<PAGE>
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 September 30, 1998
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 0-17920
BRITE VOICE SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
KANSAS 48-0986248
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
250 INTERNATIONAL PARKWAY
HEATHROW, FLORIDA 32746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (407) 357-1000
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 [ ]
As of November 9, 1998, 12,215,540 shares of the registrant's common stock were
outstanding.
TOTAL NUMBER OF PAGES: 18
<PAGE>
BRITE VOICE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 and December 31, 1997. . . . . . 3
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . 16
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITE VOICE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 3,204 $ 26,979
Accounts receivable, less allowance for doubtful accounts:
1998 - 1,626; 1997 - 1,366 . . . . . . . . . . . . . . . . 57,468 36,457
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 24,036 13,788
Prepaid expenses and other. . . . . . . . . . . . . . . . . . 6,863 8,738
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . 91,571 85,962
-------- --------
PROPERTY AND EQUIPMENT
Land, building and improvements . . . . . . . . . . . . . . . 3,074 3,074
Furniture and equipment . . . . . . . . . . . . . . . . . . . 26,190 17,319
-------- --------
29,264 17,319
Less accumulated depreciation . . . . . . . . . . . . . . . . (10,601) (7,163)
-------- --------
Total Property and Equipment . . . . . . . . . . . . . . . 18,663 13,230
-------- --------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 6,044 5,838
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $116,278 $105,030
-------- --------
-------- --------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-3-
<PAGE>
BRITE VOICE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . $ 22,474 $ 10,552
Accrued salaries and wages. . . . . . . . . . . . . . . . . . 3,917 2,975
Other accrued expenses. . . . . . . . . . . . . . . . . . . . 1,163 3,578
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . 4,726 5,022
Customer deposits . . . . . . . . . . . . . . . . . . . . . . 5,892 11,530
Income taxes payable. . . . . . . . . . . . . . . . . . . . . 2,930 1,259
--------- ---------
Total Current Liabilities. . . . . . . . . . . . . . . . . 41,102 34,916
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, no par value; authorized 10,000,000 shares;
none issued and outstanding. . . . . . . . . . . . . . . . -- --
Common stock, no par value; authorized 30,000,000 shares;
Issued 12,215,540 shares - 1998; 12,032,280 shares - 1997. 44,904 43,714
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 29,849 26,620
Accumulated other comprehensive income. . . . . . . . . . . . 423 (220)
--------- ---------
Total Stockholders' Equity . . . . . . . . . . . . . . . . 75,176 70,114
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . $ 116,278 $ 105,030
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-4-
<PAGE>
BRITE VOICE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Systems. . . . . . . . . . . . . . . . . . $ 25,851 $ 16,243 $ 70,375 $ 52,119
Services . . . . . . . . . . . . . . . . . 14,403 13,184 38,779 37,443
--------- --------- --------- ---------
40,254 29,427 109,154 89,562
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of Sales:
Systems. . . . . . . . . . . . . . . . . 13,680 7,700 36,545 23,860
Services . . . . . . . . . . . . . . . . 8,702 7,537 22,911 21,563
Research and engineering . . . . . . . . . 3,754 3,337 11,094 9,693
Selling, general and administrative. . . . 11,980 10,716 33,754 32,815
Restructuring, relocation and other. . . . -- 1,543 -- 8,328
--------- --------- --------- ---------
38,116 30,833 104,304 96,259
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS. . . . . . . . 2,138 (1,406) 4,850 (6,697)
OTHER INCOME (EXPENSE), NET. . . . . . . . . (65) 24 558 61
--------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES . . . . . . . . . 2,073 (1,382) 5,408 (6,636)
PROVISION (CREDIT) FOR
INCOME TAXES . . . . . . . . . . . . . . . 759 (414) 2,179 (2,083)
--------- --------- --------- ---------
NET INCOME (LOSS). . . . . . . . . . . . . . $ 1,314 $ (968) $ 3,229 $ (4,553)
--------- --------- --------- ---------
--------- --------- --------- ---------
BASIC EARNINGS (LOSS) PER SHARE. . . . . . . $ .11 $ (.08) $ .27 $ (.38)
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED EARNINGS (LOSS) PER SHARE. . . . . . $ .11 $ (.08) $ .26 $ (.38)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-5-
