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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1997
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-13616
INTERVOICE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 75-1927578
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
17811 WATERVIEW PARKWAY
DALLAS, TEXAS 75252
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(214) 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
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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 X NO
--- ---
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. [ ]
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NONAFFILIATES AS OF MAY
19,1997: $180,140,027
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 19, 1997:
16,192,362
DOCUMENTS INCORPORATED BY REFERENCE
LISTED BELOW ARE DOCUMENTS PARTS OF WHICH ARE INCORPORATED HEREIN BY
REFERENCE AND THE PART OF THIS REPORT INTO WHICH THE DOCUMENT IS INCORPORATED:
(1) PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS - PART III.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business.......................................................... 1
Call Automation Industry.......................................... 1
Markets........................................................... 2
Product Strategy.................................................. 3
Products and Services............................................. 4
Competition....................................................... 6
Distribution...................................................... 6
Backlog........................................................... 7
Proprietary Rights................................................ 7
Manufacturing and Facilities...................................... 8
Employees......................................................... 8
ITEM 2. Properties........................................................ 9
ITEM 3. Legal Proceedings................................................. 9
ITEM 4. Submission of Matters to a Vote of Security Holders............... 9
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 10
ITEM 6. Selected Financial Data.......................................... 10
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
ITEM 8. Financial Statements and Supplementary Data...................... 16
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................... 30
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............. 31
ITEM 11. Executive Compensation.......................................... 31
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management......................................... 31
ITEM 13. Certain Relationships and Related Transactions.................. 31
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................... 32
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PART I
ITEM 1. BUSINESS
InterVoice, Inc. (together with its subsidiaries, collectively referred to
as "InterVoice" or the "Company") develops, sells and services call automation
systems. The Company's historical emphasis has been on interactive voice
response ("IVR") systems, which allow individuals a self help facility using
their telephones, personal computers, credit card terminals or voices to access
and/or provide information to computer data bases utilized by businesses and
telecommunications companies. The Company's systems are sold under the trade
names "OneVoice" and "InterDial". OneVoice Systems are used by a variety of
enterprises to disseminate and receive information efficiently, allowing
multiple callers simultaneous access to computer data bases without the expense
of maintaining a customer service representative and workstation for each
telephone line. InterDial systems improve call center efficiency by
automatically dialing phone numbers and only transferring a call to a live
agent if the call is answered and the called party remains on the phone. The
Company's products include software development tools designed to support a
number of diverse product applications and to simplify system customization.
Applications currently function in a wide range of industries including banking
and financial services, cable TV, government, healthcare, help desk, higher
education, insurance, retail and wholesale distribution, telecommunications,
transportation and manufacturing and utilities.
OneVoice Systems sell at list prices ranging from approximately twenty
five thousand to millions of dollars and support from four to thousands of
voice and data channels. Scalability is a key differentiator for all OneVoice
Systems, which incorporate multiple modules of up to 96 voice and data channels
per module which, in turn, can be connected by local area networks for a single
system appearance, management control and redundancy. InterDial Systems sell
at list prices ranging from approximately fifty thousand to five hundred
thousand dollars or more and support from four to 40 agent positions on a
single module. Multiple InterDial Systems can be connected via a node adapter
to support up to a total of 128 agents. OneVoice/UNIX Systems sell at list
prices ranging from approximately thirty thousand to two hundred thousand
dollars and support from 12 to 96 ports per system. The OneVoice/Unix Systems
replace the VoicePlex Systems previously marketed by the Company.
The Company sells its products directly to end-users and through more than
130 domestic and international distributors. Since the Company's inception in
1984, the number of worldwide installations of the Company's systems has grown
to over 8,300 in 49 countries. The end-users to which the Company has sold
systems include Aetna, Bank of America, Bell Canada, British Telecom, CitiBank,
Fidelity Investments, First Chicago, First Union Corporation, GTE, J.C. Penney,
LCI International, Martin Marietta, MCI Telecommunication, Merrill Lynch,
Microsoft, National Data Corporation, National Westminster Bank U.K.,
NationsBank, Sears Roebuck and Co., Social Security Administration, Sprint, The
New England, T U Electric, USAA and Wachovia Bank. Other than Siemens AG, an
InterVoice distributor, which accounted for 10.2% of the Company's total sales
in fiscal 1997, and MCI Telecommunications, which accounted for 11.2% and 11.7%
of the Company's total sales in fiscal 1996 and fiscal 1995, no customer
represented 10 percent or more of the Company's aggregate sales during fiscal
1997, 1996 or 1995.
CALL AUTOMATION INDUSTRY
The number of telephone calls requesting information or requiring operator
services that must be handled by businesses, telecommunications service
providers and other organizations has increased dramatically in recent years.
Traditionally, consumers obtained data or services from organizations such as
banks, insurance companies, or telephone companies, by phoning a customer
service representative, agent, or operator who used a terminal linked to a
computer to process the data or service request. The major disadvantage of
this procedure is the high cost of providing a large number of individuals to
answer calls and provide service, which imposes practical limits on access
frequency and the amount of information and level of service that can be given
to each caller. Another disadvantage is that, if the volume of calls increases
or substantially varies with the time of day or other factors, the potential
for service delays and errors may increase. As a result of these high costs
and inefficiencies, organizations have increasingly turned to various methods
of automation to process such calls. With IVR systems, callers receive
accurate responses to routine service requests so customer service
representatives, agents and/or operators are free to work on other important
tasks requiring their personal expertise. The Company believes that such
systems provide more service to more customers without additional staff,
improve customer and employee retention and can result in significant cost
savings to the Company's customers. The call automation industry has
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matured to the point that, in certain system applications such as credit limit
requests, callers may prefer dealing with an IVR system rather than a human in
order to preserve privacy and confidentiality.
The Company believes that the industry can be divided into five primary system
markets:
Interactive voice response is the use of a wide variety of devices,
such as telephones, facsimile or personal computers in conjunction with
public and private telecommunication networks and/or the Internet to input
or retrieve information or request services from a computer data base.
Applications include checking account balances, credit card authorizations,
insurance claims and automating telephone calls formerly requiring operator
assistance. The Company believes the industry will also embrace
applications utilizing recently introduced multi-media and internet
capabilities (e.g. the use of voice, graphics and images). The Company's
VisualConnect product addresses internet applications while the Company's
MediaConnect product addresses multi-media applications. The Company
participates in this market with its OneVoice System which comprised more
than 90% of its system sales in fiscal 1997.
Outbound call processing involves the automatic dialing of telephone
numbers and the use of computerized voice messages and live agents to
communicate with customers and prospects. Applications include customer
notifications, delinquent bill collecting and the telemarketing of goods
and services. The Company addresses this market with its InterDial System
which comprised 7% of its system sales in fiscal 1997.
Automated call directing serves the functions typically performed by a
receptionist and involves the use of a computerized announcer which asks
callers to select an extension or department.
Voice mail enables callers to leave, exchange and retrieve electronic
voice messages 24-hours a day, seven days a week.
Audiotex is the use of a telephone to access and to listen to a wide
variety of current information, such as sports scores, weather, stock
quotes, business news, classified ads or other similar information.
The general public has become increasingly receptive to IVR systems,
having become familiar with them from early adopters in the financial services
industry. Such systems are becoming more pervasive in a wide variety of
industries and applications as indicated below:
INDUSTRY APPLICATION
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Financial Services Banking/Credit Union
Bill Payment
401K/Employee Benefit
Health Care Benefits Coverage
Test Results
Claims Status
Cable TV Service Requests
Event Ordering
Education Enrollment
Grade Reporting
Financial Aid
Housing
Electronic Benefits Transfer Child Support
Welfare Payments
Food Stamps
Telecommunications Automated Operator Services
Service Requests
MARKETS
The Company continues to evaluate a wide variety of potential industry
specific or "vertical" markets and has selected key markets based upon the
Company's evaluation of their potential for rapid acceptance of IVR technology.
