<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 June 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 August 5, 1998, 12,215,415 shares of the registrant's common stock were
outstanding.
TOTAL NUMBER OF PAGES: 18
<PAGE>
BRITE VOICE SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 and
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income - Three and Six Months
Ended June 30, 1998 and 1997. . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows - Six Months
Ended June 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 4. Submission of Matters to a Vote of Security Holders. . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 17
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRITE VOICE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 11,452 $ 26,979
Accounts receivable, less allowance for doubtful accounts:
1998--$1,506; 1997--$1,366 . . . . . . . . . . . . . . . . . . . 44,653 36,457
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,991 13,788
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . 6,401 8,738
----------- -----------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . 81,497 85,962
----------- -----------
PROPERTY AND EQUIPMENT
Land, building and improvements . . . . . . . . . . . . . . . . . . . 3,074 3,074
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . 21,621 17,319
----------- -----------
24,695 20,393
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . (9,234) (7,163)
----------- -----------
Total Property and Equipment . . . . . . . . . . . . . . . . . . 15,461 13,230
----------- -----------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,589 5,838
----------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 103,547 $ 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>
June 30, December 31,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,013 $ 10,552
Accrued salaries and wages. . . . . . . . . . . . . . . . . . . . . . 3,720 2,975
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 1,945 3,578
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,638 5,022
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 3,927 11,530
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . 2,257 1,259
----------- -----------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . 30,500 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 12,211,561 shares - 1998; 12,032,280 shares - 1997. . . . 44,663 43,714
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 28,535 26,620
Accumulated other comprehensive income. . . . . . . . . . . . . . . . (151) (220)
----------- -----------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . 73,047 70,114
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . $ 103,547 $ 105,030
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements
-4-
<PAGE>
BRITE VOICE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Systems . . . . . . . . . . . . . . . . . . . . . . . . $ 26,576 $ 16,770 $ 44,524 $ 35,876
Services. . . . . . . . . . . . . . . . . . . . . . . . 12,569 12,375 24,376 24,259
----------- ----------- ----------- -----------
39,145 29,145 68,900 60,135
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of Sales:
Systems. . . . . . . . . . . . . . . . . . . . . . 14,429 7,467 22,865 16,160
Services . . . . . . . . . . . . . . . . . . . . . 7,486 7,193 14,209 14,026
Research and engineering. . . . . . . . . . . . . . . . 3,833 3,281 7,340 6,356
Selling, general and administrative . . . . . . . . . . 11,578 11,715 21,774 22,099
Restructuring, relocation and other . . . . . . . . . . -- 6,785 -- 6,785
----------- ----------- ----------- -----------
37,326 36,441 66,188 65,426
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS. . . . . . . . . . . . . . . . 1,819 (7,296) 2,712 (5,291)
OTHER INCOME (EXPENSE), NET. . . . . . . . . . . . . . . . . 260 (39) 623 37
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES . . . . . . . . . . . . . . . . . 2,079 (7,335) 3,335 (5,254)
PROVISION (CREDIT) FOR
INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 860 (2,459) 1,420 (1,669)
----------- ----------- ----------- -----------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . $ 1,219 $ (4,876) $ 1,915 $ (3,585)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC EARNINGS (LOSS) PER SHARE. . . . . . . . . . . . . . . $ 0.10 $ (0.41) $ 0.16 $ (0.30)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DILUTED EARNINGS (LOSS) PER SHARE. . . . . . . . . . . . . . $ 0.10 $ (0.41) $ 0.16 $ (0.30)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See Notes to Financial Statements
-5-
<PAGE>
BRITE VOICE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,915 $ (3,585)
Items not requiring (providing) cash:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 2,045 2,227
Discount recorded for warrant. . . . . . . . . . . . . . . . . . 744 --
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 133 (73)
Restructuring, relocation and other. . . . . . . . . . . . . . . -- 3,327
Changes in:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . (9,675) (3,253)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . (5,109) (3,271)
Accounts payable and accrued expenses. . . . . . . . . . . . . . 2,721 5,044
Other current assets and liabilities . . . . . . . . . . . . . . (4,863) (3,625)
----------- -----------
Net cash used in operating activities . . . . . . . . . . . (12,089) (3,209)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment, net . . . . . . . . . . . . . . . (4,215) (2,711)
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . (20) (1,107)
Proceeds from sale of property. . . . . . . . . . . . . . . . . . . . -- 16
----------- -----------
Net cash used in investing activities . . . . . . . . . . . (4,235) (3,802)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . 949 263
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . -- 1,500
----------- -----------
Net cash provided by financing activities . . . . . . . . . 949 1,763
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH. . . . . . . . . . . . . . . . . . (152) (261)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . (15,527) (5,509)
----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. . . . . . . . . . . . . . 26,979 8,084
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . $ 11,452 $ 2,575
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements
-6-
<PAGE>
BRITE VOICE SYSTEMS, INC.