<PAGE>
BRITE VOICE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . $ 3,229 $ (4,553)
Items not requiring (providing) cash:
Depreciation and amortization. . . . . . . . 3,342 3,155
Discount recorded for warrant. . . . . . . . 1,665 --
Deferred tax asset . . . . . . . . . . . . . 161 (145)
Restructuring, relocation and other. . . . . -- 3,328
Changes in:
Accounts receivable. . . . . . . . . . . . . (22,222) (4,213)
Inventories. . . . . . . . . . . . . . . . . (9,868) (2,260)
Accounts payable and accrued expenses. . . . 10,436 3,285
Other current assets and liabilities . . . . (2,387) (6,540)
-------- --------
Net cash used in operating activities. . . (15,644) (7,943)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment, net . . . . (8,585) (3,516)
(Increase) decrease in other assets . . . . . . 75 (1,296)
Proceeds from sale of property and equipment. . -- --
-------- --------
Net cash used in investing activities. . . (8,510) (4,812)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock. . . . . . . . . . . . -- --
Exercise of stock options . . . . . . . . . . . 1,190 774
Principal payments on debt. . . . . . . . . . . -- --
Short-term borrowings . . . . . . . . . . . . . -- 6,751
-------- --------
Net cash provided by financing activities. 1,190 7,525
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH. . . . . . (811) (293)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . (23,775) (5,523)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . 26,979 8,084
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . $ 3,204 $ 2,561
-------- --------
-------- --------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
-6-
<PAGE>
BRITE VOICE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The 1998 and 1997 financial statements (except for the December 31, 1997
Balance Sheet) included herein have been prepared by the Company, without
audit, and reflect all adjustments (consisting only of those of a normal
recurring nature) which are, in the opinion of management, necessary to
fairly present the financial position, results of operations and cash flows
for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with the financial statements
and the notes thereto for the year ended December 31, 1997, contained in
the Company's Annual Report to Stockholders and Form 10-K filed with the
Securities and Exchange Commission.
2. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Purchased parts. . . . . . . . . . $ 10,696 $ 5,417
Work in progress . . . . . . . . . 11,028 5,401
Finished goods . . . . . . . . . . 2,312 2,970
--------- --------
$ 24,036 $ 13,788
--------- --------
--------- --------
</TABLE>
3. The Company has adopted Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components. Other comprehensive
income (expense), consists of foreign currency translation of $574,000 and
($402,000) for the three months ended September 30, 1998 and 1997,
respectively and $643,000 and ($1,282,000) for the nine months ended
September 30, 1998 and 1997, respectively. Total comprehensive income
(loss) was $1,888,000 and ($1,370,000) for the three months ended September
30, 1998 and 1997, respectively, and $3,872,000 and ($5,835,000) for the
nine months ended September 30, 1998 and 1997, respectively.
4. Income taxes paid (refunded) during the nine months ended September 30,
1998 and 1997 were ($108,000) and $1,469,000, respectively.
Interest paid during the nine months ended September 30, 1998 and 1997 was
$89,000 and $183,000, respectively.
5. Following is a reconciliation of the weighted average shares used to
compute basic and diluted earnings per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding . . 12,215 11,901 12,144 11,840
Options . . . . . . . . . . . . . . . . . . . 186 127 185 202
------ ------ ------ ------
Diluted weighted average shares outstanding . 12,401 12,028 12,329 12,042
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
-7-
<PAGE>
6. Revenues from sales of systems generally are recognized upon shipment.
However, on occasion the Company enters into contracts for the sale of
large systems that require substantial software development in addition to
hardware. The Company entered into such an agreement with AT&T in December
1997 (the "AT&T Contract"). Revenues for this contract are recognized
using the percentage of completion basis, measured by the percentage of
costs incurred to date to estimated total costs required for the specific
contract. Excess of costs and earnings over billings are included in
accounts receivable.