The Company has traditionally focused on the financial services industry and,
more recently, the
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telecommunications industry. The Company also has expanded its focus to
include, among others, the human resource, healthcare and call center vertical
markets.
PRODUCT STRATEGY
The Company's products are designed to assist its customers in achieving
the following objectives:
o Increase revenues with reduced costs
o Improve customer and/or employee service
o Provide product and service differentiation
The Company believes that its OneVoice System enables the Company's
customers to handle more calls with fewer delays and errors at a lower cost
than through use of customer service representatives, agents or operators while
preserving callers' privacy and confidentiality, which is important in some
applications. InterDial allows the Company's customers to contact a large
number of people in applications such as collections and telemarketing while
improving the productivity of agents. Both the OneVoice and InterDial Systems
operate on the OneVoice Software Agent Platform which can simultaneously host
both systems, each of which, in turn, can simultaneously host multiple
applications, allowing the Company's customers to leverage their investments in
their OneVoice and InterDial systems. The OneVoice/UNIX System provides
network based voicemail applications for telecommunications companies. The
Company has adapted its OneVoice Software Agent Platform platform, called NSP
5000, to address the growing Intelligent Peripheral market within the
telecommunication industry. Intelligent Peripherals are the building blocks
for the provisioning of automated operator services, such as processing credit
card calls, and advanced telecommunications features, such as voice dialing, to
be offered in the Advanced Intelligent Networks currently being contemplated by
domestic and international wireline and wireless telecommunications network
operators.
The Company's product strategy emphasizes leveraging industry standard
computer platforms and operating systems to allow the Company to take advantage
of hardware and software technology offered by third parties. This strategy
also provides the Company's customers the option to select the computer
platform and operating system of their preference should they wish
compatibility with other computer systems. This allows the Company to focus
its development efforts on call automation technology. The Company has
developed a robust suite of call processing functions and features
characterized by the following factors:
Host Computer Platform Independence: By virtue of compliance with
industry standards, the Company's hardware and software is designed to be
independent of the host computer platform. The same hardware and software
can operate on computer platforms produced by a variety of manufacturers.
This allows the Company to deliver its products integrated with the computer
platform of its customers' choice rather than dictating the selection of a
specific computer platform. This is an important factor in vendor selection
for many of the Company's current and potential customers. This product
strategy also allows the Company to avoid the expense of maintaining
multiple versions of the Company's hardware and software.
Operating Software Independence: The Company's InterSoft run time
software is simultaneously compatible with all popular operating systems,
such as UNIX, OS/2 and Windows NT. This allows the Company to give its
customers operating system freedom of choice, an important factor in vendor
selection for many of the Company's current and potential customers. This
product strategy also allows the Company to avoid the expense of maintaining
multiple versions of the Company's run time software.
Flexible Programming: The Company offers its customers a wide variety
of software features that can be included in the OneVoice and InterDial
Systems. The Company's software is designed to support a number of diverse
product applications. The Company's recently introduced graphical user
interface (GUI) software development tool, InVision, simplifies the
generation and customization of customer applications.
System Expandability/Networking: The OneVoice System can be expanded
from four up to 96 lines per module by adding expansion cards without
software changes. Multiple modules can be interconnected via a local area
network to provide simultaneous access for thousands of callers while
maintaining control from a single workstation on the network. InterDial
Systems are expandable from 4 to 40 lines per system and multiple InterDial
Systems can be connected via a node adapter to support up to a total of 128
agents.
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Voice and Data Connectivity: Systems can be connected to most digital
and analog PBX's and/or central office switches and to a wide variety of
host computers.
The Company believes that its products are designed and manufactured to be
highly reliable and to require minimum maintenance, most of which can be
handled from its headquarters using on-line remote diagnostic and test
capabilities. The Company has contracted with an independent company with
local service offices throughout the United States to perform customer site
service. When customer repair is required, the Company electronically
dispatches service technicians. International distributors are generally
responsible for providing service for the systems they sell.
PRODUCTS AND SERVICES
One Voice Systems
OneVoice Systems are primarily focused on the IVR market and comprised
more than 90% of the Company's system sales in fiscal 1997. These systems
combine a variety of standard computer platforms and standard operating systems
together with the Company's proprietary run time software, known as InterSoft,
and Company developed and third party developed expansion boards to perform IVR
functions. Each OneVoice System module utilizes the same proprietary run time
software, which allows the Company's customers to expand their OneVoice Systems
via the addition of expansion cards or via the linkage of multiple modules
through a local area network, as capacity and other requirements grow.
OneVoice Systems can be configured using a variety of computer platforms and
operating systems depending on the customer's preferences and processing
requirements.
The Company's run time software, known as InterSoft, offers customers a
variety of features that can be included in OneVoice Systems, including:
VisualConnect ~: A feature which allows OneVoice Systems to
communicate with multi-media personal computers via the Internet. Data can
be transmitted in any combination of voice, graphic and image formats.
MediaConnect ~: A feature allowing customers to communicate with
OneVoice Systems with multi-media personal computers via telecommunications
networks. Data can be transmitted in any combination of voice, graphic and
image formats.
VoiceDial ~: A voice recognition feature, available in several
languages, allowing a telephone caller to issue oral commands to OneVoice
Systems, in both numeric and alpha format, including continuous speech.
YourVoice ~: A feature allowing customers to customize and change
recorded messages from any telephone.
VirtualVoice ~: A voice storage and playback feature allowing
OneVoice Systems to store and retrieve large quantities of verbal
information received from many telephone lines.
DataConnect ~: A feature allowing OneVoice Systems to communicate
with personal computers, data terminals and hearing impaired devices using
the same telephone lines as voice callers.
MultiFrequency Decoding ~: A feature allowing OneVoice Systems to
emulate central office signaling.
PulseDial Decoding ~: A feature which allows rotary phones to
communicate with OneVoice Systems.
Digital Interface ~: A feature which makes possible 24 channel
capacity with fully integrated T1 Direct Connectivity or 30 channel
capacity with fully integrated E1 Direct Connectivity in the European
marketplace.
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InVision is the Company's proprietary, next-generation software tool which
aids in the development and testing of custom IVR applications. InVision is
based on a graphical user interface and allows developers to visualize and hear
the interaction between users and OneVoice Systems while developing custom
applications. The Company believes its customers will expand the scope and use
of its systems by virtue of this user-friendly development tool. InterForm is
the Company's proprietary, forms based software program which also can be used
by developers to generate and maintain custom applications.
VocalCard, a proprietary voice automation board, allows OneVoice Systems
to perform many functions in software which many other suppliers must perform
using discrete hardware. Extensive use of software enables the Company to add
features or enhance OneVoice Systems without redesigning hardware.
The Company has developed the FoneTower, an expansion chassis which
enables users to insert up to 18 additional cards into a OneVoice module due to
limitations in the number of expansion slots in some computer platforms.
Capacity expansion and the provisioning of additional features and functions
often require additional voice automation cards, such as VocalCard.
The Company integrates compatible programmable add-in cards with
proprietary software to interface OneVoice Systems with enterprise systems
predicated on host computers produced by IBM, Unisys, NCR, DEC, and others,
using standard communications protocols and native terminal emulation via the
Internet; local area networks, including the IBM Token Ring, Ethernet and
Arcnet; advanced wide area networks, including ISDN-PRI and X.25; and customer
private networks.
One Voice 5000
The Company's OneVoice 5000 systems utilize a compact, modular, passive
backplane design which allows for high port density per system, a critical
factor for call center applications. The passive backplane design allows for
easy system expansion and for the upgrade of system components, such as CPU's,
as technologies advance.
Network Services Platform (NSP) 5000
Similar in design to the Company's OneVoice 5000 systems, this product is
positioned to address the Intelligent Peripheral (or service node) market
within the telecommunications industry. The Company is actively marketing NSP
5000 systems for the provisioning of automated operator services, such as
processing credit card calls, and advanced telecommunication features, such as
voice navigated voice mail, voice activated dialing and short message delivery
services.
