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As Filed with the Securities and Exchange Commission on
May 16, 2005
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended February 28, 2005 |
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Or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission File Number: 1-15045
Intervoice, Inc.
(Exact name of registrant as specified in its charter)
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Texas |
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75-1927578 |
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(State of Incorporation) |
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(I.R.S. Employer
Identification Number) |
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17811 Waterview Parkway
Dallas, Texas
(Address of principal executive offices) |
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75252
(Zip Code) |
Registrant’s telephone number, including area code:
(972) 454-8000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Title of Each Class
Common Stock, No Par Value
Preferred Share Purchase Rights
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
Aggregate Market Value of Common Stock held by Nonaffiliates as
of August 31, 2004: $325,122,287
Number of Shares of Common Stock Outstanding as of
April 25, 2005: 37,867,974
Documents Incorporated by Reference
Listed below are documents parts of which are incorporated
herein by reference and the part of this Report into which such
document is incorporated:
(1) Proxy Statement for the 2005 Annual Meeting of
Shareholders — Part III.
TABLE OF CONTENTS
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PART I
Overview
Intervoice, Inc. (NASDAQ: INTV) is a leading provider of voice
automation and data management solutions used by enterprises and
communication network operators to automate and personalize
their customers’ access to information and services. Our
software solutions and professional services allow businesses to
lower the cost of their call center operations while enhancing
their customers’ experience and building brand loyalty. Our
solutions for network operators, including next generation
IP-based voice messaging, voice portal and payment systems,
provide operators with revenue generating services that meet
growing consumer demands for personalization and innovation. We
provide our customers a clear return on investment (ROI) by
combining the latest in information and communication
technologies with the power of the human voice to increase
employee productivity, workplace efficiency, corporate
profitability, and customer satisfaction.
Intervoice operates as a single, integrated business unit that
focuses on two primary markets — the enterprise and
network markets. We offer these markets flexible, scalable
integration platforms, a selection of customized and packaged
software applications, powerful development and reporting tools
and comprehensive services and support. We offer our solutions
on either a straight sale/license basis or as a managed service.
Our activities in both markets are supported by shared resources
in the sales, operational support, research and development and
administrative areas. Our corporate headquarters is in Dallas,
Texas, and we have sales and/or customer service locations
throughout the world, including offices in Europe, the Middle
East, South America and Singapore. We sell our products both
directly and through an established network of distributors,
system integrators and channel partners. For the fiscal year
ended February 28, 2005, we reported revenues of
approximately $183.3 million, including $100.5 million
of solution sales, $59.4 million of maintenance and related
service revenues and $23.4 million of managed service
revenues. Sales to North American customers totaled
$107.8 million or 59% of total sales for the year.
Intervoice was founded in 1983, and for two decades we have
provided innovative answers to our clients’ business
automation needs. Intervoice is committed to delivering
end-to-end solutions that are compliant with open standards that
are hardware independent and that integrate seamlessly with
other systems, software and standards. We support standards,
including VoiceXML (Voice eXtensible Mark-up Language) and SALT
(Speech Application Language Tags) specifications for
voice-enabled web applications, and J2EE and
Microsoft’s®.NET for enterprise software
architectures. We continuously assess evolving industry
standards and are actively involved in industry associations
such as the VoiceXML Forum, the Internet Engineering Task Force
and the SALT Forum, as well as network-focused organizations
such as the 3GPP and the GSM Association.
Intervoice also delivers unique value through the integration of
industry standard hardware and software provided by our numerous
alliance partners. These strategic relationships are an integral
part of our product strategy and allow us to create voice
automation solutions tailored to meet each customer’s
specific business needs. We have forged alliances with leading
technology companies, including Intel, HP, BEA, ScanSoft, and
others. Through a strategic alliance with Microsoft, we are
making it faster, easier and more economical to build and
deliver open, standards-based enterprise telephony and
multi-modal speech solutions based on SALT standards.
Products and Services
Intervoice is a leader in providing converged voice and data
solutions and related services. We sell solutions that allow you
to access account data or order services from a company at a
time you find convenient, using a communication device you find
convenient (e.g. phone, computer, PDA, etc.) and without the
need to wait for an available company representative. We also
sell solutions that support the use of prepaid phone services
and various advanced phone messaging activities. When we use the
term “solutions sales” in this Annual Report, we mean
the sale of hardware and/or software applications and the
related professional
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services associated with designing, developing, integrating, and
installing custom applications to perform these functions. When
we use the term “recurring services”, we mean the sale
of maintenance and software upgrade offerings and the provision
of customized solutions to customers on a managed service basis.
Enterprise Solutions
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Omvia Interactive Voice Response |
Intervoice is a recognized market leader in the creation and
deployment of Interactive Voice Response (IVR) solutions
for businesses. Our speech-enabled IVR solutions allow
organizations of all kinds to automate their communications,
reduce costs and improve interactions with customers, employees
and business partners. Our solutions provide users with access
to information when, where, and how they want to receive it
using speech-enabled and touch-tone interfaces. As speech
recognition and text-to-speech technologies gain acceptance as
natural user interfaces, our solutions allow for the automation
of interactions previously seen as too complex for a traditional
touch-tone interface. Businesses now use our solutions to
automate access to account information, allow secure access to
sensitive information through voice verification, change or
correct name and address information, and support workforce
management activities. Enterprise-wide applications also enable
customers to order products, activate accounts, pay bills,
enroll for college courses, apply for jobs, execute securities
trades, re-charge prepaid accounts and many other increasingly
complex interactions.
Our Omvia Voice Framework is an advanced software-based platform
that can be used to create and manage voice-based solutions. The
Omvia Voice Framework delivers a flexible, modular and highly
scalable design (built upon open industry standards including
VoiceXML, SALT, VoIP, SS7 and others) that encourages the
seamless integration of Web- and enterprise-based systems into
intuitive speech-enabled solutions with a clear business ROI.
Companies in a wide range of industries use the Omvia Voice
Framework to drive operational efficiencies. The Omvia Voice
Framework delivers a true end-to-end converged voice and data
solution and supports best-of-class deployments through our
alliance partnerships with the leading names in information
technology. Omvia Voice Framework modules can be implemented
individually to meet specific requirements or applied as a
comprehensive solution to achieve enterprise-class voice
automation results. The modules include leading technologies,
proven applications, an award-winning development environment,
and intuitive management tools that are backed by comprehensive
professional consultation services and technical support. The
modules can be deployed in a customer premise or hosted managed
service environment.
We offer a suite of packaged applications under the brand name
Omvia Voice Express. This set of packaged voice-based
applications is designed to allow the voice automation of
popular business processes using convenient “out of the
box” user interfaces that can be further customized to meet
specific needs. Omvia Voice Express packaged applications
include:
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Omvia Authenticator — a voice authentication
solution that uses speaker verification and other biometric
technology to confirm the caller’s identity prior to
providing access to accounts or agents to help reduce fraud and
identity theft; |
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Omvia Locator — a software application that
provides callers quick and easy access to the location,
including cross street information, of popular retail
destinations such as ATMs or storefronts; |
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Omvia Auto-Attendant — an application that
enables callers to reach their desired party by simply speaking
the party’s name rather than dialing an extension or
punching out the party’s name on the telephone keyboard; |
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Omvia Survey — an application for creating,
managing and reporting on effective and engaging speech-enabled
surveys that allow organizations to build relationships with
their customers; and |
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Omvia Identifier — a solution that provides
complete reset functionality, including caller log-in and
identification, authentication, a flexible range of PIN/password
reset options, and a Voice User Interface that can be easily
customized to meet any industry or service requirement. |
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Professional Services for Custom Application
Development |
Intervoice offers the services of engineers, designers,
developers and other professional services specialists who
provide our customers the experience we have gained in the
development of over 5,000 custom voice-enabled solutions. We
offer customers a single source for needs assessment and
application design, VUI design, project management, effective
training and optimization of their custom speech-enabled
solution. Customers using our professional services can receive
access to a state-of-the-art usability testing lab, as well as
analysis based on caller goal completion rates and our
patent-pending Usability Grade Testing Metric that helps measure
an application’s ease of use. Our professional services are
designed to reduce the time and cost of speech automation
deployments, to improve customer communication and satisfaction,
and to drive higher ROI performance through increased
transaction resolution rates.
Network Solutions
We offer network providers an array of revenue generating
solutions that includes traditional Intelligent Network
(IN)-based messaging applications, next generation Internet
Protocol (IP)-based messaging and media management applications,
and prepaid and postpaid payment solutions.
Our traditional, IN-based messaging solutions include voicemail,
unified communications, short message service (SMS) and
call notification. Our messaging suite incorporates a range of
advanced features, including intelligent call return,
mailbox-to-mailbox messaging, universal mailboxes, call
notification and conditional personal greetings. Our
applications support network operators in their efforts to build
subscriber counts, loyalty and usage.
Omvia Media Exchange is a flexible, IP-based multimedia enhanced
services solution designed specifically for mobile network
operators, cable service providers and fixed line operators. It
includes a customizable mix of multimedia service options
including next generation messaging, voice activated dialing,
web user interfaces, voice portals and text to speech
capabilities.
The Omvia Media Exchange suite of solutions includes the
following packaged applications:
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Omvia Communicator — next-generation voice mail
functionality offering a common message store and common data
base; |
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Omvia Media Messaging — a media-independent
message deposit utility that allows subscribers to record a
voice message and have it delivered as a voicemail, email,
Multi-Media Messaging Service (MMS) or animated message; |
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Omvia Voice Activated Dialing — a solution
which lets end users create their own address books, store
contact information and initiate calls with voice
dialing; and |
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Omvia Personal Ringback Tone — software which
offers subscribers a selection of ringback tones, including
popular songs, jokes and infotainment. |
Our Omvia Media Exchange portal applications allow subscribers
instant access to information content and entertainment services
via a voice or touch-tone user interface or through a web
browser. Portal applications include access to horoscope
information, sports, weather, traffic and financial data and can
be “branded” and customized to enhance subscriber
loyalty and revenues.
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We provide a range of products and services that allows network
operators to offer prepaid and postpaid services. Operators can
offer prepaid telephony services to facilitate subscriber
acquisition and usage in selected markets where subscribers
prefer to pay by cash or where collection might be an issue. We
support a wide range of prepaid services, including prepaid
calling cards, prepaid residential, prepaid wireless and
automated operator services. Our prepaid solutions integrate
seamlessly with other telco-grade, revenue-generating
applications, including voicemail delivered by our Omvia
platform.
Omvia Intelligent Network Prepaid can be deployed to provide
enhanced flexibility and efficiency in both wireline and
wireless networks. Network operators use IN Prepaid solutions to
manage rapid subscriber growth, to provide cost-effective
roaming, and to boost subscriber satisfaction.
Our Automated Operator Services (AOS) and Postpaid Calling
Cards allow network operators to offer privately branded
long-distance calling services to both retail and wholesale
customers. Operators can deploy postpaid services to allow
consumers to pay for calls using credit or debit cards or
collect call arrangements.
Recurring Services
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Maintenance and Software Support |
Intervoice offers the services and support needed to keep our
solutions running at peak efficiency. We understand
customers’ requirements to protect their investment through
world-class technical support that is accessible, effective and
responsive to the customers’ business requirements and
objectives.
To provide this long term support, we maintain a customer
support program known as RealCare®. The RealCare support
program provides comprehensive hardware and software support and
maintenance services on up to a 24/7/365 basis. RealCare allows
our customers to reduce production costs and extend the useful
lives of their systems, while driving new revenue and improving
customer loyalty and satisfaction.
RealCare includes a wide variety of service options, including:
Maintenance and Technical Support for anywhere/anytime tech
support from an international team of voice application
specialists; Remote Monitoring Services that can be
combined with various warranty and post-warranty plans to
monitor the “heartbeat” of a voice solution; Software
Services Program, a subscription-based service that provides
convenient, cost-effective upgrade solutions; and a Disaster
Recovery service that includes full planning, support and system
redundancy for key business systems.
All our products and support services are available for purchase
or as a component of a flexible Managed Services solution. We
offer a suite of Managed Services designed to give enterprises
and network operators access to leading edge solutions while
reducing the cost and risk of deploying state-of-the-art voice
automation. Hosted applications also enable incremental and
rapid integration of emerging technologies, as well as easier
migration to speech-enabled services employing VoiceXML and
SALT, and next-generation network environments such as 2.5G, 3G,
GPRS, IN and SIP-based VoIP.
Intervoice supplies managed services for some of the
world’s largest financial institutions and network
operators with highly stringent network uptime and performance
demands. Intervoice supports these customers from secure,
inter-networked hosting locations in Cambridge in the U.K., and
Orlando, Florida and Dallas, Texas in the U.S. We also have
hosting agreements with MCI and AT&T which enable us to
deploy our solutions and services in most developed countries in
the world.
Markets
We provide the platform, software and services necessary to
create and support interactive speech enabled technology
solutions for customers in the enterprise and network operator
markets.
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The enterprise market is characterized by an ongoing drive to
improve customer service, satisfaction and loyalty while
controlling the cost of communications. Automated communications
are increasingly the norm, with consumers beginning to show a
marked preference for well-designed self-service solutions.
Organizations in a wide range of industries are responding by
deploying converged speech and data technologies. Intervoice
technologies continue to evolve to meet the needs of the
enterprise marketplace.
Network operators seek innovative services that generate
immediate subscriber uptake and accelerated ROI while
controlling capital and operational expenditures. Network
operators view voicemail, text messaging, multimedia messaging,
information portals, voice activated dialing, personal alerts
and other enhanced services as clear opportunities to increase
subscriber counts, loyalty and usage. Intervoice network
solutions are designed to support both wireline and wireless
network operator needs for rapid, lower-risk ROI that extends
the useful life of existing network infrastructure.
Competition
The enterprise market is fragmented and highly competitive. Our
major competitors in this market are Nortel, Genesys, Avaya and
Edify. The principal competitive factors in this market include
breadth and depth of solution, product features, product
scalability and reliability, client services, the ability to
implement solutions, and the creation of a referenceable
customer base. We believe that our long history and unmatched
product line of speech-enabled solutions, combined with our
professional and technical services and our extensive customer
base, allow us to compete favorably in this market. The market
is evolving rapidly, however, and we anticipate intensified
competition not only from traditional IVR vendors but also from
emerging vendors with non-traditional technologies and solutions
Competition in the enhanced network services market ranges from
large telecommunication suppliers offering turnkey,
multi-application solutions to “niche” companies that
specialize in a particular enhanced service such as prepaid,
voicemail or voice services such as voice activated dialing. Our
primary competitors in this market are suppliers such as
Comverse Technology, Lucent Technologies and Huawei that provide
a suite of enhanced services.
Smaller niche players that compete with us in various
geographies and/or products include TellMe, Convergys, Cisco,
Nuance and Boston Communications Group.
We believe that, with our current suite of integrated and
interoperable payment, messaging and portal services, open
IP-based platform, our flexible business models, and our
professional and technical service offerings, we compare
favorably with our competition. Nevertheless, we anticipate that
competition will continue from existing and new competitors,
some of which have greater financial, technological and
marketing resources and greater market share than we have.
Sales and Marketing
We market our products directly, with a global sales force, and
through more than 70 domestic and international distributors. We
enter into arrangements with distributors to broaden
distribution channels, to increase our sales penetration in
specific markets and industries and to provide certain customer
services. We select distributors based on their access to the
markets, industries and customers that are candidates for
Intervoice products. Our direct sales force consists of
approximately 80 sales directors and representatives
worldwide. During fiscal 2005, 74% of our solutions sales was
attributable to direct sales to end-users and 26% came from
sales to distributors.
Our major domestic distributors include Aurum Technology, EDS,
Fiserv, Liberty/ FiTech, Nextira One, Norstan, Siemens Business
Communications, Sprint and Symitar Systems. Our major
international distributors include Ericsson (Worldwide),
Information Technologies Australia (Australia), IVRS (Hong Kong,
China), Loxbit (Thailand), NextCom K.K. (Japan), Norstan
(Canada), OLTP (Venezuela and the Caribbean), Promotora Kranon
(Mexico), Siemens AG (Worldwide), Switch (Chile), Tatung
(Taiwan) Telia Promotor (Sweden) and Wittel (Brazil).
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Intervoice subsidiaries maintain offices in the U.K., Germany,
Switzerland, the Netherlands, the United Arab Emirates, and
South Africa to support sales throughout Europe, the Middle East
and Africa. A company office located in Singapore supports sales
in the Pacific Rim. We support Latin American sales from our
Dallas headquarters and through a regional office in Brazil.
Our international revenues were 41% of total revenues in fiscal
2005, 2004 and 2003. See “Cautionary Disclosures To Qualify
Forward-Looking Statements” under Item 7 —
Management’s Discussion and Analysis of Financial Condition
and Results of Operations for a discussion of risks attendant to
our international operations.
See “Sales” in Item 7 —
Management’s Discussion and Analysis of Financial Condition
and Results of Operations for additional information on sales by
product line and geographic area and concentration of revenue.
Strategic Alliances
Intervoice continues to build strategic partner relationships
with leading companies in key industries. We have established
partnerships with software and technology solution partners,
system integration partners and niche market partners. These
alliances enhance our value proposition as delivered through our
Omvia product line, strengthen our ability to deliver end-to-end
solutions, and extend our market reach.
In October 2003, we announced the addition of Intel®
Netstructuretm
DM/ V-A Resource Series telephony boards supporting both SALT
and VoiceXML to our Omvia Voice Framework suite for the
development, deployment and management of voice solutions. This
partnership continues to allow our customers to select other
powerful telephony boards from Intel as part of their
speech-activated solutions.
We continue to collaborate with Microsoft in a joint technology
and marketing alliance to help make speech recognition solutions
mainstream with the implementation of SALT standards-based
solutions along with the Microsoft Speech Server products. In
fiscal 2004, we introduced our Telephony Interface Manager
(TIM) software product and pre-configured hardware platform
for the deployment of speech applications in the Microsoft
Speech Server Beta program. In fiscal 2005, we continued
developing and introducing various products, including CTI
connectors and legacy host connectors, that enhance the
functionality of the Microsoft Speech Server product line.
During the middle of fiscal 2005, we concluded the speech server
beta program, and the Microsoft Speech Server and our associated
products and services became available for general sale and use.
We have also partnered with HP and Intel to refine the hardware
needed to develop, test and deploy Microsoft Speech Server based
solutions.
We continue to work closely with leaders of the speech
technology industry. We partner with ScanSoft to develop and
bring to market speech recognition and text-to-speech solutions,
and we leverage Nuance speech software solutions to give people
access to information and services anywhere, anytime and from
any phone.
Backlog
Our solutions backlog at February 28/29, 2005, 2004 and 2003,
which does not include the contracted value of future
maintenance and managed services to be recognized, was
approximately $35 million, $32 million and
$34 million, respectively. We expect all existing backlog
to be delivered within fiscal 2006. Some of our sales are
completed in the same fiscal quarter as ordered. Thus, our
backlog at any particular date may not be indicative of actual
sales for any future period.
Research and Development
Research and development expenses were approximately
$16 million, $15 million and $23 million during
fiscal 2005, 2004 and 2003, respectively, and included the
design of new products and the enhancement of existing products.
Our research and development spending is focused in four key
areas. First, we are developing software tools to aid in the
development and deployment of customer applications
incorporating speech recognition,
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text-to-speech, and other rich media technologies for
enterprise, wireless, and fixed line providers. Next, we are
developing server-based application software platforms for
operations and management of contact center, speech and call
completion applications. These applications are branded under
the product name Omvia Voice Framework and are scheduled for
release in fiscal 2006. We will use these software platforms for
deployment and management of enterprise, wireless and wireline
network operator applications, which are designed to operate in
both J2EE and Microsoft’s®.NET enterprise computing
environments. Third, we are developing media servers,
“voice browsers”, and call processing infrastructure
based on open standards such as SALT, VoiceXML and CCXML. These
media servers are VoIP enabled, allowing operation in
soft-switch and hybrid PSTN and VoIP networks. Finally, we are
developing packaged, speech enabled applications for the network
operator and enterprise markets. These include a range of
vertical and horizontal applications that are designed to
greatly enhance customer return on investment by providing many
commonly used, configurable functions that can be deployed more
quickly than can custom applications. Certain of these
applications are currently available under the product name
Omvia Voice Express. Additionally, we are developing modular
productivity and communications applications for wireless and
fixed-line applications including speech driven voice mail,
voice activated dialing, and enhanced personal information
management. The network products are branded under the product
name Omvia Media Exchange and are scheduled for release in
fiscal 2006.
We expect to maintain a strong commitment to research and
development so that we can remain at the forefront of technology
development in our markets.
Proprietary Rights
We believe our existing patent, copyright, license and other
proprietary rights in our products and technologies are material
to the conduct of our business. To protect these proprietary
rights, we rely on a combination of patent, trademark, trade
secret, copyright and other proprietary rights laws,
nondisclosure safeguards and license agreements. As of
February 28, 2005, we owned 72 patents, 4 of which were
received during fiscal 2005, and had 19 pending applications for
patents in the United States. In addition, we have registered
“Intervoice” as a trademark in the United States,
along with 245 other registered trademarks and service marks.
Some of our patents and marks are also registered in certain
foreign countries. We also have 5 registered copyrights in
the United States. Our software and other products are generally
licensed to a customer under the terms of a nontransferable
license agreement that restricts the use of the software and
other products to the customer’s internal purposes.
Although our license agreements prohibit a customer from
disclosing proprietary information contained in our products to
any other person, it is technologically possible for our
competitors to copy aspects of our products in violation of our
rights. Furthermore, even in cases where we hold patents, the
detection and policing of the unauthorized use of the patented
technology is difficult. Moreover, judicial enforcement of
copyrights may be uncertain, particularly in foreign countries.
The unauthorized use of our proprietary information by our
competitors could have a material adverse effect on our
business, operating results and financial condition.
We provide our customers a qualified indemnity against the
infringement of third party intellectual property rights. From
time to time, various owners of patents and copyrighted works
send us or our customers letters alleging that our products do
or might infringe upon the owner’s intellectual property
rights, and/or suggesting that we or our customers should
negotiate a license or cross-license agreement with the owner.
Our policy is to never knowingly infringe upon any third
party’s intellectual property rights. Accordingly, we
forward any such allegation or licensing request to our outside
legal counsel for their review and opinion. We generally attempt
to resolve any such matter by informing the owner of our
position concerning non-infringement or invalidity, and/or, if
appropriate, negotiating a license or cross-license agreement.
Even though we attempt to resolve these matters without
litigation, it is always possible that the owner of a patent or
copyrighted work will sue us. Although no such litigation is
currently pending against us, owners of patents and/or
copyrighted works have previously sued us alleging infringement
of their intellectual property rights, . As noted above, we
currently have a portfolio of 72 patents, and have applied for
and will continue to apply for and receive a number of
additional patents to protect our technological innovations. We
believe our patent portfolio could allow us to assert
counterclaims for infringement against certain owners of
intellectual property rights if those owners were to sue us for
infringement. In certain situations, it might be beneficial for
us to
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cross-license certain of our patents for other patents which are
relevant to the call automation industry. See
Item 3. — Legal Proceedings for a discussion of
certain patent matters. See Cautionary Disclosures to Qualify
Forward-Looking Statements in Item 7 for a discussion of
risks associated with claims of intellectual property
infringement.
Manufacturing and Facilities
Our manufacturing operations consist primarily of the final
assembly, integration and extensive testing of subassemblies,
host computer platforms, operating software and our run time
software. We currently use third parties to perform printed
circuit board assembly, sheet metal fabrication and
customer-site service and repair. Although we generally use
standard parts and components for our products, some of our
components, including semi-conductors and, in particular,
digital signal processors manufactured by Texas Instruments, are
available only from a small number of vendors. Likewise, we
license speech recognition technology from a small number of
vendors. As we continue to migrate to open, standards-based
systems, we will become increasingly dependent on our component
suppliers and software vendors. To date, we have been able to
obtain adequate supplies of needed components and licenses in a
timely manner, and we expect to continue to be able to do so.
Nevertheless, if our significant vendors are unable to supply
components or licenses at current levels, we may not be able to
obtain these items from another source or at historical prices.
In such situations, we would be unable to provide products and
services to our customers or generate historical operating
margins, and our business and operating results would suffer.
Employees
As of April 25, 2005, we had 746 employees.
Availability of Company Filings with the SEC
Our Internet website is www.intervoice.com. Our annual report on
Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 are posted on our website as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission (SEC).
Intervoice owns approximately 225,000 square feet of
manufacturing and office facilities in Dallas, Texas. We lease
approximately 216,000 square feet of office space as
follows:
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Allen, Texas
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130,000 |
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Orlando, Florida
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34,000 |
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Manchester, United Kingdom
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27,000 |
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Cambridge, United Kingdom
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12,000 |
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Other domestic and international locations
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13,000 |
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During the fourth quarter of fiscal 2002, we announced that we
would forego expansion into the leased space in Allen, Texas. As
of February 28, 2005, we had sub-leased approximately
34,000 square feet of such space. The Allen, Texas lease
expires in June 2005.