Costs and estimated earnings on this specific contract consisted of the
following as of September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Costs incurred and estimated earnings on specific contract. $ 19,149
Less billings to date . . . . . . . . . . . . . . . . . . . 15,768
---------
Excess of costs and earnings over billings. . . . . . . . . $ 3,381
---------
---------
</TABLE>
-8-
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission, including this Form 10-Q report, may contain certain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). The words "expects," "anticipates,"
"believes" and similar words generally signify a "forward-looking" statement.
These forward-looking statements are made pursuant to the safe harbor provisions
of the Act. The reader is cautioned that all forward-looking statements are
necessarily speculative and that there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements. Such risks and uncertainties include those
inherent in the voice processing, call processing and telecommunications
consulting industries, such as product demand, pricing, market acceptance,
reliance on significant customers, intellectual property rights, risks in
product and technology developments, and other risk factors detailed in the
section below entitled "Certain Factors to be Considered". The Company
undertakes no obligation to publicly revise any forward-looking statement due to
changes in circumstances after the date of this report, or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997
The Company derives revenue from the sale of voice processing and call
processing systems to domestic and international customers and the provision of
services related to the operation of these systems, as well as the provision of
telecommunications management services. The Company's systems products can be
divided into two categories: those that increase its customers' revenues through
increased subscription or user fees ("network systems"), and those that reduce
customers' costs or improve the efficiency of services provided to end user
customers ("business systems").
Total revenues increased $10,827,000, or 36.8%, for the three months, and
$19,592,000, or 21.9%, for the nine months ended September 30, 1998. Revenues
of the Company's electronic publishing division were $3,401,000 and $9,804,000
for the three months and nine months ended September 30, 1997, respectively.
The electronic publishing division was sold in October 1997, and no revenues
have been recorded for this division during 1998. With revenues from this
division excluded from 1997 results, total revenues would have increased
$14,228,000, or 54.7%, and $29,396,000, or 36.9%, for the three months and nine
months ended September 30, 1998, respectively.
Systems revenues increased $9,608,000, or 59.2%, for the three months ended
September 30, 1998, and $18,256,000, or 35.0%, for the nine months ended
September 30, 1998. Both business systems revenues and network systems revenues
increased for the three months and nine months ended September 30, as shown in
the following table:
-9-
<PAGE>
<TABLE>
<CAPTION>
SYSTEMS REVENUES
(IN THOUSANDS)
Three Months Ended
September 30,
--------------------
1998 1997 % Increase
-------- -------- ----------
<S> <C> <C> <C>
Business systems. . . . . . . . . . . . . . . $ 6,659 $ 5,819 14.4%
Network systems . . . . . . . . . . . . . . . 19,192 10,424 84.1%
-------- -------- -----
Total . . . . . . . . . . . . . . . . . . . . $ 25,851 $ 16,243 59.2%
-------- --------
-------- --------
Nine Months Ended
September 30,
--------------------
1998 1997 % Increase
-------- -------- ----------
<S> <C> <C> <C>
Business systems. . . . . . . . . . . . . . . $ 20,167 $ 14,482 39.3%
Network systems . . . . . . . . . . . . . . . 50,208 37,637 33.4%
-------- -------- -----
Total . . . . . . . . . . . . . . . . . . . . $ 70,375 $ 52,119 35.0%
-------- --------
-------- --------
</TABLE>
The increase in business systems revenues of $840,000, or 14.4%, for the
three months, and $5,685,000, or 39.3%, for the nine months ended September 30,
1998 was primarily due to the sale of several large systems to new and existing
customers. Network systems revenues increased $8,768,000, or 84.1%, for the
three months, and $12,571,000, or 33.4%, for the nine months ended September 30,
1998. This increase was due primarily to the recognition of revenues from the
AT&T Contract.