NOTES TO CONSOLIDATED 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>
June 30, December 31,
1998 1997
----------- --------------
<S> <C> <C>
Purchased parts . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,282 $ 5,417
Work in progress. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,907 5,401
Finished goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,802 2,970
----------- -----------
$ 18,991 $ 13,788
----------- -----------
----------- -----------
</TABLE>
3. On October 30, 1997, the Company consummated the sale of certain assets
used in its electronic publishing business for $35,000,000 in cash. The
business sold included: i) the management of audiotex systems installed on
customers' premises; ii) the creation and transmission by satellite of
information for access by telephone callers; iii) the creation and provision
of a variety of information for yellow pages publishers over the Internet;
iv) the sale of advertising sponsorships to various categories of audiotex
information made available through yellow pages publishers' audiotex systems;
and v) advertiser management services provided on behalf of yellow pages
publishers whereby advertising entities are contacted from an outbound call
center for periodic updating of their audiotex sponsorships and
advertisements. Revenues related to the business sold were $3,450,000 for
the three months ended June 30, 1997 and $6,403,000 for the six months ended
June 30, 1997, and are included in "Services Revenues" in the accompanying
financial statements.
4. Income taxes paid (refunded) during the six months ended June 30, 1998
and 1997 were ($1,486,000) and $715,000, respectively.
Interest paid during the six months ended June 30, 1998 and 1997 was
$28,000 and $59,000, respectively.
5. 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 ($50,000) and
$168,000 for the three months ended June 30, 1998 and 1997, respectively, and
$69,000 and ($880,000) for the six months ended June 30, 1998 and 1997,
respectively. Total comprehensive income (loss) was $1,169,000 and
($4,708,000) for the three months ended June 30, 1998 and 1997,
-7-
<PAGE>
respectively, and $1,984,000 and ($4,465,000) for the six months ended June
30, 1998 and 1997, respectively.
6. 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 Six Months Ended
June 30, June 30,
---------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding . . . . . . . 12,158 11,833 12,108 11,832
Options . . . . . . . . . . . . . . . . . . . . . . . . 230 122 186 240
------ ------ ------ ------
Diluted weighted average shares outstanding . . . . . . 12,388 11,955 12,294 12,072
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
7. 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 June 30, 1998 (in thousands):
<TABLE>
<S> <C>
Costs incurred and estimated earnings on specific contract. . . . . . $ 8,551
Less billings to date . . . . . . . . . . . . . . . . . . . . . . . . 7,349
-----------
Excess of costs and earnings over billings. . . . . . . . . . . . . . $ 1,202
-----------
-----------
</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 SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 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 $10,000,000, or 34.3%, for the three months, and
$8,765,000, or 14.6%, for the six months ended June 30, 1998. Revenues of the
Company's electronic publishing division were $3,450,000 and $6,403,000 for the
three months and six months ended June 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 $13,450,000, or 52.3%, and
$15,168,000, or 28.2%, for the three months and six months ended June 30, 1998,
respectively.
Systems revenues increased $9,806,000, or 58.5%, for the three months ended
June 30, and $8,648,000, or 24.1%, for the six months ended June 30. Both
business systems revenues and network systems revenues increased for the three
months and six months ended June 30, as shown in the following table:
-9-
<PAGE>
SYSTEMS REVENUES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------- % Increase
1998 1997 (Decrease)
----------- ----------- ----------
<S> <C> <C> <C>
Business systems. . . . . . . . . . . . . . . $ 7,598 $ 3,507 116.6%
Network systems . . . . . . . . . . . . . . . 18,978 13,263 43.1%
----------- ----------- -----
Total . . . . . . . . . . . . . . . . . . . . $ 26,576 $ 16,770 58.5%
----------- -----------
----------- -----------
<CAPTION>
Six Months Ended
June 30,
--------------------------- % Increase
1998 1997 (Decrease)
----------- ----------- ----------
<S> <C> <C> <C>
Business systems. . . . . . . . . . . . . . . $ 13,508 $ 8,663 55.9%
Network systems . . . . . . . . . . . . . . . 31,016 27,213 14.0%
----------- ----------- -----
Total . . . . . . . . . . . . . . . . . . . . $ 44,524 $ 35,876 24.1%
----------- -----------
----------- -----------
</TABLE>
The increase in business systems revenues of $4,091,000, or 116.6%, for the
three months, and $4,845,000, or 55.9%, for the six months ended June 30, 1998
was primarily due to the sale of several large systems to new and existing
customers. Network systems revenues increased $5,715,000, or 43.1%, for the
three months, and $3,803,000, or 14.0%, for the six months ended June 30. This
increase was due primarily to the recognition of a portion of the revenues from
the AT&T Contract.
