint, the suit originally focused
on land-line prepaid services not
provided by the Company. As part of an unsuccessful mediation effort, Aerotel
also sought compensation for certain prepaid wireless services provided to
Sprint PCS by the Company. As a result of the mediation effort, Sprint has
requested that the Company provide a defense and indemnification to Aerotel's
infringement claims, to the extent that they pertain to any wireless prepaid
services offered by the Company. In response to this request, the Company has
offered to assist Sprint's counsel in defending against such claims, to the
extent they deal with issues unique to the system and services provided by the
Company, and to reimburse Sprint for the reasonable attorneys' fees associated
therewith. The trial court has stayed the lawsuit pending certain rulings from
the United States Patent and Trademark Office. The Company has received opinions
from its outside patent counsel that the wireless prepaid services offered by
the Company do not infringe the "275 patent". If the Company does become
involved in litigation in connection with the "275 patent", under a contractual
indemnity or any other legal theory, the Company intends to vigorously contest
any claims that its prepaid wireless services infringe the "275 patent" and to
assert appropriate defenses.
Audiofax, which holds certain patents covering unified messaging products, has
advised the Company and other businesses that, if they provide unified
messaging, they are infringing Audiofax's patents. Audiofax has therefore
recently requested that the Company enter into a license agreement for such
patents. The Company is in the process of reviewing its product offerings
against the claims in the patents to determine whether a license of the Audiofax
patents is necessary or appropriate. There is no assurance that Audiofax and the
Company will be willing or able to come to terms on any such license agreement.
Tax Matters
The Company's tax returns for its fiscal years 2000 and 2001 are undergoing
audit by the Internal Revenue Service. In October 2002, the Company received a
"Notice of Proposed Adjustment", stating that the IRS believes the Company
overstated a net operating loss carry back claim relating to the Company's
fiscal 2000 taxable loss. The notice discussed the reasons for the proposed
adjustment and invited the Company to provide the IRS any information that might
alter or reverse the proposed adjustment. The Company is in the process of
reviewing the issues raised in the Notice. When the review is completed, the
Company will provide its position and any relevant information to the IRS. If
the IRS ultimately adopts the position set forth in the Notice, and that
position is sustained, the Company will have to repay approximately $3 million
of previously received refunds, a portion of which may result in a charge to the
Company's tax provision.
Pending Litigation
David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated
v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, pending in the United
States District Court, Northern District of Texas, Dallas Division:
Several related class action lawsuits were filed in the United States District
Court for the Northern District of Texas on behalf of purchasers of common stock
of the Company during the period from October 12, 1999 through June 6, 2000, the
"Class Period." Plaintiffs have filed claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and the Securities and Exchange Commission
Rule 10b-5 against the Company as well as certain named current and former
officers and directors of the Company on behalf of the alleged class members. In
the complaint, Plaintiffs claim that the Company and the named current and
former officers and directors issued false and misleading statements during the
Class Period concerning the financial condition of the Company, the results of
the Company's merger with Brite and the alleged future business projections of
the Company. Plaintiffs have asserted that these alleged statements resulted in
artificially inflated stock prices.
The Company believes that it and its officers complied with their obligations
under the securities laws, and intends to defend the lawsuits vigorously. The
Company responded to these complaints, which were consolidated into one
proceeding, by filing a motion to dismiss the complaint in the consolidated
proceeding. The Company asserted that the complaint lacked the degree of
specificity and factual support to meet the pleading standards applicable to
federal securities litigation. On this basis, the
Company requested that the United States District Court for the Northern
District of Texas dismiss the complaint in its entirety. Plaintiffs responded to
the Company's request for dismissal. On August 8, 2002, the Court entered an
order granting the Company's motion to dismiss the class action lawsuit. In the
order dismissing the lawsuit, the Court granted plaintiffs an opportunity to
reinstate the lawsuit by filing an amended complaint. Plaintiffs filed an
amended complaint on September 23, 2002. The Company intends to file a motion to
dismiss the amended complaint. All discovery and other proceedings not related
to the dismissal will be stayed pending resolution of the Company's request to
dismiss the amended complaint.
On or about April 26, 2002, Telemac Corporation ("Telemac") commenced an
arbitration proceeding in the Los Angeles, California, office of JAMS against
the Company and InterVoice Brite Ltd. and Brite Voice Systems, Inc., JAMS Case
No. 1220026278, claiming fraud, negligent misrepresentation and breach of
contract in connection with formation of and the performance under certain
agreements between the Company, and/or its alleged predecessors, and Telemac,
and seeking reformation, compensatory damages of approximately $58 million,
punitive damages and attorneys' fees and other costs and fees. Telemac's
allegations arise out of the negotiations and terms of the Amended and Restated
Prepaid Phone Processing Agreement between Telemac and Brite Voice Systems
Group, Ltd., dated November 1, 1998, and certain amendments thereto under which
Telemac licensed prepaid wireless software for use in various markets and
exploited in the United Kingdom under agreement with Cellnet, a provider of
wireless telephony in the United Kingdom.
The Company has asserted counterclaims against Telemac for breach of contract,
breach of warranty and breach of the implied covenant of good faith and fair
dealing with respect to the capabilities of software supplied by Telemac and
handsets provided by parties contracting with Telemac and other matters.
The Company and Telemac have selected as arbitrator Justice William A. Masterson
(Ret.) formerly of the California Court of Appeal and the Los Angeles County
Superior Court. The arbitration hearing is set to commence January 13, 2003, in
Los Angeles, California. The Company acknowledges it may owe an immaterial
amount for certain software development services rendered by Telemac. With the
exception of this immaterial amount, the Company believes that the claims
asserted by Telemac are without merit. The Company further believes it has
meritorious defenses and counterclaims and intends to vigorously defend the
claims of Telemac and assert the Company's claims in the arbitration.
Both Telemac and the Company filed motions for summary disposition. Those
motions have been denied. An amended complaint was recently filed by Telemac.
The Company is preparing its amended counterclaims, which will be filed by
October 19, 2002. Discovery is ongoing, including depositions which are
scheduled to take place in November, 2002.
The Company is a defendant from time to time in lawsuits incidental to its
business. Based on currently available information, the Company believes that
resolution of all known contingencies, including the matters described above, is
uncertain, and there can be no assurance that future costs related to such
matters would not be material to the Company's financial position or results of
operations.