Services revenues increased $1,219,000, or 9.3%, for the three months, and
$1,336,000, or 3.6%, for the nine months ended September 30, 1998. In 1997,
services revenues included revenues of the electronic publishing division, which
was sold in October 1997. Revenues of this division are included in managed
services and information services. With revenues of this division excluded from
the 1997 results, services revenues would have increased $4,620,000, or 47.2%,
and $11,140,000, or 40.3%, for the three months and nine months ended September
30, 1998, respectively. The breakdown of services revenues is shown in the
following table:
SERVICES REVENUES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------
1998 1997 % Increase
-------- -------- ----------
<S> <C> <C> <C>
Managed services. . . . . . . . . . . . . . . $ 5,424 $ 3,637 49.1%
Service contract and repair . . . . . . . . . 4,174 3,656 14.2%
Information services. . . . . . . . . . . . . -- 1,470 --
Telecommunications management
services. . . . . . . . . . . . . . . . . . 4,805 4,421 8.7%
--------- ------- ----
Total . . . . . . . . . . . . . . . . . . . . $ 14,403 $13,184 9.3%
--------- -------
--------- -------
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1998 1997 % Increase
-------- -------- ----------
<S> <C> <C> <C>
Managed services. . . . . . . . . . . . . . . $ 13,150 $ 10,760 22.2%
Service contract and repair . . . . . . . . . 11,457 11,031 3.9%
Information services. . . . . . . . . . . . . -- 4,431 --
Telecommunications management
services. . . . . . . . . . . . . . . . . . 14,172 11,221 26.3%
-------- -------- -----
Total . . . . . . . . . . . . . . . . . . . . $ 38,779 $ 37,443 3.6%
-------- --------
-------- --------
</TABLE>
Managed services revenues increased $1,787,000, or 49.1%, for the three
months ended September 30, 1998, and $2,390,000, or 22.2%, for the nine months
ended September 30, 1998. The 1997 results included revenues of $1,931,000 for
the three months, and $5,373,000 for the nine months ended September 30 that are
attributed to the electronic publishing division. Excluding the revenues from
1997, managed services revenues would have increased $3,718,000, or 217.9%, for
the three months, and $7,763,000, or 144.1%, for the nine months ended September
30, 1998. These increases were primarily due to the commencement of contracts
for the Company to provide prepaid calling services to North American and
European telecommunications providers.
Service contract and repair revenues increased $518,000, or 14.2%, for the
three months ended September 30, 1998 and $426,000, or 3.9%, for the nine months
ended September 30, 1998. These increases in revenues were primarily due to an
increase in the number of installations performed during the period.
Installation revenues are recognized as systems are installed, and may fluctuate
due to customers' timing requirements or the Company's mix of system sales,
upgrades and software development.
No information services revenue was recorded in 1998 due to the sale of the
electronic publishing division in October 1997.
Telecommunications management services consists of three principal
products: software and managed services, professional services and billing
verification services. Revenues increased $384,000, or 8.7%, for the three
months, and $2,951,000, or 26.3%, for the nine months ended September 30, 1998.
These overall increases are primarily due to an increase in the number of
customers for the Company's software and managed services, and an increase in
the average size of billing verification refunds received during the quarter.
Cost of systems sales increased $5,980,000, or 77.7%, for the three months,
and $12,685,000, or 53.2%, for the nine months ended September 30, 1998. As a
percentage of systems sales, actual costs increased to 52.9% in 1998, compared
to 47.4% in 1997, for the three months ended September 30, and increased to
51.9% in 1998, compared to 45.8% in 1997, for the nine months ended September
30. Actual costs increased due primarily to an increase in the number of systems
shipped by the Company, including costs related to the AT&T Contract. The
increases as a percentage of revenues were due primarily to the lower margin
recognized on the AT&T Contract, and an increase in costs associated with the
Company's European operations. System sales for the nine months ended September
30, 1998 included a larger number of customized sales, which have a higher cost
of sales and, therefore, lower margins.