OneVoice CallCenter
The OneVoice CallCenter is targeted for regional or branch offices of
large businesses, providing them integrated inbound and/or outbound call
automation systems without replacing their existing telecommunications
equipment. The OneVoice CallCenter adds call switching capabilities to the
OneVoice Multi Application Platform and supports both OneVoice Systems and
InterDial systems. These systems serve to combine PBX functionalities with
ISDN PRI capabilities to enable the transmission of both voice and data on a
single line to support agent query.
OneVoice/Unix
The OneVoice/UNIX historically has been marketed primarily to
telecommunications companies to provision their networks with central office
based voice mail
InterDial
The Company's InterDial System provides outbound call processing. A
typical application of an InterDial system permits the Company's customers to
improve the productivity of their telemarketing operations by automatically
dialing phone numbers and only transferring a call to an agent if the call is
answered and the called party remains on the phone. InterDial's patented
advanced call processing monitoring and automatic call pacing
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algorithms also improve productivity by transferring a caller to a
telemarketing agent immediately upon completion of the agent's previous call.
RealCare
The Company offers its customers a system maintenance program, known as
RealCare, which combines on-line remote diagnostic and test capabilities with
nationwide on-site repair performed, in part, by the Company's service
partners. RealCare enables customers to access the Company's Help Desk, to
receive on-line tests, and, if necessary, to receive software modifications.
When on-site repair is required, the Company may electronically dispatch its
service partners' service technicians while monitoring and directing repair
activities.
COMPETITION
The call automation industry is fragmented and highly competitive. Based
on industry surveys, the Company believes no company participating in this
industry has more than a 20% market share. Technological advances are critical
to industry leadership. The Company competes primarily on the basis of a broad
range of product capabilities and features, professional services (such as
system customization), and customer support services. The principal
competitors for the Company's OneVoice Systems include Lucent Technologies
(Formerly AT&T), Periphonics, Brite Voice and Edify. The principal competitors
for the Company's InterDial System include Davox, EIS and Mosaix. The
principal competitors for the Company's telecommunications products include
Boston Technology, Octel and Comverse Technology. The Company anticipates that
competition from existing competitors will continue to intensify. The Company
may also face market entry from non-traditional competitors, including
telephone switching equipment manufacturers and independent IVR service
bureaus. Some of these competitors have greater financial, technological and
marketing resources than the Company.
DISTRIBUTION
The Company markets its product through both direct and indirect sales
channels. During fiscal 1997, approximately 53% and 47% of the Company's total
sales were attributable to direct sales to end-users and to sales to
distributors, respectively. The Company provides discounts to volume end-user
purchasers and its distributors reflecting decreased costs associated with such
sales. During fiscal 1997, sales to existing customers, as a percentage of the
Company's total sales, were 65% comparable to 67% in fiscal year 1996, as
customers continued to expand their systems, and to add new and/or enhanced
applications. The Company anticipates that sales to existing customers, as a
percentage of the Company's total sales, will continue to be a significant
percent of the Company's total sales as the Company focuses additional
marketing efforts on current users of InterVoice's systems. One customer,
Siemens AG, an InterVoice distributor, accounted for 10.2% of the Company's
total sales in fiscal 1997 while MCI Telecommunications accounted for 11.2% and
11.7% of the Company's sales in fiscal 1996 and fiscal 1995.
United States Distribution
The Company sells its products directly to end-users and more than 85
distributors in the United States which allows it to leverage an indirect sales
force numbering in excess of 1,700 in addition to its domestic direct sales
force of approximately 75. During fiscal 1997, approximately 69% and 31% of
the Company's domestic sales were attributable to end-users and distributors,
respectively. The Company's end-users include, among others, Aetna, Bank of
America, Bell Canada, Fidelity Investments, First Chicago, First Union
Corporation, GTE, J. C. Penney, LCI International, Martin Marietta, MCI
Telecommunications, Merrill Lynch, Microsoft, National Data Corporation,
National Westminster Bank U.K., NationsBank, Sears Roebuck & Co., Social
Security Administration, Sprint, The New England, TU Electric, USAA, and
Wachovia. Marketing efforts by the Company include advertising, trade shows,
direct mail campaigns and telemarketing, implemented by a field sales force.
The Company enters into arrangements with distributors to broaden
distribution channels, to increase its sales penetration to specific markets
and industries and to provide customer services relating to the Company's
products on behalf of the Company. Distributors are selected based on their
access to markets, industries and customers that are candidates for the
Company's products. The Company's major distributors include Ameritech
Information Systems, EDS, Fiserv, Fujitsu, GTE, Information Technology, Inc.,
NEC West, Norstan, Rockwell International, Siemens Rolm, Sprint, Symitar
Systems, U.S. Order and Wiltel.
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International Distribution
The Company offers its products outside the United States through a
network of more than 45 distributors which allows it to leverage an indirect
sales force numbering in excess of 300 in addition to its international direct
sales force of approximately 15. International distributors include
Information Technology & Data (Turkey), IVRS Ltd. (Hong Kong), Loxbit
(Australia), OLTP Voice (Venezuela), Phonetix (Canada), Promotora Kranon
(Mexico), Siemens Rolm, Switch (Chile) and Telecom Equipment (Singapore). The
Company maintains offices in London and Frankfurt to support sales by
distributors throughout the European Community, the Middle East and Africa.
Offices in Singapore, Melbourne and Bejing support sales by distributors
throughout the Pacific Rim. The Company also maintains an office in Toronto to
support its Canadian distributors. The Company's products are currently sold
in 49 countries. Most countries lag the United States in the development of
their IVR markets. Government regulation of telecommunications equipment and
services, and the low penetration of digital switches and touch-tone
telephones, have limited sales of IVR systems in many countries. Subject to
differences in culture and business practices, the Company anticipates that the
international market for IVR systems will grow as foreign countries overcome
regulatory, technological and other barriers which limit the use of such
systems. The Company believes that international buyers are attracted to its
products for a number of reasons including: its digital technology; the ease
with which buyers can customize applications in foreign languages; OneVoice
Systems' ability to support multiple languages concurrently, to interact with
rotary telephones, and to support voice recognition when touchtone telephones
are unavailable; and the Company's efforts in obtaining the required approvals
for connectivity to the telephone networks in numerous international markets.
In previous fiscal years, the Company had many large sales to the European
audiotex market, however, such sales slowed to less than 1% of the Company's
European sales during fiscal 1997. The Company expects only minimal sales to
the European audiotex market in future years as the Company believes demand in
that market will remain flat or continue to decline. During fiscal 1997, the
Company continued its focus on building its European distribution channels by
increasing its European staffing to strengthen existing distributor
relationships and to add new distributors. The Company also continued to
expand distribution in the Pacific Rim and Latin America to increase the
Company's presence in these rapidly growing markets.
International sales in fiscal 1997, 1996 and 1995 grew 36%, 65% and 6%
respectively, and, as a percentage of total sales, were 24% in fiscal 1997, 19%
in fiscal 1996 and 14% in fiscal 1995. Sales to the Americas (excluding the
United States) constituted 47%, 61% and 33% of international sales in fiscal
1997, 1996 and 1995, respectively. Sales to Europe constituted 34%, 20% and
45% of international sales in fiscal 1997, 1996 and 1995, respectively. Sales
to the Pacific Rim constituted 19%, 19%, and 22% of international sales in
fiscal 1997, 1996 and 1995, respectively. The increase in sales to Europe as a
percent of international sales in fiscal 1997 was primarily attributable to a
large sale to a European based, global telecommunications company. The decline
in sales to Europe as a percent of international sales in fiscal 1996 was
primarily attributable to the slowing of sales to the European audiotex market,
as mentioned above. The large increase in sales to the Americas (excluding the
United States) as a percent of international sales in fiscal 1996 was primarily
attributable to several large sales to Central and South American
telecommunications companies. A discussion of the Company's export sales by
geographical area for fiscal 1997, 1996 and 1995 is found in Note G to the
Consolidated Financial Statements located in Item 8 of this report which is
incorporated herein by reference.