Services revenues increased $194,000, or 1.6%, for the three months, and
$117,000, or 0.5%, for the six months ended June 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 $3,644,000, or 40.8%, and
$6,520,000, or 36.5%, for the three months and six months ended June 30,
respectively. The breakdown of services revenues is shown in the following
table:
SERVICES REVENUES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------- % Increase
1998 1997 (Decrease)
----------- ----------- ----------
<S> <C> <C> <C>
Managed services. . . . . . . . . . . . . . . $ 3,815 $ 3,851 (0.9)%
Service contract and repair . . . . . . . . . 3,767 3,614 4.2%
Information services. . . . . . . . . . . . . -- 1,470 --
Telecommunications management
services . . . . . . . . . . . . . . . . . 4,987 3,440 45.0%
----------- ----------- -----
Total . . . . . . . . . . . . . . . . . . . . $ 12,569 $ 12,375 1.6%
----------- -----------
----------- -----------
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------- % Increase
1998 1997 (Decrease)
----------- ----------- ----------
<S> <C> <C> <C>
Managed services. . . . . . . . . . . . . . . $ 7,726 $ 7,123 8.5%
Service contract and repair . . . . . . . . . 7,283 7,375 (1.2)%
Information services. . . . . . . . . . . . . -- 2,961 --
Telecommunications management
services . . . . . . . . . . . . . . . . . 9,367 6,800 37.8%
----------- ----------- -----
Total . . . . . . . . . . . . . . . . . . . . $ 24,376 $ 24,259 0.5%
----------- -----------
----------- -----------
</TABLE>
Managed services revenues decreased $36,000, or 0.9%, for the three months
ended June 30, 1998, and increased $603,000, or 8.5%, for the six months ended
June 30, 1998. The 1997 results included revenues of $1,980,000 for the three
months, and $3,442,000 for the six months ended June 30 that are attributed to
the electronic publishing division. Excluding the revenues from 1997, managed
services revenues would have increased $1,944,000, or 103.9%, for the three
months, and $4,045,000, or 109.9%, for the six months ended June 30. 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 $153,000, or 4.2%, for the
three months ended June 30, 1998 and decreased $92,000, or 1.2%, for the six
months ended June 30, 1998. The decrease in revenues was primarily due to a
decline 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 $1,547,000, or 45.0%, for the three
months, and $2,567,000, or 37.8%, for the six months ended June 30, 1998. This
overall increase is primarily due to an increase in software and managed
services revenues due to an increase in the number of customers, and an increase
in billing verification revenues due to an increase in the average size of
refunds during the quarter.
Cost of systems sales increased $6,962,000, or 93.2%, for the three months,
and $6,705,000, or 41.5%, for the six months ended June 30, 1998. As a
percentage of systems sales, actual costs increased to 54.3% in 1998, compared
to 44.5% in 1997, for the three months ended June 30, and increased to 51.4% in
1998, compared to 45.0% in 1997, for the six months ended June 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. Systems sales for the quarter ended June 30, 1998 included a larger
number of customized sales, which have a higher cost of sales and, therefore,
lower margins.
Cost of services increased $293,000, or 4.1%, for the three months, and
$183,000, or 1.3%, for the six months ended June 30, 1998. As a percentage of
services revenues, these costs were 59.6% in 1998, compared to 58.1% in 1997,
for the three months, and 58.3% in 1998 compared to 57.8% in 1997, for the six
months ended June 30. If the costs associated with the electronic publishing
division were removed from the 1997 results, on a comparative basis, costs would
have increased $2,027,000, or
-11-
<PAGE>
37.1%, for the three months, and $3,344,000, or 30.8%, for the six months
ended June 30, and as a percentage of revenues would have declined to 59.6%
in 1998, from 61.2% in 1997, for the three months ended, and to 58.3% in
1998, from 60.8% in 1997, for the six months ended June 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 was due to the receipt of a set-up fee from a new
customer.