Cost of services increased $1,165,000, or 15.5%, for the three months, and
$1,348,000, or 6.3%, for the nine months ended September 30, 1998. As a
percentage of services revenues, these costs were 60.4% in 1998, compared to
57.2% in 1997, for the three months, and 59.1% in 1998 compared to 57.6%
-11-
<PAGE>
in 1997, for the nine months ended September 30, 1998. If the costs
associated with the electronic publishing division were removed from the 1997
results, on a comparative basis, costs would have increased $2,822,000, or
48.0%, for the three months, and $6,166,000, or 36.8%, for the nine months
ended September 30, and as a percentage of revenues would have increased to
60.4% in 1998, from 60.1% in 1997, for the three months, and decreased to
59.1% in 1998, from 60.6% in 1997, for the nine months ended September 30.
The increases in actual costs were due primarily to the commencement of
contracts under which the Company provides prepaid calling services on a
managed services basis. The improvement in margins for the nine months ended
September 30 was due to the receipt of a set-up fee from a new customer.
Research and engineering expenses increased $417,000, or 12.5%, for the
three months, and $1,401,000, or 14.5%, for the nine months ended September 30,
1998. The increase in actual expenditures was due to an increase in staff
dedicated to designing new products and enhancing existing products. As a
percentage of revenues, these expenses decreased to 9.3% in 1998, compared to
11.3% in 1997, for the three months ended September 30, and decreased to 10.2%
in 1998, compared to 10.8% in 1997, for the nine months ended September 30. The
Company typically targets its annual engineering expenditures based upon annual
revenue goals. Fluctuations in engineering expenditures as a percentage of
sales in a given quarter are generally due to fluctuations from revenue goals,
or variances from budgeted expenditures. The Company believes that it must
continue to increase spending on research and engineering activities in absolute
terms in order to remain competitive in the voice and call processing market.
Such expenses could continue to increase as a percentage of revenues as well.
Selling, general and administrative expenses increased $1,264,000, or
11.8%, for the three months, and $939,000, or 2.9%, for the nine months ended
September 30, 1998. As a percentage of revenues, these expenses decreased to
29.8% from 36.4% for the three months ended September 30, 1998 and 1997,
respectively, and decreased to 30.9% from 36.6% for the nine months ended
September 30, 1998 and 1997, respectively. The decline in actual costs was due
to the restructuring of the Company in June 1997. The restructuring resulted in
an approximate 12% decrease in the number of employees performing sales and
marketing functions. The decreases as a percentage of revenues were due to a
larger revenue base over which to spread the fixed costs of operations.
The effective income tax rate for the three months ended September 30, 1998
was 37%, compared to 30% in 1997, and for the nine months ended September 30,
1998 was 40%, compared to 31% in 1997. The variances from the United States
statutory rate for 1998, and the increase from 1997, were due primarily to
losses by certain of the Company's foreign subsidiaries for which the benefit
received was less than the United States effective rate.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had a current ratio of 2.2 to 1 and
working capital of $50,469,000, compared to a current ratio of 2.5 to 1 and
working capital of $51,046,000 at December 31, 1997.
Cash flows from operating activities utilized net cash of $15,644,000 for
the nine months ended September 30, 1998, principally due to increases in
accounts receivable and inventory. The increase in accounts receivable is due
to an increase in sales and to a number of large, complex contracts for which
revenue recognition may precede the billing milestones. The Company expects that
continued progress on these contracts will result in a reduction of accounts
receivable in the next two quarters. The increase in inventory is primarily due
to the purchase of parts required to fulfill several large contracts to be
delivered in the fourth quarter, and the expectation that systems sales in
general will continue to increase.