NOTE K - SUBSEQUENT EVENTS
During September 2002, the Company announced plans to reduce its workforce by
approximately 50 positions. The Company estimates that it will incur charges of
between $1.0 million and $1.5 million during the third quarter in connection
with this action. The Company anticipates that operating expenses will be
reduced approximately $0.5 million to $0.8 million per quarter from second
quarter fiscal 2003 levels once these restructuring activities are completed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including,
without limitation, statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements" located elsewhere herein regarding the
Company's financial position, business strategy, plans and objectives of
management of the Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to
important factors described elsewhere in this report, the following significant
factors, among others, sometimes have affected, and in the future could affect,
the Company's actual results and could cause such results during fiscal 2003,
and beyond, to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company:
o The Company has experienced recent operating losses and may not operate
profitably in the future. The Company incurred net losses of
approximately $44.7 million in fiscal 2002, $2.3 million in fiscal 2001
and $14.8 million in fiscal 2000. For the first six months of fiscal
2003, the Company incurred a net loss of $40.7 million. The Company may
continue to incur losses, which could hinder the Company's ability to
operate its current business. The Company cannot provide assurances that
it will be able to generate sufficient revenues from its operations to
achieve or sustain profitability in the future.
o The Company is obligated to make periodic payments of principal and
interest under its financing instruments. The Company has material
indebtedness outstanding under a mortgage loan with Beal Bank, S.S.B.,
secured by the Company's office facilities in Dallas, Texas and under a
senior secured term loan facility. The Company is required to make
periodic payments of interest on each of these financial instruments
and, in the case of the term loan, periodic payments of principal. The
Company may, from time to time, have additional indebtedness outstanding
under its new revolving credit facility. The Company is not in default
under any of the financing instruments and believes it will have the
resources to make all required principal and interest payments. If,
however, the Company at any time does default on any of its payment
obligations or other obligations under any financing instrument, the
creditors under the applicable instrument will have all rights available
under the instrument, including acceleration, termination and
enforcement of security interests. The financing instruments also have
certain qualified cross-default provisions, particularly for
acceleration of indebtedness under one of the other instruments. Under
such circumstances, the Company's cash position and liquidity would be
severely impacted, and it is possible the Company would not be able to
pay its debts as they come due.
o The Company's financing agreements include significant financial and
operating covenants and default provisions. In addition to the payment
obligations, the Company's senior secured term loan and revolving credit
facility and its mortgage loan facility contain significant financial
covenants, operating covenants and default provisions. If the Company
does not comply with any of these covenants and default provisions, the
Company's secured lenders can accelerate all indebtedness outstanding
under the facilities and foreclose on substantially all of the Company's
assets. In order for the Company to comply with the escalating minimum
EBITDA requirements in its senior secured credit facility, the Company
will have to increase its revenues for its third quarter of fiscal 2003
as compared to revenues for its second fiscal quarter as disclosed in
this quarterly report, and continue to increase revenues and/or lower
expenses in future quarters. See the discussion of the Company's
financing facilities set forth in "Liquidity and Capital Resources" in
this Item 2.
o General business activity has declined. The Company's sales are largely
dependent on the strength of the domestic and international economies
and, in particular, on demand for telecommunications equipment,
computers, software and other technology products. The market for
telecommunications equipment has declined sharply, and the markets for
computers, software and other technology products also have declined. In
addition, there is an increased concern that demand for the types of
products offered by the Company will remain soft for some period of time
as a result of domestic and global economic and political conditions.
o In recent quarters, the Company has fallen short of its sales and
earnings expectations. Many of the Company's transactions are completed
in the same fiscal quarter as ordered. The size and timing of some
transactions have historically caused sales fluctuations from quarter to
quarter. While in the past the impact of these fluctuations was
mitigated to some extent by the geographic and vertical market
diversification of the Company's existing and prospective customers, the
Company has become increasingly prone to quarterly sales fluctuations
because of its sales to the enhanced telecommunications services systems
market. The quantity and size of large sales (sales valued at
approximately $2.0 million or more) during any quarter can cause wide
variations in the Company's quarterly sales and earnings, as such sales
are unevenly distributed throughout the fiscal year. The Company's
accuracy in estimating future sales is largely dependent on its ability
to successfully qualify, estimate and close system sales during a
quarter. Based on these difficulties, the Company has not forecasted
revenues or earnings for any future reporting period. See the discussion
entitled "Sales" in this Item 2 for a discussion of the Company's
"pipeline" of system sales opportunities.
o The Company is subject to potential and pending lawsuits and other
claims. The Company is subject to certain potential and pending lawsuits
and other claims discussed in Item 1 "Legal Proceedings" in Part II, and
in the Company's other SEC filings. The Company believes that each of
the pending lawsuits to which it is subject is without merit and intends
to defend each matter vigorously. There can be no assurances, however,
that the Company will prevail in any or all of the litigation or other
matters. An adverse judgment in any of these matters, as well as the
Company's expenses relating to its defense of a given matter, could have
consequences materially adverse to the Company.
o The Company faces intense competition based on product capabilities and
experiences ever increasing demands from its actual and prospective
customers for its products to be compatible with a variety of rapidly
proliferating computing, telephony and computer networking technologies
and standards. The ultimate success of the Company's products is
dependent, to a large degree, on the Company allocating its resources to
developing and improving products compatible with those technologies,
standards and functionalities that ultimately become widely accepted by
the Company's actual and prospective customers. The Company's success is
also dependent, to a large degree, on the Company's ability to implement
arrangements with other vendors with complementary product offerings to
provide actual and prospective customers greater functionality and to
ensure that the Company's products are compatible with the increased
variety of technologies and standards. The principal competitors for the
Company's systems include AVAYA, IBM, Nortel Networks, Comverse
Technology, Ericsson, Lucent Technologies and UNISYS. Many of the
Company's competitors have greater financial, technological and
marketing resources than the Company has. Although the Company has
committed substantial resources to enhance its existing products and to
develop and market new products, there is no assurance it will be
successful.
o The Company may not be able to retain its customer base and, in
particular, its more significant customers, such as MMO2. The Company's
success depends substantially on retaining its significant customers.
The loss of one of the Company's significant customers could negatively
impact the Company's results of operations. The Company's installed base
of customers generally is not contractually obligated to place further
systems orders with the Company or to extend their services contracts
with the Company at the expiration of their current contracts.
Sales to MMO2, formerly BT Cellnet, which purchases both systems and
managed services from the Company, accounted for approximately 11% and
14% of the Company's total sales during the
three month periods ended August 31, 2002 and 2001, respectively. Under
the terms of its managed services contract with MMO2 and at current
exchange rates, the Company will recognize revenues of approximately
$0.9 million per month through July 2003, down from approximately $2.4
million per month recognized during the second quarter of fiscal 2002.
The amounts received under the agreement may vary based on future
changes in the exchange rate between the dollar and the British pound.
o The Company's reliance on significant vendor relationships could result
in significant expense or an inability to serve its customers if it
loses these relationships. Although the Company generally uses standard
parts and components for its products, some of its components, including
semi-conductors and, in particular, digital signal processors
manufactured by Texas Instruments and AT&T Corp., are available only
from a small number of vendors. Likewise, the Company licenses speech
recognition technology from a small number of vendors. To date, the
Company has been able to obtain adequate supplies of needed components
and licenses in a timely manner. If the Company's significant vendors
are unable or cease to supply components or licenses at current levels,
the Company may not be able to obtain these items from another source.