BACKLOG
The Company's backlog at February 28, 1997, February 29, 1996 and February
28, 1995 was approximately $11.4 million, $21.3 million and $11.7 million,
respectively. The Company expects all existing backlog to be delivered within
the next fiscal year. Due to customer demand, many of the Company's sales are
completed in the same fiscal quarter as ordered. Thus, the Company's backlog
at any particular date may not be indicative of actual sales for any future
period.
PROPRIETARY RIGHTS
The Company believes that its existing patent, copyright, license and
other proprietary rights in its products and technologies are material to the
conduct of its business. To protect these proprietary rights, the Company
relies on a combination of patent, trademark, trade secret, copyright and other
proprietary rights laws, nondisclosure safeguards and license agreements. As
of February 28, 1997, the Company owned 14 patents. In addition, the Company
has registered "InterVoice" as a trademark in the United States and in certain
foreign
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countries. The Company has also registered 21 trademarks and servicemarks in
the United States for other product and service names and has registrations
pending in the United States for various product names. The Company's software
and other products are generally licensed to customers pursuant to a
nontransferable license agreement that restricts the use of the software and
other products to the customer's internal purposes. Although the Company's
license agreements prohibit a customer from disclosing proprietary information
contained in the Company's products to any other person, it is technologically
possible for competitors of the Company to copy aspects of the Company's
products in violation of the Company's rights. Furthermore, even in cases
where patents are granted, the detection and policing of their unauthorized use
is difficult. Moreover, judicial enforcement of copyrights may be uncertain,
particularly in foreign countries. The occurrence of the unauthorized use of
the Company's proprietary information by the Company's competitors could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Item 3. Legal Proceedings."
From time to time various owners of patents and copyrighted works send the
Company letters alleging that its products do or might infringe upon the
owners' intellectual property rights, and/or suggesting that the Company should
negotiate a license or cross-license agreement with the owner. The Company's
policy is to never knowingly infringe upon any third party's intellectual
property rights. Accordingly, the Company forwards any such allegation or
licensing request to its outside legal counsel for their review and opinion.
The Company generally attempts to resolve any such matter by informing the
owner of its position concerning non-infringement or invalidity, and/or, if
appropriate, negotiating a license or cross-license agreement. Even though the
Company attempts to resolve these matters without litigation, it is always
possible that the owner of the patent or copyrighted works will institute
litigation. Owners of patent(s) and/or copyrighted work(s) have previously
instituted litigation against the Company alleging infringement of their
intellectual property rights, however, no such litigation is currently pending
against the Company. The Company has accelerated its program for applying for
and receiving patents to reflect its technological inovations. The Company
currently has a portfolio of fourteen patents, and has applied and will
continue to apply for a number of additional patents. The Company believes
that its patent portfolio could allow it to assert counterclaims for
infringement against certain owners of intellectual property rights if those
owners were to sue the Company for infringement. In certain situations, it
might be beneficial for the Company to cross license certain of its patents for
other patents which are relevant to the call automation industry.
The Company believes that software companies and technology companies,
including the Company and other companies in the Company's industry, may become
increasingly subject to infringement claims. Such claims may require the
Company to enter into costly license agreements, or result in even more costly
litigation. To the extent the Company requires a licensing arrangement, 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 that the Company will prevail in any litigation instituted
against the Company asserting infringement of intellectual property rights. To
the extent the Company suffers an adverse judgment, it might have to pay
substantial damages, discontinue the use and sale of infringing products,
repurchase infringing products from the Company's customers pursuant to
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 the Company's business, financial condition and results of
operations.
MANUFACTURING AND FACILITIES
The Company's manufacturing operations consist primarily of the final
assembly and the extensive testing and quality control of materials,
components, subassemblies and systems. The Company currently uses third parties
to perform printed circuit board assembly, sheet metal fabrication and
customer-site service and repair. Although the Company generally uses standard
computer platform parts and components for its products, some components,
including certain semiconductors, and more specifically, digital signal
processors and static random access memories, are presently available only from
limited suppliers. To date, the Company has been able to obtain adequate
supplies of such components in a timely manner. However, the Company's
operating results could be adversely affected if the Company were unable to
obtain such components from such sources in the future.
EMPLOYEES
As of May 19, 1997, the Company had 697 employees.
8
11
ITEM 2. PROPERTIES
The Company owns and occupies a 225,000 square foot manufacturing and
office facility in Dallas, Texas. The Company also leases approximately 5,000
square feet of office space in London and approximately 1,000 square feet of
office space in Singapore.
The Company has suitable properties and productive capacity for its
near-term requirements. The Company owns land adjacent to its Dallas facility
should additional office and/or manufacturing capacity be required.
ITEM 3. LEGAL PROCEEDINGS
Lucent Technologies ("Lucent") has suggested in correspondence to the
Company that it should consider licensing certain Lucent patents for a
substantial payment. The Company has an opinion from its outside legal counsel
that the Company does not infringe the Lucent patents by reason of
non-infringement and/or invalidity. The Company has suggested to Lucent that
Lucent should consider licensing certain patents of the Company, and that a
mutual cross-license might be in the best interests of both parties. The
parties are currently attempting to negotiate a mutually satisfactory
cross-license agreement which would resolve the matter. There is no assurance
that the Company will be able to negotiate a cross-license agreement based on
mutually satisfactory terms. Lucent has not threatened litigation against the
Company. In the event that litigation is instituted against the Company
concerning the Lucent patents, the Company intends to vigorously contest the
claims and to assert defenses of non-infringement and/or invalidity of the
patents, together with any other meritorious defenses and counterclaims,
including any counterclaim for infringement of its patents, the Company might
have. As with any legal proceeding, there is no guarantee that the Company
will prevail in any litigation asserted against the Company in connection with
the Lucent patents.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
9
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
The Company's outstanding shares of common stock are quoted in the Nasdaq
National Market under the symbol INTV. The Company has not paid any cash
dividends since its incorporation and does not anticipate paying cash dividends
in the foreseeable future. The Company is not bound by any contractual terms
that either prohibit or restrict the payment of dividends.
High and low prices for the shares as reported in the Nasdaq National
Market are shown below for the Company's fiscal quarters during fiscal 1997 and
1996.
Fiscal 1997 Fiscal 1996
- ----------- -----------
Quarter High Low Quarter High Low
- ------- ---- --- ------- ---- ---
1st $ 30 1/2 $21 3/4 1st $ 16 1/2 $ 14 1/8
2nd 22 12 1/4 2nd 22 3/4 14 5/8
3rd 15 3/4 11 3/16 3rd 26 3/8 17 7/8
4th 14 7/8 10 1/2 4th 24 1/2 16 5/8
There were approximately 1,000 shareholders of record and approximately
12,500 beneficial shareholders of the Company at May 19, 1997 On May 19, 1997
the closing price of the Common Stock was $11.13.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes included elsewhere herein and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" set forth below. The selected
consolidated financial data presented below for each of the years in the
five-year period ended February 28, 1997 are derived from the consolidated
financial statements of InterVoice, Inc., which financial statements have been
audited by Ernst & Young LLP, independent certified public accountants. The
consolidated financial statements as of February 28, 1997 and February 29, 1996
and, and for each of the years in the three-year period ended February 28, 1997
and the report of Ernst & Young LLP thereon, are included elsewhere herein.
FISCAL YEAR ENDED FEBRUARY 29/28
--------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Net Sales $104,845,692 $ 97,103,054 $ 76,265,228 $ 60,933,903 $ 44,566,352
Income from Operations 17,548,615** 25,054,742 9,304,113*** 16,988,225 10,950,223
Net Income 12,760,481** 17,259,358 2,533,580*** 11,705,501 7,824,309
Total Assets 109,178,509 89,726,806 62,718,565 74,218,417 52,633,577
Long Term Debt -- -- -- -- --
Per Common Share
Net Income .77** 1.05 .15*** .64 .45
Cash Dividend -- -- -- -- --
Weighted average
number of common and
common equivalent
shares* 16,618,937 16,397,924 16,755,289 18,419,088 17,461,876
*The number of weighted average common and common equivalent shares in fiscal
years prior to 1994 have been restated to reflect 2 for 1 stock splits in the
form of 100% stock dividends paid August 16, 1993 and October 16, 1992.