-12-
<PAGE>
The Company maintains a $10,000,000 line of credit that is used from time
to time to fund short-term cash requirements. There were no borrowings
outstanding under the line as of September 30, 1998.
The Company regularly invests excess funds in short-term securities, such
as bankers' acceptances, government obligations and variable rate demand notes,
having maturities up to one year. Management believes that restricting
investments to these types of securities maximizes financial flexibility and
minimizes exposure to interest rate and market risks. The Company utilizes
these investments as sources of liquidity, to the extent that cash requirements
exceed short-term cash receipts.
The Company has no additional capital commitments, and believes that funds
on hand and the availability of its line of credit will provide sufficient
sources of funds to meet all capital requirements for at least the next twelve
months. The Company believes that it has adequate borrowing capacity to fund
its long-term objectives as well.
INFLATION
Inflation has not had a material impact on the Company's results of
operations. Because of the competitive nature of the computer industry, the
costs of parts used in the Company's products have remained relatively stable.
However, should inflation rise to higher levels, the Company believes that such
inflationary costs would be passed on to customers by both the Company and its
competition.
CERTAIN FACTORS TO BE CONSIDERED
UNCERTAINTY OF REVENUES. There are no long-term supply agreements with
customers and, as a result, revenues in any quarter are dependent upon orders
that are received and shipped during the quarter. Further, a large percentage
of any quarter's system shipments are recorded in the last month of the quarter.
Consequently, quarterly revenues and operating results will depend on the volume
and timing of new orders received during a quarter, which are difficult to
predict. In addition, quarterly revenues are dependent upon the delivery of
contracts in the backlog and delays in delivery or increased costs could impact
quarterly revenues and operating results. Failure to receive adequate amounts
of new orders could adversely affect revenues and operating results, and such
shortfalls may not be known until very late in any quarter.
INTERNATIONAL OPERATIONS. The Company faces a number of risks in
conducting its international business that do not affect its domestic business,
including greater concentration of business with fewer customers, longer payment
cycles, greater difficulty in accounts receivable collection and difficulty in
staffing and managing foreign subsidiary operations. The Company has recently
experienced a decline in sales made into Europe, the Middle East and Africa.
The Company has recently taken steps to integrate management, marketing, program
management and engineering functions in the European area with those in the
United States, in an attempt to both reduce costs and to provide substantially
similar products on a global basis. The Company is unable to predict the affect
these changes may have on European operations.
Installation of the Company's products outside the United States requires
that the Company conform to local telephone and electrical regulations. The
Company has traditionally relied on its suppliers to obtain the necessary
registrations in order for the Company to install products within specific
countries. There can be no assurance that these factors will not have an
adverse impact on the Company's future international sales or operating results.
PRODUCT DEVELOPMENT. The voice processing industry is subject to rapid
technological change, including continuing improvements in hardware and software
performance. In order to maintain its
-13-
<PAGE>
competitive position, the Company must continually release new products and
develop enhancements and new features for its existing products on a timely
basis. There can be no assurance that the Company will be successful in
developing and marketing, on a timely basis, product modifications or
enhancements, or new products that respond to technological advances by
others, or that such new or enhanced products or features will adequately and
competitively address the needs of the marketplace. Because of the increasing
complexity of the Company's products, these efforts can be expected to
continue to increase in technical difficulty. Moreover, the Company must
manage product transitions successfully, since announcements or
introductions, or the perception that such events are likely to occur, by
either the Company or its competitors, could adversely affect sales of
existing products.
PENDING SALE OF TELECOMMUNICATIONS MANAGEMENT SERVICES DIVISION. On
September 18, 1998, the Company announced that it had entered into a letter of
intent to sell the assets of its telecommunications management services division
(TSL) for $20 million in cash and $5 million in preferred stock to an
undisclosed buyer. The TSL division is responsible for all of the
telecommunications management services revenues reflected in the accompanying
financial statements, amounting to $4,805,000 for the three months, and
$14,172,000 for the nine months ended September 30, 1998. There can be no
assurance that this transaction will be consummated. Further, if the
transaction is not consummated, there exists the possibility that the
negotiations could have a negative impact on employees and customers, which
could have a material impact on revenues and operating results.