Research and engineering expenses increased $552,000, or 16.8%, for the
three months, and $984,000, or 15.5%, for the six months ended June 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 9.8% in 1998, compared to 11.3% in 1997,
for the three months ended June 30, and slightly increased to 10.7% in 1998,
compared to 10.6% in 1997, for the six months ended June 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 decreased $137,000, or 1.2%,
for the three months, and $325,000, or 1.5%, for the six months ended June 30,
1998. As a percentage of revenues, these expenses decreased to 29.6% from 40.2%
for the three months ended June 30, and decreased to 31.6% from 36.7% for the
six months ended June 30. 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 decrease as a percentage of revenues was 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 June 30, 1998 was
41%, compared to 34% in 1997, and for the six months ended June 30, 1998 was
43%, compared to 32% 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 June 30, 1998, the Company had a current ratio of 2.7 to 1 and
working capital of $50,997,000, 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 $12,089,000 for
the six months ended June 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 extended terms granted to certain customers under
long-term contracts. The increase in inventory is primarily due to the purchase
of parts required to fulfill a large contract to be delivered in stages
beginning in the second quarter through the fourth quarter. The Company expects
that it will experience additional increases in both accounts receivable and
inventory in the short term, and that it will continue to utilize cash for at
least the next two fiscal quarters.
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 June 30, 1998.
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<PAGE>
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. The Company has historically operated with very
little backlog. 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. 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. As a result of this decline, the Company has
restructured its European operations and formed global product marketing
organizations.
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 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
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<PAGE>
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.
TELECOMMUNICATIONS MANAGEMENT SERVICES. The Company's telecommunications
management services revenues have fluctuated significantly since this division
was acquired in August 1995. In addition, gross margins have fluctuated due
to a shift in revenues away from high margin billing verification revenues to
lower margin software and professional services revenues. Although the
Company believes that the prospects for this business remain promising on a
long-term basis, it is currently evaluating the strategic significance of
this business unit, and because of its inconsistent operating results, may
choose to sell or otherwise dispose of this business unit.
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 and will continue to require 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.
Therefore, the failure of the Company to fulfill its obligations under this
contract would be expected to materially and adversely affect the Company's
operating results and financial condition. The Company has failed to meet
certain delivery dates required by the contract, in part due to changes in
specifications and delivery requirements by the customer. The Company is
currently attempting to accelerate development and to provide an alternative
means for the customer to operate the intended service. AT&T has not asserted
any penalties under the contract, and has not indicated an intention to do
so. There is no assurance, however, that should the customer assert such
penalties in a future period, that the Company will prevail.
SOLE SOURCE OF SUPPLY. For quality control, ease of development and
purchasing efficiencies, the Company has elected to purchase components from
one supplier. 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 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.
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<PAGE>
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 new system is Year 2000
compliant. All remaining in-house computer systems 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 estimates that approximately half of its systems are
currently compliant. Non-compliant systems must be replaced or abandoned
prior to the beginning of 2000. The Company estimates the cost of replacing
the remaining non-compliant systems 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.
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 its key vendors and obtain certification will not be
material.
-15-
<PAGE>
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 other tasks that
may be beneficial to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-16-
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on May 12, 1998,
the Company's stockholders:
(a) elected the following to serve as Directors of the Company:
<TABLE>
<CAPTION>
For Abstain
---------- -------
<S> <C> <C>
Stanley G. Brannan 10,582,540 35,200
Perry E. Esping 10,529,961 35,200
C. MacKay Ganson, Jr. 10,528,040 35,200
David S. Gergacz 10,486,214 35,200
John F. Kelsey, III 10,544,782 35,200
Alan C. Maltz 10,505,798 35,200
Scott A. Maltz 10,485,586 35,200
</TABLE>
(b) approved an amendment to the Company's 1994 Employee Stock Purchase
Plan by a vote of 10,146,623 shares in favor, 363,691 shares against
and 48,160 shares abstaining; and
(c) ratified the appointment of Arthur Andersen LLP to serve as the
Company's independent public accountants for 1998 by a vote of
10,514,421 shares in favor, 16,834 shares against and 27,220 shares
abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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<PAGE>
SIGNATURE
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: August 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 QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,452
<SECURITIES> 0
<RECEIVABLES> 44,653
<ALLOWANCES> 1,506
<INVENTORY> 18,991
<CURRENT-ASSETS> 81,497
<PP&E> 24,695
<DEPRECIATION> 9,234
<TOTAL-ASSETS> 103,547
<CURRENT-LIABILITIES> 30,500
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0
0
<COMMON> 44,663
<OTHER-SE> 28,384
<TOTAL-LIABILITY-AND-EQUITY> 103,547
<SALES> 26,576
<TOTAL-REVENUES> 39,145
<CGS> 14,429
<TOTAL-COSTS> 37,326
<OTHER-EXPENSES> (260)
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