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Legal Proceedings |
Intellectual Property Matters
From time to time, Ronald A. Katz Technology Licensing L.P.
(RAKTL) has sent letters to certain of our customers
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
10
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, many of our customers have had discussions, or
are in discussions, with RAKTL.
We offer certain products that can be programmed and configured
to provide enhanced services to network providers and call
processing applications for call centers. Our contracts with
customers usually include a qualified obligation to indemnify
and defend customers against claims that products as delivered
by Intervoice infringe a third party’s patent. None of our
customers have notified us that RAKTL has claimed that any
product provided by Intervoice infringes any claims of any RAKTL
patent. Accordingly, we have not been required to defend any
customers against a claim of infringement under an RAKTL patent.
We have, however, received letters from customers notifying us
of the efforts by RAKTL to license its patent portfolio and
reminding us of our potential obligations under the
indemnification provisions of our agreements in the event that a
claim is asserted. In response to correspondence from RAKTL, a
few customers have attempted to tender to us the defense of our
products under contractual indemnity provisions. We have
informed these customers that while we fully intend to honor any
contractual indemnity provisions, we do not believe we currently
have any obligation to provide such a defense because RAKTL does
not appear to have made a claim that an Intervoice product
infringes a patent. Some of these customers have disagreed with
us and believe that the correspondence from RAKTL can be
construed as claims against Intervoice products.
Some of our customers have licensed certain rights under the
RAKTL patent portfolio. One such customer who attempted to
tender the defense of its products to us informed us that the
customer had entered into an agreement to license certain rights
under the RAKTL patents and demanded we indemnify the customer
for unspecified amounts, including attorney’s fees, paid in
connection with the license agreement. We notified the customer
over 11 months ago that we believe we do not have any
indemnity obligation in connection with the license agreement.
We received no further response from the customer.
Even though no claims have been made that a specific product
offered by Intervoice infringes any claim under the RAKTL patent
portfolio, we have received opinions from our outside patent
counsel that certain products and applications we offer do not
infringe certain claims of the RAKTL patents. We have also
received opinions from our outside counsel that certain claims
under the RAKTL patent portfolio are invalid or unenforceable.
Furthermore, based on the reviews by outside counsel, we are not
aware of any valid and enforceable claims under the RAKTL
portfolio that are infringed by our products. If we do become
involved in litigation in connection with the RAKTL patent
portfolio, under a contractual indemnity or any other legal
theory, we intend to vigorously contest the claims and to assert
appropriate defenses.
We have received letters from Webley Systems (Webley), a
division of Parus Holdings, Inc. (Parus), and their counsel
alleging that certain Webley patents cover one or more of our
products and services. In the letters, Parus offers a license to
the Webley patents. As a result of the correspondence, we are in
discussions with Parus. Based on reviews by outside counsel, we
are not aware of any valid and enforceable claims under the
Webley patents that are infringed by our products or services.
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 our common stock of Intervoice during
the period from October 12, 1999 through June 6, 2000
(the “Class Period”). Plaintiffs have filed
claims, which were consolidated into one proceeding, under
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and the Securities and Exchange Commission Rule 10b-5
against us as well as certain named current and former officers
and directors of Intervoice on behalf of the alleged class
members. In the complaint, Plaintiffs claim that we and the
named current and former officers and directors issued false and
misleading statements during
11
the Class Period concerning the financial condition of
Intervoice, the results of the merger with Brite and the alleged
future business projections of Intervoice. Plaintiffs have
asserted that these alleged statements resulted in artificially
inflated stock prices.
We believe that we and our officers complied with our
obligations under the securities laws, and we have vigorously
defended the lawsuit. We responded to this complaint by filing a
motion to dismiss the complaint in the consolidated proceeding.
We 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, we requested that
the United States District Court for the Northern District of
Texas dismiss the complaint in its entirety. Plaintiffs
responded to our request for dismissal. On August 8, 2002,
the Court entered an order granting our 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 which the Court dismissed
on September 15, 2003. Plaintiffs appealed the District
Court decision to the Fifth Circuit Court of Appeals. On
January 12, 2005, the Fifth Circuit Court of Appeals issued
an opinion in which it affirmed, in part, the District
Court’s order of dismissal. The Court of Appeals’
opinion also reversed a limited number of issues in the District
Court’s proceedings. On February 25, 2005, we filed a
motion for rehearing with the Fifth Circuit Court of Appeals
requesting the Court to modify its opinion. On May 12,
2005, the Fifth Circuit Court of Appeals denied our petition for
rehearing but modified its opinion to clarify the Court’s
decision. The case has been remanded to the District Court for
further proceedings consistent with the Fifth Circuit’s
opinion. We continue to believe that we and our officers and
directors complied with the securities laws and will continue to
vigorously defend the portions of the case that have been
remanded to the District Court.
Audit Committee Investigation
In December 2004, our Audit Committee completed an investigation
it had begun in August 2004 of certain transactions occurring
during our fiscal years 2000 through 2002. The Audit Committee
was assisted in its investigation by separate independent legal
counsel and a national accounting firm. The Audit Committee
reported the results of the investigation to, and we are
cooperating with, the SEC. We are currently providing documents
to the SEC in response to a subpoena requesting information
about the transactions that were the subject of the
investigation. Our Audit Committee and its counsel are actively
monitoring our response to the SEC, and they have been
conducting a review of certain documents provided to the SEC
which we located after the Committee’s original
investigation. Intervoice is also honoring our pre-existing
obligation to indemnify two former officers of Intervoice who
received subpoenas from the SEC in connection with the
investigation.
The Audit Committee investigation found that we accounted for
certain transactions incorrectly during our fiscal years 2000
through 2002. The Audit Committee investigation concluded that a
$900,000 payment made by Intervoice to a publicly held supplier
purportedly for certain prepaid licenses was linked to an
agreement to amend a 1997 warrant issued to us by the supplier
to permit our cashless exercise of the warrant. As a result, we
believe the $900,000 payment should have been recorded as a
reduction in the $21.4 million gain we recognized on the
sale of the shares underlying the warrant during the fourth
quarter of fiscal 2001 and should not have been recorded as
prepaid license inventory. Our payment to the supplier may have
rendered unavailable a nonexclusive registration exemption for
the sale of the shares underlying the warrant. The Audit
Committee investigation also found that we intentionally
provided the same supplier false or misleading documents for
such supplier to use to support such supplier’s improper
recognition of revenue in calendar 2001.
In addition, the Audit Committee investigation and review found
that six of the seven customer sales transactions the Committee
investigated were accounted for incorrectly and that there was
intentional misconduct in at least one of those sales
transactions. These six transactions occurred at the end of
quarters in which we just met analysts’ expectations with
respect to earnings per share. The Audit Committee found that we
improperly recognized revenue in a quarter-end barter
transaction involving approximately 0.4% of annual revenues for
fiscal 2000, and that we improperly accelerated the recognition
of revenue in five quarter-end
12
transactions totaling approximately 0.4% and 0.3% of annual
revenues in fiscal 2000 and fiscal 2002, respectively.
Separately, the Audit Committee further determined that in
September 2001 one of our current executive officers improperly
communicated Intervoice information to a shareholder.
Intervoice’s management has concluded, with the concurrence
of the Audit Committee and our external auditors, that
restatement of our prior period financial statements to adjust
for the findings of the Audit Committee investigation and review
is not necessary. In reaching this conclusion, we considered the
impact of the incorrect accounting on each of the periods
affected, the ages of the affected financial statements and the
lack of any material changes in prior period trends as a result
of the incorrect accounting. In addition, we noted that since
the date of the most recent transaction reviewed in the
investigation, we have restructured our business, made
significant management changes, consolidated our physical
operations, significantly reduced our fixed operating costs and
refinanced and repaid all of our major debt obligations. We
cannot predict whether we may have future losses relating to the
matters investigated by the Audit Committee as a result of
future claims, if any, including any claims by the government.
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| Item 4. |
Submission of Matters to a Vote of Security Holders |
Not applicable.
PART II
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| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Common Stock
Our outstanding shares of common stock are quoted on the NASDAQ
National Market under the symbol INTV. We have not paid any cash
dividends since our incorporation. The credit agreement
evidencing our debt facilities restricts our ability to pay a
dividend in cash, stock or any other property in excess of
$6.0 million in any fiscal year. We do not anticipate
paying cash dividends in the foreseeable future.
High and low share prices as reported on the NASDAQ National
Market are shown below for our fiscal quarters during fiscal
2005 and 2004.
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| Fiscal 2005 Quarter |
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High | |
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Low | |
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|
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4th
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$ |
14.50 |
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|
$ |
10.30 |
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3rd
|
|
$ |
13.50 |
|
|
$ |
8.05 |
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2nd
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|
$ |
14.30 |
|
|
$ |
7.23 |
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1st
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|
$ |
18.00 |
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|
$ |
11.06 |
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| Fiscal 2004 Quarter |
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High | |
|
Low | |
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|
| |
|
| |
|
4th
|
|
$ |
14.44 |
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|
$ |
9.10 |
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3rd
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|
$ |
11.12 |
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$ |
7.05 |
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2nd
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|
$ |
8.45 |
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|
$ |
3.16 |
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1st
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|
$ |
3.73 |
|
|
$ |
1.50 |
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On April 25, 2005, there were 716 shareholders of
record and approximately 12,700 beneficial shareholders of
Intervoice. The closing price of our Common Stock on that date
was $11.22.
Information regarding securities authorized for issuance under
our equity compensation plans is incorporated by reference to
Item 12 of this Form 10-K, which in turn incorporates
by reference a section of our definitive proxy statement.
13
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| Item 6. |
Selected Financial Data |
The following selected consolidated financial data should be
read in conjunction with our consolidated financial statements
and related notes included in Item 8 and in conjunction
with Management’s Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 7.
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Fiscal Year Ended February 28/29 | |
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|
2005 | |
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2004 | |
|
2003* | |
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2002** | |
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2001*** | |
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(In millions, except per share data) | |
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Sales
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|
$ |
183.3 |
|
|
$ |
165.3 |
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|
$ |
156.2 |
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|
$ |
211.6 |
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$ |
274.7 |
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Income (loss) from operations
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|
|
24.7 |
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|
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18.8 |
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|
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(44.1 |
) |
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(51.6 |
) |
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0.4 |
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Income (loss) before the cumulative effect of a change in
accounting principle
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|
|
22.5 |
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|
|
11.3 |
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(50.6 |
) |
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(44.7 |
) |
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|
9.5 |
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Net income (loss)
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22.5 |
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|
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11.3 |
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(66.4 |
) |
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(44.7 |
) |
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(2.3 |
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Total assets
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|
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134.9 |
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|
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111.6 |
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|
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101.0 |
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|
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175.4 |
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256.8 |
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Current portion of long term debt
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0.4 |
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— |
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|
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3.3 |
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6.0 |
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18.5 |
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Long term debt, net of current portion
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|
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1.3 |
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|
|
13.1 |
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|
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15.8 |
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|
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24.0 |
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|
|
31.1 |
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Per basic common share:
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Income (loss) before the cumulative effect of a change in
accounting principle
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0.62 |
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0.33 |
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(1.49 |
) |
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|
(1.34 |
) |
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|
0.29 |
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Net income (loss)
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|
|
0.62 |
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|
|
0.33 |
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|
|
(1.95 |
) |
|
|
(1.34 |
) |
|
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(0.07 |
) |
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Shares used in per basic common share calculation
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|
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36.2 |
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34.4 |
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34.0 |
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33.4 |
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32.7 |
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Per diluted common share:
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Income (loss) before the cumulative effect of a change in
accounting principle
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0.59 |
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0.32 |
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(1.49 |
) |
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(1.34 |
) |
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|
0.28 |
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Net income (loss)
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0.59 |
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0.32 |
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(1.95 |
) |
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(1.34 |
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(0.07 |
) |
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Shares used in per diluted common share calculation
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38.5 |
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35.7 |
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34.0 |
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33.4 |
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34.3 |
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* |
The fiscal 2003 loss from operations was impacted by special
charges of $34.3 million related to staffing reductions,
facilities closures, the write down of excess inventories, costs
associated with loss contracts, loss on early extinguishment of
debt, and impairment of certain intangible assets. (See
“Special Charges” and “Amortization and
Impairment of Goodwill and Acquired Intangible Assets”
under Item 7.) The fiscal 2003 net loss was also
increased as a result of a $15.8 million charge for the
cumulative effect of a change in accounting principle associated
with our adoption of Statement of Financial Accounting Standards
No. 142 “Accounting for Goodwill and Other Intangible
Assets”. Fiscal 2003 results benefited from a change in the
U.S. federal tax law that allowed us to recognize net tax
benefits of approximately $3.0 million. |
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** |
The fiscal 2002 loss from operations was impacted by special
charges of $33.4 million related to the streamlining of
product lines, the write down of excess inventories and
non-productive assets, the closure of certain facilities, and
staffing reductions (see “Special Charges” under
Item 7). |
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| *** |
The fiscal 2001 income from operations was impacted by special
charges of $8.2 million related to changes in our
organizational structure and product offerings. Income before
the cumulative effect of a change in accounting principle was
impacted by those special charges of $8.2 million
($5.4 million net of taxes) and by a $21.4 million
($13.8 million net of taxes) gain on the sale of
SpeechWorks International, Inc. common stock. Sales, income from
operations, income before the cumulative effect of a change in
accounting principle and net loss also were affected by
Intervoice’s adoption of Staff Accounting
Bulletin No. 101 (SAB 101) effective
March 1, 2000. During fiscal 2001, we recognized
$22.4 million in revenue whose contribution to income was
included in the cumulative effect adjustment as of March 1,
2000. |
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| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Cautionary Disclosures to Qualify Forward-Looking
Statements
This report on Form 10-K 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-K, 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 in this report regarding our financial
position, business strategy, plans and objectives of management
for future operations, future sales, and industry conditions,
are forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will
prove to be correct. In addition to important factors described
elsewhere in this report, we caution current and potential
investors that the following important risk factors, among
others, sometimes have affected, and in the future could affect,
our actual results and could cause such results during fiscal
2006 and beyond to differ materially from those expressed in any
forward-looking statements made by or on behalf of Intervoice:
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We are prone to quarterly sales fluctuations. The sales
value of an individual order for our solutions and services can
range from a few thousand dollars to several million dollars
depending on the complexity of our customer’s business need
and the size of its operations. The quantity and size of large
sales (sales valued at approximately $2.0 million or more)
during any quarter can cause wide variations in our quarterly
sales and earnings, as such sales are often unevenly distributed
throughout the fiscal year. In addition, some of our sales
transactions are completed in the same fiscal quarter as
ordered. Our accuracy in estimating future sales is largely
dependent on our ability to successfully qualify, estimate and
close solution sales from our pipeline of sales opportunities
during a quarter. No matter how promising a pipeline opportunity
may appear, there is no assurance it will ever result in a sale.
The accuracy of our estimate of future sales is also dependent
on our ability to accurately estimate the amount of revenue to
be contributed from beginning backlog and revenue from cash
basis customers during any fiscal quarter. This estimate can be
affected by factors outside our control, including changes in
project timing requested by our customers. Accordingly, our
actual sales for any fiscal reporting period may be
significantly different than any estimate of sales we make for
such period. See the discussion entitled “Sales” in
this Item 7 for a discussion of our system for estimating
sales and trends in our business. |
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• |
We are subject to potential and pending lawsuits and other
claims. We are subject to certain potential and pending
lawsuits and other claims discussed in Item 3 “Legal
Proceedings” of Part I of this Annual Report on
Form 10-K. We believe the pending lawsuit to which we are
subject is without merit, and we intend to defend the matter
vigorously. There can be no assurances, however, that we will
prevail in this matter. Furthermore, we may become subject to
claims, including claims by the government, or other adverse
consequences arising from the findings of an Audit Committee
investigation we completed in December 2004. We and two of our
former officers are currently responding to SEC subpoenas
requesting information about the transactions that were the
subject of the investigation. Any adverse judgment, penalty or
settlement related to any lawsuit or other such claim could have
consequences that would be material to our financial position or
results of operations. Our insurance policies provide coverage
for losses and expenses incurred by us and our current and
former directors and officers in connection with claims made
under the federal securities laws. These policies, however,
exclude losses and expenses related to the Barrie class action
lawsuit discussed in Item 3 and contain other customary
provisions to limit or exclude coverage for certain losses and
expenses. |
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• |
We face intense competition based on product capabilities,
and we experience ever increasing demands from our actual and
prospective customers for our products to be compatible with a
variety of rapidly proliferating computing, telephony and
computer networking technologies and standards. Our success
is dependent, to a large degree, on our effectiveness in
allocating resources to developing and |
15
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improving products compatible with those technologies, standards
and functionalities that ultimately become widely accepted by
our current and prospective customers. Our success is also
dependent, to a large degree, on our ability to implement
arrangements with vendors of complementary product offerings so
that we can provide our current and prospective customers
greater functionality. Our principal competitors include
Genesys, Avaya, Nortel, Edify, Comverse Technology, Huawei and
Lucent Technologies. Many of our competitors have greater
financial, technological and marketing resources than we have.
Although we have committed substantial resources to enhance our
existing products and to develop and market new products, there
is no assurance we will be successful. |
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• |
We may not be successful in transitioning our products and
services to an open, standards-based business model.
Intervoice has historically provided complete, bundled hardware
and software solutions using internally developed components to
address our customers’ total business needs. Increasingly,
the markets for our products are requiring a shift to the
development of products and services based on an open,
standards-based architecture such as the J2EE and
Microsoft’s®.NET environments utilizing VoiceXML
and/or SALT standards. Such an open, standards-based approach
allows customers to independently purchase and combine hardware
components, standardized software modules, and customization,
installation and integration services from individual vendors
deemed to offer the best value in the particular class of
product or service. In such an environment, we believe we may
sell less hardware and fewer bundled systems and may become
increasingly dependent on our development and sale of software
application packages, customized software and consulting and
integration services. This shift will place new challenges on us
to transition our products and to hire and retain the mix of
personnel necessary to respond to this business environment, to
adapt to the changing expense structure that the new environment
may tend to foster, and to increase sales of services,
customized software and application packages to offset reduced
sales of hardware and bundled solutions. The shift to open
standards will also challenge us to accurately estimate the
level of R&D expenditures that will be necessary in future
periods to comply with existing standards and, potentially, to
migrate to new open standards. If we are unsuccessful in
resolving one or more of these challenges, our revenues and
profitability could decline. |
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• |
We may not be able to retain our customer base, and, in
particular, our more significant customers. Our success is
heavily dependent on our ability to retain our significant
customers. The loss of one of our significant customers could
negatively impact our operating results. Our installed base of
customers generally is not contractually obligated to place
further solutions orders with us or to extend their services
contracts with us at the expiration of their current contracts. |
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• |
We will be harmed if we lose key business and technical
personnel. We rely upon the services of a relatively small
number of key technical, project management and senior
management personnel, most of whom do not have employment
contracts. If we were to lose any of our key personnel,
replacing them could be difficult and costly. If we were unable
to successfully and promptly replace such personnel, our
business could be materially harmed. |
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• |
Our reliance on significant vendor relationships could result
in significant expense or an inability to serve our customers if
we lose these relationships. Although we generally use
standard parts and components in our products, some of our
components, including semi-conductors and, in particular,
digital signal processors manufactured by Texas Instruments, are
available only from a small number of vendors. Likewise, we
license speech recognition technology from a small number of
vendors. As we continue to migrate to open, standards-based
systems, we will become increasingly dependent on our component
suppliers and software vendors. To date, we have been able to
obtain adequate supplies of needed components and licenses in a
timely manner and we expect to continue to be able to do so.
Nevertheless, if our significant vendors are unable to supply
components or licenses at current levels, we may not be able to
obtain these items from another source or at historical prices.
In such instances, we would be unable to provide products and
services to our customers or generate historical operating
margins, and our business and operating results would suffer. |
16
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• |
If third parties assert claims that our products or services
infringe on their technology and related intellectual property
rights, whether the claims are made directly against us or
against our customers, we could incur substantial costs to
defend these claims. We believe software and technology
companies, including Intervoice and others in our industry,
increasingly may become subject to infringement claims. Such
claims may require us to enter into costly license agreements or
result in even more costly litigation. To the extent a licensing
arrangement is required, the arrangement may not be available at
all, or, if available, may be very expensive or even
prohibitively expensive. As with any legal proceeding, there is
no guarantee we will prevail in any litigation instituted
against us asserting infringement of intellectual property
rights. To the extent we suffer an adverse judgment, we might
have to pay substantial damages, discontinue the use and sale of
infringing products, repurchase infringing products from our
customers in accordance with indemnity obligations, expend
significant resources to acquire non-infringing alternatives,
and/or obtain licenses to the intellectual property that has
been infringed upon. As with licensing arrangements,
non-infringing substitute technologies may not be available and,
if available, may be very expensive, or even prohibitively
expensive, to implement. Accordingly, for all of the foregoing
reasons, a claim of infringement could ultimately have a
material adverse effect on our business, financial condition and
results of operations. |
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• |
We are exposed to risks related to our international
operations that could increase our costs and hurt our
business. Our products are currently sold in more than 75
countries. Our international sales were 41% of total sales in
each of fiscal 2005, 2004 and 2003. International sales,
personnel and property are subject to certain risks, including: |
|
|
|
| |
• |
terrorism; |
| |
| |
• |
fluctuations in currency exchange rates; |
| |
| |
• |
the difficulty and expense of maintaining foreign offices and
distribution channels; |
| |
| |
• |
tariffs and other barriers to trade; |
| |
| |
• |
greater difficulty in protecting and enforcing intellectual
property rights; |
| |
| |
• |
general economic and political conditions in each country; |
| |
| |
• |
loss of revenue, property and equipment from expropriation; |
| |
| |
• |
import and export licensing requirements; and |
| |
| |
• |
additional expenses and risks inherent in conducting operations
in geographically distant locations, including risks arising
from differences in language and cultural approaches to the
conduct of business. |
|
|
|
| |
• |
Our inability to meet contracted performance targets could
subject us to significant penalties. Many of our contracts,
particularly for managed services, foreign contracts and
contracts with telecommunication companies, include provisions
for the assessment of liquidated damages for delayed project
completion and/or for our failure to achieve certain minimum
service levels. We have had to pay liquidated damages in the
past and may have to pay additional liquidated damages in the
future. Any such future liquidated damages could be significant. |
| |
| |
• |
Increasing consolidation in the telecommunications and
financial industries could adversely affect our revenues and
profitability. The majority of our largest customers are in
the telecommunications and financial industries. These
industries are undergoing significant consolidation as a result
of merger and acquisition activity. This activity could result
in a decrease in the number of customers purchasing our products
and/or in delayed purchases of our products by customers that
are reviewing their strategic alternatives in light of a pending
merger or acquisition. If these results occur, our revenues and
profitability could decline. |
17
Leadership Changes
In November 2004, we announced the retirement of David W.
Brandenburg as Chairman and Chief Executive Officer of
Intervoice. In December 2004, Mr. Brandenburg also retired
as a director of Intervoice. Mr. Brandenburg had served as
CEO since June 2000 and as Chairman since December 2000, and had
previously served as our President from June 1990 through
December 1994 and on our Board of Directors from 1990 through
1995 and again since 1997.
In connection with Mr. Brandenburg’s retirement, our
Board of Directors elected Gerald F. Montry, a director of
Intervoice since October 2002, to serve as Chairman of the
Board. Mr. Montry has been an active member of the Board of
Directors and currently serves on the Finance and Strategic
Planning, Audit and Compensation Committees of the Board.
Robert E. Ritchey, the President and a director of Intervoice,
assumed the additional responsibilities of Chief Executive
Officer in November 2004. Mr. Ritchey joined Intervoice as
President and General Manager, Enterprise Solutions Division, in
December 2000, was appointed President of the Company in July
2002. He was elected a member of the Board of Directors in July
2004.