DEPENDENCE ON CERTAIN PERSONNEL. The Company's success is largely
dependent upon its ability to attract and retain qualified employees, especially
technical employees and executives. There exists substantial competition for
highly qualified personnel and there can be no assurance that the Company will
be successful in hiring and retaining the required personnel.
AT&T CONTRACT. On December 18, 1997, the Company announced that it had
signed an agreement with AT&T Corp. to provide enhanced telecommunications
products. The initial order under this contract was for approximately $25
million, representing the largest single contract in the Company's history.
Fulfillment of this contract, which began during the second quarter of 1998, has
required extensive software development, integration and testing. The contract
provides for substantial financial penalties in the event that the product is
not timely delivered, causes a network outage or fails to meet service
availability requirements. The Company failed to meet its initial software
delivery dates under the contract and the Company and AT&T amended the contract
to provide for the interim provision of the services on a limited managed
service basis. The Company has completed the software development and
integration phases of the contract, and is working with AT&T to complete testing
in order to begin delivering the service to customers. AT&T has not asserted
any penalties under the contract, and has not indicated its intention to do so.
There is no assurance, however, that AT&T will not assert such penalties in a
future period. Such penalties could adversely affect the Company's operating
results and financial condition.
SOLE SOURCES OF SUPPLY. For quality control, ease of development and
purchasing efficiencies, the Company purchases certain components from sole
sources. Although the Company has been able to obtain supplies of these
components in a timely manner, the interruption in supply of any of these
components could have an adverse impact on the Company's revenues and operating
results. While the Company believes that other suppliers could provide required
components in the event of an interruption in supply, a change in suppliers
could cause a delay in manufacturing and a possible loss of sales, which would
adversely affect operating results.
PROPRIETARY RIGHTS. The Company has periodically received, and may receive
in the future, communications from third parties asserting patent rights or
copyrights on certain of the Company's products and product features. The
Company believes that its products and other proprietary rights do
-14-
<PAGE>
not infringe the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Company in the future, or that any such claims will not require
the Company to enter into license arrangements or result in protracted and
costly litigation, regardless of the merits of such claims. There also can
be no assurance that the Company will be able to obtain licenses to disputed
third party technology or that such licenses, if available, would be
available on commercially reasonable terms.
VOLATILITY OF COMMON STOCK PRICE. The market for the Company's stock is
highly volatile. Any variance in operating results from analysts' expectations
or changes in estimated results by industry analysts could have an adverse
affect on the trading price of the Company's common stock in a given period.
Furthermore, in recent years the market prices of securities of many high
technology companies have experienced extreme fluctuations, in many cases for
reasons unrelated to the operating performance of the specific companies. These
broad market fluctuations may adversely affect the market price of the Company's
common stock.
YEAR 2000 COMPLIANCE. In 1997, the Company began the process of
identifying and determining the appropriate resolution to all of the Company's
issues relating to the "Millennium Bug". These issues arise because of the date
sensitive software programs which use two digits to define the applicable year,
resulting in interpretation of a date using "00" as the year 1900 rather than
2000. This could result in miscalculations or a major system failure. The
Company has concluded that if no action is taken to avoid the consequences, its
Year 2000 issues will have a material effect on the Company's results of
operations and financial condition.
Areas which require remediation are: 1) in-house systems and software
programs used to run the business; 2) products sold to the Company's customers;
and 3) systems and services provided by vendors.