**Fiscal 1997 income from operations and net income were impacted by charges
totaling approximately $1.8 million and $1.3 million, respectively, or $0.08
per share, resulting from a non-recurring litigation settlement. Without this
charge, earnings for fiscal 1997 would have been $0.85 per share.
***Fiscal 1995 income from operations and net income were impacted by charges
totaling approximately $10.5 million, or $0.65 per share, associated with a
non-recurring charge resulting from a significant portion of the
10
13
purchase price of VoicePlex Corporation having been attributed to in-process
research and development. Without this charge, earnings for fiscal 1995 would
have been $0.80 per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURES REGARDING 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 under "Business
- - Product Strategy," "Business - Distribution," and "Notes to Consolidated
Financial Statements" located elsewhere herein regarding the Company's
financial position, business strategy, plans and objectives of management of
the Company for future operations, and industry conditions, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct. In addition to important factors
described elsewhere in this report, the following significant factors, among
others, sometimes have affected, and in the future could affect, the Company's
actual results and could cause such results during fiscal 1998, and beyond, to
differ materially from those expressed in any forward-looking statements made
by or on behalf of the Company:
The Company faces ever-increasing demands from its actual and prospective
customers for its products to be compatible with a variety of rapidly
proliferating computing, telephony and computer networking technologies
and standards and to provide greater functionality. Since the Company does
not have the resources to cause its products to be compatible with each
new technology or standard and to provide all requested functionality, the
ultimate success of the Company's products is dependent, to a large
degree, on the Company allocating its resources to developing and
improving products compatible with those technologies, standards and
functionalities that ultimately become widely accepted by the Company's
actual and prospective customers. The Company's success is also dependent,
to a large degree, on the Company's ability to implement arrangements with
other vendors with complementary product offerings to provide actual and
prospective customers greater functionality and to ensure that the
Company's products are compatible with the increased variety of
technologies and standards.
o Intense competition in the voice automation industry. See "Business -
Competition."
o Ability of the Company to continue to introduce new features and products
as the Company's markets evolve, as new technologies and standards become
available, and customers demand additional functionality, requiring a
continued high level of expenditures by the Company for research and
development.
o Ability of the Company to properly estimate costs under fixed price
contracts in developing application software and otherwise tailoring its
systems to customer-specific requests.
o Continued availability of suitable non-proprietary computing platforms and
system operating software that are compatible with the Company's products.
o The quantity and size of large sales (sales valued at approximately $1
million or more) during any fiscal quarter, which can cause wide
variations in the Company's sales on a quarter to quarter basis.
o The ability of the Company to retain its customer base and, in particular,
its more significant customers (such as Siemens AG, an InterVoice
distributor, which accounted for over ten percent of the Company's total
sales during fiscal 1997 and MCI Telecommunications, which accounted for
over ten percent of the Company's total sales during fiscal 1996 and 1995),
since such customers generally are not contractually obligated to place
further orders with the Company.
o Certain of the components for the Company's products are available from
limited suppliers. The Company's operating results could be adversely
affected if the Company were unable to obtain such components in the
future. See. "Business - Manufacturing."
11
14
o Risks involved in the Company's international distribution and sales of
its products, including unexpected changes in regulatory requirements,
unexpected changes in exchange rates, the difficulty and expense of
maintaining foreign offices and distribution channels, tariffs and other
barriers to trade, difficulty in protecting intellectual property rights,
foreign governmental regulations that may limit or restrict the sales of
call automation systems. Additionally, changes in foreign credit markets
and currency exchange rates may result in requests by many international
customers for extended payment terms and may have an adverse impact on the
Company's cash flow and its level of accounts receivable.
o Legislative and administrative changes and, in particular, changes
affecting the telecommunications industry, such as the recently enacted
Telecommunications Act of 1996. While many industry analysts expect the
Telecommunications Act of 1996 ultimately to result in at least a
temporary surge in the procurement of telecommunications equipment and
related software and other products, there is no assurance that the
Company can estimate with sufficient accuracy those products which will
ultimately be purchased, the timing of any such purchases or the
quantities to be purchased.
o The Company's ability to hire and retain, within the Company's
compensation parameters, qualified technical talent and outside
contractors in highly competitive markets for the services of such
personnel.
o Extreme price and volume trading volatility in the U.S. stock market,
which has had a substantial effect on the market prices of securities of
many high technology companies, frequently for reasons other than the
operating performance of such companies. These broad market fluctuations
could adversely affect the market price of the Company's common stock.
o Increasing litigation with respect to the enforcement of patents,
copyrights and other intellectual property. See Item 3. "Legal
Proceedings", and "Business - Proprietary Rights."
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements disclosed in this paragraph and otherwise
in this report.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 128
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which the Company is required to adopt
on February 28, 1998. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
not expected to have a material change on primary or fully diluted earnings per
share for the three years in the period ended February 28, 1997, however,
primary earnings per share will increase by 2%, 5% and 4% for fiscal years
1997, 1996 and 1995, respectively.
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15
RESULTS OF OPERATIONS
The following table presents certain items as a percentage of sales for
the Company's last three fiscal years.
Year ended February 29/28
---------------------------------
1997 1996 1995
-------- -------- --------
Sales 100% 100% 100%
Cost of goods sold 38.3 35.5 36.6
Gross Margin 61.7 64.5 63.4
Research and development expenses 11.1 10.0 9.6
Selling, general and administrative expenses 32.2 28.7 27.8
Purchased research and development -- -- 13.8**
Litigation settlement 1.7* -- --
Operating income 16.7* 25.8 12.2**
Other income - net .6 .5 .6
Income before taxes 17.3* 26.3 12.8**
Income taxes 5.2 8.6 9.5
Net Income 12.1%* 17.7% 3.3%**
*Impacted by a non-recurring charge totaling approximately $1.8 million, ($1.3
million net of tax) resulting from litigation settlement. Without this charge,
operating income and net income for fiscal 1997 would have been 18.4% and
13.4% of sales, respectively.
**Impacted by charges totaling approximately $10.5 million associated with a
non-recurring charge resulting from a significant portion of the purchase price
of VoicePlex Corporation having been attributed to in-process research and
development. Without this charge, operating income and net income for fiscal
1995 would have been 26% and 17% of sales, respectively.
SALES
Sales are derived primarily from the shipment of voice automation systems
to both new and existing customers in two major market categories: Customer
Premise Equipment (CPE) and Telecommunications (Telco). Due to customer
demand, many of the Company's transactions are completed in the same fiscal
quarter as ordered. The size and timing of some transactions have historically
resulted in sales fluctuations from quarter to quarter. In the past, the
impact of these fluctuations has been mitigated to some extent by vertical
markets and by the geographic location of the Company's existing and
prospective customers. However, the Company has become more prone to quarterly
sales fluctuations due to its sales to the worldwide Telco market which are
generally large in dollar amount and unevenly distributed throughout the fiscal
year.
Worldwide sales in fiscal 1997, 1996 and 1995 increased from the
immediately preceding year 8%, 27% and 25%, respectively. Worldwide CPE sales
increased 15% and 41% in fiscal years 1997 and 1996 and declined 3% in fiscal
1995. Worldwide Telco sales declined 19% in fiscal 1997 and increased 5% and
170% in fiscal years 1996 and 1995. CPE sales constituted 69%, 65% and 55% of
the Company's total sales in fiscal years 1997, 1996 and 1995, respectively,
while Telco sales made up 19%, 26% and 31% of the Company's total sales during
the same time periods. Sales of system maintenance contracts expanded to over
3,200 end users and comprised 12%, 9% and 11% of the Company's total sales in
fiscal 1997, 1996 and 1995, respectively.