Consequently, the Company would be unable to provide products and to
service its customers, which would negatively impact its business and
operating results.
o The Company's inability to protect its intellectual property against
infringement and infringement claims could negatively impact its
business. The Company's protection of its patent, copyright, trademarks
and other proprietary rights in its products and technologies is
critical to the continued success of its business. Although the
Company's proprietary rights are protected by a combination of
intellectual property laws, nondisclosure safeguards and license
agreements, it is technologically possible for the Company's competitors
to copy aspects of the Company's products in violation of these
protected rights. Moreover, it may be possible for competitors to
provide products and technologies competitive to those of the Company
without violating the Company's protected rights. Even in cases where
patents protect aspects of the Company's technology, the detection and
policing of the unauthorized use of the patented technology is
difficult. Further, judicial enforcement of patents, trademarks and
copyrights may be uncertain, particularly in foreign countries.
Unauthorized use of the Company's proprietary technology by its
competitors could negatively impact its business, operating results and
financial condition.
o If third parties assert claims that the Company's products or services
infringe on their technology and related intellectual property rights,
whether the claims are made directly against the Company or against the
Company's customers, the Company could incur substantial costs to defend
these claims. If any of these claims is ultimately successful, a third
party could require the Company to pay substantial damages, discontinue
the use and sale of infringing products, expend significant resources to
acquire non-infringing alternatives, and/or obtain licenses to use the
infringed intellectual property rights. Moreover, where the claims are
asserted with respect to the Company's customers, additional expenses
may be involved in indemnifying the customer and/or designing and
providing non-infringing products.
o The Company is exposed to risks related to its international operations
that could increase its costs and hurt its business. The Company's
products are currently sold in more than 75 countries. The Company's
international sales, as a percentage of total Company sales, were 42%
and 47% in the three months ended August 31, 2002 and 2001,
respectively. International sales are subject to certain risks,
including:
o fluctuations in currency exchange rates;
o the difficulty and expense of maintaining foreign offices and
distribution channels;
o tariffs and other barriers to trade;
o greater difficulty in protecting and enforcing intellectual
property rights;
o general economic and political conditions in each country;
o loss of revenue, property and equipment from expropriation;
o import and export licensing requirements; and
o additional expenses and risks inherent in conducting operations in
geographically distant locations, including risks arising from
customers speaking different languages and having different
cultural approaches to the conduct of business.
o The Company's inability to properly estimate costs under fixed price
contracts could negatively impact its profitability. Some of the
Company's contracts to develop application software and customize
systems provide for the customer to pay a fixed price for its products
and services regardless of whether the Company's costs to perform under
the contract exceed the amount of the fixed price. If the Company is
unable to estimate accurately the amount of future costs under these
fixed price contracts, or if unforeseen additional costs must be
incurred to perform under these contracts, the Company's ability to
operate profitably under these contracts will be adversely affected. The
Company has realized significant losses under certain customer contracts
in the past and may experience similar significant losses in the future.
Many of the Company's contracts, particularly for managed services,
foreign contracts and contracts with telecommunication companies,
include provisions for the assessment of liquidated damages for delayed
performance by the Company. Since the Company's projects frequently
require a significant degree of customization, it is difficult for the
Company to predict when it will complete such projects. The Company has
had to pay liquidated damages in the past and may have to pay additional
liquidated damages in the future. Any such future liquidated damages
could be significant.
o Increasing consolidation in the telecommunications and financial
industries could affect the Company's revenues and profitability.
Several of the Company's significant customers are in the
telecommunications and financial industries, which are undergoing
increasing consolidation as a result of merger and acquisition activity.
This activity involving the Company's significant customers could
decrease the number of customers purchasing the Company's products
and/or delay purchases of the Company's products by customers that are
in the process of reviewing their strategic alternatives in light of a
pending merger or acquisition. If the Company has fewer customers or its
customers delay purchases of the Company's products as a result of
merger and acquisition activity, the Company's revenues and
profitability could decline.
o Government action and, in particular, action with respect to the
Telecommunications Act of 1996 regulating the telecommunications
industry could have a negative impact on the Company's business. Future
growth in the markets for the Company's products will depend in part on
privatization and deregulation of certain telecommunication markets
worldwide. Any reversal or slowdown in the pace of this privatization or
deregulation could negatively impact the markets for the Company's
products. Moreover, the consequences of deregulation are subject to many
uncertainties, including judicial and administrative proceedings that
affect the pace at which the changes contemplated by deregulation occur,
and other regulatory, economic and political factors. Any invalidation,
repeal or modification of the requirements imposed by the
Telecommunications Act of 1996 could negatively impact the Company's
business, financial condition and results of operations. Furthermore,
the uncertainties associated with deregulation could cause the Company's
customers to delay purchasing decisions pending the resolution of such
uncertainties.
o Significant market fluctuations could affect the price of the Company's
common stock. Extreme price and volume trading volatility in the U.S.
stock market has had a substantial effect on the market prices of
securities of many high technology companies, frequently for reasons
other than the operating performance of such companies. These broad
market fluctuations could adversely affect the market price of the
Company's common stock.
o 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.
RESULTS OF OPERATIONS
SALES. During the second quarter of fiscal 2003, the Company eliminated its
former Enterprise Solutions / Network Solutions divisional structure and
reorganized its business into a single, integrated business unit focusing on a
streamlined product line. The Company, however, will continue to sell integrated
systems and services into both the enterprise and networks markets and will also
continue to provide and manage applications on a managed service provider (MSP)
basis for customers preferring an outsourced solution.
The Company's total sales for the second quarter and first six months of fiscal
2003 were $35.6 million and $74.0 million, respectively, a decrease of $28.9
million (45%) and $52.0 million (41%), respectively, as compared to the same
periods of fiscal 2002. The Company's enterprise systems, networks systems and
services sales totaled $11.3 million, $6.6 million and $17.7 million,
respectively, for the second quarter of fiscal 2003, down 54%, 63% and 20%,
respectively, from the second quarter of fiscal 2002. Total systems sales were
down $3.7 million (17%) from the first quarter of fiscal 2003, while services
sales increased $0.9 million (5%). The decline in system sales from fiscal 2002
levels reflects the previously reported sharp decline in the Company's primary
markets, particularly the decline in the market for telecommunications
equipment, which the Company has experienced over the last three quarters. The
Company believes the market for telecommunications equipment will remain soft
through fiscal 2004.
The net decline in services sales compared to fiscal 2002 levels is comprised of
decreases in the Company's managed service revenues partially offset by
increases in its warranty and related customer service revenue. The decline in
managed services revenues is attributable to a decrease in the volume of
activity processed under certain of the Company's MSP contracts, including,
particularly, its contract with MMO2 (formerly BT Cellnet). Managed service
revenues under the MMO2 contract totaled approximately $0.9 million per month
for the six months ended August 31, 2002, down significantly from the same
period of fiscal 2002 when such revenues totaled approximately $2.5 million per
month. The lower fee will continue through July 2003 when, unless renewed, the
contract expires. Total systems and services sales to MMO2, accounted for
approximately 11% of the Company's total sales during the three and six month
periods ended August 31, 2002, and 14% and 15% for corresponding periods in
fiscal 2002.
International sales comprised 42% of the Company's total sales during the second
quarter and first six months of fiscal 2003, down slightly from approximately
47% of sales during similar periods for fiscal 2002. The decline is primarily
attributable to lower sales volumes in Latin American and the Pacific Rim in
fiscal 2003 as compared to fiscal 2002.