Results of Operations
The following table presents certain items as a percentage of
sales for our last three fiscal years.
| |
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|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended February 28/29 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003* | |
| |
|
| |
|
| |
|
| |
|
Sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of goods sold
|
|
|
44.2 |
|
|
|
45.5 |
|
|
|
56.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
55.8 |
|
|
|
54.5 |
|
|
|
43.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
8.6 |
|
|
|
9.2 |
|
|
|
14.5 |
|
|
Selling, general and administrative expenses
|
|
|
32.9 |
|
|
|
32.2 |
|
|
|
42.2 |
|
|
Amortization of goodwill and acquisition related intangible
assets
|
|
|
0.8 |
|
|
|
1.7 |
|
|
|
4.5 |
|
|
Impairment of goodwill and acquisition related intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
10.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
13.5 |
|
|
|
11.4 |
|
|
|
(28.2 |
) |
|
Other income (expense), net
|
|
|
.2 |
|
|
|
(2.5 |
) |
|
|
(4.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and the cumulative effect of a
change in accounting principle
|
|
|
13.7 |
|
|
|
8.9 |
|
|
|
(32.8 |
) |
|
Income taxes (benefit)
|
|
|
1.4 |
|
|
|
2.0 |
|
|
|
(0.5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before the cumulative effect of a change in
accounting principle
|
|
|
12.3 |
|
|
|
6.9 |
|
|
|
(32.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| * |
The fiscal 2003 loss from operations was impacted by special
charges of $34.3 million (22.0% of sales) related to
staffing reductions, facilities closures, the write down of
excess inventories, costs associated with loss contracts, loss
on early extinguishment of debt, and impairment of certain
intangible assets. (See “Special Charges” and
“Amortization and Impairment of Goodwill and Acquired
Intangible Assets” under Item 7.) Fiscal 2003 results
benefited from a change in the U.S. federal tax law that
allowed us to recognize net tax benefits of approximately
$3.0 million (1.9% of sales). |
Critical Accounting Policies
In preparing our consolidated financial statements in conformity
with accounting principles generally accepted in the United
States, we use estimates and projections that affect the
reported amounts and related disclosures and that may vary from
actual results. We consider the following accounting policies to
be both those most important to the portrayal of our financial
condition and those that require the most subjective judgment.
If actual results differ significantly from management’s
estimates and projections, there could be a material effect on
our financial statements.
18
Intervoice recognizes revenue from the sale of hardware and
software solutions, from the delivery of recurring maintenance
and other customer services associated with installed solutions
and from the provision of our enterprise and network solutions
on a managed service basis. Our policies for revenue recognition
follow the guidance in Statement of Position No. 97-2
“Software Revenue Recognition,” as amended
(SOP 97-2), SEC Staff Accounting Bulletin No. 104
(SAB 104) and EITF 00-21 “Revenue Arrangements
with Multiple Deliverables.” If contracts include multiple
elements, each element of the arrangement is separately
identified and accounted for based on the relative fair value of
such element as evidenced by vendor specific objective evidence.
Revenue is not recognized on any element of the arrangement if
undelivered elements are essential to the functionality of the
delivered elements.
Sale of Hardware and Software Solutions: Many of our
sales are of customized software or customized hardware/
software solutions. Such solutions incorporate newly designed
software and/or standard building blocks of hardware and
software which have been significantly modified, configured and
assembled to match unique customer requirements defined at the
beginning of each project. We account for sales of these
customized solutions using contract accounting principles under
either the percentage of completion (POC) or completed
contract methodology as further described below. In other
instances, particularly in situations where we sell to
distributors or where we are supplying only additional product
capacity (i.e., similar hardware and software solutions to what
is already in place) for an existing customer, we may sell
solutions that do not require significant customization. In
those situations, we recognize revenue when there is persuasive
evidence that an arrangement exists, delivery has occurred, our
fee is fixed or determinable, and collectibility is probable.
Typically, this is at shipment when there is no installation
obligation or at the completion of minor post-shipment
installation obligations.
Generally, we use POC accounting for our more complex custom
solutions. In determining whether a particular sale qualifies
for POC treatment, we consider multiple factors including the
value of the contract and the degree of customization inherent
in the project. Projects normally must have an aggregate value
of more than $500,000 to qualify for POC treatment. For a
project accounted for under the POC method, we recognize revenue
as work progresses over the life of the project based on a
comparison of actual labor hours to current estimates of total
labor hours required to complete the project. We review and
update project estimates on a quarterly basis.
The terms of most POC projects require customers to make interim
progress payments during the course of the project. These
payments and a written customer acknowledgement at the
completion of the project, usually following a final customer
test phase, document the customer’s acceptance of the
project. In some circumstances, the passage of a contractually
defined time period or the customer’s use of the system in
a live operating environment may also constitute final
acceptance of a project.
We use completed contract accounting for smaller custom projects
not meeting the POC thresholds described above. We also use
completed contract accounting in situations where the technical
requirements of a project are so complex or are so dependent on
the development of new technologies or the unique application of
existing technologies that our ability to make reasonable
estimates is in doubt or in situations where a sale is subject
to unusual “inherent hazards”. Such hazards are
unrelated to, or only incidentally related to, our typical
activities and include situations where the enforceability of a
contract is suspect, completion of the contract is subject to
pending litigation, or where the solutions produced are subject
to condemnation or expropriation risks. These latter situations
are extremely rare. For all completed contract sales, we
recognize revenue upon customer acceptance as evidenced by a
written customer acknowledgement, the passage of a contractually
defined time period or the customer’s use of the solution
in a live operating environment.
We generate a significant percentage of our sales, particularly
sales of enhanced telecommunications services solutions, 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, we may offer selected customers such payment
terms. In all cases, however, we only recognize revenue at such
time as our solutions or service fee is fixed or determinable,
19
collectibility is probable and all other criteria for revenue
recognition have been met. In some limited cases, this policy
causes us to recognize revenue on a “cash basis”,
limiting revenue recognition on certain sales of solutions
and/or services to the actual cash received to date from the
customer, provided that all other revenue recognition criteria
have been satisfied. Costs associated with our services to cash
basis customers are expensed as we incur them.
Sale of Maintenance and Other Customer Services: We
recognize revenue from maintenance and other customer services
when the services are performed or ratably over the related
contract period. All significant costs and expenses associated
with maintenance contracts are expensed as incurred. This
approximates a ratable recognition of expenses over the contract
period.
Sale of Managed Services: We provide enhanced
communications solutions to some customers on an outsourced
basis through our managed service business. While specific
arrangements can vary, we generally build a customized solution
to address a specific customer’s business needs and then
own, monitor, and maintain that system, ensuring that it
processes the customer’s business transactions in
accordance with defined specifications. For our services, we
generally receive a one-time setup fee paid at the beginning of
the contract and a service fee paid monthly over the life of the
contract. Most contracts range from 12 to 36 months in
length.
We combine the setup fee and the total service fee to be
received from the customer and recognize revenue ratably over
the term of the managed service contract. We capitalize the cost
of the computer system(s) and related applications used to
provide the service and depreciate such costs over the contract
life (for assets unique to the individual contract) or the life
of the equipment (for assets common to the general managed
service operations or for assets whose useful lives are shorter
than the related contract term). We expense all labor and other
period costs required to provide the service as we incur them.
Loss Contracts: We update our estimates of the costs
necessary to complete all customer contracts in process on a
quarterly basis. Whenever current estimates indicate that we
will incur a loss on the completion of a contract, we
immediately record a provision for such loss as part of the
current period cost of goods sold.
Inventories are valued at the lower of cost or market.
Inventories are recorded at standard cost which approximates
actual cost determined on a first-in, first-out basis. We
periodically review our inventories for unsaleable or obsolete
items and for items held in excess quantities based on current
and projected usage. We make adjustments where necessary to
reduce the carrying value of individual items to reflect the
lower of cost or market, and any such adjustments create a new
carrying value for the affected items.
|
|
|
Intangible Assets and Goodwill |
Intangible Assets: Intangible assets are comprised of
separately identifiable intangible assets arising out of our
fiscal 2000 acquisition of Brite Voice Systems, Inc., and
certain capitalized purchased software. We amortize intangible
assets using the straight-line method over each asset’s
estimated useful life. Such lives range from 5 to 12 years.
We review our intangible assets for possible impairment when
events and circumstances indicate that the assets might be
impaired and the undiscounted projected cash flows associated
with such assets are less than the carrying amounts of the
assets. In those situations, we recognize an impairment loss on
the intangible asset equal to the excess of the carrying amount
of the asset over the asset’s fair value, generally based
upon discounted estimates of future cash flows.
We expense the cost of internally developed software products
and substantial enhancements to existing software products for
sale until technological feasibility is established, after which
point any additional costs are capitalized. Technological
feasibility of a computer software product is established when
we have completed all planning, designing, coding, and testing
activities necessary to establish that the product can be
produced to meet its design specifications including functions,
features, and technical performance requirements. No costs have
been capitalized to date for internally developed software
products and enhancements as our current process for developing
software is essentially completed concurrent with the
establishment of
20
technological feasibility. We capitalize purchased software upon
acquisition when such software is technologically feasible or if
it has an alternative future use, such as use of the software in
different products or resale of the purchased software.
Goodwill: Goodwill is also attributable to our fiscal
2000 purchase of Brite Voice Systems, Inc. Under the provisions
of SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets,
which we adopted on March 1, 2002, goodwill is presumed to
have an indefinite life and is not subject to annual
amortization. We do, however, perform an impairment test on our
goodwill balance on at least an annual basis and more frequently
if we identify triggering events on an interim basis. Our
impairment review follows the two-step approach defined in
SFAS No. 142. The first step compares the fair value
of Intervoice with its carrying amount, including goodwill. If
the fair value exceeds the carrying amount, goodwill is
considered not impaired. If the carrying amount exceeds fair
value, we compare the implied fair value of goodwill with the
carrying amount of that goodwill. If the carrying amount of
goodwill exceeds the implied fair value of that goodwill, we
recognize an impairment loss in an amount equal to the lesser of
that excess or the carrying amount of goodwill.
We recognize deferred income taxes using the liability method
and reflect the tax impact of temporary differences between the
amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and
regulations. We provide a valuation allowance for deferred tax
assets in circumstances where we do not consider realization of
such assets to be more likely than not. This is a highly
subjective assessment and requires us to evaluate the
predictability of future taxable income while considering the
significant losses we incurred in fiscal 2003 and 2002. In
general, we anticipate reversing valuation allowances associated
with deferred tax assets of our U.S. and U.K. operations only
when the underlying deferred tax assets are realized or at the
time the respective taxable entities’ actual results have
demonstrated a sustained profitability and their projected
results support our ability to realize the deferred tax assets
currently being reserved.
Sales
Intervoice is a leading provider of converged voice and data
solutions and related services. As used in this report,
solutions sales include the sale of hardware and/or software
applications and the related professional services associated
with designing, integrating, and installing custom applications
to address customers’ business needs. Recurring services
include a suite of maintenance and software upgrade offerings
and the provision of customized solutions to customers on a
managed service (outsourced) basis. Our solutions product
line includes Voice Automation/ IVR, network portal, messaging,
and payment solutions. In fiscal 2003 and prior years, we
grouped sales made to network market customers in a single
“Network solutions” category. Beginning in fiscal
2004, we determined that product line distinction provided the
most meaningful breakdown of quarterly and annual sales activity
and began capturing and reporting our activity in that manner.
We are not able to provide the historical breakdown of Network
solution sales into portal, messaging and payment solutions
components.
21
Our sales by product line for fiscal 2005, 2004 and 2003 were as
follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Voice Automation/ IVR solution sales
|
|
$ |
68.1 |
|
|
$ |
52.5 |
|
|
$ |
52.4 |
|
|
Network portal solution sales
|
|
|
5.9 |
|
|
|
1.7 |
|
|
|
— |
|
|
Messaging solution sales
|
|
|
10.4 |
|
|
|
10.8 |
|
|
|
— |
|
|
Payment solution sales
|
|
|
16.1 |
|
|
|
18.6 |
|
|
|
— |
|
|
Network solution sales
|
|
|
— |
|
|
|
— |
|
|
|
32.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total solution sales
|
|
|
100.5 |
|
|
|
83.6 |
|
|
|
84.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Maintenance and related services revenues
|
|
|
59.4 |
|
|
|
57.0 |
|
|
|
49.7 |
|
|
Managed services revenues
|
|
|
23.4 |
|
|
|
24.7 |
|
|
|
21.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total recurring services revenues
|
|
|
82.8 |
|
|
|
81.7 |
|
|
|
71.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$ |
183.3 |
|
|
$ |
165.3 |
|
|
$ |
156.2 |
|
| |
|
|
|
|
|
|
|
|
|
We assign revenues to geographic locations based on the location
of the customer. Our net sales by geographic area for fiscal
years 2005, 2004 and 2003 were as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
North America
|
|
$ |
107.8 |
|
|
$ |
97.7 |
|
|
$ |
91.5 |
|
|
Europe
|
|
|
40.9 |
|
|
|
32.4 |
|
|
|
39.5 |
|
|
Middle East and Africa
|
|
|
21.3 |
|
|
|
25.2 |
|
|
|
16.2 |
|
|
Central and South America
|
|
|
6.8 |
|
|
|
7.5 |
|
|
|
6.1 |
|
|
Pacific Rim
|
|
|
6.5 |
|
|
|
2.5 |
|
|
|
2.9 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
183.3 |
|
|
$ |
165.3 |
|
|
$ |
156.2 |
|
| |
|
|
|
|
|
|
|
|
|
International sales constituted 41% of total sales in fiscal
2005, 2004 and 2003.
Total sales increased 11% in fiscal 2005 and 6% in fiscal 2004
when compared to sales of the preceding year. The increase in
sales in fiscal 2005 was comprised of a 20% increase in
solutions sales and a 1% increase in recurring services
revenues. Our fiscal 2005 sales of Voice Automation/ IVR
solutions grew approximately 30%, and sales of network portal
solutions grew approximately 243%, but such growth was offset by
continuing softness in sales of messaging and payment solutions
which decreased approximately 3% and 14% as compared to fiscal
2004 levels, respectively. Voice Automation/ IVR sales in fiscal
2005 included approximately $10.3 million recognized under
an $11.4 million sale to a major U.S. wireless
provider that is being accounted for on a percentage of
completion basis. The increase in recurring services revenues is
made up of growth of approximately 4% in the sales of
maintenance and related services and a reduction of
approximately 6% in managed services revenues. One customer that
purchased approximately $2.6 million of maintenance
services during fiscal 2005 has notified us that it will not
renew its maintenance contracts in fiscal 2006. Managed services
revenues during fiscal 2005 included $1.5 million relating
to services performed for an international managed services
customer for which we recognize revenue on a cash basis. We
recognized $5.7 million of similar sales to the same
customer in fiscal 2004. At February 28, 2005, this
customer owed us approximately $1.3 million for services
performed but not recognized as revenue through that date. In
addition, we have contracted to provide services totaling
approximately $0.9 million from March 2005 through November
2005. Our ability to recognize these amounts or any future
amounts to be earned under contracts with this customer as
revenue and the timing of any such revenue recognition are
uncertain. Changes in foreign currency exchange rates from
fiscal 2004 to 2005, including particularly the devaluation of
the U.S. dollar as compared to the British pound, served to
increase sales for fiscal 2005 by approximately
$3.6 million. Similar changes from fiscal 2003 to fiscal
2004 served to increase sales for fiscal 2004 by approximately
$2.7 million. Changes to such exchange rates between fiscal
2002 and 2003 had no material effect on fiscal 2003 sales.
22
The increase in sales in fiscal 2004 over fiscal 2003 levels was
comprised of a 1% decrease in solutions sales and a 14% increase
in recurring services revenues. The decrease in our fiscal 2004
solution sales resulted from the continuing softness in sales of
our network market products which decreased approximately 4% as
compared to fiscal 2003 levels. The increase in recurring
services revenues was made up of growth of approximately 15% in
the sales of maintenance and related services and growth of
approximately 13% in managed services revenues. The managed
services growth was primarily attributable to the increase in
cash receipts from the international managed services customer
as discussed above.
We have historically made significant sales of solutions,
customer services and managed services to O2. Such combined
sales accounted for 10% of our total sales during fiscal 2005
and 2004 and 11% of our total sales during fiscal 2003. No other
customer accounted for 10% or more of our sales during such
periods. Sales under one long term managed services contract
with O2 totaled $10.0 million, $10.0 million and
$11.7 million in fiscal 2005, 2004 and 2003, respectively.
During fiscal 2005, we announced that this contract, which
otherwise would have ended in July 2005 had been extended
through July 2006. At current exchange rates, the contract is
expected to yield managed service revenues of approximately
$0.9 million per month through July 2005 and approximately
$0.7 million per month from August 2005 to July 2006.
We are prone to quarterly sales fluctuations. Some of our
transactions are completed in the same fiscal quarter as
ordered. The quantity and size of large sales (sales valued at
approximately $2.0 million or more) during any quarter can
cause wide variations in our quarterly sales and earnings, as
such sales are unevenly distributed throughout the fiscal year.
We use a system combining estimated sales from our recurring
services contracts, “pipeline” of solution sales
opportunities, and backlog of committed solution orders to
estimate sales and trends in our business. For the years ended
February 28, 2005, February 29, 2004 and
February 28, 2003 sales were sourced as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
February 28/29 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(Based on Averages of | |
| |
|
Quarterly Activity) | |
|
Sales from recurring service and support contracts, including
contracts for managed services
|
|
|
45 |
% |
|
|
49 |
% |
|
|
46 |
% |
|
Sales from solutions backlog
|
|
|
41 |
% |
|
|
36 |
% |
|
|
29 |
% |
|
Sales from the pipeline
|
|
|
14 |
% |
|
|
15 |
% |
|
|
25 |
% |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
Our service and support contracts range in original duration
from one month to five years, with most managed service
contracts having initial terms of two to three years and most
maintenance and related contracts having initial terms of one
year. Because many of the longer duration contracts give
customers early cancellation privileges, we do not consider our
book of services contracts to be reportable backlog, as a
portion of the potential revenue reflected in the contract
values may never be realized. Nevertheless, it is easier for us
to estimate service and support sales than to estimate solution
sales for the next quarter because the service and support
contracts generally span multiple quarters and revenues
recognized under each contract are generally similar from one
quarter to the next.
Our backlog is made up of customer orders for solutions for
which we have received complete purchase orders and which we
expect to ship within twelve months. At February 28/29, 2005,
2004 and 2003, our backlog of solutions sales was approximately
$35.4 million, $31.7 million and $33.5 million,
respectively. Our ability to estimate the amount of backlog that
will be converted to revenue in any fiscal quarter can be
affected by factors outside our control, including changes in
project timing requested by our customers.
Our pipeline of opportunities for solutions sales is the
aggregation of our sales opportunities for which we have not
received a purchase order, 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 us some sales guidelines in our business
planning and budgeting, pipeline estimates are
23
necessarily speculative and may not consistently correlate to
solutions sales in a particular quarter or over a longer period
of time. While we know the amount of solutions backlog available
at the beginning of a quarter, we must speculate on our pipeline
of solutions opportunities for the quarter. Our accuracy in
estimating total solutions sales for future fiscal quarters is,
therefore, highly dependent upon our ability to successfully
estimate which pipeline opportunities will close during the
quarter.
To compete effectively in our target markets in fiscal 2006 and
beyond, we believe we must continue to transition our products
and services to an open, standards-based business model. We have
historically provided complete, bundled hardware and software
systems using internally developed components to address our
customers’ total business needs. Increasingly, the markets
for our products are requiring a shift to the development of
products and services based on an open, standards-based
architecture such as the J2EE and Microsoft’s®.NET
environments utilizing VoiceXML and/or SALT standards. Such an
open, standards-based approach allows customers to independently
purchase and combine hardware components, standardized software
modules, and customization, installation and integration
services from individual vendors deemed to offer the best value
in the particular class of product or service. In such an
environment, we believe we may sell less hardware and fewer
bundled systems and may become increasingly dependent on our
development and sale of software application packages,
customized software and consulting and integration services.
This shift will place new challenges on our management to
transition our products and to hire and retain the mix of
personnel necessary to respond to this business environment, to
adapt to the changing expense structure that the new environment
may tend to foster, and to increase sales of services,
customized software and application packages to offset reduced
sales of hardware and bundled systems.
Special Charges
During fiscal 2004, we incurred severance charges of
approximately $1.4 million in connection with a reduction
in workforce affecting 56 positions. In addition, we incurred
cash and non-cash charges totaling approximately
$0.5 million and $0.3 million, respectively, under the
terms of a separation agreement with our former Chief Financial
Officer who resigned to pursue other opportunities.
The following table summarizes the effect on reported operating
results by financial statement category of all special charge
activities for fiscal 2004 (in millions).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Selling, | |
|
|
| |
|
Cost of | |
|
Research and | |
|
General and | |
|
|
| |
|
Goods Sold | |
|
Development | |
|
Administrative | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
Severance payments and related benefits
|
|
$ |
0.6 |
|
|
$ |
0.2 |
|
|
$ |
0.6 |
|
|
$ |
1.4 |
|
|
Separation settlement
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
|
|
0.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
0.6 |
|
|
$ |
0.2 |
|
|
$ |
1.4 |
|
|
$ |
2.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
All cash charges related to these special charges have been paid.
During fiscal 2003, we continued to implement actions designed
to lower cost and improve operational efficiency in response to
continued softness in the primary markets for our products. We
also reviewed our intangible assets for evidence of impairment
in light of changes in our business and continued weakness in
the world-wide telecommunications networks markets. (See
“Amortization and Impairment of Goodwill and Acquired
Intangible Assets.”)
24
The following table summarizes the effect on reported operating
results by financial statement category of all special charges
activities for fiscal 2003 (in millions).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost of | |
|
Research & | |
|
|
|
Other | |
|
Impairment of | |
|
|
| |
|
Goods Sold | |
|
Development | |
|
SG&A | |
|
Expenses | |
|
Intangibles | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Write down of intangible assets
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
16.7 |
|
|
$ |
16.7 |
|
|
Severance payments and related benefits
|
|
|
2.3 |
|
|
|
0.8 |
|
|
|
3.1 |
|
|
|
— |
|
|
|
— |
|
|
|
6.2 |
|
|
Facilities closures
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
0.7 |
|
|
Write down of excess inventories
|
|
|
4.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.1 |
|
|
Costs associated with loss contracts
|
|
|
4.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.7 |
|
|
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.9 |
|
|
|
— |
|
|
|
1.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
11.3 |
|
|
$ |
0.9 |
|
|
$ |
3.5 |
|
|
$ |
1.9 |
|
|
$ |
16.7 |
|
|
$ |
34.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The severance and related costs recognized during fiscal 2003
related to three separate workforce reductions that affected a
total of 273 employees. One of the reductions was associated
with the consolidation of our separate Enterprise and Networks
divisions into a single, integrated organizational structure.
The charge also included costs associated with the resignation
of the Networks division president during the first quarter of
fiscal 2003. Costs related to facilities closures included
$0.4 million for the closure of our leased facility in
Chicago, Illinois, and $0.3 million associated with the
closure of a portion of our leased facilities in Manchester,
United Kingdom. The downsizing of the leased space in Manchester
followed from our decision to consolidate virtually all of our
manufacturing operations into our Dallas, Texas facilities. The
inventory adjustments reflected our continued assessment of our
inventory levels in light of sales projections, the decision to
eliminate the U.K. manufacturing operation and the consolidation
of the business units. The charges for loss contracts reflected
the costs incurred on two contracts which were expected to
result in net losses to Intervoice upon completion. The loss on
early extinguishment of debt included $1.4 million in
non-cash charges to write-off unamortized debt discount and
unamortized debt issue costs and $0.5 million in prepayment
premiums. All cash charges related to these special charges have
been paid.
Cost of Goods Sold
Cost of goods sold was $81.0 million (44.2% of sales),
$75.3 million (45.5% of sales) and $88.0 million
(56.3% of sales) in fiscal 2005, 2004, and 2003, respectively.
During fiscal 2004 and 2003, we incurred special charges to cost
of goods sold totaling $0.6 million (0.3% of sales) and
$11.3 million (7.2% of sales), respectively, as described
in the preceding “Special Charges” section. A
significant portion of our 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 decrease in cost of goods sold as a
percentage of sales in fiscal 2005 as compared to fiscal 2004
resulted primarily from our ability to increase our sales volume
without incurring proportional increases in our fixed labor
costs. The decrease in cost of goods sold in absolute dollars
and as a percentage of sales in fiscal 2004 as compared to
fiscal 2003 resulted from the reduction in special charges
between years, the ongoing benefit in fiscal 2004 of our fiscal
2003 cost cutting initiatives and the effect of significantly
greater cash basis managed service revenues recognized in
fiscal 2004.
Research and Development
Research and development expenses during fiscal 2005, 2004, and
2003 were approximately $15.8 million (8.6% of sales),
$15.2 million (9.2% of sales), and $22.6 million
(14.5% of sales), respectively. We incurred special charges of
$0.2 million (0.1% of sales) and $0.9 million (0.6% of
sales) in fiscal 2004 and 2003, respectively, as described in
“Special Charges” above. Expenses were down in fiscal
2004 from prior year levels as a result of our cost reduction
initiatives and as a result of the reassignment of certain
resources from R&D to direct customer service activities
(cost of goods sold) in connection with our fiscal 2003
reorganization. Recurring research and development expenses
included the design of new products and the enhancement of
existing products.