Domestic CPE sales in fiscal 1997, 1996 and 1995 increased 11%, 36% and
2%, respectively due to the Company's continued investment in the addition of
new distributors and in the hiring and training of new and existing sales,
service and support personnel and is expanding its marketing and advertising
programs. International CPE sales in fiscal 1997 and 1996 increased 30% and
62% for the same reasons as domestic CPE sales and declined 23% in fiscal 1995
due to a lower European demand for audiotex applications. International
13
16
CPE sales constituted 24%, 21% and 18% of the Company's total CPE sales in
fiscal years 1997, 1996 and 1995, respectively.
The Company believes the decline in Telco sales during fiscal 1997 was
attributable to temporary delays by some telecommunications companies in
implementing call automation solutions while they evaluate marketing and
investment strategies in the light of new opportunities resulting from
deregulation under the Telecommunications Act of 1996 and while they also
evaluate the implications of the recent judicial stay of certain provisions of
the Act and its regulations. Telco sales increased in fiscal 1996 and 1995 as
a result of the hiring and training of new and existing sales, service and
support personnel and of the expansion of marketing programs. International
Telco sales constituted 39%, 21% and 12% of the Company's total Telco sales in
fiscal years 1997, 1996 and 1995, respectively.
Prices for the Company's products have remained stable, as measured by
price per line shipped, during fiscal 1997, 1996 and 1995 although the features
and functions per line shipped have become more robust. Accordingly, the
Company's sales increases are largely the result of increased unit shipments.
The Company's exposure to foreign currency fluctuations is minimal as less than
3% of total sales are denominated in foreign currencies.
COST OF GOODS SOLD
During fiscal 1997, the Company experienced an increase in cost of goods
sold to 38.3% of total sales from 35.5% and 36.6% in fiscal 1996 and 1995,
respectively. This was the result of the Company's continued investment in
applications engineering and customer service resources to pursue opportunities
in all of its markets despite lower than anticipated sales. The Company
believes, based on anticipated sales, that in fiscal 1998 its cost of goods
sold, as a percentage of sales, will be slightly lower than fiscal 1997.
RESEARCH AND DEVELOPMENT
Fiscal 1997, 1996 and 1995 research and development expenses were
approximately $11.7 million, $9.8 million and $7.3 million, respectively.
Fiscal 1997 expenses included porting the Company's InterSoft core software to
the UNIX and Windows NT operating systems; developing computer platform
independent voice automation hardware and software; and the development of
VisualConnect (the ability to communicate with OneVoice Systems via the
Internet), MediaConnect (the multi-media implementation of IVR), and InVision
(the Company's next generation custom application development tool).
Additionally, expenditures were made in fiscal 1997, 1996 and 1995 for the
ongoing development of the Company's OneVoice Software Agent Platform including
OneVoice Systems (the Company's IVR system), InterDial (the Company's outbound
predictive dialer system), OneLink (a digital interface for analog switches),
development of InVision, and continued development of InterForm (a custom
applications generation, or script building, user tool) and digital VocalCard
software and hardware functionality. Research and development expenses in these
years also reflect the development of computer platform independent hardware
and software, a voice mail system, speech recognition in both alpha and numeric
format (including continuous speech), voice verification, a facsimile server,
the OneVoice CallCenter, vertical industry application packages (including
applications targeted for the telecommunications industry), enhancements to the
products acquired in the VoicePlex transaction, and international homologations
(the approvals required for connectivity to the telephone network in numerous
international markets). The Company has not capitalized internal hardware or
software development expenses. The Company expects that in fiscal 1998 it will
maintain its strong commitment to research and development at a targeted
percentage of anticipated sales similar to fiscal 1997. The Company believes
that this level of commitment should enable it to stay in the forefront of
technology development in its business segment, which is essential to improving
the Company's position in the industry.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased to approximately
$33.7 million in fiscal 1997 from approximately $27.8 million in fiscal 1996
and approximately $21.2 million in fiscal 1995 as the Company continued to hire
and train new and existing sales, service and support personnel and expand its
marketing and advertising programs worldwide. The Company expects that in
fiscal 1998 it will invest in selling, general and administrative resources at
a targeted percentage of anticipated sales slightly less than fiscal 1997.
14
17
OTHER INCOME
Other income is primarily interest income on cash and short term
investments. The increase in other income in fiscal 1997 versus fiscal 1996
and in fiscal 1996 versus fiscal 1995 reflected the Company's increased average
cash balances resulting from the Company's positive net cash flow
INCOME FROM OPERATIONS
In order to understand the Company's operating and net income over the
last three fiscal years, it must be noted that the Company, during fiscal 1997,
incurred a one time charge of approximately $1.8 million ($1.3 million net of
tax) in connection with the settlement of certain litigation. Additionally,
during fiscal 1995, the Company purchased VoicePlex Corporation for
approximately $8.0 million in cash and approximately 255,000 shares of the
Company's common stock. Substantially all the purchase price was allocated to
in-process research and development which resulted in a one time $10.5 million
charge to expense with no related tax benefit. Adjusting for these one time
charges, the Company generated operating income of approximately $19.3 million,
and net income of approximately $14.0 million in fiscal 1997 and operating
income of approximately $19.8 million and net income of approximately $13.1
million in fiscal 1995.
Adjusted operating income in fiscal 1997 decreased 23% versus fiscal 1996
operating income as the Company increased its investment in sales, marketing,
application engineering, and research and development resources at a greater
rate than the increase in the Company's sales in order to continue to pursue
opportunities in the CPE and Telco markets. Operating income in fiscal 1996
increased 26% versus fiscal 1995 adjusted operating income as a result of a 27%
increase in the Company's total sales, improved gross margins due to an
increased software content in the Company's systems and productivity
improvements from the Company's sales, marketing and administrative staffs.
Adjusted net income in fiscal 1997 decreased 19% versus fiscal 1996 net
income. Adjusted fiscal 1997 net income fell at a lesser rate than adjusted
fiscal 1997 operating income due to a favorable tax rate versus fiscal 1996
resulting from the recognition of the cumulative losses of a foreign
subsidiary. Net income in fiscal 1996 increased 32% versus fiscal 1995
adjusted net income. Fiscal 1996 net income grew at a slightly faster rate
than operating income due to a favorable tax rate versus fiscal 1995 as a
result of increased sales through the Company's foreign sales corporation
Any anticipated increases in operating income and net income are expected
to be at a rate generally commensurate with the percentage increase in
anticipated sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $24.2 million in cash and cash equivalents
at February 28, 1997, up from $23.6 million at February 29, 1996. This
increase is attributable to the Company's internally generated cash flow. The
Company believes that its cash reserves and internally generated cash flow will
be sufficient to meet its operating cash requirements for the foreseeable
future. The Company reviews share repurchase and acquisition opportunities
from time to time and believes it has or has access to the financial resources
necessary to pursue attractive repurchase and/or acquisition opportunities as
they arise. As of May 19, 1997, the Company has repurchased 180,664 shares of
its common stock pursuant to an authorization by its Board of Directors to
repurchase up to 1,000,000 shares. The Company believes that market conditions
made such shares of value to its shareholders.
Impact of Inflation
The Company does not expect any significant short term impact of inflation
on its financial condition. Technological advances should continue to reduce
costs in the computer and communications industries. Further, the Company
presently is not bound by long term fixed price sales contracts and has no long
term debt obligations, which should reduce the Company's exposure to
inflationary effects.
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QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
------------------
FISCAL 1997 31-May-96 31-Aug-96 30-Nov-96 28-Feb-97
--------- ---------- --------- ---------
Sales $25,559,501 $27,300,022 24,335,974 $27,650,200
Income (loss) from Operations 5,797,049 6,158,964 1,655,513* 3,937,089
Net income (loss) 3,979,261 4,271,054 1,249,990* 3,260,176
Net income (loss) per Common
Share .24 .26 .08* .20
*Includes a one time charge of $1,800,000, ($1,287,000 net of taxes), or $0.08
per share, associated with the settlement of certain litigation. Without this
charge, earnings for the quarter ended November 30, 1996 would have been $0.16
per share.