The Company uses a system combining estimated sales from its service and support
contracts, "pipeline" of systems sales opportunities, and backlog of committed
systems orders to estimate sales and trends in its business. Sales from service
and support contracts, including contracts for MSP managed services, comprised
approximately 50% of the Company's sales for the second quarter of fiscal 2003,
up from 44% in the first quarter of the year and 40% for all of fiscal 2002. The
pipeline of opportunities for systems sales and backlog of systems sales
comprised approximately 18% and 32% of sales, respectively, during the second
quarter of fiscal 2003 and 30% and 26% of sales, respectively, during the first
quarter of fiscal 2003. Each comprised approximately 30% of sales during fiscal
2002.
The Company's service and support contracts range in duration from one month to
three years, with many longer duration contracts allowing customer cancellation
privileges. It is easier for the Company to estimate service and support sales
than to measure systems sales for the next quarter because service and support
contracts generally span multiple quarters and revenues recognized under each
contract are generally similar from one quarter to the next. As described above,
however, a significant portion of the Company's services revenue is derived from
its contract with MM02. As a result of the significant reduction to quarterly
revenues under the managed services contract with MMO2, the Company will have to
increase its sales under other service and support contracts with new or
existing customers to maintain or increase service and support revenues in
future quarters.
The Company's backlog is made up of customer orders for systems for which it has
received complete purchase orders and which the Company expects to ship within
twelve months. Backlog at August 31, 2002 was down slightly from May 2002 but
remained above levels posted during fiscal 2002. Backlog (in millions) as of the
end of the Company's fiscal quarters during fiscal 2003 and 2002 is as follows:
Fiscal Fiscal
Backlog as of 2003 2002
------------- ------ ------
May 31 32.0 31.0
August 31 31.1 25.4
November 30 21.0
February 28 26.0
The Company's pipeline of opportunities for systems sales is the aggregation of
its sales opportunities, with each opportunity evaluated for the date the
potential customer will make a purchase decision, competitive risks, and the
potential amount of any resulting sale. No matter how promising a pipeline
opportunity may appear, there is no assurance it will ever result in a sale.
While this pipeline may provide the Company some sales guidelines in its
business planning and budgeting, pipeline estimates are necessarily speculative
and may not consistently correlate to revenues in a particular quarter or over a
longer period of time. While the Company knows the amount of systems backlog
available at the beginning of a quarter, it must speculate on its pipeline of
systems opportunities for the quarter. The Company's accuracy in estimating
total systems sales for the next fiscal quarter is, therefore, highly dependent
upon its ability to successfully estimate which pipeline opportunities will
close during the quarter.
SPECIAL CHARGES. During the first and second quarters of fiscal 2003, the
Company continued to implement actions designed to lower costs and improve
operational efficiency. During the quarter ended May 31, 2002, the Company
incurred special charges of approximately $2.8 million, including $2.4 million
for severance payments and related benefits associated with a workforce
reduction affecting 103 employees, and $0.4 million for the closure of its
leased facility in Chicago, Illinois. At May 31, 2002 and August 31, 2002,
approximately $1.1 million and $0.5 million, respectively, of the special
charges incurred in the first quarter of fiscal 2003 remained unpaid. The
Company expects to pay the majority of the remaining costs in the third quarter
of fiscal 2003.
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 follows from the Company's decision to consolidate virtually all of
its manufacturing operations into its Dallas, Texas facilities. The inventory
adjustments reflect 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 reflect 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 include costs actually incurred during the quarter as
well as an accrual of the amounts by which total contract costs are expected to
exceed total contract revenue. At August 31, 2002, approximately $4.0 million of
the special charges incurred in the second quarter of fiscal 2003 remained
unpaid. The Company expects to pay the majority of the remaining costs during
the balance of fiscal 2003.
The following table summarizes the net effect on reported operating results by
financial statement category of all special charges activities for the quarter
and six months ended August 31, 2002 (in millions).
Selling, General
Cost of Research and and
Goods Sold Development Administrative Total
---------- ------------ ---------------- -------
Quarter ended May 31, 2002
Severance payments and related benefits $ 1.1 $ 0.4 $ 0.9 $ 2.4
Adjustments to severance accruals from fiscal 2002 -- -- (0.2) (0.2)
Facility closure 0.3 0.1 -- 0.4
---------- ------------ ---------------- -------
Total $ 1.4 $ 0.5 $ 0.7 $ 2.6
---------- ------------ ---------------- -------
Quarter ended August 31, 2002
Severance payments and related benefits $ 0.8 $ 0.4 $ 1.6 $ 2.8
Facility closure -- -- 0.4 0.4
Write down of excess inventories 2.2 -- -- 2.2
Costs associated with loss contracts 4.7 -- -- 4.7
---------- ------------ ---------------- -------
Total $ 7.7 $ 0.4 $ 2.0 $ 10.1
---------- ------------ ---------------- -------
Total for six months ended August 31, 2002 $ 9.1 $ 0.9 $ 2.7 $ 12.7
========== ============ ================ =======
COST OF GOODS SOLD. Cost of goods sold for the second quarter and first six
months of fiscal 2003 was approximately $24.7 million (69.4% of total sales) and
$47.5 million (64.2% of sales) as compared to $31.4 million (48.7% of sales) and
$59.2 million (47.0% of sales) for the second quarter and first six months of
fiscal 2002. Net of the severance, inventory write down, and loss contract
expenses discussed in "Special Charges," above, cost of goods sold for the
second quarter and first six months of fiscal 2003 was $17.0 million (47.8% of
sales) and $38.4 million (51.9% of sales). Enterprise systems costs averaged
75.2% of sales for the quarter, up from 48.2% for the second quarter of fiscal
2002. Network systems costs averaged 129.8% of sales versus 52.8% in the
previous year's second quarter. In each case, the higher percentage results, in
part, from the special charges incurred as part of the fiscal 2003
reorganization and, in part, from the nature of the Company's cost structure. A
significant portion of the Company's cost of goods sold is comprised of labor
costs that are fixed over the near term as opposed to direct material and
license/royalty costs that vary directly with sales volume. The loss contracts
discussed in Special Charges, above, are both network system contracts. Services
cost of sales was 43.1% of sales for the current quarter, down slightly from
45.9% in the second quarter of fiscal 2002.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the
second quarter and first six months of fiscal 2003 were approximately $6.5
million (18% of the Company's total sales) and $12.5 million (17% of sales),
respectively. During comparable periods of the previous fiscal year, research
and development expenses were $7.1 million (11% of sales) and $14.6 million (12%
of sales), respectively. Expenses were down from fiscal 2002 in dollars as a
result of the Company's prior quarters' cost reduction initiatives. Expenses
were higher as a percent of sales in fiscal 2003 because of the significantly
lower sales levels in fiscal 2003. 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 second quarter and first six months of fiscal
2003 were approximately $18.4 million (51.7% of the Company's total sales) and
$36.1 million (48.8% of sales), respectively. Net of the severance and related
expenses discussed in "Special Charges," above, SG&A for the same periods
totaled $16.4 million (46.1% of sales) and $33.4 million (45.1% of sales). SG&A
expenses during the comparable periods of fiscal 2002 were $18.9 million (29.3%
of sales) and $38.5 million (30.6% of sales). As with the research and
development expenses discussed above, SG&A expenses have declined in absolute
dollars over the same periods last year as a result of cost control initiatives
implemented by the Company and as a result of lower commissions and incentive
bonuses being earned on the lower sales volumes. They have increased as a
percent of the Company's total sales because of the decline in sales.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLE ASSETS AND CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING Principle. Effective March 1, 2002, the Company adopted
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets (the "Statements"). Statement No.