The Company has reviewed its in-house systems for compliance and determined
that all systems will be affected. During 1997, the Company began the conversion
of its accounting, inventory, manufacturing control and human resources systems
to a new system in order to provide more efficient management information
throughout the Company. The conversion was completed in 1998 at a cost of
approximately $2 million and the vendor has stated that the new system is Year
2000 compliant. All remaining in-house computer systems which are mission
critical have been identified, including operating systems and applications
software, and studies are currently being conducted to determine which programs
are compliant and which are not. The Company believes that the majority of its
mission critical systems are currently compliant or can be made compliant at
minimal cost. Non-compliant systems must be replaced or abandoned prior to the
beginning of 2000. The Company estimates the cost of administering its internal
Year 2000 program to be approximately $1.5 million.
Each of the Company's products sold or licensed to customers must be
evaluated for Year 2000 compliance. The Company must determine which products
will be discontinued, and which products will be made compliant. The Company
has completed an inventory of its products in the field, and is in the process
of establishing revision levels and dates by which each product will be Year
2000 compliant. Each product must have an agreed upon test plan, engineering
plan, and a plan for notifying customers of product revisions and phase-outs.
The Company is unable to estimate the cost of completing this effort, but
believes that it will be material. However, the Company believes that it may be
able to charge for integration and installation of compliant systems, and that
such charges will offset a substantial portion of the cost to be incurred.
Failure to complete plans for each product, or failure to execute such plans,
will have a material impact on the Company's sales, as it will be unable to
compete with companies which offer Year 2000 compliant products.
-15-
<PAGE>
Notwithstanding the fact that the Company regularly provides free software
upgrades to its customers and the fact that these newer upgrades are Year 2000
compliant, certain customers of the Company may still be running earlier, non-
compliant versions of the Company's products. The Company is in the process of
informing customers of the need to migrate to current products that management
believes are Year 2000 compliant. The Company anticipates that generally
throughout the software industry substantial litigation may be brought against
software vendors of non-compliant operating environments. The Company believes
that any such claims against the Company, with or without merit, could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company purchases components and services which must be evaluated for
Year 2000 compliance. The Company has divided its vendors into those who supply
critical services, manufacturing suppliers and manufacturing contractors. The
Company intends to obtain certification from each of its material vendors as to
its Year 2000 compliance. The Company believes that the costs to evaluate and
obtain certification from its key vendors will not be material.
Despite the Company's intent to complete the modifications necessary to be
Year 2000 compliant, there exists the risk that the Company will be unable to
complete all tasks required in a timely manner, or that certain systems could be
overlooked. Should the required modifications not be made, or should they not
be completed in a timely manner, this issue could materially and adversely
affect the Company's operating results and financial condition. Furthermore,
the majority of the effort described above will be performed by the Company's
employees. During the period such employees are completing Year 2000
remediation, they will be unavailable to perform their normal tasks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) On September 18, 1998, the Company filed a report on Form 8-K in which
it reported that it had entered into a letter of intent to sell the
assets of Telecom Services Limited, its telecommunications management
services division, to an undisclosed buyer for $20 million cash and $5
million in preferred stock.'
-17-
<PAGE>
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.
Dated: November 13, 1998
BRITE VOICE SYSTEMS, INC.
/s/ Glenn A. Etherington
-------------------------------------
Glenn A. Etherington
Chief Financial Officer
Duly Authorized Officer on behalf of the Registrant
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,204
<SECURITIES> 0
<RECEIVABLES> 57,468
<ALLOWANCES> 1,626
<INVENTORY> 24,036
<CURRENT-ASSETS> 91,571
<PP&E> 29,264
<DEPRECIATION> 10,601
<TOTAL-ASSETS> 116,278
<CURRENT-LIABILITIES> 41,102
<BONDS> 0
44,904
0
<COMMON> 0
<OTHER-SE> 29,849
<TOTAL-LIABILITY-AND-EQUITY> 116,278
<SALES> 25,851
<TOTAL-REVENUES> 40,254
<CGS> 13,680
<TOTAL-COSTS> 38,116
<OTHER-EXPENSES> 65
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,073
<INCOME-TAX> 759
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,314
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