25
Intervoice’s research and development spending is focused
in four key areas. First, we are developing software tools to
aid in the development and deployment of customer applications
incorporating speech recognition, text-to-speech, and other rich
media technologies for enterprises and wireless and wireline
providers. Next, we are developing server-based application
software platforms for operations and management of contact
center, speech and call completion applications. These
applications are branded under the product name Omvia Voice
Framework and are scheduled for release in fiscal 2006. We will
use these software platforms for deployment and management of
enterprise, wireless and wireline network operator applications
which are designed to operate in both J2EE and
Microsoft’s®.NET enterprise computing environments.
Third, we are developing media servers, “voice
browsers”, and call processing infrastructure based on open
standards such as SALT, VoiceXML, and CCXML. These media servers
are VoIP enabled, allowing operation in soft-switch and hybrid
PSTN and VoIP networks. Finally, we are developing packaged,
speech enabled applications for the network operator and
enterprise markets. These include a range of vertical and
horizontal applications that are designed to greatly enhance
customer return on investment by providing many commonly used,
configurable functions that can be deployed more quickly than
can custom applications. Certain of these applications are
currently available under the product name Omvia Voice Express.
Additionally, we are developing modular productivity and
communications applications for wireless and wireline
applications including speech driven voice mail, voice activated
dialing, and enhanced personal information management. The
network products are branded under the product name Omvia Media
Exchange and are scheduled for release in fiscal 2006.
We expect to maintain a strong commitment to research and
development so that we can remain at the forefront of technology
development in our business markets.
Selling, General and Administrative
SG&A expenses totaled $60.3 million (32.9% of sales),
$53.2 million (32.2% of sales), and $65.9 million
(42.2% of sales) in fiscal 2005, 2004 and 2003, respectively. We
incurred SG&A charges in connection with the Audit Committee
investigation described in Item 3 of Part 1 of this
Form 10-K of approximately $2.0 million, or 1.1% of
total sales, during fiscal 2005. SG&A expenses included
special charges of $1.4 million (0.8% of sales) in fiscal
2004 and $3.5 million (2.2% of sales) in fiscal 2003, as
described in “Special Charges” above. SG&A
expenses declined in fiscal 2004 from prior year levels
primarily as a result of cost control initiatives implemented by
the Company.
Amortization and Impairment of Goodwill and Acquired
Intangible Assets
In connection with our purchase of Brite in fiscal 2000, we
recorded intangible assets and goodwill totaling
$103.8 million. These assets were assigned useful lives
ranging from 5 to 10 years. For the fiscal years ended
February 28/29, 2005, 2004 and 2003, we recognized amortization
and impairment expense related to these assets as follows (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Amortization of acquisition related intangible assets
|
|
$ |
1.5 |
|
|
$ |
2.8 |
|
|
$ |
7.1 |
|
|
Impairment of acquisition related intangible assets as described
below
|
|
|
— |
|
|
|
— |
|
|
|
16.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total amortization and impairment charged to operating income
|
|
$ |
1.5 |
|
|
$ |
2.8 |
|
|
$ |
23.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill in connection with the adoption of
SFAS No. 142 as described below
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
15.8 |
|
| |
|
|
|
|
|
|
|
|
|
Effective March 1, 2002, we 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.
26
In adopting the Statements, we first reclassified
$2.7 million of intangible assets associated with our
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. We then allocated
our adjusted goodwill balance of $19.2 million to our then
existing Enterprise and Networks divisions and completed the
transitional impairment tests required by Statement
No. 142. The fair values of the reporting units were
estimated using a combination of the expected present values of
future cash flows and an assessment of comparable market values.
As a result of these tests, we determined that the goodwill
associated with our Networks division was fully impaired, and,
accordingly, we recognized a non-cash, goodwill impairment
charge of $15.8 million as the cumulative effect on prior
years of this change in accounting principle. This impairment
resulted primarily from the significant decline in Networks
sales and profitability during the fourth quarter of fiscal 2002
and related reduced forecasts for the division’s sales and
profitability. Effective August 1, 2002, we combined our
divisions into a single integrated organizational structure in
order to address changing market demands and global customer
requirements. We conducted our required annual test of goodwill
impairment during the fourth quarters of fiscal 2005, 2004 and
2003. No additional impairment of goodwill was indicated.
Accordingly, at February 28, 2005, our remaining goodwill
totaled $3.4 million.
During fiscal 2003, we were adversely affected by continuing
softness in the general U.S. economy, by extreme softness
in the worldwide network/telecommunications market and by
political tensions in parts of South America and the Middle
East. We experienced a second year of declining network revenue
and significantly reduced our estimates of near term growth in
revenue and net income for our networks based products. As a
result, we determined that a triggering event, as defined in
SFAS No. 144, had occurred during the fourth quarter
of fiscal 2003 and, we evaluated our intangible assets for
evidence of impairment. Based on the results of our review, we
recognized impairment charges of $14.2 million and
$2.5 million, respectively, to reduce the carrying value of
our customer relations and developed technology intangible
assets to their respective fair values. These fair values were
based on estimated discounted future cash flows.
During fiscal 2005, we completed the amortization of our
developed technology intangible assets. At February 28,
2005, we had $4.7 million in remaining net intangible
assets other than goodwill which will be subject to amortization
in future periods. The estimated amortization expense
attributable to our intangible assets for each of the next five
years is as follows (in millions):
| |
|
|
|
|
|
Fiscal 2006
|
|
$ |
1.2 |
|
|
Fiscal 2007
|
|
$ |
1.1 |
|
|
Fiscal 2008
|
|
$ |
1.1 |
|
|
Fiscal 2009
|
|
$ |
1.0 |
|
|
Fiscal 2010
|
|
$ |
0.3 |
|
Other Income (Expense)
Other income (expense) during fiscal 2005, 2004 and 2003
was comprised primarily of interest income on cash and cash
equivalents and foreign currency transaction losses totaling
approximately ($0.1) million, ($2.3) million and
($0.9) million, respectively.
Interest Expense
We incurred interest expense of approximately $0.6 million,
$2.0 million and $4.7 million during fiscal 2005, 2004
and 2003, respectively. Substantially all of this expense
related to our long term borrowings initially obtained in
connection with the Brite merger and subsequently refinanced.
The reduction in interest expense from fiscal 2003 through
fiscal 2005 is primarily attributable to the lower levels of
debt outstanding in successive years as we made scheduled and
discretionary payments of principal. Interest expense also
declined because we were able to negotiate lower interest rates
when we refinanced our debt in fiscal 2004 and 2005. Borrowings
under all credit agreements totaled $1.7 million,
$13.1 million and $19.1 million at February 28/29,
2005, 2004 and 2003, respectively. In March 2005, we repaid the
remaining $1.7 million of debt.
27
Income Taxes
We recognized income tax expense of $2.6 million (10% of
pretax income) for fiscal 2005 and $3.4 million (23% of
pretax income) for fiscal 2004. We recognized an income tax
benefit of $0.8 million (1% of pretax loss) for fiscal
2003. The fiscal 2005 and 2004 percentages differ from the
U.S. statutory rate of 35% primarily as a result of the
taxability in the U.S. of certain dividends deemed to have
been received from our foreign subsidiaries, the use of certain
fully reserved net operating loss carryforwards and other fully
reserved deferred tax assets as further described below and the
favorable resolution of certain tax contingencies. The fiscal
2003 percentage differs from the statutory rate primarily
as a result of benefits recognized in fiscal 2003 as a result of
a change in U.S. tax laws, operating losses and credit
carryforwards generated but not benefited, and an increase in
our deferred tax asset valuation allowance.
Our U.S. taxable income for fiscal 2005 and 2004 included
distributions deemed to have been made to our U.S. company
by several of our foreign subsidiaries, including, particularly,
our U.K. subsidiary. Such deemed distributions stemmed from the
existence and ultimate settlement of intercompany debt owed by
the U.S. entity to certain of our foreign subsidiaries and
from the pledging of certain U.K. assets as collateral for a
term loan that was outstanding for a portion of fiscal 2004.
During fiscal 2005 and 2004, we used net operating losses
carried forward from previous years and the reversal of certain
temporary differences to offset virtually all of our
U.S. taxable income. As a result, our current tax expense
was limited to a small amount of U.S. alternative minimum
tax expense and to tax expense on our international operations.
The reversal of a portion of our deferred tax asset valuation
allowances offset the deferred tax expense we would otherwise
have incurred as a result of using the assets, and, as a result,
our overall effective tax rate for the year was substantially
less than the statutory rates. Tax expense for fiscal 2005 also
reflected the benefit of a $0.9 million favorable tax
settlement with a foreign government reached during the year.
During fiscal 2004, we reached final settlement with the
Internal Revenue Service regarding audits of our federal income
tax returns for fiscal years 2000 and 2001. In the settlement,
we lost the ability to carry back approximately
$5.4 million in net operating losses generated in fiscal
2001 and repaid approximately $2.1 million of refunds
previously received from the IRS plus approximately
$0.5 million in accrued interest. The final settlements had
been anticipated in our fiscal 2003 net tax provision and
had no material effect on the tax provision or net income for
fiscal 2004.
During fiscal 2004, our wholly owned subsidiary, Brite Voice
Systems, Inc. (“Brite”), reached final settlement with
the IRS regarding a disputed Notice of Deficiency relating to
Brite’s August 1999 federal income tax return. As a result
of the settlement, we reversed approximately $1.2 million
of taxes payable we had accrued in prior years in response to
the IRS challenge.
During fiscal 2003, United States tax law was amended to allow
companies which incurred net operating losses in 2001 and 2002
to carry such losses back a maximum of five years instead of the
maximum of two years previously allowed. As a result of this
change, during the first quarter of fiscal 2003, we used
$21.5 million of our then existing net operating loss
carryforwards and $0.4 million of our then existing tax
credit carryforwards and recognized a one-time tax benefit of
$7.9 million, of which $2.2 million was recognized as
additional capital associated with previous stock option
exercises. Also during fiscal 2003, we became aware of the audit
issues described above associated with our fiscal 2000 and 2001
U.S. tax returns and recorded a charge of approximately
$2.7 million as part of our tax provision for the year.
During fiscal 2003, we recognized tax expense totaling
$0.8 million to increase our valuation allowance for net
foreign deferred tax assets that existed at February 28,
2002. We had not previously provided a valuation allowance for
deferred assets associated with our foreign subsidiaries. Also
during fiscal 2003, we reduced our deferred tax liabilities by
$1.4 million in connection with the reclassification of our
assembled workforce intangible asset to goodwill. As a result of
this transaction, we increased the valuation allowance
associated with our U.S. net deferred tax asset by
$1.4 million.
At February 28, 2005, we had U.S. federal net
operating loss carryforwards totaling $13.0 million. This
amount, if not used, will expire beginning in fiscal 2021.
Virtually all of the net operating loss carryforwards
28
arose from employee stock option exercises. As a result, the use
of such carryforwards in fiscal 2006 and future years will
increase equity and will not reduce our U.S. tax provision
for those years. We also had $2.9 million,
$0.9 million and $0.4 million in U.S. research
and development, U.S. and U.K. foreign tax and
U.S. alternative minimum tax credit carryforwards,
respectively. If unused, the foreign tax credit carryforwards
will expire beginning in fiscal 2006.
During fiscal 2003 and 2002, we established a valuation
allowance against our net deferred tax assets, including those
arising from our net operating loss carryforwards, tax credit
carryforwards and certain temporary differences. Although we
earned a profit in fiscal 2005 and 2004 and were able to use
some previously reserved deferred tax assets, we believe the
existence of substantive losses in our U.S. operations in
fiscal 2003 and 2002 and the dependency of our international
subsidiaries on continuing U.S. operations prevent us from
concluding that it is more likely than not that our deferred tax
assets will be realized. This is a highly subjective assessment
that requires us to evaluate the predictability of future
taxable income while considering the significant losses we
incurred in fiscal 2003 and 2002. In general, we anticipate
reversing valuation allowances associated with deferred tax
assets of our U.S. and U.K. operations only when the underlying
deferred tax assets are realized or at the time the respective
taxable entities’ actual results have demonstrated a
sustained profitability and their projected results support our
ability to realize the deferred tax assets currently being
reserved.
In calculating a projected annual tax rate for fiscal 2006 or
future years, we estimate the amount of deferred tax assets that
will reverse during the year. Because we have a 100% valuation
allowance against our deferred tax assets as discussed above,
the projected change in the level of temporary differences
during the year affects our annualized rate calculation. If the
actual reversal of temporary differences differs from our
estimate, our effective rate for the year will be affected, and
the change in such rate could be significant.
On October 22, 2004, the American Jobs Creation Act
(“the AJCA”) was signed into law. The AJCA provides
for a deduction of 85% of certain foreign earnings that are
repatriated, as defined in the AJCA. We may elect to apply this
provision to qualifying earnings repatriations in fiscal 2006.
We have begun an evaluation of the effects of the repatriation
provision; however, we have not reached a decision on whether or
not the election will be beneficial to us. The range of possible
amounts we are considering for repatriation under the AJCA is
between $0 and $13.0 million. The related potential range
of income tax expense associated with the repatriation is
between $0 and $0.7 million. We expect to complete our
evaluation of the effects of the repatriation provision during
the third quarter of fiscal 2006.
Income (Loss) From Operations and Net Income (Loss)
We generated income from operations of $24.7 million and
net income of $22.5 million during fiscal 2005. Income from
operations and net income were $18.8 million and
$11.3 million during fiscal 2004. Our loss from operations,
loss before the cumulative effect of a change in accounting
principle and net loss totaled ($44.1) million,
($50.6) million and ($66.4) million, respectively in
fiscal 2003.
In fiscal 2005, our increasing profitability resulted primarily
from significant growth in our Voice Automation/ IVR and network
portal sales, reduced interest expense resulting from
significant reductions in debt, reduced amortization expense and
a low effective tax rate. In fiscal 2004, we combined
improvements in the overall economic environment, improving
markets for our IVR and portal products, our focus on speech
solutions and open architecture, our focus on our recurring
services offerings and our multi-year efforts to reduce
operating cost and enhance efficiency to produce a return to
profitability. Our losses in fiscal 2003 were primarily
attributable to a significant decline in our sales volumes from
prior year levels and to the significant restructuring and other
special charges incurred in our efforts to adjust our operations
to the rapidly changing market for our products. In addition,
the cumulative effect of a change in accounting principle on
prior years associated with our adoption of
SFAS No. 142 resulted in a charge to income in fiscal
2003 of $15.8 million.
29
Liquidity and Capital Resources
We had $60.2 million in cash and cash equivalents at
February 28, 2005, an increase of $19.4 million over
ending fiscal 2004 balances. Borrowings under our long-term
credit facilities totaled $1.7 million at February 28,
2005, a reduction of $11.4 million from fiscal 2004 ending
balances.
Operating cash flow for fiscal 2005 totaled $25.5 million,
the result of our solid profitability for the year and our
continuing focus on balance sheet management. Our days sales
outstanding of accounts receivable was 60 days at
February 28, 2005.
For sales of certain of our more complex, customized solutions
(generally those with a sales price of $500,000 or more), we
recognize revenue based on a percentage of completion
methodology. Unbilled receivables accrued under this methodology
totaled $7.4 million (23.0% of total net receivables) at
February 28, 2005, as compared to $8.8 million (37.1%
of total receivables) at February 29, 2004. We expect to
bill and collect unbilled receivables as of February 28,
2005 within the next twelve months.
While we continue to focus on the level of our investment in
accounts receivable, we generate a significant percentage of our
sales, particularly sales of enhanced telecommunications
services solutions, 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, we may
offer selected customers such payment terms. In all cases,
however, we only recognize revenue at such time as our solution
or service fee is fixed or determinable, collectibility is
probable and all other criteria for revenue recognition have
been met. In some limited cases, this policy may result in our
recognizing revenue on a “cash basis”, limiting
revenue recognition on certain sales of solutions and/or
services to the actual cash received to date from the customer,
provided that all other revenue recognition criteria have been
satisfied.
We used $7.3 million of cash in net investing activities
during fiscal 2005. Of this amount, we used $1.7 million to
purchase equipment to expand our managed services business and
the remainder for replacement and expansion of our computing
infrastructure. We expect to make capital expenditures of
approximately $9.0 million in fiscal 2006.
During fiscal 2005, our financing activities provided
$0.6 million in net cash flow. Our option holders exercised
options for 1.5 million shares of common stock and, in so
doing, provided us with $9.2 million of cash. We used our
improved financial condition to facilitate the refinancing of
$8.0 million outstanding under our mortgage loan and to
obtain the release of $2.8 million held as cash collateral
under the line of credit. We made scheduled debt payments of
$0.3 million and discretionary debt payments of
$11.1 million during the year.
In connection with a sale of convertible notes during fiscal
2003, which notes were subsequently redeemed in full for cash
prior to the fiscal 2003 year end, we issued warrants to
the buyers. The warrants gave the holders the right to purchase
from us an aggregate of 621,304 shares of our common stock
for $4.0238 per share. In April 2005, the warrant holders
paid us $2.5 million to purchase the full
621,304 shares available under the warrants.
In January 2004, we entered into a credit agreement with a
lender which provides for a revolving line of credit equal to
the lesser of $5.5 million or a defined borrowing base
comprised of eligible U.S. accounts receivable. The credit
agreement contains terms, conditions and representations that
are generally customary for asset-based credit facilities,
including requirements that we comply with certain financial and
operating covenants. As of February 28, 2005, we were in
compliance with all such covenants. Borrowings under the credit
agreement are secured by first liens on our accounts receivable,
general intangibles, equipment and inventory and by a first lien
on the real property and fixtures comprising our Dallas
headquarters building and fixtures. We may borrow, partially or
wholly repay our outstanding borrowings without penalty, and
reborrow under the agreement so long as the total outstanding
borrowings do not exceed the available borrowing base.
30
We had no amounts drawn under this line at February 28,
2005. The revolving line of credit agreement expires on
January 31, 2007.
In June 2004, we entered into an amended and restated credit
agreement with our lender that added an $8.0 million term
loan to our existing line of credit. We used the proceeds of the
new term loan to repay all amounts outstanding under our
mortgage loan. At February 28, 2005, we had
$1.7 million outstanding under the term loan. We repaid the
outstanding balance of the term loan in full in March 2005.
|
|
|
Summary of Future Obligations |
The following table summarizes our obligations and commitments
as of February 28, 2005, to be paid in fiscal 2006 through
2010 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
Fiscal Year Ending February 28/29 | |
| |
|
| |
| Nature of Commitment |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Long-term debt (paid in full in March 2005)
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.1 |
|
|
Operating lease payments
|
|
|
2.5 |
|
|
|
1.4 |
|
|
|
1.1 |
|
|
|
0.8 |
|
|
|
0.4 |
|
|
Firm purchase commitments
|
|
|
2.0 |
|
|
|
1.2 |
|
|
|
0.7 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations and commitments
|
|
$ |
4.9 |
|
|
$ |
3.0 |
|
|
$ |
2.2 |
|
|
$ |
1.2 |
|
|
$ |
0.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The operating lease payments shown above were our only
off-balance sheet arrangements at February 28, 2005.
Most of our purchases are executed under cancelable purchase
orders. The firm purchase commitments shown above are comprised
of non-cancelable commitments for certain communications charges
and royalties.
We believe our cash reserves and internally generated cash flow
along with any cash availability under our line of credit will
be sufficient to meet our operating cash requirements for the
next twelve months.
We do not expect any significant short-term impact of inflation
on our financial condition. Technological advances should
continue to reduce costs in the computer and communications
industries. Further, we presently are not bound by long term
fixed price sales contracts. The absence of such contracts
should reduce our exposure to inflationary effects.
Selected Quarterly Financial Data (Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
May 31, | |
|
August 31, | |
|
November 30, | |
|
February 28, | |
| Fiscal 2005 |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except per share data) | |
|
Sales
|
|
$ |
41.9 |
|
|
$ |
44.3 |
|
|
$ |
48.4 |
|
|
$ |
48.7 |
|
|
Gross profit
|
|
|
22.9 |
|
|
|
24.1 |
|
|
|
27.6 |
|
|
|
27.6 |
|
|
Income from operations
|
|
|
4.3 |
|
|
|
6.5 |
|
|
|
6.9 |
|
|
|
7.1 |
|
|
Net income
|
|
|
3.2 |
|
|
|
5.1 |
|
|
|
7.0 |
|
|
|
7.2 |
|
|
Net income per basic share
|
|
|
0.09 |
|
|
|
0.14 |
|
|
|
0.20 |
|
|
|
0.20 |
|
|
Net income per diluted share
|
|
|
0.08 |
|
|
|
0.13 |
|
|
|
0.18 |
|
|
|
0.18 |
|
31
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
May 31, | |
|
August 31, | |
|
November 30, | |
|
February 29, | |
| Fiscal 2004 |
|
2003 | |
|
2003 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except per share data) | |
|
Sales
|
|
$ |
38.4 |
|
|
$ |
41.6 |
|
|
$ |
41.8 |
|
|
$ |
43.5 |
|
|
Gross profit
|
|
|
20.5 |
|
|
|
22.9 |
|
|
|
22.8 |
|
|
|
23.9 |
|
|
Income from operations
|
|
|
2.4 |
|
|
|
5.4 |
|
|
|
4.9 |
|
|
|
6.2 |
|
|
Net income
|
|
|
0.9 |
|
|
|
3.6 |
|
|
|
3.6 |
|
|
|
3.2 |
|
|
Net income per basic share
|
|
|
0.03 |
|
|
|
0.11 |
|
|
|
0.10 |
|
|
|
0.09 |
|
|
Net income per diluted share
|
|
|
0.03 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.09 |
|
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
We invest 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 these investments.
We transact business in certain foreign currencies including,
particularly, the British pound and the Euro. Our primary
software application development, research and development and
other administrative activities are conducted from offices in
the United States and the United Kingdom, and our primary
manufacturing operations are conducted in the United States.
Virtually all sales arranged through our U.S. offices are
denominated in U.S. dollars, which is the functional and
reporting currency of our U.S. entity. Sales arranged
through our U.K. subsidiary are denominated in various
currencies, including the British pound, the U.S. dollar
and the Euro; however, the U.K. subsidiary’s functional
currency is the British pound.
For the fiscal year ended February 28, 2005, sales
originating from our U.K. subsidiary represented approximately
33% of consolidated sales. As a result of our international
operations, we are subject to exposure from adverse movements in
certain foreign currency exchange rates. We have not
historically used foreign currency options or forward contracts
to hedge our currency exposures because of variability in the
timing of cash flows associated with our larger contracts, and
we did not have any such hedge instruments in place at
February 28, 2005. Rather, we attempt to mitigate our
foreign currency risk by generally transacting business in the
functional currency of each of our major subsidiaries, thus
creating natural hedges by paying expenses incurred in the local
currency in which revenues will be received.
As noted above, our operating results are exposed to changes in
certain exchange rates including, particularly, those between
the U.S. dollar, the British pound and the Euro. When the
U.S. dollar strengthens against the other currencies, our
sales are negatively affected upon the translation of U.K.
operating results to the reporting currency. The effect of these
changes on our operating profits varies depending on the level
of British pound denominated expenses and the U.K.
subsidiary’s overall profitability. For the fiscal year
ended February 28, 2005, the result of a hypothetical,
uniform 10% strengthening in the value of the U.S. dollar
relative to the British pound and the Euro would have been a
decrease in sales of approximately $3.7 million and an
increase in net income of approximately $0.1 million. In
addition to the direct effects of changes in exchange rates,
which are a changed dollar value of the resulting sales and/or
operating expenses, changes in exchange rates also could affect
the volume of sales or the foreign currency sales price as
competitors’ products become more or less attractive. This
sensitivity analysis of the effects of changes in foreign
currency exchange rates does not factor in a potential change in
sales levels or local currency prices.
32
|
|
| Item 8. |
Financial Statements and Supplementary Data |
The Report of Independent Registered Public Accounting Firm
Ernst & Young LLP and the Consolidated Financial
Statements of Intervoice as of February 28, 2005 and
February 29, 2004 and for each of the three years in the
period ended February 28, 2005 follow:
33
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Intervoice, Inc.
We have audited the accompanying consolidated balance sheets of
Intervoice, Inc and subsidiaries as of February 28, 2005
and February 29, 2004 and the related consolidated
statements of operations, changes in stockholders’ equity
and cash flows for each of the three years in the period ended
February 28, 2005. Our audits also included the financial
statement schedule listed in the index at Item 15(a). These
consolidated financial statements and schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Intervoice, Inc and
subsidiaries at February 28, 2005 and February 29,
2004, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
February 28, 2005, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.