141 refines the definition of what assets may be considered as separately
identified intangible assets apart from goodwill. Statement No. 142 provides
that goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized, but will be subject to impairment tests on at least an
annual basis.
In adopting the Statements, the Company first reclassified $2.7 million of
intangible assets associated with its assembled workforce (net of related
deferred taxes of $1.4 million) to goodwill because such assets did not meet the
new criteria for separate identification. The Company then allocated its
adjusted goodwill balance of $19.2 million to its then existing ESD and NSD
divisions and completed the transitional impairment tests required by Statement
No. 142. The fair values of the reporting units were estimated using a
combination of the expected present values of future cash flows and an
assessment of comparable market values. As a result of these tests, the Company
determined that the goodwill associated with its NSD division was fully
impaired, and, accordingly, it recognized a non-cash, goodwill impairment charge
of $15.8 million as the cumulative effect on prior years of this change in
accounting principle. This impairment resulted primarily from the significant
decline in NSD's sales and profitability during the fourth quarter of fiscal
2002 and related reduced forecasts for the division's sales and profitability.
As previously noted, effective August 1, 2002, the Company combined its
divisions into a single unified organizational structure in order to address
changing market demands and global customer requirements. The Company expects to
conduct its annual test of goodwill impairment at the beginning of its fourth
fiscal quarter (December 2002).
The Company's intangible assets other than goodwill will continue to be
amortized over lives that primarily range from 5 to 10 years. Amortization of
these assets totaled $1.8 million for each of the first two quarters of fiscal
2003. Amortization in each of the first two quarters of fiscal 2002 totaled $3.4
million and but would have totaled $2.2 million had the new rules been effective
during those periods. The estimated amortization expense for the balance of
fiscal 2003 and for each of the next four years is as follows (in thousands):
Balance of fiscal year ending February 28, 2003 $3,682
Fiscal 2004 $7,357
Fiscal 2005 $4,470
Fiscal 2006 $3,481
Fiscal 2007 $3,413
INTEREST EXPENSE. Interest expense was approximately $1.6 million and $3.0
million during the second quarter and first six months of fiscal 2003, versus
$1.2 million and $2.6 million for the same periods of fiscal 2002. The fiscal
2003 second quarter expense is comprised of approximately $0.4 million and $0.2
million in cash interest expense incurred under the Company's mortgage loan and
convertible notes, respectively, $0.7 million for the amortization of debt
issuance costs and discounts associated with the convertible notes, and
approximately $0.3 million in primarily non-cash charges associated with the
termination of the Company's original revolving credit facility. During the
first quarter of fiscal 2003, the Company's interest charges included $0.6
million incurred under the Company's term loan and revolving
credit facility, $0.6 million for the amortization of debt issuance costs on
those credit facilities (including $0.4 million incurred in connection with the
retirement of the term loan as part of the Company's debt restructuring
activities) and $0.3 million relating to the final amortization under certain
interest rate swap arrangements terminated by the Company during fiscal 2002.
The Company further restructured its long-term debt during and subsequent to the
close of the second quarter of fiscal 2003. See "Note F - Long-Term Borrowings"
in Item 1 and "Liquidity and Capital Resources" for a description of the
Company's long term borrowings and the impact of its recent debt restructuring
on interest expense.
INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). The Company generated an
operating loss of $15.8 million, a loss before the cumulative effect of a change
in accounting principle of $16.3 million and a net loss of $16.3 million during
the second quarter of fiscal 2003. For the six months ended August 31, 2002, the
Company generated 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. As described in Note B to the consolidated financial
statements in Item 1, the Company recorded a $15.8 million charge in the first
quarter of fiscal 2003 as the cumulative effect on prior years of a change in
accounting principle in connection with its adoption of Statements of Financial
Accounting Standards No. 141 and No. 142. During the second quarter and first
six months of fiscal 2002, the Company generated operating income of $3.6
million and $6.8 million, respectively, and net income of $1.7 million and $3.1
million, respectively. The decline in operating income is primarily attributable
to the significant decline in sales from fiscal 2002 to fiscal 2003 as discussed
in Sales above.
LIQUIDITY AND CAPITAL RESOURCES. The Company had approximately $20.1 million in
cash and cash equivalents at August 31, 2002, while borrowings under the
Company's restructured long-term debt facilities totaled $23.3 million. The
Company's cash reserves increased $6.1 million during the three months ended
August 31, 2002, with operating activities providing $11.8 million of cash, net
investing activities using $1.8 million of cash and net financing activities
using $4.3 million of cash.
Operating cash flow for the second quarter of fiscal 2003 was negatively
impacted by the Company's net loss of $16.3 million for the quarter and by
approximately $1.9 million of cash payments made in settlement of severance and
other special charges associated with the Company's cost control initiatives
undertaken in previous quarters. Operating cash flow was favorably impacted by
the non-recurring receipt of $7.9 million in federal tax refunds and by the
Company's ongoing initiatives to reduce accounts receivable (down $3.7 million
for the quarter) and inventories (down $6.9 million for the quarter). Days sales
outstanding (DSO) of accounts receivable at August 31, 2002, was 82 days, down
from 85 days at May 31, 2002 and 133 days at February 28, 2002.
For sales of certain of its more complex, customized systems (generally ones
with a sales price of $500,000 or more), the Company recognizes revenue based on
a percentage of completion methodology. Unbilled receivables accrued under the
methodology totaled $10.0 million at August 31, 2002. The Company expects to
bill and collect unbilled receivables as of August 31, 2002 within the next
twelve months.
While the Company continues to focus on reducing the level of its investment in
accounts receivable, it now generates a significant percentage of its sales,
particularly sales of enhanced telecommunications services systems, outside the
United States. Customers in certain countries are subject to significant
economic and political challenges that affect their cash flow, and many
customers outside the United States are generally accustomed to vendor financing
in the form of extended payment terms. To remain 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 and collectibility is probable.
During September 2002, the Company announced plans to reduce its workforce by
approximately 50 positions. The Company estimates that it will incur charges of
between $1.0 million and $1.5 million during the third quarter in connection
with this action. The Company anticipates that operating expenses
will be reduced approximately $0.5 million to $0.8 million per quarter from
second quarter fiscal 2003 levels once these restructuring activities are
completed.