THREE MONTHS ENDED
------------------
FISCAL 1996 31-May-95 31-Aug-95 30-Nov-95 29-Feb-96
--------- --------- --------- ---------
Sales $ 22,016,697 $ 23,683,721 $ 25,145,270 $ 26,257,366
Income from
Operations 5,989,157 6,321,086 6,612,046 6,132,453
Net Income 3,990,260 4,237,924 4,411,047 4,620,127
Net Income per Common Share .25 .26 .27 .28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors Report of Ernst & Young LLP and the Consolidated
Financial Statements of the Company as of February 28, 1997 and February 29,
1996, and for each of the three years in the period ended February 28, 1997
follow:
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19
REPORT OF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS
The Stockholders and Board of Directors of
InterVoice, Inc.
We have audited the accompanying consolidated balance sheets of InterVoice,
Inc. and subsidiaries as of February 28, 1997 and February 29, 1996, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended February 28, 1997.
Our audits also included the financial statement schedule listed in the index
at item 14(a). These 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 generally accepted auditing
standards. 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, 1997 and February 29, 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended February 28, 1997, in conformity with
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.
Ernst & Young LLP
Dallas, Texas
April 2, 1997,
except for
Note F, for
which the date
is April 9, 1997.
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20
InterVoice, Inc.
Consolidated Balance Sheets
February 28, February 29,
ASSETS 1997 1996
- ---------------------------------------------------------- -------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 24,162,024 $ 23,573,976
Accounts and notes receivable, net of allowance
for doubtful accounts of $250,950 in 1997 and
$746,027 in 1996 33,506,747 24,704,425
Inventory 12,107,738 12,586,640
Prepaid expenses and other assets 3,833,248 804,428
Deferred taxes 1,419,495 1,714,246
-------------- --------------
75,029,252 63,383,715
PROPERTY AND EQUIPMENT
Building 16,140,989 15,865,605
Computer equipment and software 20,663,578 10,117,852
Furniture, fixtures and other 5,322,288 4,737,625
Service equipment 1,975,825 2,025,558
-------------- --------------
44,102,680 32,746,640
Less allowance for depreciation 13,676,956 9,540,886
-------------- --------------
30,425,724 23,205,754
OTHER ASSETS
Intangible assets, net of amortization
of $1,802,708 in 1997 and
$1,893,619 in 1996 3,723,533 2,788,205
Other assets -- 349,132
-------------- --------------
$ 109,178,509 $ 89,726,806
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 12,893,725 $ 11,796,125
Customer deposits 3,403,739 2,527,514
Deferred income 4,995,231 4,075,099
Income taxes payable -- 1,053,519
-------------- --------------
21,292,695 19,452,257
DEFERRED TAXES 1,695,294 713,074
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: 19,353,973 issued,
16,353,973 outstanding in 1997
and 18,984,206 issued, 15,984,206
outstanding in 1996 9,667 9,460
Additional paid-in capital 43,028,780 39,103,070
Unearned compensation (493,634) (436,281)
Treasury stock - at cost (24,003,245) (24,003,245)
Retained earnings 67,648,952 54,888,471
-------------- --------------
86,190,520 69,561,475
-------------- --------------
$ 109,178,509 $ 89,726,806
============== ==============
See notes to consolidated financial statements.
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InterVoice, Inc.
Consolidated Statements of Income
Year Ended February 29/28
-------------------------------------------------
1997 1996 1995
------------ ------------ ------------
SALES $104,845,697 $ 97,103,054 $ 76,265,228
COST OF GOODS SOLD 40,131,308 34,468,112 27,882,870
------------ ------------ ------------
GROSS MARGIN 64,714,389 62,634,942 48,382,358
Research and development expenses 11,652,934 9,757,972 7,313,780
Selling, general and
administrative expenses 33,712,840 27,822,228 21,222,547
Purchased research and development -- -- 10,541,918
Litigation settlement 1,800,000 -- --
------------ ------------ ------------
INCOME FROM OPERATIONS 17,548,615 25,054,742 9,304,113
Other income - net 680,644 532,065 438,586
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 18,229,259 25,586,807 9,742,699
INCOME TAXES
Current 4,191,807 8,371,856 7,328,307
Deferred 1,276,971 (44,407) (119,188)
------------ ------------ ------------
INCOME TAXES 5,468,778 8,327,449 7,209,119
------------ ------------ ------------
NET INCOME $ 12,760,481 $ 17,259,358 $ 2,533,580
============ ============ ============
Net income per common and
common equivalent share $ .77 $ 1.05 $ .15
============ ============ ============
Weighted average number of common
and common equivalent shares 16,618,937 16,397,924 16,755,289
============ ============ ============
See notes to consolidated financial statements.
19
22
InterVoice, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Common Stock Additional
---------------------- Paid-in Unearned Treasury Retained
Shares Amount Capital Compensation Stock Earnings Total
--------------------------------------------------------------------------------------------
Balance at February 28, 1994 17,760,805 $8,857 $28,047,450 -- -- $35,095,533 $ 63,151,840
Exercise of stock
options 365,690 183 1,606,960 -- -- -- 1,607,143
Acquisition of
business 255,008 127 2,980,279 -- -- -- 2,980,406
Purchase of
treasury stock (3,000,000) -- -- -- (24,003,245) -- (24,003,245)
Tax benefit from
exercise of
stock options -- -- 577,374 -- -- -- 577,374
Net Income -- -- -- -- -- 2,533,580 2,533,580
--------------------------------------------------------------------------------------------
Balance at February 28, 1995 15,381,503 9,167 33,212,063 -- (24,003,245) 37,629,113 46,847,098
--------------------------------------------------------------------------------------------
Exercise of stock
options 571,942 278 3,763,469 -- -- -- 3,763,747
Tax benefit from
exercise of
stock options -- -- 1,545,825 -- -- -- 1,545,825
Issuance of
restricted stock 30,761 15 581,713 (436,281) -- -- 145,447
Net Income -- -- -- -- -- 17,259,358 17,259,358
--------------------------------------------------------------------------------------------
Balance at February 29, 1996 15,984,206 $9,460 $39,103,070 ($436,281) ($24,003,245) $54,888,471 $ 69,561,475
Exercise of stock
options 344,083 194 2,710,623 -- -- -- 2,710,817
Tax benefit from
exercise of
stock options -- -- 562,340 -- -- -- 562,340
Issuance of
restricted stock,
net of forfeitures 25,684 13 652,747 (57,353) -- -- 595,407
Net Income -- -- -- -- -- 12,760,481 12,760,481
--------------------------------------------------------------------------------------------
Balance at February 28, 1997 16,353,973 $9,667 $43,028,780 ($493,634) ($24,003,245) $67,648,952 $ 86,190,520
============================================================================================
See notes to consolidated financial statements.
20
23
InterVoice, Inc.
Consolidated Statements of Cash Flows
Year Ended February 29/28
--------------------------------------------------
1997 1996 1995
------------ ------------ ------------
OPERATING ACTIVITIES
Net Income $ 12,760,481 $ 17,259,358 $ 2,533,580
Adjustments to reconcile net income
to net cash provided by
operating activities:
Purchased research and
development -- -- 10,541,918
Depreciation and amortization 4,946,376 4,393,988 3,522,925
Compensation expense
related to restricted stock issuances 595,407 145,447 --
Benefit for deferred income taxes 1,276,971 (44,407) (119,188)
Provision for doubtful accounts 397,739 173,928 481,938
Provision for slow moving inventories 1,200,000 752,090 660,000
Disposal of equipment 89,447 11,669 37,014
Changes in operating assets and
liabilities net of effects of acquisition:
Increase in accounts receivable (9,200,060) (7,279,317) (3,396,102)
Increase in inventories (3,520,298) (3,657,122) (3,499,289)
(Increase) decrease in prepaid expenses (488,673) (288,339) 124,669
Increase in accounts payable
and accrued expenses 1,097,596 2,258,010 2,273,304
Increase (decrease) in customer deposits 876,225 1,395,750 (84,607)
Increase in deferred income 920,132 710,251 1,088,334
Increase (decrease) in income taxes payable -- (459,505) 1,027,768
------------ ------------ ------------
10,768,651 15,371,801 15,192,264
INVESTING ACTIVITIES
Acquisition of business, net of
cash acquired -- -- (9,130,574)
Purchases of property and equipment (11,483,435) (6,525,578) (9,197,365)
Increase in other assets (1,407,985) (1,020,279) (819,401)
(Increase) decrease in notes receivable -- 161,508 (151,462)
------------ ------------ ------------
(12,891,420) (7,384,349) (19,298,802)
FINANCING ACTIVITIES
Purchase of treasury stock -- -- (24,003,245)
Exercise of stock options 2,710,817 5,309,572 2,184,517
------------ ------------ ------------
2,710,817 5,309,572 (21,818,728)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 588,048 13,297,024 (25,925,266)
Cash and cash equivalents, beginning of year 23,573,976 10,276,952 36,202,218
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 24,162,024 $ 23,573,976 $ 10,276,952
============ ============ ============
See notes to consolidated financial statements.