As discussed in Note C to the consolidated financial
statements, effective March 1, 2002 the Company changed its
method of accounting for goodwill and other intangible assets.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Intervoice, Inc. and subsidiaries internal
control over financial reporting as of February 28, 2005,
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated
May 13, 2005 expressed an unqualified opinion thereon.
Dallas, Texas
May 13, 2005
34
INTERVOICE, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
| |
|
February 28, | |
|
February 29, | |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands, except share | |
| |
|
and per share data) | |
|
ASSETS |
|
Current Assets
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
60,242 |
|
|
$ |
40,859 |
|
| |
Trade accounts receivable, net of allowance for doubtful
accounts of $799 in 2005 and $947 in 2004
|
|
|
32,605 |
|
|
|
23,719 |
|
| |
Inventory
|
|
|
7,642 |
|
|
|
8,415 |
|
| |
Prepaid expenses and other current assets
|
|
|
4,339 |
|
|
|
5,087 |
|
| |
|
|
|
|
|
|
| |
|
|
104,828 |
|
|
|
78,080 |
|
|
Property and Equipment
|
|
|
|
|
|
|
|
|
| |
Land and buildings
|
|
|
16,932 |
|
|
|
16,857 |
|
| |
Computer equipment and software
|
|
|
46,514 |
|
|
|
39,073 |
|
| |
Furniture, fixtures and other
|
|
|
3,345 |
|
|
|
3,190 |
|
| |
Service equipment
|
|
|
9,267 |
|
|
|
9,421 |
|
| |
|
|
|
|
|
|
| |
|
|
76,058 |
|
|
|
68,541 |
|
| |
Less allowance for depreciation
|
|
|
54,303 |
|
|
|
48,325 |
|
| |
|
|
|
|
|
|
| |
|
|
21,755 |
|
|
|
20,216 |
|
|
Other Assets
|
|
|
|
|
|
|
|
|
| |
Intangible assets, net of accumulated amortization of $15,840 in
2005 and $34,443 in 2004
|
|
|
4,707 |
|
|
|
6,363 |
|
| |
Goodwill
|
|
|
3,401 |
|
|
|
3,401 |
|
| |
Other assets
|
|
|
168 |
|
|
|
3,491 |
|
| |
|
|
|
|
|
|
| |
|
$ |
134,859 |
|
|
$ |
111,551 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current Liabilities
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
11,485 |
|
|
$ |
10,746 |
|
| |
Accrued expenses
|
|
|
13,745 |
|
|
|
11,919 |
|
| |
Customer deposits
|
|
|
6,871 |
|
|
|
6,625 |
|
| |
Deferred income
|
|
|
24,448 |
|
|
|
22,257 |
|
| |
Current portion of long term borrowings
|
|
|
400 |
|
|
|
— |
|
| |
Income taxes payable
|
|
|
4,129 |
|
|
|
7,379 |
|
| |
|
|
|
|
|
|
| |
|
|
61,078 |
|
|
|
58,926 |
|
|
Long Term Borrowings
|
|
|
1,333 |
|
|
|
13,101 |
|
|
Other Long Term Liabilities
|
|
|
— |
|
|
|
271 |
|
| |
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
| |
|
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: 37,196,216
issued and outstanding in 2005, 35,691,389 issued and
outstanding in 2004
|
|
|
19 |
|
|
|
18 |
|
| |
Additional capital
|
|
|
85,421 |
|
|
|
75,276 |
|
| |
Accumulated deficit
|
|
|
(12,931 |
) |
|
|
(35,441 |
) |
| |
Accumulated other comprehensive loss
|
|
|
(61 |
) |
|
|
(600 |
) |
| |
|
|
|
|
|
|
| |
|
|
72,448 |
|
|
|
39,253 |
|
| |
|
|
|
|
|
|
| |
|
$ |
134,859 |
|
|
$ |
111,551 |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
35
INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
February 28, | |
|
February 29, | |
|
February 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share and | |
| |
|
per share data) | |
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Solutions
|
|
$ |
100,504 |
|
|
$ |
83,612 |
|
|
$ |
84,755 |
|
| |
Recurring services
|
|
|
82,754 |
|
|
|
81,666 |
|
|
|
71,457 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
183,258 |
|
|
|
165,278 |
|
|
|
156,212 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Solutions
|
|
|
52,116 |
|
|
|
47,675 |
|
|
|
60,723 |
|
| |
Recurring services
|
|
|
28,928 |
|
|
|
27,603 |
|
|
|
27,292 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
81,044 |
|
|
|
75,278 |
|
|
|
88,015 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Solutions
|
|
|
48,388 |
|
|
|
35,937 |
|
|
|
24,032 |
|
| |
Recurring services
|
|
|
53,826 |
|
|
|
54,063 |
|
|
|
44,165 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
102,214 |
|
|
|
90,000 |
|
|
|
68,197 |
|
| |
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
15,812 |
|
|
|
15,193 |
|
|
|
22,592 |
|
|
Selling, general and administrative expenses
|
|
|
60,265 |
|
|
|
53,188 |
|
|
|
65,941 |
|
|
Amortization of goodwill and acquisition related intangible
assets
|
|
|
1,461 |
|
|
|
2,820 |
|
|
|
7,101 |
|
|
Impairment of goodwill and acquisition related intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
16,710 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
24,676 |
|
|
|
18,799 |
|
|
|
(44,147 |
) |
|
Other income (expense)
|
|
|
974 |
|
|
|
(1,650 |
) |
|
|
(658 |
) |
|
Interest expense
|
|
|
(585 |
) |
|
|
(1,966 |
) |
|
|
(4,674 |
) |
|
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
(488 |
) |
|
|
(1,868 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and the cumulative effect of a
change in accounting principle
|
|
|
25,065 |
|
|
|
14,695 |
|
|
|
(51,347 |
) |
|
Income tax (benefit)
|
|
|
2,555 |
|
|
|
3,368 |
|
|
|
(752 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before the cumulative effect of a change in
accounting principle
|
|
|
22,510 |
|
|
|
11,327 |
|
|
|
(50,595 |
) |
|
Cumulative effect of change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
(15,791 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
22,510 |
|
|
$ |
11,327 |
|
|
$ |
(66,386 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Per Basic Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before the cumulative effect of a change in
accounting principle
|
|
$ |
0.62 |
|
|
$ |
0.33 |
|
|
$ |
(1.49 |
) |
|
Cumulative effect of change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
(0.46 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.62 |
|
|
$ |
0.33 |
|
|
$ |
(1.95 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Per Diluted Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before the cumulative effect of a change in
accounting principle
|
|
$ |
0.59 |
|
|
$ |
0.32 |
|
|
$ |
(1.49 |
) |
|
Cumulative effect of a change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
(0.46 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.59 |
|
|
$ |
0.32 |
|
|
$ |
(1.95 |
) |
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
36
INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Retained | |
|
Accumulated | |
|
|
| |
|
Common Stock | |
|
|
|
Earnings | |
|
Other | |
|
|
| |
|
| |
|
Additional | |
|
(Accumulated | |
|
Comprehensive | |
|
|
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit) | |
|
Loss | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share data) | |
|
Balance at February 28, 2002
|
|
|
34,029,180 |
|
|
$ |
17 |
|
|
$ |
61,725 |
|
|
$ |
19,618 |
|
|
$ |
(5,926 |
) |
|
$ |
75,434 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(66,386 |
) |
|
|
— |
|
|
|
(66,386 |
) |
| |
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,324 |
|
|
|
2,324 |
|
| |
Valuation adjustment of interest rate swap hedge, net of tax
effect of ($118)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
192 |
|
|
|
192 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,870 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Exercise of stock options
|
|
|
81,921 |
|
|
|
— |
|
|
|
192 |
|
|
|
— |
|
|
|
— |
|
|
|
192 |
|
| |
Tax benefit from exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
2,171 |
|
|
|
— |
|
|
|
— |
|
|
|
2,171 |
|
| |
Issuance of warrants
|
|
|
— |
|
|
|
— |
|
|
|
1,056 |
|
|
|
— |
|
|
|
— |
|
|
|
1,056 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2003
|
|
|
34,111,101 |
|
|
|
17 |
|
|
|
65,144 |
|
|
|
(46,768 |
) |
|
|
(3,410 |
) |
|
|
14,983 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,327 |
|
|
|
— |
|
|
|
11,327 |
|
| |
Foreign currency translation adjustment, including tax benefits
of $419
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,810 |
|
|
|
2,810 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,137 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tax benefit from exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
594 |
|
|
|
— |
|
|
|
— |
|
|
|
594 |
|
| |
Extension of stock options
|
|
|
— |
|
|
|
— |
|
|
|
279 |
|
|
|
— |
|
|
|
— |
|
|
|
279 |
|
| |
Exercise of stock options
|
|
|
1,580,288 |
|
|
|
1 |
|
|
|
9,259 |
|
|
|
— |
|
|
|
— |
|
|
|
9,260 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2004
|
|
|
35,691,389 |
|
|
|
18 |
|
|
|
75,276 |
|
|
|
(35,441 |
) |
|
|
(600 |
) |
|
|
39,253 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,510 |
|
|
|
— |
|
|
|
22,510 |
|
| |
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
539 |
|
|
|
539 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,049 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tax benefit from exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
939 |
|
|
|
— |
|
|
|
— |
|
|
|
939 |
|
| |
Exercise of stock options
|
|
|
1,504,827 |
|
|
|
1 |
|
|
|
9,206 |
|
|
|
— |
|
|
|
— |
|
|
|
9,207 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2005
|
|
|
37,196,216 |
|
|
$ |
19 |
|
|
$ |
85,421 |
|
|
$ |
(12,931 |
) |
|
$ |
(61 |
) |
|
$ |
72,448 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
37
INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Year Ended | |
| |
|
| |
| |
|
February 28, | |
|
February 29, | |
|
February 28, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
22,510 |
|
|
$ |
11,327 |
|
|
$ |
(66,386 |
) |
| |
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
7,733 |
|
|
|
9,750 |
|
|
|
16,065 |
|
| |
|
Deferred income taxes
|
|
|
— |
|
|
|
— |
|
|
|
2,200 |
|
| |
|
Provision for doubtful accounts
|
|
|
312 |
|
|
|
342 |
|
|
|
(774 |
) |
| |
|
Write down of inventories
|
|
|
57 |
|
|
|
34 |
|
|
|
5,667 |
|
| |
|
Disposal of equipment
|
|
|
(4 |
) |
|
|
7 |
|
|
|
736 |
|
| |
|
Foreign exchange loss (gain)
|
|
|
(271 |
) |
|
|
1,981 |
|
|
|
246 |
|
| |
|
Write off of goodwill and intangible assets
|
|
|
— |
|
|
|
— |
|
|
|
32,501 |
|
| |
|
Loss on early extinguishment of debt acquisition costs
|
|
|
— |
|
|
|
488 |
|
|
|
1,868 |
|
| |
|
Tax benefit for exercise of stock options
|
|
|
939 |
|
|
|
594 |
|
|
|
— |
|
| |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable
|
|
|
(8,701 |
) |
|
|
3,290 |
|
|
|
17,788 |
|
| |
|
Inventories
|
|
|
807 |
|
|
|
127 |
|
|
|
12,353 |
|
| |
|
Prepaid expenses and other assets
|
|
|
895 |
|
|
|
711 |
|
|
|
2,494 |
|
| |
|
Accounts payable and accrued expenses
|
|
|
1,822 |
|
|
|
(4,191 |
) |
|
|
(10,389 |
) |
| |
|
Income taxes payable
|
|
|
(3,280 |
) |
|
|
501 |
|
|
|
1,804 |
|
| |
|
Customer deposits
|
|
|
385 |
|
|
|
(2,641 |
) |
|
|
2,943 |
|
| |
|
Deferred income
|
|
|
1,732 |
|
|
|
(4,163 |
) |
|
|
988 |
|
| |
|
Other
|
|
|
560 |
|
|
|
952 |
|
|
|
3,761 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,496 |
|
|
|
19,109 |
|
|
|
23,865 |
|
| |
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchase of property and equipment
|
|
|
(7,253 |
) |
|
|
(5,495 |
) |
|
|
(4,169 |
) |
| |
Proceeds from sale of fixed assets
|
|
|
— |
|
|
|
22 |
|
|
|
1,890 |
|
| |
Purchased software
|
|
|
— |
|
|
|
(50 |
) |
|
|
(323 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,253 |
) |
|
|
(5,523 |
) |
|
|
(2,602 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Paydown of debt
|
|
|
(19,368 |
) |
|
|
(10,611 |
) |
|
|
(44,869 |
) |
| |
Premium on early extinguishment of debt
|
|
|
(5 |
) |
|
|
(20 |
) |
|
|
(470 |
) |
| |
Borrowings
|
|
|
8,000 |
|
|
|
4,601 |
|
|
|
34,000 |
|
| |
Debt issuance costs
|
|
|
— |
|
|
|
— |
|
|
|
(2,515 |
) |
| |
Restricted cash
|
|
|
2,750 |
|
|
|
(2,750 |
) |
|
|
— |
|
| |
Exercise of stock options
|
|
|
9,207 |
|
|
|
9,260 |
|
|
|
192 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
584 |
|
|
|
480 |
|
|
|
(13,662 |
) |
|
Effect of exchange rate on cash
|
|
|
556 |
|
|
|
582 |
|
|
|
964 |
|
| |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
19,383 |
|
|
|
14,648 |
|
|
|
8,565 |
|
|
Cash and cash equivalents, beginning of period
|
|
|
40,859 |
|
|
|
26,211 |
|
|
|
17,646 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
60,242 |
|
|
$ |
40,859 |
|
|
$ |
26,211 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
38
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A — Description of Business
Intervoice, Inc. (together with our subsidiaries) is a leader in
providing converged voice and data solutions for the network and
enterprise markets. Through our open, standards based product
suites, we offer speech-enabled IVR applications, multi-media
and network-grade portals, voicemail and prepaid calling
solutions that allow network operators and service providers to
increase revenue through value-added services and/or reduce
costs through automation and that allow enterprise customers to
reduce costs and improve customer service levels. In addition,
we provide a suite of professional services including
implementation, business and technical consulting services and
recurring maintenance services that supports our installed
systems. To further leverage the strong return on investment
offered by our systems offerings, we also offer enhanced
communications solutions to our customers on an outsourced basis
as a Managed Service Provider, or MSP.
Note B — Significant Accounting Policies
Principles of Consolidation: The consolidated financial
statements include the accounts of Intervoice, Inc. and our
subsidiaries, all of which are directly or indirectly 100% owned
by Intervoice, Inc. All significant intercompany transactions
and accounts have been eliminated in consolidation. Certain
prior year balances have been reclassified to conform to the
current year presentation. Financial statements of our foreign
subsidiaries have been translated into U.S. dollars at
current and average exchange rates. Resulting translation
adjustments are recorded in stockholders’ equity as a part
of accumulated other comprehensive loss. Any foreign currency
transaction gains or losses are included in the accompanying
consolidated statements of operations.
Use of Estimates: The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States requires management to make certain estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.
Cash and Cash Equivalents: Cash equivalents include
investments in highly liquid securities with a maturity of three
months or less at the time of acquisition. The carrying amount
of these securities approximates fair market value. Interest
income was $0.9 million, $0.6 million and
$0.3 million in fiscal 2005, 2004 and 2003, respectively.
Inventories: Inventories are valued at the lower of cost
or market. Inventories are recorded at standard cost which
approximates actual cost determined on a first-in, first-out
basis. We periodically review our inventories for unsaleable or
obsolete items and for items held in excess quantities based on
current and projected usage. Adjustments are made where
necessary to reduce the carrying value of individual items to
reflect the lower of cost or market, and any such adjustments
create a new carrying value for the affected items.
Property and Equipment: Property and equipment is stated
at cost. Depreciation is provided using the straight-line method
over each asset’s estimated useful life. The range of
useful lives by major category are: buildings: 5 to
40 years; computer equipment and software: 3 to
5 years; furniture, fixtures and other: 5 years; and
service equipment: 3 years. Depreciation expense totaled
$6.1 million, $6.7 million and $8.7 million in
fiscal 2005, 2004 and 2003, respectively.
Intangible Assets and Impairment of Long-Lived Assets:
Intangible assets are comprised of separately identifiable
intangible assets arising out of our fiscal 2000 acquisition of
Brite Voice Systems, Inc., and certain capitalized purchased
software. We amortize intangible assets using the straight-line
method over each asset’s estimated useful life. Such lives
range from five to twelve years. Amortization expense for these
items totaled $1.7 million, $3.0 million and
$7.4 million in fiscal 2005, 2004 and 2003, respectively.
We review our intangible and other long-lived assets for
possible impairment when events and circumstances indicate that
the
39
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
assets might be impaired and the undiscounted projected cash
flows associated with such assets are less than the carrying
amounts of the assets. In those situations, we recognize an
impairment loss on the intangible asset equal to the excess of
the carrying amount of the asset over the asset’s fair
value, generally determined based upon discounted estimates of
future cash flows. We recognized impairment losses related to
intangible assets totaling $16.7 million in fiscal 2003.
See “Note C — Change in Accounting Principle
for Goodwill and Other Intangible Assets”. No additional
impairment was indicated for fiscal 2005 or 2004.
We expense the cost of internally developed software products
and substantial enhancements to existing software products for
sale until technological feasibility is established, after which
point any additional costs are capitalized. Technological
feasibility of a computer software product is established when
we have completed all planning, designing, coding, and testing
activities necessary to establish that the product can be
produced to meet its design specifications including functions,
features, and technical performance requirements. No costs have
been capitalized to date for internally developed software
products and enhancements as our current process for developing
software is essentially completed concurrent with the
establishment of technological feasibility. We capitalize
purchased software upon acquisition when such software is
technologically feasible or if it has an alternative future use,
such as use of the software in different products or resale of
the purchased software.
Goodwill: Goodwill is also attributable to our fiscal
2000 purchase of Brite Voice Systems, Inc. Under the provisions
of SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible
Assets, which we adopted on March 1, 2002, goodwill is
presumed to have an indefinite life and is not subject to annual
amortization. We, however, do perform an impairment test on our
goodwill balance on at least an annual basis and at any interim
date at which we identify that a triggering event has occurred.
Our impairment review follows the two-step approach defined in
SFAS No. 142. The first step compares the fair value
of Intervoice with our carrying amount, including goodwill. If
the fair value exceeds the carrying amount, goodwill is
considered not impaired. If the carrying amount exceeds fair
value, we compare the implied fair value of goodwill with the
carrying amount of that goodwill. If the carrying amount of
goodwill exceeds the implied fair value of that goodwill, we
recognize an impairment loss in an amount equal to the lesser of
that excess or the carrying amount of goodwill. See Note C
for an expanded discussion of our fiscal 2003 adoption of
SFAS No. 141 and SFAS No. 142 and for a
summary of impairment charges recorded during fiscal 2003. No
additional impairment was indicated for fiscal 2005 or 2004.
Other Assets: At February 28, 2005, other assets was
comprised of refundable deposits. Other Assets at
February 29, 2004 was comprised of $2.8 million of
restricted cash used to collateralize a portion of our line of
credit, $0.6 million of restricted certificates of deposit
which matured during fiscal 2005, refundable deposits and
long-term debt issuance costs. The restriction on the
$2.8 million of cash was released in August 2004.
Customer Deposits: Customer Deposits is comprised of
amounts received from customers for orders not yet fulfilled.
Deferred Income: Deferred income is comprised primarily
of amounts collected but not yet earned under annual maintenance
and software support contracts. We recognize revenue from such
contracts ratably over the term of the contracts.
Product Warranties: We provide limited warranties on the
sale of certain of our solutions in the U.S. Such
warranties cover routine bug-fixes and hardware problems and do
not provide a right to system upgrades and enhancements. The
warranties are typically valid for one year. At February 28/29,
2005 and 2004, our accrued warranty costs totaled
$1.1 million and $1.0 million, respectively.
Revenue Recognition: We recognize revenue from the sale
of hardware and software solutions, from the delivery of
recurring maintenance and other customer services associated
with installed solutions and from the provision of our
enterprise and network solutions on a managed service basis. Our
policies for revenue recognition follow the guidance in
Statement of Position No. 97-2 “Software Revenue
Recognition”, as
40
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amended (SOP 97-2), SEC Staff Accounting
Bulletin No. 104 (SAB 104) and EITF 00-21
“Revenue Arrangements with Multiple Deliverables”
(EITF 00-21). If contracts include multiple elements, each
element of the arrangement is separately identified and
accounted for based on the relative fair value of such element
as evidenced by vendor specific objective evidence. Revenue is
not recognized on any element of the arrangement if undelivered
elements are essential to the functionality of the delivered
elements.
Sale of Hardware and Software Solutions: Many of our
sales are of customized software or customized hardware/
software solutions. Such solutions incorporate newly designed
software and/or standard building blocks of hardware and
software which have been significantly modified, configured and
assembled to match unique customer requirements defined at the
beginning of each project. We account for sales of these
customized solutions using contract accounting principles under
either the percentage of completion (POC) or completed
contract methodology as further described below. In other
instances, particularly in situations where we sell to
distributors or where we are supplying only additional product
capacity (i.e., similar hardware and software solutions to what
is already in place) for an existing customer, we may sell
solutions that do not require significant customization. In
those situations, we recognize revenue when there is persuasive
evidence that an arrangement exists, delivery has occurred, our
fee is fixed or determinable, and collectibility is probable.
Typically, this is at shipment when there is no installation
obligation or at the completion of minor post-shipment
installation obligations.
Generally, we use POC accounting for our more complex custom
solutions. In determining whether a particular sale qualifies
for POC treatment, we consider multiple factors including the
value of the contract and the degree of customization inherent
in the project. Projects normally must have an aggregate value
of more than $500,000 to qualify for POC treatment. For a
project accounted for under the POC method, we recognize revenue
as work progresses over the life of the project based on a
comparison of actual labor hours worked to current estimates of
total labor hours required to complete the project. We review
and update project estimates on a quarterly basis. Unbilled
receivables accrued under this POC methodology totaled
$7.4 million (23% of total net receivables) and
$8.8 million (37% of total net receivables) at February
28/29, 2005 and 2004, respectively. We expect to bill and
collect unbilled receivables as of February 28, 2005 within
the next twelve months.
The terms of most POC projects require customers to make interim
progress payments during the course of the project. These
payments and a written customer acknowledgement at the
completion of the project, usually following a final customer
test phase, document the customer’s acceptance of the
project. In some circumstances, the passage of a contractually
defined time period or the customer’s use of the solution
in a live operating environment may also constitute final
acceptance of a project.
We use completed contract accounting for smaller custom projects
not meeting the POC thresholds described above. We also use
completed contract accounting in situations where the technical
requirements of a project are so complex or are so dependent on
the development of new technologies or the unique application of
existing technologies that our ability to make reasonable
estimates is in doubt or in situations where a sale is subject
to unusual “inherent hazards”. Such hazards are
unrelated to, or only incidentally related to, our typical
activities and include situations where the enforceability of a
contract is suspect, completion of the contract is subject to
pending litigation, or where the solutions produced are subject
to condemnation or expropriation risks. These latter situations
are extremely rare. For all completed contract sales, we
recognize revenue upon customer acceptance as evidenced by a
written customer acknowledgement, the passage of a contractually
defined time period or the customer’s use of the solution
in a live operating environment.
We generate a significant percentage of our sales, particularly
sales of enhanced telecommunications services solutions, 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, we may offer selected customers such payment
terms. In all cases,
41
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
however, we only recognize revenue at such time as our solution
or service fee is fixed or determinable, collectibility is
probable and all other criteria for revenue recognition have
been met. In some limited cases, this policy causes us to
recognize revenue on a “cash basis”, limiting revenue
recognition on certain sales of solutions and/or services to the
actual cash received to date from the customer, provided that
all other revenue recognition criteria have been satisfied.
Costs associated with our services to cash basis customers are
expensed as we incur them.
Sale of Maintenance and Other Customer Services: We
recognize revenue from maintenance and other customer services
when the services are performed or ratably over the related
contract period. All significant costs and expenses associated
with maintenance contracts are expensed as incurred. This
approximates a ratable recognition of expenses over the contract
period.
Sale of Managed Services: We provide enhanced
communications solutions to some customers on an outsourced
basis through our managed service business. While specific
arrangements can vary, we generally build a customized solution
to address a specific customer’s business need and then
own, monitor, and maintain that system, ensuring that it
processes the customer’s business transactions in
accordance with defined specifications. For our services, we
generally receive a one-time setup fee paid at the beginning of
the contract and a service fee paid monthly over the life of the
contract. Most contracts range from 12 to 36 months in
length.
We combine the setup fee and the total service fee to be
received from the customer and recognize revenue ratably over
the term of the managed service contract. We capitalize the cost
of the computer system(s) and related applications used to
provide the service and depreciate such costs over the contract
life (for assets unique to the individual contract) or the life
of the equipment (for assets common to the general managed
service operations or for assets whose useful lives are shorter
than the related contract term). We expense all labor and other
period costs required to provide the service as we incur them.