The Company's tax returns for its fiscal years 2000 and 2001 are undergoing
audit by the Internal Revenue Service. In October 2002, the Company received a
"Notice of Proposed Adjustment":, stating that the IRS believes the Company
overstated a net operating loss carry back claim relating to the Company's
fiscal 2000 taxable loss. The notice discussed the reasons for the proposed
adjustment and invited the Company to provide the IRS any information that might
alter or reverse the proposed adjustment. The Company is in the process of
reviewing the issues raised in the Notice. When the review is completed, the
Company will provide its position and any relevant information to the IRS. If
the IRS ultimately adopts the position set forth in the Notice, and that
position is sustained, the Company will have to repay approximately
$3 million of previously received refunds, a portion of which may result in a
charge to the Company's tax provision.
Investing activities during the quarter were comprised of the purchase of
computer and test equipment, a use of approximately $1.8 million of cash.
Financing activities included the repayment of the $4.0 million balance
outstanding under the Company's then existing revolving credit facility, the
termination of such facility in anticipation of funding of a new term loan and
revolving credit agreement as further discussed below and the payment of $0.4
million in debt issue costs associated with the new credit agreement. The
Company will pay an additional $0.6 million in such debt issue costs during the
third fiscal quarter of 2003.
New Term Loan and Revolving Credit Agreement
In August 2002, the Company entered into a new credit facility agreement with a
lender which provides for an amortizing term loan of $10.0 million and a
revolving credit commitment equal to the lesser of $25.0 million minus the
principal outstanding under the term loan and the balance of any letters of
credit ($15.0 million maximum at the loan's inception) or a defined borrowing
base comprised primarily of eligible US and UK accounts receivable ($0.7 million
maximum at the loan's inception).
The term loan principal is due in 36 equal monthly installments of approximately
$0.3 million each beginning October 1, 2002. Interest on the term loan is also
payable monthly and accrues at a rate equal to the then prevailing prime rate of
interest plus 2.75% (7.5% as of the closing date of the loan). Proceeds from the
term loan were used to retire the Company's outstanding convertible notes and to
provide additional working capital to the Company.
Advances under the revolver loan will accrue interest at a rate equal to the
then prevailing prime rate of interest plus a margin of 0.5% to 1.5%, or at a
rate equal to the then prevailing London Inter-bank Offering Rate plus a margin
of 3% to 4%. The Company may request an advance under the revolver loan at any
time during the term of the revolver agreement so long as the requested advance
does not exceed the then available borrowing base. The Company's available
funding based on its US accounts receivable at the date of closing of the new
credit facility was approximately $0.7 million. The initial availability of
funding based on UK accounts receivable is contingent on and will be determined
in connection with the lender's completion of a collateral audit of the
Company's UK subsidiary. The Company has not requested an advance under the
revolver as of the date of this filing. The term loan and the revolving credit
agreement expire on August 29, 2005.
The new credit facility contains terms, conditions and representations that are
generally customary for asset-based credit facilities, including requirements
that the Company comply with certain significant financial and operating
covenants. In particular, the Company is initially required to have EBITDA in
minimum cumulative amounts on a monthly basis through August 31, 2003. While
lower amounts are allowed within each fiscal quarter, the Company must generate
cumulative EBITDA of $0, $2.0 million, $5.0 million and $9.0 million,
respectively, for the three, six, nine and twelve month periods ending November
30, 2002, February 28, 2003, May 31, 2003 and August 31, 2003. Thereafter, the
Company is required to have minimum cumulative EBITDA of $15 million and $20
million for the 12-month periods ending November 30, 2003 and February 28, 2004,
respectively, and $25 million for the 12-month periods ending each fiscal
quarter thereafter. The Company is also required to maintain defined levels of
actual and projected service revenues and is prohibited from incurring capital
expenditures in excess of $1.6 million for the six months ending February 28,
2003 and in excess of $4.0 million for any fiscal year thereafter except in
certain circumstances and with the lender's prior approval. Borrowings under the
new credit facility are secured by first liens on virtually all of the Company's
personal property and by a subordinated lien on the Company's Dallas
headquarters. The new credit facility also contains cross-default provisions
with respect to the Company's mortgage loan.
Mortgage Loan
At August 31, 2002, the Company had $14.0 million in principal outstanding under
its mortgage loan. Interest on this loan accrues at the greater of 10.5% or the
prime rate plus 2.0% and is payable monthly. The loan is secured by a first lien
on the Company's Dallas headquarters facility and contains cross-default
provisions with respect to the Company's new term loan and revolving credit
facility. In October 2002, the Company amended the mortgage loan to reduce a
minimum net equity requirement contained in the loan agreement from $35.0
million to $25.0 million and to provide that compliance with the covenant would
be measured on a quarterly basis. In connection with this amendment, the Company
prepaid $1.5 million of the principal amount outstanding under the loan. The
remaining principal under this loan is due in May 2005.
Future Compliance with Covenants
The Company believes the liquidity provided by these financing transactions
combined with cash generated from operations should be sufficient to sustain its
operations for the next twelve months. In order to meet the EBITDA, minimum net
equity and other terms of its credit agreements, however, the Company will have
to increase its revenues and/or lower its expenses as compared to the quarter
completed on August 31, 2002. If it is not able to achieve these objectives and
maintain compliance with its various debt covenants, the lenders have all
remedies available to them under the terms of the various loan agreements,
including, without limitation, the ability to declare all debt immediately due
and payable. Under such circumstances, the Company's cash position and liquidity
would be severely impacted, and it is possible the Company would not be able to
continue its business.
Impact of Inflation
The Company does not expect any significant short-term impact of inflation on
its financial condition.
Technological advances should continue to reduce costs in the computer and
communications industries. Further, the Company presently is not bound by long
term fixed price sales contracts. The absence of such contracts reduces the
Company's exposure to inflationary effects.
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, 2002, the Company's outstanding long-term debt was comprised of
the following (in thousands):
August 31, 2002
---------------
Mortgage loan, bearing interest payable monthly at the greater
of 10.5% or the prime rate plus 2.0%; principal due May 28, 2005;
$1.5 million principal reduction made subsequent to
August 31, 2002 $ 14,000
Convertible notes, net of discount of $1,056; refinanced in full
Subsequent to August 31, 2002 9,297
---------------
$ 23,297
===============
In September 2002, the Company used the proceeds from its new term loan to pay
all amounts outstanding under the convertible notes. The term loan principal is
due in 36 equal monthly installments of approximately $0.3 million each
beginning October 1, 2002. Interest on the term loan is also payable monthly and
accrues at a rate equal to the then prevailing prime rate of interest plus 2.75%
(7.5% as of the closing date of the loan).
The following table provides information about the Company's credit agreements
that are sensitive to changes in interest rates. Amounts are adjusted to reflect
the effects of the refinancings that took place subsequent to quarter end. 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,
2002.