Loss Contracts: We update our estimates of the costs
necessary to complete all customer contracts in process on a
quarterly basis. Whenever current estimates indicate that we
will incur a loss on the completion of a contract, we
immediately record a provision for such loss as part of the
current period cost of goods sold.
Research and Development: Research and development costs
are expensed as incurred.
Advertising Costs: Advertising costs are expensed as
incurred. Advertising expense was $2.2 million in fiscal
2005, $0.9 million in fiscal 2004 and $1.2 million in
fiscal 2003.
Income Taxes: We recognize deferred income taxes using
the liability method to reflect the tax impact of temporary
differences between the amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax
laws and regulations. We provide a valuation allowance for
deferred tax assets in circumstances where we do not consider
realization of such assets to be more likely than not. This is a
highly subjective assessment and requires us to evaluate the
predictability of future taxable income while considering the
significant losses we incurred in fiscal 2003 and 2002. In
general, we anticipate reversing valuation allowances associated
with deferred tax assets of our U.S. and U.K. operations only
when the underlying deferred tax assets are realized or at the
time the respective taxable entities’ actual results have
demonstrated a sustained profitability and their projected
results support our ability to realize the deferred tax assets
currently being reserved.
Stock Compensation: We account for our stock-based
employee compensation using the intrinsic value method as
defined in Accounting Principles Board Statement No. 25
(APB 25). Under this approach, we recognize expense at the
grant date of an option only to the extent that the fair value
of the related common stock at the grant date exceeds the
exercise price of the option. In practice, we typically grant
options at an exercise price equal to the fair value of the
stock on the grant date, and, accordingly, we typically do not
recognize any expense upon the granting of an option.
42
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Because we have elected this treatment, Statement of Financial
Accounting Standards No. 123, “Accounting for
Stock-Based Compensation”,
(“SFAS No. 123”) and Statement of Financial
Accounting Standards No. 148, “Accounting for
Stock-Based Compensation — Transition and
Disclosure” (SFAS No. 148) require disclosure of
pro forma information which provides the effects on net income
(loss) and net income (loss) per share as if we had accounted
for our employee stock awards under the fair value method
prescribed by SFAS 123. The Financial Accounting Standards
Board has issued a revision to SFAS No. 123
(SFAS 123R) that requires companies to include a
compensation expense in their statements of operations relating
to the issuance of employee stock options and other equity
awards based on the grant date fair value of the equity
instrument. This change in accounting for stock options will
become effective for our fiscal year beginning March 1,
2006. We are still assessing the transition method we will use
to implement SFAS 123R as well as the impact of the new
statement on our Consolidated Statements of Operations.
We estimated the fair value of our employee stock awards using a
Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal 2005, 2004 and 2003,
respectively: risk-free interest rates of 2.47%, 2.34% and
2.95%; stock price volatility factors of 0.86, 1.22 and 1.11;
and expected option lives of 2.16 years, 3.03 years
and 2.73 years. We do not have a history of paying
dividends, and none have been assumed in estimating the fair
value of the options. The weighted-average fair value per share
of options granted in fiscal 2005, 2004 and 2003 was $9.77,
$5.90 and $1.95, respectively. A reconciliation of our actual
net income (loss) and net income (loss) per diluted common share
to our pro forma net income (loss) and net income (loss) per
diluted common share using the fair value method of accounting
for stock options for fiscal 2005, 2004 and 2003 is as follows
(in millions, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Net income (loss) as reported
|
|
$ |
22.5 |
|
|
$ |
11.3 |
|
|
$ |
(66.4 |
) |
|
Add: stock-based employee compensation expense included in
reported net income net of related tax effect
|
|
|
— |
|
|
|
.3 |
|
|
|
— |
|
|
Deduct: total stock-based employee compensation expense
determined under fair value method, net of related tax effect
|
|
|
(7.5 |
) |
|
|
(4.1 |
) |
|
|
(2.5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$ |
15.0 |
|
|
$ |
7.5 |
|
|
$ |
(68.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic — as reported
|
|
$ |
0.62 |
|
|
$ |
0.33 |
|
|
$ |
(1.95 |
) |
| |
Basic — pro forma
|
|
$ |
0.42 |
|
|
$ |
0.22 |
|
|
$ |
(2.02 |
) |
| |
Diluted — as reported
|
|
$ |
0.59 |
|
|
$ |
0.32 |
|
|
$ |
(1.95 |
) |
| |
Diluted — pro forma
|
|
$ |
0.40 |
|
|
$ |
0.21 |
|
|
$ |
(2.02 |
) |
Note C — Change in Accounting Principle for
Goodwill and Other Intangible Assets
Effective March 1, 2002, we 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, we first reclassified
$2.7 million of intangible assets associated with our
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. We then allocated
our adjusted goodwill balance of $19.2 million to our then
existing Enterprise and Networks divisions and completed the
transitional impairment tests required by Statement
No. 142. The fair values of the reporting units were
estimated using a combination of the expected present values of
future cash flows and an assessment of comparable market
43
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
values. As a result of these tests, we determined that the
goodwill associated with our Networks division was fully
impaired, and, accordingly, we recognized a non-cash, goodwill
impairment charge of $15.8 million as the cumulative effect
on prior years of this change in accounting principle. This
impairment resulted primarily from the significant decline in
Networks sales and profitability during the fourth quarter of
fiscal 2002 and related reduced forecasts for the
division’s sales and profitability. Effective
August 1, 2002, we combined our divisions into a single
integrated organizational structure in order to address changing
market demands and global customer requirements. We conducted
our required annual test of goodwill impairment during the
fourth quarters of fiscal 2005, 2004 and 2003. No additional
impairment of goodwill was indicated.
During fiscal 2003, we were adversely affected by continuing
softness in the general US economy, by extreme softness in the
worldwide network/telecommunications market and by political
tensions in parts of South America and the Middle East. We
experienced a second year of declining network revenue and
significantly reduced our estimates of near term growth in
revenue and net income for our network based products. As a
result, we determined that a triggering event, as defined in
SFAS No. 144, had occurred during the fourth quarter
of fiscal 2003 and, we evaluated our intangible assets for
evidence of impairment. Based on the results of our review, we
recognized impairment charges of $14.2 million and
$2.5 million, respectively, to reduce the carrying value of
our customer relations and developed technology intangible
assets to their respective fair values. These fair values were
based on estimated discounted future cash flows.
Intangible assets other than goodwill at February 28, 2005
and February 29, 2004 are comprised of the following (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
February 28, 2005 | |
| |
|
|
|
| |
| |
|
|
|
Gross | |
|
|
| |
|
Amortization | |
|
Carrying | |
|
Accumulated | |
|
Unamortized | |
| Amortized Intangible Assets |
|
Period | |
|
Amount | |
|
Amortization | |
|
Balance | |
| |
|
| |
|
| |
|
| |
|
| |
|
Customer relations
|
|
|
10 years |
|
|
$ |
18.6 |
|
|
$ |
14.3 |
|
|
$ |
4.3 |
|
|
Other intangibles
|
|
|
5-12 years |
|
|
|
2.0 |
|
|
|
1.6 |
|
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
|
|
|
$ |
20.6 |
|
|
$ |
15.9 |
|
|
$ |
4.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
February 29, 2004 | |
| |
|
|
|
| |
| |
|
|
|
Gross | |
|
|
| |
|
Amortization | |
|
Carrying | |
|
Accumulated | |
|
Unamortized | |
| Amortized Intangible Assets |
|
Period | |
|
Amount | |
|
Amortization | |
|
Balance | |
| |
|
| |
|
| |
|
| |
|
| |
|
Customer relations
|
|
|
10 years |
|
|
$ |
18.6 |
|
|
$ |
13.3 |
|
|
$ |
5.3 |
|
|
Developed technology
|
|
|
5 years |
|
|
|
20.2 |
|
|
|
19.7 |
|
|
|
0.5 |
|
|
Other intangibles
|
|
|
5-12 years |
|
|
|
2.0 |
|
|
|
1.4 |
|
|
|
0.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
|
|
|
$ |
40.8 |
|
|
$ |
34.4 |
|
|
$ |
6.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense attributable to these
intangible assets for each of the next five years is as follows
(in millions):
| |
|
|
|
|
|
Fiscal 2006
|
|
$ |
1.2 |
|
|
Fiscal 2007
|
|
$ |
1.1 |
|
|
Fiscal 2008
|
|
$ |
1.1 |
|
|
Fiscal 2009
|
|
$ |
1.0 |
|
|
Fiscal 2010
|
|
$ |
0.3 |
|
44
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note D — Inventory
Inventory at February 28/29 consisted of the following (in
millions):
| |
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Purchased parts
|
|
$ |
3.8 |
|
|
$ |
4.1 |
|
|
Work in progress
|
|
|
3.8 |
|
|
|
4.3 |
|
| |
|
|
|
|
|
|
| |
|
$ |
7.6 |
|
|
$ |
8.4 |
|
| |
|
|
|
|
|
|
Note E — Accrued Expenses
Accrued expenses consisted of the following at February 28/29
(in millions):
| |
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Accrued compensation and other employee related costs, including
accrued vacation
|
|
$ |
7.7 |
|
|
$ |
5.7 |
|
|
Other
|
|
|
6.0 |
|
|
|
6.2 |
|
| |
|
|
|
|
|
|
| |
|
$ |
13.7 |
|
|
$ |
11.9 |
|
| |
|
|
|
|
|
|
Note F — Long-Term Borrowings
At February 28/29, 2005 and 2004, our long-term debt was
comprised of the following (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
February 28/29 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Line of credit, bearing interest, payable monthly, accruing at a
rate equal to the prime rate plus 0.25% or the London Inter-Bank
Offering Rate plus 1.75%
|
|
$ |
— |
|
|
$ |
4.6 |
|
|
Term loan, bearing interest, payable monthly, accruing at a rate
equal to the prime rate plus 0.50% or the London Inter-Bank
Offering Rate plus 2.25% (4.875% at February 28, 2005);
principal repaid in full during March 2005
|
|
|
1.7 |
|
|
|
— |
|
|
Mortgage loan, bearing interest payable monthly at the greater
of 10.5% or the prime rate plus 2.0%; refinanced during June 2004
|
|
|
— |
|
|
|
8.5 |
|
| |
|
|
|
|
|
|
|
Total debt outstanding
|
|
|
1.7 |
|
|
|
13.1 |
|
|
Less: current portion
|
|
|
0.4 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$ |
1.3 |
|
|
$ |
13.1 |
|
| |
|
|
|
|
|
|
In January 2004, we entered into a credit agreement with a
lender which provided for a revolving line of credit equal to
the lesser of $5.5 million or a defined borrowing base
comprised of eligible U.S. accounts receivable and
$2.8 million held in a cash collateral account. The
agreement was amended August 17, 2004 to release us from
the obligation to maintain the cash collateral and to remove
such collateral from the borrowing base definition. Initial
borrowings under the revolving line of credit of
$4.6 million were used to retire indebtedness then
outstanding under an amortizing term loan. The credit agreement
contains terms, conditions and representations that are
generally customary for asset-based credit facilities including
requirements that we comply with certain financial and operating
covenants. As of February 28, 2005, we were in compliance
with all such covenants. Borrowings under the credit agreement
are secured by first liens on our accounts receivable, general
intangibles, equipment and inventory and by a first lien on the
real property and fixtures comprising our Dallas headquarters
building and fixtures. We may borrow, partially or wholly repay
45
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
our outstanding borrowings without penalty, and reborrow under
the agreement so long as the total outstanding borrowings do not
exceed the available borrowing base. The revolving line of
credit agreement expires on January 31, 2007.
In June 2004, we entered into an amended and restated credit
agreement with our lender that added an $8.0 million term
loan to our existing line of credit. We used the proceeds of the
new term loan to repay all amounts outstanding under our
mortgage loan. We repaid the outstanding balance of the term
loan in full in March 2005.
|
|
|
Costs Associated with Refinancings |
During fiscal 2004, we expensed $0.5 million of unamortized
debt issuance costs associated with the term loan that was
retired when we entered into our new line of credit agreement.
During fiscal 2003, we recognized a loss of approximately
$1.9 million on the early extinguishment of
$9.0 million of convertible notes. The loss included a
$0.5 million early conversion premium and the write off of
unamortized debt issuance costs and unamortized discount
associated with the convertible notes.
We made interest payments totaling $0.6 million,
$2.0 million and $2.5 million in fiscal 2005, 2004,
and 2003, respectively.
Note G — Income Taxes
Our income (loss) before income taxes and the cumulative effect
of a change in accounting principle was attributable to our
domestic and foreign operations as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Domestic | |
|
Foreign | |
|
|
| Fiscal Year |
|
Operations | |
|
Operations | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
2005
|
|
$ |
15.4 |
|
|
$ |
9.7 |
|
|
$ |
25.1 |
|
|
2004
|
|
|
7.2 |
|
|
|
7.5 |
|
|
|
14.7 |
|
|
2003
|
|
|
(51.7 |
) |
|
|
0.4 |
|
|
|
(51.3 |
) |
Our income tax provision (benefit) attributable to income (loss)
before income taxes and the cumulative effect of a change in
accounting principle was comprised of the following elements (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Income tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal
|
|
$ |
0.6 |
|
|
$ |
2.0 |
|
|
$ |
(3.1 |
) |
| |
|
State
|
|
|
(0.1 |
) |
|
|
0.3 |
|
|
|
— |
|
| |
|
Foreign
|
|
|
2.1 |
|
|
|
1.1 |
|
|
|
0.1 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total current
|
|
|
2.6 |
|
|
|
3.4 |
|
|
|
(3.0 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal
|
|
|
— |
|
|
|
— |
|
|
|
1.4 |
|
| |
|
State
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Foreign
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total deferred
|
|
|
— |
|
|
|
— |
|
|
|
2.2 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
2.6 |
|
|
$ |
3.4 |
|
|
$ |
(0.8 |
) |
| |
|
|
|
|
|
|
|
|
|
46
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A reconciliation of our income tax expense (benefit) with the
United States federal statutory rate is as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Federal income taxes (benefit) at statutory rates
|
|
$ |
8.8 |
|
|
|
35 |
% |
|
$ |
5.1 |
|
|
|
35 |
% |
|
$ |
(18.0 |
) |
|
|
35 |
% |
|
Deemed dividends and other taxable income from wholly owned
foreign subsidiaries
|
|
|
1.3 |
|
|
|
5 |
|
|
|
13.6 |
|
|
|
92 |
|
|
|
— |
|
|
|
— |
|
|
Operating losses and credit carryforwards not benefited
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18.1 |
|
|
|
(35 |
) |
|
Change in US federal tax law, net of related IRS audit issues
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3.0 |
) |
|
|
6 |
|
|
Change in valuation allowance, in fiscal 2005 and 2004 primarily
as a result of the use of net operating losses carried forward
from prior years
|
|
|
(6.2 |
) |
|
|
(25 |
) |
|
|
(13.8 |
) |
|
|
(94 |
) |
|
|
2.2 |
|
|
|
(5 |
) |
|
State taxes, net of federal effect
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
0.3 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
Other
|
|
|
(1.2 |
) |
|
|
(5 |
) |
|
|
(1.8 |
) |
|
|
(12 |
) |
|
|
(0.1 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
2.6 |
|
|
|
10 |
% |
|
$ |
3.4 |
|
|
|
23 |
% |
|
$ |
(0.8 |
) |
|
|
1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We paid (received) income taxes (refunds), net, of
$4.6 million, $0.8 million, and $(7.9) million in
fiscal 2005, 2004, and 2003, respectively.
Our U.S. taxable income for fiscal 2005 and 2004 included
distributions deemed to have been made to our U.S. company
by several of our foreign subsidiaries, including, particularly,
our U.K. subsidiary. Such deemed distributions stemmed from the
existence and ultimate settlement of intercompany debt, owed by
the U.S. entity to certain of its foreign subsidiaries and
from the pledging of certain U.K. assets as collateral for a
term loan that was outstanding for a portion of fiscal 2004.
During fiscal 2005 and 2004, we used net operating losses
carried forward from previous years and the reversal of certain
temporary differences to offset virtually all of our
U.S. taxable income. As a result, our current tax expense
was limited to a small amount of U.S. alternative minimum
tax expense and to tax expense on our international operations.
The reversal of a portion of our deferred tax asset valuation
allowances offset the deferred tax expense we would otherwise
have incurred as a result of using the assets, and, as a result,
our overall effective tax rate for the year was substantially
less than the statutory rates. Tax expense for fiscal 2005 also
reflected the benefit of a $0.9 million favorable tax
settlement with a foreign government reached during the year.
During fiscal 2004, we reached final settlement with the
Internal Revenue Service regarding audits of our federal income
tax returns for fiscal years 2000 and 2001. In the settlement,
we lost the ability to carry back approximately
$5.4 million in net operating losses generated in fiscal
2001 and repaid approximately $2.1 million of refunds
previously received from the IRS plus approximately
$0.5 million in accrued interest. The final settlements had
been anticipated in our fiscal 2003 net tax provision and
had no material effect on the tax provision or net income for
fiscal 2004.
During fiscal 2004, our wholly owned subsidiary, Brite Voice
Systems, Inc. (“Brite”), reached final settlement with
the IRS regarding a disputed Notice of Deficiency relating to
Brite’s August 1999 federal income tax return. As a result
of the settlement, we reversed approximately $1.2 million
of taxes payable we had accrued in prior years in response to
the IRS challenge.
During fiscal 2003, United States tax law was amended to allow
companies which incurred net operating losses in 2001 and 2002
to carry such losses back a maximum of five years instead of the
maximum of two years previously allowed. As a result of this
change, during the first quarter of fiscal 2003, we used
$21.5 million of our then existing net operating loss
carryforwards and $0.4 million of our then existing tax
47
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 fiscal 2003, we became aware of the audit
issues described above associated with our fiscal 2000 and 2001
U.S. tax returns and recorded a charge of approximately
$2.7 million as part of our tax provision for the year.
Deferred taxes arise because we recognize the effect of certain
transactions in different periods for financial and tax
reporting purposes. Our deferred tax assets and liabilities were
comprised of the following significant components at February
28/29 (in millions):
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
| |
Net operating loss carryforwards
|
|
$ |
5.0 |
|
|
$ |
0.1 |
|
| |
Tax credit carryforwards
|
|
|
4.2 |
|
|
|
7.4 |
|
| |
Accrued expenses
|
|
|
1.8 |
|
|
|
2.1 |
|
| |
Inventory
|
|
|
1.5 |
|
|
|
2.3 |
|
| |
Depreciation and amortization
|
|
|
1.1 |
|
|
|
1.7 |
|
| |
Deferred revenue
|
|
|
0.4 |
|
|
|
0.8 |
|
| |
Allowance for doubtful accounts
|
|
|
0.2 |
|
|
|
0.3 |
|
| |
Intercompany interest
|
|
|
— |
|
|
|
1.2 |
|
| |
Other items
|
|
|
1.2 |
|
|
|
1.8 |
|
| |
|
|
|
|
|
|
| |
|
Total deferred tax assets
|
|
|
15.4 |
|
|
|
17.7 |
|
| |
Valuation allowance
|
|
|
(13.3 |
) |
|
|
(15.5 |
) |
| |
|
|
|
|
|
|
| |
|
Net deferred tax assets
|
|
|
2.1 |
|
|
|
2.2 |
|
| |
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Acquisition-related identified intangibles
|
|
|
(1.5 |
) |
|
|
(2.0 |
) |
| |
Other items
|
|
|
(0.6 |
) |
|
|
(0.2 |
) |
| |
|
|
|
|
|
|
| |
|
Total deferred tax liabilities
|
|
|
(2.1 |
) |
|
|
(2.2 |
) |
| |
|
|
|
|
|
|
| |
|
Net deferred tax assets
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
At February 28, 2005, we had U.S. federal net
operating loss carryforwards totaling $13.0 million. This
amount, if not used, will expire beginning in fiscal 2021.
Virtually all of the net operating loss carryforwards arose from
employee stock option exercises. As a result, the use of such
carryforwards in fiscal 2006 and future years will increase
equity and will not reduce our U.S. tax provision for those
years. We also had $2.9 million, $0.9 million and
$0.4 million in U.S. research and development tax
credit, U.S. and U.K. foreign tax credit and
U.S. alternative minimum tax credit carryforwards,
respectively. If unused, the foreign tax credit carryforwards
will expire beginning in fiscal 2006.
During fiscal 2003 and 2002, we established a valuation
allowance against our net deferred tax assets. Although we
earned a profit in fiscal 2005 and 2004 and were able to use
some previously reserved net operating loss carryforwards, we
believe the existence of substantive losses in our
U.S. operations in fiscal 2003 and 2002 and the dependency
of our international subsidiaries on continuing
U.S. operations prevent us from concluding that it is more
likely than not that our deferred tax assets will be realized.
This is a highly subjective assessment that requires us to
evaluate the predictability of future taxable income while
considering the significant losses we incurred in fiscal 2003
and 2002. In general, we anticipate reversing valuation
allowances associated with deferred tax assets of our U.S. and
U.K. operations only when the underlying deferred tax assets are
realized or at the time the respective taxable entities’
actual results have demonstrated
48
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
a sustained profitability and their projected results support
our ability to realize the deferred tax assets currently being
reserved.
In fiscal 2002, we did not provide a valuation allowance for
deferred assets associated with our foreign subsidiaries. In
providing such a reserve during fiscal 2003, we recognized tax
expense totaling $0.8 million to increase the valuation
allowance for net foreign deferred tax assets that existed at
February 28, 2002. Also during fiscal 2003, and as further
discussed in Note C, we reduced our deferred tax
liabilities by $1.4 million in connection with the
reclassification of our assembled workforce intangible asset to
goodwill. As a result of that transaction, we increased the
valuation allowance associated with our U.S. net deferred
tax asset by $1.4 million.
On October 22, 2004, the American Jobs Creation Act
(“the AJCA”) was signed into law. The AJCA provides
for a deduction of 85% of certain foreign earnings that are
repatriated, as defined in the AJCA. We may elect to apply this
provision to qualifying earnings repatriations in fiscal 2006.
We have begun an evaluation of the effects of the repatriation
provision; however, we have not reached a decision on whether or
not the election will be beneficial to us. The range of possible
amounts we are considering for repatriation under the AJCA is
between $0 and $13.0 million. The related potential range
of income tax expense associated with the repatriation is
between $0 and $0.7 million. We expect to complete our
evaluation of the effects of the repatriation provision during
the third quarter of fiscal 2006.
Note H — Stockholders’ Equity
We have five plans under which we have issued or may issue
options to employees and non-employee members of our Board of
Directors: the 1990 Employee Stock Option Plan, the 1990
Non-Employee Option Plan, the 1998 Employee Non-Qualified Plan,
the 1999 Non-Qualified Plan and the 2003 Stock Option Plan. As
of February 28, 2005, we had reserved 6,808,238 shares
of common stock for issuance under these plans, with
6,362,885 shares reserved for stock options outstanding at
that date and 445,353 shares reserved for future grants.
The Compensation Committee of our Board of Directors controls
the granting of options under these plans. Option prices are set
at the fair market value per share of stock on the date of
grant. Substantially all of the options have a 10-year term.
Except for options granted in July 2004, options generally vest
ratably over a 3 or 4 year period. Fifty percent of the
options granted in July 2004 vested on February 28, 2005,
and the remaining fifty percent will vest in July 2007.
Summarized information about stock options outstanding at
February 28, 2005 under the plans described above is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average | |
| |
|
|
|
|
|
Remaining | |
| |
|
|
|
Weighted Average | |
|
Contractual Life | |
| Exercise Prices |
|
Shares | |
|
Exercise Price | |
|
in Years | |
| |
|
| |
|
| |
|
| |
|
$1.02 - $ 6.97
|
|
|
1,867,949 |
|
|
$ |
3.54 |
|
|
|
5.63 |
|
|
$7.00 - $ 8.40
|
|
|
1,293,357 |
|
|
$ |
7.15 |
|
|
|
8.27 |
|
|
$8.55 - $ 9.11
|
|
|
1,652,455 |
|
|
$ |
9.10 |
|
|
|
9.34 |
|
|
$9.22 - $28.88
|
|
|
1,549,124 |
|
|
$ |
13.04 |
|
|
|
5.43 |
|
| |
|
|
|
|
|
|
|
|
|
|
$1.02 - $28.88
|
|
|
6,362,885 |
|
|
$ |
8.03 |
|
|
|
7.08 |
|
| |
|
|
|
|
|
|
|
|
|
49
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Summarized information about stock options exercisable under
these plans at February 28, 2005 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average | |
| |
|
|
|
|
|
Remaining | |
| |
|
|
|
Weighted Average | |
|
Contractual Life | |
| Exercise Prices |
|
Shares | |
|
Exercise Price | |
|
in Years | |
| |
|
| |
|
| |
|
| |
|
$1.02 - $ 5.00
|
|
|
1,026,796 |
|
|
$ |
3.54 |
|
|
|
4.63 |
|
|
$5.15 - $ 9.11
|
|
|
1,559,209 |
|
|
$ |
8.01 |
|
|
|
8.02 |
|
|
$9.22 - $28.88
|
|
|
1,153,121 |
|
|
$ |
13.02 |
|
|
|
4.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
$1.02 - $28.88
|
|
|
3,739,126 |
|
|
$ |
8.33 |
|
|
|
5.85 |
|
| |
|
|
|
|
|
|
|
|
|
Activity under the plans during fiscal 2005, 2004 and 2003 is
summarized as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted Average | |
| |
|
|
|
Exercise Price | |
| |
|
Shares | |
|
per Share | |
| |
|
| |
|
| |
|
Balance at February 28, 2002
|
|
|
5,306,618 |
|
|
$ |
9.11 |
|
| |
Granted
|
|
|
994,750 |
|
|
|
1.91 |
|
| |
Exercised
|
|
|
(18,036 |
) |
|
|
4.91 |
|
| |
Forfeited
|
|
|
(772,326 |
) |
|
|
9.93 |
|
| |
|
|
|
|
|
|
|
Balance at February 28, 2003
|
|
|
5,511,006 |
|
|
$ |
7.71 |
|
| |
Granted
|
|
|
2,271,875 |
|
|
|
5.90 |
|
| |
Exercised
|
|
|
(1,126,134 |
) |
|
|
7.50 |
|
| |
Forfeited
|
|
|
(548,281 |
) |
|
|
9.53 |
|
| |
|
|
|
|
|
|
|
Balance at February 29, 2004
|
|
|
6,108,466 |
|
|
$ |
6.91 |
|
| |
Granted
|
|
|
2,303,310 |
|
|
|
9.77 |
|
| |
Exercised
|
|
|
(1,413,952 |
) |
|
|
5.86 |
|
| |
Forfeited
|
|
|
(634,939 |
) |
|
|
8.42 |
|
| |
|
|
|
|
|
|
|
Balance at February 28, 2005
|
|
|
6,362,885 |
|
|
$ |
8.03 |
|
| |
|
|
|
|
|
|
50
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Employee Stock Purchase Plan |
We also had stock option activity under our Employee Stock
Purchase Plan during fiscal 2005 and previous years. Under this
plan, options were granted to all eligible employees in
accordance with a formula prescribed by the plan and were
exercised automatically at the end of a one-year payroll
deduction period. The option price per share was 85% of the
lower of the fair market value on the grant date or the exercise
date. The option period consisted of the 12-month period
beginning January 1 and ending the following December 31.
Our employees exercised all options outstanding under this plan
during the fourth quarter of fiscal 2005, and we subsequently
terminated the plan. Activity under the plan during the three
years ended February 28, 2005 was as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted Average | |
| |
|
|
|
Exercise Price | |
| |
|
Shares | |
|
per Share | |
| |
|
| |
|
| |
|
Balance at February 28, 2002
|
|
|
130,518 |
|
|
$ |
10.29 |
|
| |
Granted
|
|
|
498,369 |
|
|
|
1.84 |
|
| |
Exercised
|
|
|
(63,885 |
) |
|
|
1.62 |
|
| |
Forfeited
|
|
|
(66,633 |
) |
|
|
1.69 |
|
| |
|
|
|
|
|
|
|
Balance at February 28, 2003
|
|
|
498,369 |
|
|
$ |
1.84 |
|
| |
Granted
|
|
|
103,808 |
|
|
|
10.09 |
|
| |
Exercised
|
|
|
(444,517 |
) |
|
|
1.84 |
|
| |
Forfeited
|
|
|
(53,852 |
) |
|
|
1.84 |
|
| |
|
|
|
|
|
|
|
Balance at February 29, 2004
|
|
|
103,808 |
|
|
$ |
10.09 |
|
| |
Granted
|
|
|
— |
|
|
|
— |
|
| |
Exercised
|
|
|
(90,875 |
) |
|
|
10.09 |
|
| |
Forfeited
|
|
|
(12,933 |
) |
|
|
10.09 |
|
| |
|
|
|
|
|
|
|
Balance at February 28, 2005
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Preferred Share Purchase Rights |
One Preferred Share Purchase Right is attached to each
outstanding share of our common stock. The rights will become
exercisable upon the earlier to occur of ten days after the
first public announcement that a person or group has acquired
beneficial ownership of 20 percent or more of our
outstanding common stock, or ten days after a person or group
announces a tender offer that would result in beneficial
ownership of 20 percent or more of our outstanding common
stock. At such time as the rights become exercisable, each right
will entitle its holder to purchase one eight-hundredth of a
share of Series A Preferred Stock for $37.50, subject to
adjustment. If we are acquired in a business combination
transaction while the rights are outstanding, each right will
entitle its holder to purchase for $37.50 common shares of the
acquiring company having a market value of $75. In addition, if
a person or group acquires beneficial ownership of
20 percent or more of our outstanding common stock, each
right will entitle its holder (other than such person or members
of such group) to purchase, for $37.50, a number of shares of
our common stock having a market value of $75. Furthermore, at
any time after a person or group acquires beneficial ownership
of 20 percent or more (but less than 50 percent) of
our outstanding common stock, the Board of Directors may, at its
option, exchange part or all of the rights (other than rights
held by the acquiring person or group) for shares of our common
stock on a one-for-one basis. At any time prior to the
acquisition of such a 20 percent position, we can redeem
each right for $0.00125. The Board of Directors is also
authorized to reduce the 20 percent thresholds referred to
above to not less than 10 percent if, in its judgment, it
is to Intervoice’s benefit to do so. The rights expire in
May 2011.
51
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In connection with a sale of convertible notes during fiscal
2003, which notes were subsequently redeemed in full for cash
prior to the fiscal 2003 year end, we issued warrants to
the buyers. The warrants gave the holders the right to purchase
from us an aggregate of 621,304 shares of our common stock
for $4.0238 per share. In April 2005, the warrant holders
paid us $2.5 million to purchase the full
621,304 shares available under the warrants.
|
|
|
Accumulated Comprehensive Loss |
Changes in accumulated comprehensive loss are as follows (in
millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Foreign | |
|
FAS 133 | |
|
|
| |
|
Currency | |
|
Derivative | |
|
|
| |
|
Translation | |
|
Liability | |
|
|
| |
|
Adjustments | |
|
Adjustments | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
Balance at February 28, 2002
|
|
$ |
(5.7 |
) |
|
$ |
(0.2 |
) |
|
$ |
(5.9 |
) |
| |
Foreign currency translation adjustments
|
|
|
2.3 |
|
|
|
— |
|
|
|
2.3 |
|
| |
Reclassification of derivative losses into earnings, net of tax
effect of $(0.1)
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2003
|
|
$ |
(3.4 |
) |
|
$ |
— |
|
|
$ |
(3.4 |
) |
| |
Foreign currency translation adjustments
|
|
|
2.8 |
|
|
|
— |
|
|
|
2.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2004
|
|
$ |
(0.6 |
) |
|
$ |
— |
|
|
$ |
(0.6 |
) |
| |
Foreign currency translation adjustments
|
|
|
0.5 |
|
|
|
— |
|
|
|
0.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2005
|
|
$ |
(0.1 |
) |
|
$ |
— |
|
|
$ |
(0.1 |
) |
| |
|
|
|
|
|
|
|
|
|
Note I — Leases
Rental expense, net of the effect of special charges discussed
in Note J and the early termination of a facility lease
recorded during fiscal 2002, was $2.0 million,
$1.9 million and $2.5 million in fiscal 2005, 2004 and
2003, respectively. Rental costs in all years generally related
to office and manufacturing facility leases. The lease
agreements include renewal provisions and require us to pay
taxes, insurance and maintenance costs. At February 28,
2005, our commitments for minimum rentals under noncancelable
operating leases were as follows (in millions):
| |
|
|
|
|
|
| Fiscal Year |
|
Amount | |
| |
|
| |
| |
2006
|
|
$ |
2.5 |
|
| |
2007
|
|
$ |
1.4 |
|
| |
2008
|
|
$ |
1.1 |
|
| |
2009
|
|
$ |
0.8 |
|
| |
2010
|
|
$ |
0.4 |
|
|
Thereafter
|
|
$ |
0.6 |
|
Note J — Special Charges
During fiscal 2004, we incurred severance charges of
approximately $1.4 million in connection with a reduction
in workforce affecting 56 positions. In addition, we incurred
cash and non-cash charges totaling approximately
$0.5 million and $0.3 million, respectively, under the
terms of a separation agreement with our former Chief Financial
Officer who resigned to pursue other opportunities.
52
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the effect on reported operating
results by financial statement category of all special charges
activities for fiscal 2004 (in millions).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Selling, | |
|
|
| |
|
Cost of | |
|
Research and | |
|
General and | |
|
|
| |
|
Goods Sold | |
|
Development | |
|
Administrative | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
Severance payments and related benefits
|
|
$ |
0.6 |
|
|
$ |
0.2 |
|
|
$ |
0.6 |
|
|
$ |
1.4 |
|
|
Separation settlement
|
|
|
— |
|
|
|
— |
|
|
|
0.8 |
|
|
|
0.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
0.6 |
|
|
$ |
0.2 |
|
|
$ |
1.4 |
|
|
$ |
2.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
All cash charges related to these special charges have been paid.
During fiscal 2003, we continued to implement actions designed
to lower cost and improve operational efficiency. We also
reviewed our intangible assets for evidence of impairment in
light of changes in its business and continued softness in the
world-wide telecommunications networks markets. (See
Note C.)
The following table summarizes the effect on reported operating
results by financial statement category of all special charges
activities for fiscal 2003 (in millions).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cost of | |
|
Research & | |
|
|
|
Other | |
|
Impairment of | |
|
|
| |
|
Goods Sold | |
|
Development | |
|
SG&A | |
|
Expenses | |
|
Intangibles | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Write down of intangible assets
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
16.7 |
|
|
$ |
16.7 |
|
|
Severance payments and related benefits
|
|
|
2.3 |
|
|
|
0.8 |
|
|
|
3.1 |
|
|
|
— |
|
|
|
— |
|
|
|
6.2 |
|
|
Facilities closures
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
— |
|
|
|
— |
|
|
|
0.7 |
|
|
Write down of excess inventories
|
|
|
4.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.1 |
|
|
Costs associated with loss contracts
|
|
|
4.7 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.7 |
|
|
Loss on early extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.9 |
|
|
|
— |
|
|
|
1.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
11.3 |
|
|
$ |
0.9 |
|
|
$ |
3.5 |
|
|
$ |
1.9 |
|
|
$ |
16.7 |
|
|
$ |
34.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The severance and related costs recognized during fiscal 2003
related to three separate workforce reductions that affected a
total of 273 employees. One of the reductions was associated
with the consolidation of our separate Enterprise and Networks
divisions into a single, integrated organizational structure.
The charge also included costs associated with the resignation
of the Networks division president during the first quarter of
fiscal 2003. Costs related to facilities closures included
$0.4 million for the closure of our leased facility in
Chicago, Illinois and $0.3 million associated with the
closure of a portion of our leased facilities in Manchester,
United Kingdom. The downsizing of the leased space in Manchester
followed from our decision to consolidate virtually all of our
manufacturing operations into our Dallas, Texas facilities. The
inventory adjustments reflected our continued assessment of our
inventory levels in light of sales projections, the decision to
eliminate the U.K. manufacturing operation and the consolidation
of the business units. The charges for loss contracts reflected
the costs incurred on two contracts expected to result in net
losses upon completion. The loss on early extinguishment of debt
included $1.4 million in non-cash charges to write-off
unamortized debt discount and unamortized debt issue costs and
$0.5 million in prepayment premiums. All cash charges
related to these special charges have been paid.
53
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note K — Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended February 28/29 | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(In millions, except | |
| |
|
per share data) | |
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before the cumulative effect of a change in
accounting principle
|
|
$ |
22.5 |
|
|
$ |
11.3 |
|
|
$ |
(50.6 |
) |
|
Cumulative effect on prior years of a change in accounting
principle
|
|
|
— |
|
|
|
— |
|
|
|
(15.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
22.5 |
|
|
$ |
11.3 |
|
|
$ |
(66.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
36.2 |
|
|
|
34.4 |
|
|
|
34.0 |
|
|
Effect of dilutive securities-employee stock options
|
|
|
1.9 |
|
|
|
1.0 |
|
|
|
— |
|
|
-outstanding
warrants
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
38.5 |
|
|
|
35.7 |
|
|
|
34.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before the cumulative effect of a change in
accounting principle
|
|
$ |
0.62 |
|
|
$ |
0.33 |
|
|
$ |
(1.49 |
) |
|
Cumulative effect on prior years of a change in accounting
principle
|
|
|
— |
|
|
|
— |
|
|
|
(0.46 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.62 |
|
|
$ |
0.33 |
|
|
$ |
(1.95 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before the cumulative effect of a change in
accounting principle
|
|
$ |
0.59 |
|
|
$ |
0.32 |
|
|
$ |
(1.49 |
) |
|
Cumulative effect on prior years of a change in accounting
principle
|
|
|
— |
|
|
|
— |
|
|
|
(0.46 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.59 |
|
|
$ |
0.32 |
|
|
$ |
(1.95 |
) |
| |
|
|
|
|
|
|
|
|
|
Options to purchase 1,109,000, 1,554,060, and
6,009,375 shares of common stock at average exercise prices
of $14.19, $12.25 and $7.23, respectively, were outstanding at
February 28, 2005, February 29, 2004 and
February 28, 2003, respectively, but were not included in
the computations of diluted earnings (loss) per share because
the effect would have been anti-dilutive to the calculations.
For fiscal 2005 and 2004, the options would be anti-dilutive
because the options’ exercise prices were greater than the
average price of the our shares for the year. For fiscal 2003,
the options would be anti-dilutive because of the loss for the
year.
54
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note L — Operating Segment Information and
Major Customers
We operate as a single, integrated business unit. Our chief
operating decision maker assesses performance and allocates
resources on an enterprise wide basis. Our product line includes
Voice Automation/ IVR solutions, network portal solutions,
messaging solutions, payment solutions, maintenance and related
services, and managed services provided for customers on an
outsourced or managed service provider basis. In fiscal 2003 and
prior years, we grouped sales made to network market customers
in a single “Network solutions” category. Beginning in
fiscal 2004, we determined that product line distinction
provides the most meaningful breakdown of quarterly and annual
sales activity. We are not able to provide the fiscal 2003
breakdown of Network solution sales into portal, messaging and
payment systems components. Our net sales by product line for
fiscal 2005, 2004 and 2003 were as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Voice Automation/ IVR solution sales
|
|
$ |
68.1 |
|
|
$ |
52.5 |
|
|
$ |
52.4 |
|
|
Network portal solution sales
|
|
|
5.9 |
|
|
|
1.7 |
|
|
|
— |
|
|
Messaging solution sales
|
|
|
10.4 |
|
|
|
10.8 |
|
|
|
— |
|
|
Payment solution sales
|
|
|
16.1 |
|
|
|
18.6 |
|
|
|
— |
|
|
Network solution sales
|
|
|
— |
|
|
|
— |
|
|
|
32.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total solution sales
|
|
|
100.5 |
|
|
|
83.6 |
|
|
|
84.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
Maintenance and related services revenues
|
|
|
59.4 |
|
|
|
57.0 |
|
|
|
49.7 |
|
|
Managed services revenues
|
|
|
23.4 |
|
|
|
24.7 |
|
|
|
21.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total recurring services revenues
|
|
|
82.8 |
|
|
|
81.7 |
|
|
|
71.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$ |
183.3 |
|
|
$ |
165.3 |
|
|
$ |
156.2 |
|
| |
|
|
|
|
|
|
|
|
|
We assign revenues to geographic locations based on locations of
customers. Our net sales by geographic area for fiscal years
2005, 2004 and 2003 were as follows (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
North America
|
|
$ |
107.8 |
|
|
$ |
97.7 |
|
|
$ |
91.5 |
|
|
Europe
|
|
|
40.9 |
|
|
|
32.4 |
|
|
|
39.5 |
|
|
Middle East and Africa
|
|
|
21.3 |
|
|
|
25.2 |
|
|
|
16.2 |
|
|
Central and South America
|
|
|
6.8 |
|
|
|
7.5 |
|
|
|
6.1 |
|
|
Pacific Rim
|
|
|
6.5 |
|
|
|
2.5 |
|
|
|
2.9 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
183.3 |
|
|
$ |
165.3 |
|
|
$ |
156.2 |
|
| |
|
|
|
|
|
|
|
|
|
Our fixed assets by geographic location are as follows (in
millions):
| |
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
United States
|
|
$ |
20.4 |
|
|
$ |
18.8 |
|
|
United Kingdom
|
|
|
1.4 |
|
|
|
1.4 |
|
| |
|
|
|
|
|
|
| |
|
$ |
21.8 |
|
|
$ |
20.2 |
|
| |
|
|
|
|
|
|
55
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We have historically made significant sales of solutions,
customer services and managed services to O2. Such combined
sales accounted for 10% of our total sales during fiscal 2005
and 2004 and 11% of our total sales during fiscal 2003. There
were no other customers accounting for 10% or more of our sales
during such periods.
Note M — Concentrations of Credit Risk
We sell systems directly to end-users and distributors primarily
in the banking and financial, telecommunications, human
resource, and healthcare markets. Customers are dispersed across
different geographic areas, primarily North America, Europe, the
Middle East and Africa. We extend credit based on an evaluation
of a customer’s financial condition, and we generally
require a deposit. We have made a provision for credit losses in
these financial statements.
Note N — Employee Benefit Plan
We sponsor an employee savings plan in the United States which
qualifies under section 401(k) of the Internal Revenue
Code. All full time employees who have completed one month of
service are eligible to participate in the plan. We match 50% of
employee contributions up to 6% of the employee’s eligible
compensation. We also sponsor a plan in the U.K. where our
contribution is based on the employee’s age and ranges from
5% to 9% of the employee’s base salary. Company
contributions under all plans totaled $1.8 million,
$1.6 million and $1.7 million in fiscal 2005, 2004 and
2003, respectively.
Note O — Contingencies
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Intellectual Property Matters |
We provide our customers a qualified indemnity against the
infringement of third party intellectual property rights. From
time to time various owners of patents and copyrighted works
send us or our customers letters alleging that our products do
or might infringe upon the owners’ intellectual property
rights, and/or suggesting that we or our customers should
negotiate a license or cross-license agreement with the owner.
Our policy is to never knowingly infringe upon any third
party’s intellectual property rights. Accordingly, we
forward any such allegation or licensing request to our outside
legal counsel for their review and opinion. We generally attempt
to resolve any such matter by informing the owner of our
position concerning non-infringement or invalidity, and/or, if
appropriate, negotiating a license or cross-license agreement.
Even though we attempt to resolve these matters without
litigation, it is always possible that the owner of a patent or
copyrighted works will sue us. Although no such litigation is
currently pending against us, owners of patents and/or
copyrighted works have previously sued us alleging infringement
of their intellectual property rights. We currently have a
portfolio of 72 patents, and we have applied for and will
continue to apply for and receive a number of additional patents
to reflect our technological innovations. We believe our patent
portfolio could allow us to assert counterclaims for
infringement against certain owners of intellectual property
rights if those owners were to sue us for infringement.
From time to time Ronald A. Katz Technology Licensing L.P.
(“RAKTL”) has sent letters to certain of our customers
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, many of Intervoice’s customers have had
discussions, or are in discussions, with RAKTL.
56
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We offer certain products that can be programmed and configured
to provide enhanced services to network providers and call
processing applications for call centers. Our contracts with
customers usually include a qualified obligation to indemnify
and defend customers against claims that products as delivered
by Intervoice infringe a third party’s patent. None of our
customers have notified us that RAKTL has claimed that any
product provided by Intervoice infringes any claims of any RAKTL
patent. Accordingly, we have not been required to defend any
customers against a claim of infringement under a RAKTL patent.
We have, however, received letters from customers notifying us
of the efforts by RAKTL to license its patent portfolio and
reminding us of our potential obligations under the
indemnification provisions of our agreements in the event that a
claim is asserted. In response to correspondence from RAKTL, a
few customers have attempted to tender to us the defense of our
products under contractual indemnity provisions. We have
informed these customers that while we fully intend to honor any
contractual indemnity provisions, we do not believe we currently
have any obligation to provide such a defense because RAKTL does
not appear to have made a claim that an Intervoice product
infringes a patent. Some of these customers have disagreed with
us and believe that the correspondence from RAKTL can be
construed as claims against Intervoice products.
Some of our customers have licensed certain rights under the
RAKTL patent portfolio. One such customer who attempted to
tender the defense of its products to us informed us that the
customer had entered into an agreement to license certain rights
under the RAKTL patents and demanded we indemnify the customer
for unspecified amounts, including attorney’s fees, paid in
connection with the license agreement. We notified the customer
over 11 months ago that we believe we do not have any
indemnity obligation in connection with the license agreement.
We have received no further response from the customer.
Even though no claims have been made that a specific product
offered by Intervoice infringes any claim under the RAKTL patent
portfolio, we have received opinions from our outside patent
counsel that certain products and applications we offer do not
infringe certain claims of the RAKTL patents. We have also
received opinions from our outside counsel that certain claims
under the RAKTL patent portfolio are invalid or unenforceable.
Furthermore, based on the reviews by outside counsel, we are not
aware of any valid and enforceable claims under the RAKTL
portfolio that are infringed by our products. If we do become
involved in litigation in connection with the RAKTL patent
portfolio, under a contractual indemnity or any other legal
theory, we intend to vigorously contest the claims and to assert
appropriate defenses.
We have received letters from Webley Systems (Webley), a
division of Parus Holdings, Inc. (Parus), and their counsel
alleging that certain Webley patents cover one or more of our
products and services. In the letters, Parus offers a license to
the Webley patents. As a result of the correspondence, we are in
discussions with Parus. Based on reviews by outside counsel, we
are not aware of any valid and enforceable claims under the
Webley patents that are infringed by our products or services.
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 Intervoice during the
period from October 12, 1999 through June 6, 2000 (the
“Class Period”). Plaintiffs have filed claims,
which were consolidated into one proceeding, under
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and the Securities and Exchange Commission Rule 10b-5
against us as well as certain named current and former officers
and directors of Intervoice on behalf of the alleged class
members. In the complaint, Plaintiffs claim that we and the
named current and former officers and directors issued false and
misleading statements during the Class Period concerning
the financial condition of Intervoice, the results of the merger
with Brite and the
57
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
alleged future business projections of Intervoice. Plaintiffs
have asserted that these alleged statements resulted in
artificially inflated stock prices.
We believe that we and our officers complied with our
obligations under the securities laws, and we have vigorously
defended the lawsuit. We responded to this complaint by filing a
motion to dismiss the complaint in the consolidated proceeding.
We 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, we requested that
the United States District Court for the Northern District of
Texas dismiss the complaint in its entirety. Plaintiffs
responded to our request for dismissal. On August 8, 2002,
the Court entered an order granting our 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 which the Court dismissed
on September 15, 2003. Plaintiffs appealed the District
Court decision to the Fifth Circuit Court of Appeals. On
January 12, 2005, the Fifth Circuit Court of Appeals issued
an opinion in which it affirmed, in part, the District
Court’s order of dismissal. The Court of Appeals’
opinion also reverses a limited number of issues in the District
Court’s proceedings. On February 25, 2005, Intervoice
filed a motion for rehearing with the Fifth Circuit Court of
Appeals requesting the Court to modify its opinion. On
May 12, 2005, the Fifth Circuit Court of Appeals denied our
petition for rehearing but modified its opinion to clarify the
Court’s decision. The case has been remanded to the
District Court for further proceedings consistent with the Fifth
Circuit’s opinion. We continue to believe that we and our
officers and directors complied with the securities laws and
will continue to vigorously defend the portions of the case that
have been remanded to the District Court.
|
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|
Audit Committee Investigation |
In December 2004, our Audit Committee completed an investigation
it had begun in August 2004 of certain transactions occurring
during our fiscal years 2000 through 2002. The Audit Committee
was assisted in its investigation by separate independent legal
counsel and a national accounting firm. The Audit Committee has
reported the results of the investigation to, and we are
cooperating with, the SEC. We are currently providing documents
to the SEC in response to a subpoena requesting information
about the transactions that were the subject of the
investigation. Our Audit Committee and its counsel are actively
monitoring our response to the SEC, and they have been
conducting a review of certain documents provided to the SEC
which we located after the Committee’s original
investigation. Intervoice is also honoring our pre-existing
obligation to indemnify two former officers of Intervoice who
received subpoenas from the SEC in connection with the
investigation.