Fiscal
----------------------------------------------------
2003 2004 2005 2006
---------- ---------- ---------- ----------
(Dollars in thousands)
Long-term debt
Variable rate US $ $ 2,889 $ 3,333 $ 3,333 $ 14,445
Projected weighted average
interest rate 9.2% 9.4% 9.8% 10.1%
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 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have reviewed
and evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 240.13a-14(c) and 15d-14(c) promulgated under
the Securities Exchange Act of 1934) as of a date within ninety days before the
filing date of this quarterly report. Based on that review and evaluation, which
included inquiries made to certain other employees of the Company, the chief
executive officer and chief financial officer have concluded that the Company's
current disclosure controls and procedures, as designed and implemented, are
reasonably adequate to ensure that they are provided with material information
relating to the Company required to be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934. There have not been
any significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation. There were no significant deficiencies or material weaknesses, and
therefore no corrective actions were taken.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Intellectual Property Matters
From time to time Ronald A. Katz Technology Licensing L.P. ("RAKTL") has sent
letters to certain customers of the Company suggesting that the customer should
negotiate a license agreement to cover the practice of certain patents owned by
RAKTL. In the letters, RAKTL has alleged that certain of its patents pertain to
certain enhanced services offered by network providers, including prepaid card
and wireless services and postpaid card services. RAKTL has further alleged that
certain of its patents pertain to certain call processing applications,
including applications for call centers that route calls using a called party's
DNIS identification number. As a result of the correspondence, an increasing
number of the Company's customers have had discussions, or are in discussions,
with RAKTL. Certain products offered by the Company can be programmed and
configured to provide enhanced services to network providers and call processing
applications for call centers. The Company's contracts with customers usually
include a qualified obligation to indemnify and defend customers against claims
that products as delivered by the Company infringe a third party's patent.
None of the Company's customers have notified the Company that RAKTL has claimed
that any product provided by the Company infringes any claims of any RAKTL
patent. Accordingly, the Company has not been required to defend any customers
against a claim of infringement under a RAKTL patent. The Company has, however,
received letters from customers notifying the Company of the efforts by RAKTL to
license its patent portfolio and reminding the Company of its potential
obligations under the indemnification provisions of the applicable agreements in
the event that a claim is asserted. In response to correspondence from RAKTL, a
few customers have attempted to tender to the Company the defense of its
products under contractual indemnity provisions. The Company has informed these
customers that while it fully intends to honor any contractual indemnity
provisions, it does not believe it currently has any obligation to provide such
a defense because RAKTL does not appear to have made a claim that a Company
product infringes a patent. Some of these customers have disagreed with the
Company and believe that the correspondence from RAKTL can be construed as
claim(s) against the Company's products. In the matter of Katz Technology
Licensing, LP v. Verizon Communications Inc., et al, No. 01-CV-5627, pending in
U.S. District Court, Eastern District of Pennsylvania, RAKTL has alleged that
Verizon Communications, Inc. ("Verizon") and certain of its affiliates infringe
patents held by RAKTL. From 1997 until November 2001 the Company's wholly owned
subsidiary, Brite, provided prepaid services to an affiliate of Verizon under a
managed services contract. The affiliate, which is named as a defendant in the
lawsuit, recently notified Brite of the pendency of the lawsuit and referenced
provisions of the managed services contract which require Brite to indemnify the
affiliate against claims that its services infringe a patent. The claims in the
lawsuit make general references to prepaid services and a variety of other
services offered by Verizon and the affiliate but do not refer to Brite's
products or services. The Company has informed the affiliate that it can find no
basis for an indemnity obligation under the expired contract.
Even though RAKTL has not alleged that a product provided by the Company
infringes a RAKTL patent, it is always possible that RAKTL may do so. In the
event that a Company product becomes the subject of litigation, a customer could
attempt to invoke the Company's indemnity obligations under the applicable
agreement. As with most sales contracts with suppliers of computerized
equipment, the Company's contractual indemnity obligations are generally limited
to the products and services provided by the Company, and generally require the
customer to allow the Company to have sole control over any litigation and
settlement negotiations with the patent holder. The customers who have received
letters from RAKTL generally have multiple suppliers of the types of products
that might potentially be subject to claims by RAKTL.
Even though no claims have been made that a specific product offered by the
Company infringes any claim under the RAKTL patent portfolio, the Company has
received opinions from its outside patent counsel that certain products and
applications offered by the Company do not infringe certain claims of
the RAKTL patents. The Company has also received opinions from its outside
counsel that certain claims under the RAKTL patent portfolio are invalid or
unenforceable. Furthermore, based on the reviews by outside counsel, the Company
is not aware of any valid and enforceable claims under the RAKTL portfolio that
are infringed by the Company's products. If the Company does become involved in
litigation in connection with the RAKTL patent portfolio, under a contractual
indemnity or any other legal theory, the Company intends to vigorously contest
the claims and to assert appropriate defenses. An increasing number of
companies, including some large, well known companies and some customers of the
Company, have already licensed certain rights under the RAKTL patent portfolio.
RAKTL has previously announced license agreements with, among others, AT&T
Corp., Microsoft Corporation and International Business Machines Corporation.
Audiofax, which holds certain patents covering unified messaging products, has
advised the Company and other businesses that, if they provide unified
messaging, they are infringing Audiofax's patents. Audiofax has therefore
recently requested that the Company enter into a license agreement for such
patents. The Company is in the process of reviewing its product offerings
against the claims in the patents to determine whether a license of the Audiofax
patents is necessary or appropriate. There is no assurance that Audiofax and the
Company will be willing or able to come to terms on any such license agreement.
Pending Litigation
David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated
v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, pending in the United
States District Court, Northern District of Texas, Dallas Division:
Several related class action lawsuits were filed in the United States District
Court for the Northern District of Texas on behalf of purchasers of common stock
of the Company during the period from October 12, 1999 through June 6, 2000, the
"Class Period." Plaintiffs have filed claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and the Securities and Exchange Commission
Rule 10b-5 against the Company as well as certain named current and former
officers and directors of the Company on behalf of the alleged class members. In
the complaint, Plaintiffs claim that the Company and the named current and
former officers and directors issued false and misleading statements during the
Class Period concerning the financial condition of the Company, the results of
the Company's merger with Brite and the alleged future business projections of
the Company. Plaintiffs have asserted that these alleged statements resulted in
artificially inflated stock prices.
The Company believes that it and its officers complied with their obligations
under the securities laws, and intends to defend the lawsuits vigorously. The
Company responded to these complaints, which were consolidated into one
proceeding, by filing a motion to dismiss the complaint in the consolidated
proceeding. The Company asserted that the complaint lacked the degree of
specificity and factual support to meet the pleading standards applicable to
federal securities litigation. On this basis, the Company requested that the
United States District Court for the Northern District of Texas dismiss the
complaint in its entirety. Plaintiffs responded to the Company's request for
dismissal. On August 8, 2002, the Court entered an order granting the Company's
motion to dismiss the class action lawsuit. In the order dismissing the lawsuit,
the Court granted plaintiffs an opportunity to reinstate the lawsuit by filing
an amended complaint. Plaintiffs filed an amended complaint on September 23,
2002. The Company intends to file a motion to dismiss the amended complaint. All
discovery and other proceedings not related to the dismissal will be stayed
pending resolution of the Company's request to dismiss the amended complaint.
On or about April 26, 2002, Telemac Corporation ("Telemac") commenced an
arbitration proceeding in the Los Angeles, California, office of JAMS against
the Company and InterVoice Brite Ltd. and Brite Voice Systems, Inc., JAMS Case
No. 1220026278, claiming fraud, negligent misrepresentation and breach of
contract in connection with formation of and the performance under certain
agreements between the Company, and/or its alleged predecessors, and Telemac,
and seeking reformation, compensatory damages of approximately $58 million,
punitive damages and attorneys' fees and other costs and fees. Telemac's
allegations arise out of the negotiations and terms of the Amended and Restated
Prepaid
Phone Processing Agreement between Telemac and Brite Voice Systems Group, Ltd.,
dated November 1, 1998, and certain amendments thereto under which Telemac
licensed prepaid wireless software for use in various markets and exploited in
the United Kingdom under agreement with Cellnet, a provider of wireless
telephony in the United Kingdom.
The Company has asserted counterclaims against Telemac for breach of contract,
breach of warranty and breach of the implied covenant of good faith and fair
dealing with respect to the capabilities of software supplied by Telemac and
handsets provided by parties contracting with Telemac and other matters.
The Company and Telemac have selected as arbitrator Justice William A. Masterson
(Ret.) formerly of the California Court of Appeal and the Los Angeles County
Superior Court. The arbitration hearing is set to commence January 13, 2003, in
Los Angeles, California. The Company acknowledges it may owe an immaterial
amount for certain software development services rendered by Telemac. With the
exception of this immaterial amount, the Company believes that the claims
asserted by Telemac are without merit. The Company further believes it has
meritorious defenses and counterclaims and intends to vigorously defend the
claims of Telemac and assert the Company's claims in the arbitration.
Both Telemac and the Company filed motions for summary disposition. Those
motions have been denied. An amended complaint was recently filed by Telemac.
The Company is preparing its amended counterclaims, which will be filed by
October 19, 2002. Discovery is ongoing, including depositions which are
scheduled to take place in November 2002.
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 28, 2002 in Dallas, 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 and Jack P. Reily. The number of votes cast for the election of
each of the nominees for director, and the number of abstentions, were as
follows: 30,021,857 votes for the election of David W. Brandenburg, with 853,175
abstentions; 30,020,345 votes for the election of Joseph J. Pietropaolo, with
854,687 abstentions; 30,021,205 votes for the election of George C. Platt, with
853,827 abstentions; 30,021,983 votes for the election of Grant A. Dove, with
853,049 abstentions; and 30,020,345 votes for the election of Jack P. Reily with
854,687 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 for the Company's Employee Stock Purchase Plan (the "Plan")
to increase from 1,000,000 to 1,500,000 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 29,728,834, the number of votes
cast against the adoption of the resolution to amend the Plan was 1,068,918 and
the number of abstentions was 77,280.
The next matter voted on and approved by the shareholders, was a resolution to
approve the issuance of shares of the Company's common stock upon conversion of
the Company's outstanding convertible notes, in lieu of cash payments on the
convertible notes, and upon exercise of the Company's outstanding warrants, to
the extent such issuance would require shareholder approval under the rules of
the Nasdaq National Market. The number of votes cast for the adoption of such
resolution was 16,967,715, the number of votes cast against the adoption of such
resolution was 2,297,534 and the number of abstentions was 84,895.
The last matter voted on and approved by the shareholders, was a resolution to
approve an amendment of the Articles of Incorporation of the Company to change
the corporate name of the Company to Intervoice, Inc. (the "Corporate Name
Change"). The resolution to approve the Corporate Name Change was duly approved.
The number of votes cast for the adoption of the resolution to approve the
Corporate Name Change was 30,696,678, the number of votes cast against the
adoption of the resolution to approve the Corporate Name Change was 103,058 and
the number of abstentions was 75,296.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amendment to Articles of Incorporation of the Company
filed with the Secretary of State of Texas on August
30, 2002.(1)
10.1 Loan and Security Agreement dated as of August 29,
2002 by and between Intervoice, Inc. (the "Company"),
as borrower, and Foothill Capital Corporation
("Foothill"), as lender.(2)
10.2 Waiver dated as of September 30, 2002, between the
Company and Foothill, authorizing the Company to make
a prepayment on the mortgage loan by Beal Bank
S.S.B.(1)
10.3 Modification Agreement dated as of September 30,
2002, by and between the Company and Beal Bank
S.S.B., as lender, modifying a deed of trust executed
by the Company for the benefit of Beal Bank
S.S.B.(1).
99.1 Certification Pursuant to 18 U.S.C. Section 1350,
signed by David W. Brandenburg.(1)
99.2 Certification Pursuant to 18 U.S.C. Section 1350,
signed by Rob-Roy J. Graham.(1)
(b) Reports on Form 8-K
1. A report on Form 8-K was filed June 3, 2002 to
announce that the sale of the Wichita, Kansas
facility had been completed.
2. A report on Form 8-K was filed June 20, 2002 to
announce the receipt of a $4.0 million tax refund
used to pay off the remaining balance of the
outstanding debt under the revolving credit facility.
3. A report on Form 8-K was filed June 25, 2002 to
announce the Company's first quarter earnings
release.
4. A report on Form 8-K was filed August 7, 2002 to
announce the receipt of a $3.2 million tax refund.
5. A report on Form 8-K was filed August 29, 2002 to
announce that the Company had entered into a new
three-year credit facility.
----------
1. Filed herewith
2. Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 29, 2002.
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 15, 2002 By: /s/ MARK C. FALKENBERG
--------------------------------------
Mark C. Falkenberg
Chief Accounting Officer
CERTIFICATIONS
I, David W. Brandenburg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Intervoice, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrants' disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 15, 2002
/s/ David W. Brandenburg
-----------------------------------------
David W. Brandenburg
Chief Executive Officer and Chairman
CERTIFICATIONS
I, Rob-Roy J. Graham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Intervoice, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrants' disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 15, 2002
/s/ Rob-Roy J. Graham
-----------------------------------------
Rob-Roy J. Graham
Executive Vice President and Chief
Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Amendment to Articles of Incorporation of the Company
filed with the Secretary of State of Texas on August
30, 2002.(1)
10.1 Loan and Security Agreement dated as of August 29,
2002 by and between Intervoice, Inc. (the "Company"),
as borrower, and Foothill Capital Corporation
("Foothill"), as lender.(2)
10.2 Waiver dated as of September 30, 2002, between the
Company and Foothill, authorizing the Company to make
a prepayment on the mortgage loan by Beal Bank
S.S.B.(1)
10.3 Modification Agreement dated as of September 30,
2002, by and between the Company and Beal Bank
S.S.B., as lender, modifying a deed of trust executed
by the Company for the benefit of Beal Bank
S.S.B.(1).
99.1 Certification Pursuant to 18 U.S.C. Section 1350,
signed by David W. Brandenburg.(1)
99.2 Certification Pursuant to 18 U.S.C. Section 1350,
signed by Rob-Roy J. Graham.(1)
----------
1. Filed herewith
2. Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 29, 2002.