The Audit Committee investigation found that we accounted for
certain transactions incorrectly during our fiscal years 2000
through 2002. The Audit Committee investigation concluded that a
$900,000 payment made by Intervoice to a publicly held supplier
purportedly for certain prepaid licenses was linked to an
agreement to amend a 1997 warrant issued to us by the supplier
to permit our cashless exercise of the warrant. As a result, we
believe that the $900,000 payment should have been recorded as a
reduction in the $21.4 million gain we recognized on the
sale of the shares underlying the warrant during the fourth
quarter of fiscal 2001 and should not have been recorded as
prepaid license inventory. Our payment to the supplier may have
rendered unavailable a nonexclusive registration exemption for
the sale of the shares underlying the warrant. The Audit
Committee investigation also found that we intentionally
provided the same supplier false or misleading documents for
such supplier to use to support such supplier’s improper
recognition of revenue in calendar 2001.
In addition, the Audit Committee investigation and review found
that six of the seven customer sales transactions the Committee
investigated were accounted for incorrectly and that there was
intentional misconduct in at least one of those sales
transactions. These six transactions occurred at the end of
quarters in which we just met analysts’ expectations with
respect to earnings per share. The Audit Committee
58
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
found that we improperly recognized revenue in a quarter-end
barter transaction involving approximately 0.4% of annual
revenues for fiscal 2000, and that we improperly accelerated the
recognition of revenue in five quarter-end transactions totaling
approximately 0.4% and 0.3% of annual revenues in fiscal 2000
and fiscal 2002, respectively. Separately, the Audit Committee
further determined that in September 2001 one of our current
executive officers improperly communicated Intervoice
information to a shareholder.
Intervoice’s management concluded, with the concurrence of
the Audit Committee and our external auditors, that restatement
of our prior period financial statements to adjust for the
findings of the Audit Committee investigation and review is not
necessary. In reaching this conclusion, we considered the impact
of the incorrect accounting on each of the periods affected, the
ages of the affected financial statements and the lack of any
material changes in prior period trends as a result of the
incorrect accounting. In addition, we noted that since the date
of the most recent transaction reviewed in the investigation, we
have restructured our business, made significant management
changes, consolidated our physical operations, significantly
reduced our fixed operating costs and refinanced and repaid all
of our major debt obligations. We cannot predict whether we may
have future losses relating to the matters investigated by the
Audit Committee as a result of future claims, if any, including
any claims by the government.
We are a defendant from time to time in lawsuits incidental to
our business. Based on currently available information, we
believe that resolution of the lawsuit and other matters
described above, is uncertain, and there can be no assurance
that future costs related to such matters would not be material
to our financial position or results of operations.
We are a party to many routine contracts in which we provide
general indemnities and warranties in the normal course of
business to third parties for various risks. These indemnities
and warranties are discussed in the following paragraphs. Except
in specific circumstances where we have determined that the
likelihood of loss is probable and the amount of the loss
quantifiable, we have not recorded a liability for any of these
indemnities. In general, we are not able to estimate the
potential amount of any liability relating to these indemnities
and warranties.
Many of our contracts, particularly for managed services,
foreign contracts and contracts with telecommunication
companies, include provisions for the assessment of liquidated
damages for delayed project completion and/or for our failure to
achieve certain minimum service levels. We have 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.
Our contracts with our customers generally contain qualified
indemnifications against third party claims relating to the
infringement of intellectual property as described in
“Intellectual Property Matters” above.
Our contracts with our customers also generally contain
warranties and, in some cases, general indemnifications against
other unspecified third party and general liability claims. We
have liability insurance protecting us against certain
obligations, primarily certain claims related to property
damage, that result from these indemnities.
We are obligated under letters of credit totaling approximately
$0.6 million issued by a bank to guarantee our performance
under a long-term international managed services contract and
related proposals. These letters of credit expire during
calendar 2005.
We have employment agreements with two executive officers. One
of these agreements requires us to make termination payments to
the officer of one and one-half time the officer’s annual
base compensation in the event the officer’s services are
terminated without cause or payments of up to 2.99 times the
officer’s annual compensation including bonuses in
connection with a termination of the officer’s services
within a two
59
INTERVOICE, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
year period following a change in ownership of Intervoice, as
defined in the agreement. If the officer with such agreement
were terminated for one of the preceding reasons during fiscal
2006, the cost to us would range from $0.6 million to
$1.7 million. The second employment agreement requires that
in the event the officer’s services are terminated without
cause, we either must make termination payments to the officer
of one times the officer’s annual base compensation and
accelerate vesting on 33,333 shares of our common stock
covered by a stock option or make termination payments to the
officer of two times the officer’s annual base
compensation. If the officer covered by this agreement were
terminated during fiscal 2006, we would be required to make
payments ranging from $0.3 million to $0.5 million.
Under the terms of our Articles of Incorporation, we indemnify
our directors, officers, employees or agents or any other person
serving at our request as a director, officer, employee or agent
of another corporation in connection with a derivative suit if
he or she (1) is successful on the merits or otherwise or
(2) acted in good faith, and in a manner he or she
reasonably believed to be in or not opposed to the best
interests of the corporation. We will not provide
indemnification, however, for any claim as to which the person
was adjudged liable for negligence or misconduct unless the
court determines that under the circumstances the person is
fairly and reasonably entitled to indemnification. We provide
the same category of persons with indemnification in a
non-derivative suit only if such person (1) is successful
on the merits or otherwise or (2) acted in good faith, and
in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation, and with
respect to any criminal action or proceeding, had no reason to
believe his or her conduct was unlawful. Under the terms of our
Bylaws, we also indemnify our current and former officers and
directors to the fullest extent permitted or required under
Article 2.02-1 of the Texas Business Corporation Act.
In connection with certain lawsuits filed against us and certain
of our present and former officers and directors (see
“Pending Litigation” above), we have agreed to pay in
advance any expenses, including attorneys’ fees, incurred
by such present and former officers and directors in defending
such litigation, in accordance with Article 2.02-1 of the
Texas Business Corporation Act and the Company’s Articles
of Incorporation and Bylaws. Each of these parties has provided
us with a written undertaking to repay us the expenses advanced
if the person is ultimately not entitled to indemnification.
We have a qualified obligation to indemnify two former officers
in connection with activities resulting from the Audit Committee
investigation and related SEC inquiries described in “Audit
Committee Investigation” above.
Texas corporations are authorized to obtain insurance to protect
officers and directors from certain liabilities, including
liabilities against which the corporation cannot indemnify its
officers and directors. We have obtained liability insurance for
our officers and directors as permitted by Article 2.02-1
of the Texas Business Corporation Act. Our insurance policies
provide coverage for losses and expenses incurred by us and our
current and former directors and officers in connection with
claims made under the federal securities laws. These policies,
however, exclude losses and expenses related to the Barrie class
action lawsuit and contain other customary provisions to limit
or exclude coverage for certain losses and expenses.
60
SCHEDULE II
INTERVOICE, INC.
VALUATION AND QUALIFYING ACCOUNTS
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Column D | |
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Column E | |
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Additions | |
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(Recoveries) | |
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Balance at | |
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Charged to | |
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Balance at | |
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Beginning | |
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Cost and | |
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End of | |
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of Period | |
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Expenses | |
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Deductions | |
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Period | |
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(In millions) | |
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Year Ended February 28, 2005:
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Allowance for doubtful accounts
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$ |
0.9 |
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$ |
0.3 |
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$ |
(0.4 |
)(A) |
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$ |
0.8 |
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Year Ended February 29, 2004:
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Allowance for doubtful accounts
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$ |
2.5 |
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$ |
0.3 |
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$ |
(1.9 |
)(A) |
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$ |
0.9 |
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Year Ended February 28, 2003:
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Allowance for doubtful accounts
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$ |
3.5 |
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$ |
(0.7 |
)(B) |
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$ |
(0.3 |
)(A) |
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$ |
2.5 |
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| (A) |
Accounts written off. |
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(B) |
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Recovery of accounts written off in a preceding year, net of
current period account charges. |
61
|
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| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
Not applicable.
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| Item 9A. |
Controls and Procedures |
Evaluation of disclosure controls and procedures. Our
chief executive officer and chief financial officer have
reviewed and evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934) as of
February 28, 2005. Based on that review and evaluation,
which included inquiries made to certain other employees, the
chief executive officer and chief financial officer have
concluded that our current disclosure controls and procedures,
as designed and implemented, are effective to ensure that
information required to be disclosed by us in reports we file or
submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission rules and
forms. Such officers also have concluded that our disclosure
controls and procedures are effective to ensure that information
required to be disclosed in the reports we file or submit under
the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal
financial officers, to allow timely decisions regarding required
disclosure.
Management’s Report on Internal Control over Financial
Reporting. The management of Intervoice is responsible for
establishing and maintaining effective internal control over
financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. Our internal control over
financial reporting is designed to provide reasonable assurance
to our management and board of directors regarding the
preparation and fair presentation of published financial
statements in accordance with generally accepted accounting
principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management assessed the effectiveness of our internal control
over financial reporting as of February 28, 2005. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control — Integrated
Framework. Based on this assessment, we believe that, as of
February 28, 2005, our internal control over financial
reporting is effective based on those criteria.
Management’s assessment of the effectiveness of internal
control over financial reporting as of February 28, 2005,
has been audited by Ernst & Young, LLP, the independent
registered public accounting firm that also audited our
consolidated financial statements. Ernst & Young’s
attestation report on management’s assessment of our
internal control over financial reporting appears below.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial
reporting during the fourth quarter of fiscal 2005 that
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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| Item 9B. |
Other Information |
On May 12, 2005, we entered into an employment agreement with
our President and Chief Executive Officer. The agreement is for
an initial term of 27 months commencing on December 1,
2004 and provides for an annual base salary of $395,000 and for
participation in any Intervoice incentive bonus program in
effect during the term of the agreement. The agreement requires
us to make termination payments to the officer of one and
one-half times the officer’s annual base compensation in
the event the officer’s services are terminated without
cause or payments of up to 2.99 times the officer’s annual
compensation including bonuses in connection with a termination
of the officer’s services within a two year period
following a change in ownership of Intervoice, as defined in the
agreement. This agreement is filed as Exhibit 10.32 to this
Form 10-K.
62
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
Shareholders and Board of Directors
Intervoice, Inc
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting, that Intervoice, Inc and subsidiaries
maintained effective internal control over financial reporting
as of February 28, 2005, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Intervoice, Inc. and subsidiaries
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Intervoice,
Inc. and subsidiaries maintained effective internal control over
financial reporting as of February 28, 2005, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Intervoice, Inc and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of February 28, 2005, based on
the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Intervoice, Inc and subsidiaries
as of February 28, 2005 and February 29, 2004 and the
related consolidated statements of operations, changes in
stockholders’ equity and cash flows for each of the three
years in the period ended February 28, 2005. Our report
dated May 13, 2005 expressed an unqualified opinion thereon.
Dallas, Texas
May 13, 2005
63
PART III
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| Item 10. |
Directors and Executive Officers of the Registrant |
We have adopted a code of ethics applicable to our principal
executive officer, principal financial officer and principal
accounting officer. Such code of ethics is included as
Exhibit 14 to this Annual Report on Form 10-K. The
additional information required by this item will be contained
in the sections entitled “Election of Directors” and
“Executive Officers” in our Definitive Proxy
Statement, involving the election of directors, to be filed
pursuant to Regulation 14A with the Securities and Exchange
Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K (the “Definitive
Proxy Statement”) and is incorporated herein by reference.
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| Item 11. |
Executive Compensation |
The information required by this item will be contained in the
section entitled “Executive Compensation” in the
Definitive Proxy Statement. Such information is incorporated
herein by reference.
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| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by this item will be contained in the
section entitled “Election of Directors” in the
Definitive Proxy Statement. Such information is incorporated
herein by reference.
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| Item 13. |
Certain Relationships and Related Transactions |
The information required by this item will be contained in the
section entitled “Certain Transactions” in the
Definitive Proxy Statement. Such information is incorporated
herein by reference.
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| Item 14. |
Principal Accountant Fees and Services |
The information required by this item will be contained in the
section entitled “Auditors” in the Definitive Proxy
Statement. Such information is incorporated herein by reference.
64
PART IV
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| Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following consolidated financial statements and
financial statement schedule of Intervoice, Inc. and
subsidiaries are included in Items 8 and 15(a),
respectively.
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(1) Financial Statements
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All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
(3) Exhibits:
The exhibits required to be filed by this Item 15 are set
forth in the Index to Exhibits accompanying this report.
65
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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By: |
/s/ ROBERT E. RITCHEY
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Robert E. Ritchey |
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President |
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and Chief Executive Officer |
Dated: May 16, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
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| Signature |
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Title |
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Date |
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/s/ ROBERT E. RITCHEY
Robert
E. Ritchey |
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President and Chief Executive Officer and Director |
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May 16, 2005 |
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/s/ CRAIG E. HOLMES
Craig
E. Holmes |
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Executive Vice President and Chief Financial Officer |
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May 16, 2005 |
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/s/ MARK C. FALKENBERG
Mark
C. Falkenberg |
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Chief Accounting Officer |
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May 16, 2005 |
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/s/ GERALD F. MONTRY
Gerald
F. Montry |
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Chairman of the Board |
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May 16, 2005 |
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/s/ SAJ-NICOLE A. JONI
Saj-nicole
A. Joni |
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Director |
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May 16, 2005 |
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/s/ JOSEPH J.
PIETROPAOLO
Joseph
J. Pietropaolo |
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Director |
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May 16, 2005 |
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/s/ GEORGE C. PLATT
George
C. Platt |
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Director |
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May 16, 2005 |
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/s/ DONALD B. REED
Donald
B. Reed |
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Director |
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May 16, 2005 |
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/s/ JACK P. REILY
Jack
P. Reily |
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Director |
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May 16, 2005 |
66
INDEX TO EXHIBITS
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| Exhibit |
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| Number |
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Description |
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3 |
.1 |
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Articles of Incorporation, as amended, of Registrant.(1) |
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3 |
.2 |
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Amendment to Articles of Incorporation of Registrant.(7) |
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3 |
.3 |
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Amendment to Articles of Incorporation of Registrant.(15) |
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3 |
.4 |
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Third Restated Bylaws of Registrant.(21) |
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4 |
.1 |
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Third Amended and Restated Rights Agreement dated as of
May 1, 2001 between the Registrant and Computershare
Investor Services, LLC, as Rights Agent.(3) |
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4 |
.2 |
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Securities Purchase Agreement, dated as of May 29, 2002,
between the Registrant and the Buyers named therein (the
“Securities Purchase Agreement”).(13) |
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4 |
.3 |
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Form of Convertible Note, dated as of May 29, 2002, between
the Registrant and each of the Buyers under the Securities
Purchase Agreement.(13) |
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4 |
.4 |
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Form of Warrant, dated as of May 29, 2002, between the
Registrant and each of the Buyers under the Securities Purchase
Agreement.(13) |
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4 |
.5 |
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Registration Rights Agreement, dated as of May 29, 2002,
between the Registrant and each of the Buyers under the
Securities Purchase Agreement.(13) |
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4 |
.6 |
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First Amendment to Third Amended and Restated Rights Agreement
dated as of May 29, 2002, between the Registrant and
Computershare Investor Services, LLC, as Rights Agent.(13) |
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10 |
.1 |
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The InterVoice, Inc. 1990 Incentive Stock Option Plan, as
Amended.(5) |
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10 |
.2 |
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The InterVoice, Inc. 1990 Nonqualified Stock Option Plan for
Non-Employees, as amended.(2) |
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10 |
.3 |
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InterVoice, Inc. Restricted Stock Plan.(4) |
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10 |
.4 |
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Employment Agreement dated as of September 16, 1998 between
the Company and Rob-Roy J. Graham.(6) |
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10 |
.5 |
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InterVoice, Inc. 1998 Stock Option Plan.(6) |
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10 |
.6 |
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Acquisition Agreement and Plan of Merger dated as of
April 27, 1999, by and among the Company, InterVoice
Acquisition Subsidiary III, Inc. (“Acquisition
Subsidiary”) and Brite Voice Systems, Inc.(9) |
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10 |
.7 |
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Patent License Agreement between Lucent Technologies GRL Corp.
and InterVoice Limited Partnership, effective as of
October 1, 1999. Portions of this exhibit have been
excluded pursuant to a request for confidential treatment.(7) |
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10 |
.8 |
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Intervoice, Inc. 1999 Stock Option Plan.(10) |
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10 |
.9 |
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Promissory Note, dated May 29, 2002, executed by the
Registrant in favor of Beal Bank, S.S.B.(13) |
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10 |
.10 |
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Deed of Trust, Security Agreement, and Assignment of Leases and
Rents dated May 29, 2002, executed by the Registrant for
its benefit of Beal Bank, S.S.B.(13) |
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10 |
.11 |
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First Amendment to Employment Agreement effective as of
July 1, 2000, between the Company and Rob-Roy J. Graham.(8) |
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10 |
.12 |
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First Amendment to Credit Agreement effective as of
January 15, 2001, between the Company, Agent and the
Lenders.(11) |
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10 |
.13 |
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Consent and Second Amendment to Credit Agreement effective as of
February 28, 2001, between the Company, Agent and the
Lenders.(11) |
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10 |
.14 |
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Second Amendment to Employment Agreement dated as of
October 31, 2001, between the Company and Rob-Roy J.
Graham.(12) |
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10 |
.15 |
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Second Amended Employment Agreement dated as of
February 18, 2002, between the Company and David W.
Brandenburg.(14) |
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10 |
.16 |
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Modification Agreement dated as of September 30, 2002, by
and between the Company and Beal Bank S.S.B., modifying a deed
of trust.(15) |
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10 |
.17 |
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Second Modification Agreement dated as of February 27, 2003
by and between the Company and Beal Bank S.S.B., modifying a
deed of trust.(16) |
67
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| Exhibit |
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| Number |
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Description |
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10 |
.18 |
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Employment Agreement dated as of October 23, 2002, between
the Company and Robert E. Ritchey.(16) |
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10 |
.19 |
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Separation Agreement with Rob-Roy J. Graham dated June 25,
2003.(17) |
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10 |
.20 |
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Intervoice, Inc. Employee Stock Purchase Plan, as amended and
restated effective June 24, 2003.(18) |
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10 |
.21 |
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Intervoice, Inc. 2003 Stock Option Plan.(18) |
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10 |
.22 |
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Employment Agreement with Craig E. Holmes effective
August 27, 2003.(18) |
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10 |
.23 |
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Credit and Security Agreement dated as of January 26, 2004,
between the Company and Wells Fargo Bank, N.A.(19) |
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10 |
.24 |
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Amended and Restated Credit Agreement dated as of June 3,
2004, between the Registrant and Wells Fargo Bank, National
Association (“Wells Fargo”).(21) |
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10 |
.25 |
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First Amendment to Credit Agreement dated as of August 17,
2004, between Registrant and Wells Fargo.(22) |
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10 |
.26 |
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Fiscal Year 2005 Transition Year Incentive Plan Summary.(22) |
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10 |
.27 |
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Intervoice, Inc. 2003 Stock Option Plan.(22) |
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10 |
.28 |
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Letter Agreement dated November 18, 2004 between Registrant
and David W. Brandenburg.(24) |
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10 |
.29 |
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Summary of Fiscal Year 2005 Second Half Incentive Plan.(23) |
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10 |
.30 |
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Summary of Fiscal Year 2006 Annual Incentive Compensation
Plan.(25) |
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10 |
.31 |
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Summary of Fiscal Year 2006 Non-Employee Director Cash
Compensation.(26) |
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10 |
.32 |
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Employment Agreement effective December 1, 2004 between
Registrant and Robert E. Ritchey.(27) |
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14 |
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Code of Ethics.(20) |
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21 |
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Subsidiaries.(27) |
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23 |
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Consent of Independent Auditors.(27) |
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31 |
.1 |
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Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a).(27) |
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31 |
.2 |
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Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a).(27) |
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32 |
.1 |
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Certification by Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350.(27)* |
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32 |
.2 |
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Certification by Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350.(27)* |
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99 |
.1 |
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Pages 12, 13, 18, 38-40, 43 and 45 of the Registration
Statement on Form S-4, as amended (incorporated by
reference to page 12, 13, 18, 38-40, 43 and 45 of the
Registration Statement on Form S-4/ A (Amendment
No. One) filed by the Company on July 13, 1999).(7) |
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(1) |
Incorporated by reference to exhibits to the Company’s 1995
Annual Report on Form 10-K for the fiscal year ended
February 28, 1995, filed with the SEC on May 30, 1995. |
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(2) |
Incorporated by reference to exhibits to the Company’s
Registration Statement on Form S-8 filed with the SEC on
April 6, 1994, with respect to the Company’s 1990
Nonqualified Stock Option Plan for Non-Employees, Registration
Number 33-77590. |
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(3) |
Incorporated by reference to exhibits to Form 8-A/ A
(Amendment 3) filed with the SEC on May 9, 2001. |
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(4) |
Incorporated by reference to exhibits to the Company’s 1996
Annual Report on Form 10-K for the fiscal year ended
February 29, 1996, filed with the SEC on May 29, 1996. |
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(5) |
Incorporated by reference to the Company’s 1997 Annual
Report on Form 10-K for the fiscal year ended
February 28, 1997, filed with the SEC on May 29, 1997. |
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(6) |
Incorporated by reference to exhibits to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
August 31, 1998, filed with the SEC on October 14,
1998. |
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(7) |
Incorporated by reference to the Company’s Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31,
1999, filed with the SEC on October 14, 1999. |
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(8) |
Incorporated by reference to the Company’s Quarterly Report
on Form 10-Q for the fiscal quarter ended August 31,
2000, filed with the SEC on October 16, 2000. |
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(9) |
Incorporated by reference to Exhibit 99(b)(1) of the
Schedule 14-D1 filed by Brite Voice systems, Inc. and
Intervoice Acquisition Subsidiary III, Inc. on May 3, 1999. |
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| (10) |
Incorporated by reference to Registration Statement on
Form S-8 filed with the SEC on October 15, 1999,
Registration Number 333-89127. |
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| (11) |
Incorporated by reference to exhibits to the Company’s 2001
Annual Report on form 10-K for the fiscal year ended
February 28, 2001, filed with the SEC on May 18, 2001. |
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| (12) |
Incorporated by reference to exhibits to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
November 30, 2001, filed with the SEC on January 11,
2002. |
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| (13) |
Incorporated by reference to exhibits to the Company’s
Current Report on Form 8-K, filed with the SEC on
May 30, 2002. |
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| (14) |
Incorporated by reference to exhibits to the Company’s 2002
Annual Report on Form 10-K for the fiscal year ended
February 28, 2002, filed with the SEC on May 30, 2002. |
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| (15) |
Incorporated by reference to exhibits to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
August 31, 2002, filed with the SEC on October 15,
2002. |
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| (16) |
Incorporated by reference to exhibits to the Company’s
Annual Report on Form 10-K for the fiscal year ended
February 28, 2003, filed with the SEC on May 29, 2003. |
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| (17) |
Incorporated by reference to exhibits to Company’s
Quarterly Report on Form 10-Q for the quarter ended
May 31, 2003, filed with the SEC on July 15, 2003. |
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| (18) |
Incorporated by reference to exhibits to Company’s
Quarterly Report on Form 10-Q for the quarter ended
August 31, 2003, filed with the SEC on October 14,
2003. |
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| (19) |
Incorporated by reference to exhibits to the Company’s
Current Report on Form 8-K, filed with the SEC on
January 26, 2004. |
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| (20) |
Incorporated by reference to exhibits to the Company’s
Annual Report on Form 10-K for the fiscal year ended
February 29, 2004, filed with the SEC on May 14, 2004. |
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| (21) |
Incorporated by reference to exhibits to the Company’s
Current Report on Form 8-K, filed with the SEC on
June 4, 2004. |
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| (22) |
Incorporated by reference to exhibits to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
August 31, 2004, filed with the SEC on October 12,
2004. |
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| (23) |
Incorporated by reference to exhibits to the Company’s
Current Report on Form 8-K, filed with the SEC on
November 19, 2004. |
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| (24) |
Incorporated by reference to exhibits to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
November 30, 2004, filed with the SEC on January 10,
2005. |
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| (25) |
Incorporated by reference to the Company’s Current Report
on Form 8-K, filed with the SEC on April 28, 2005. |
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| (26) |
Incorporated by reference to the Company’s Current Report
on Form 8-K, filed with the SEC on January 21, 2005. |
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| (27) |
Filed herewith. |
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* |
The certifications attached as Exhibit 32.1 and
Exhibit 32.2 accompany the Form 10-K pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and shall not
be deemed “filed” by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as
amended. |
69