21
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS
The Company develops, sells and services call automation systems with an
emphasis on interactive voice response allowing individuals to interact with
computer data bases using their telephones, personal computers, credit card
terminals or voice. The Company's systems are sold under the trade names
"OneVoice" and "InterDial" and are used by a variety of enterprises to
disseminate and receive information efficiently, allowing multiple callers
simultaneous access to computer data bases without the expense of maintaining a
manned workstation for each telephone line, or by automatically dialing phone
numbers and only transferring a call to an operator if the call is answered and
the called party remains on the phone. The Company's products include software
designed to simplify system customization while permitting a number of diverse
product applications. The Company sells its products directly to end-users and
through more than 130 domestic and international distributors.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of InterVoice and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles 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.
INVENTORIES: Inventories, primarily system components, are valued at the lower
of cost or net realizable value with cost determined on a first-in, first-out
basis. Amounts presented are net of inventory valuation allowances totaling
$166,000 and $1,350,000 at February 28, 1997 and February 29, 1996,
respectively.
PROPERTY AND EQUIPMENT: Property and Equipment is stated on the basis of cost.
Depreciation is provided by the straight-line method over each asset's
estimated useful life. Depreciation expense totaled $4,124,289, $2,834,613 and
$2,305,263 in fiscal 1997, 1996 and 1995, respectively.
INTANGIBLE ASSETS: Intangible assets, which include patent licenses, purchased
software and license fees for technologies such as text to speech and speech
recognition, are being amortized by the straight-line method based on the
Company's assessment of each asset's useful life. Useful lives range from five
to twelve years. Amortization expense for these items totaled $822,087,
$647,261 and $912,996 in fiscal 1997, 1996 and 1995, respectively.
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 approximate fair market
value.
REVENUE RECOGNITION: The Company recognizes revenue from sales of systems and
services at the time a contract is signed, custom system specifications, where
applicable, are defined and agreed upon, and the system has been shipped or
services rendered. In the event the Company anticipates more than a normal time
period between shipment and completion of other obligations (installation and
system testing), revenue recognition is deferred until all remaining
obligations are insignificant. Revenues from system maintenance agreements are
deferred and recognized over the term of the agreement.
DEFERRED INCOME TAXES: Deferred income taxes are recognized 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.
NET INCOME PER SHARE: Net income per share is based on the average common and
common equivalent shares outstanding during each fiscal year. Common equivalent
shares assume the exercise of all dilutive stock options, including restricted
stock, using the treasury stock method. Primary and fully diluted earnings per
share are not materially different for the years presented.
STOCK-BASED COMPENSATION: The Company has elected to follow Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") in the primary financial statements and to provide supplementary
disclosures required by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("FAS 123"). See Note F.
RECLASSIFICATIONS: Certain prior year balances have been reclassified to
conform to current year presentation.
22
25
NOTE C - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
1997 1996
---- ----
Accounts payable $10,094,466 $ 7,923,169
Accrued compensation 1,572,875 2,356,379
Other 1,226,384 1,516,577
----------- -----------
$12,893,725 $11,796,125
=========== ===========
NOTE D - INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities are
as follows:
1997 1996
---- ----
Deferred tax assets:
Allowance for slow moving inventories $ 62,956 $ 511,988
Deferred revenue 738,667 942,181
Accrued expenses 146,022 267,615
Allowance for doubtful accounts 69,782 102,777
Book over tax depreciation/amortization 453,706 --
Other 311,093 44,795
----------- ----------
Total deferred tax assets 1,782,226 1,869,356
----------- ----------
Deferred tax liabilities:
Capitalized Software 1,814,368 639,835
Tax over book depreciation -- 110,884
Prepaid assets 240,826 107,049
Other 2,831 10,416
----------- ----------
Total deferred tax liabilities 2,058,025 868,184
----------- ----------
Net deferred tax assets (liabilities) $ (275,799) $1,001,172
=========== ==========
23
26
Domestic and foreign income before taxes, and details of the income tax
provision are as follows:
1997 1996 1995
---- ---- ----
Income (loss) before taxes:
Domestic $ 18,610,597 $ 26,671,904 $ 10,969,945
Foreign (381,338) (1,085,097) (1,227,246)
------------ ------------ ------------
$ 18,229,259 $ 25,586,807 $ 9,742,699
============ ============ ============
Income tax provision (benefit):
Current:
Federal $ 4,137,807 $ 8,050,856 $ 6,349,864
Foreign -- -- 146,147
State 54,000 321,000 832,296
------------ ------------ ------------
Total current 4,191,807 8,371,856 7,328,307
Deferred:
Federal 1,156,811 (40,982) (109,996)
State 120,160 (3,425) (9,192)
------------ ------------ ------------
Total deferred 1,276,971 (44,407) (119,188)
------------ ------------ ------------
Total $ 5,468,778 $ 8,327,449 $ 7,209,119
============ ============ ============
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate is as follows:
1997 1996 1995
---- ---- ----
$ % $ % $ %
- - - - - -
Federal income taxes at statutory rates 6,380,240 35 8,955,382 35 3,409,945 35
Tax exempt interest (175,588) (1.0) -- -- (151,139) (1.6)
Purchased research & development -- -- -- -- 3,689,671 37.9
State taxes, net of federal benefit 113,204 .6 259,000 1.0 540,992 5.6
Foreign loss not benefited (659,833) (3.6) 380,576 1.5 383,777 3.9
Foreign sales corp. benefit (544,036) (3.0) (521,208) (2.0) (284,327) (2.9)
Other 354,791 1.9 (746,301) (2.9) (379,800) (3.9)
----------- ---- ----------- ---- ----------- ----
$ 5,468,778 30.0 $ 8,327,449 32.5 $ 7,209,119 74.0
=========== ==== =========== ==== =========== ====
Income taxes, net of refunds, of $6,587,097, $7,240,945 and $5,818,651 were
paid in fiscal 1997, 1996 and 1995, respectively.
NOTE E - CONTINGENCIES
Lucent Technologies ("Lucent") has suggested in correspondence to the
Company that it should consider licensing certain Lucent patents for a
substantial payment. The Company has an opinion from its outside legal counsel
that the Company does not infringe the Lucent patents by reason of
non-infringement and/or invalidity. The Company has suggested to Lucent that
Lucent should consider licensing certain patents of the Company, and that a
mutual cross-license might be in the best interests of both parties. The
parties are currently attempting to negotiate a mutually satisfactory
cross-license agreement which would resolve the matter. There is no assurance
that the Company will be able to negotiate a cross-license agreement based on
mutually satisfactory terms. Lucent has not threatened litigation against the
Company. In the event that litigation is instituted against the Company
concerning the Lucent patents, the Company intends to vigorously contest the
claims and to assert defenses of non-infringement and/or invalidity of the
patents, together with any other meritorious defenses and counterclaims,
including any counterclaim for infringement of its patents, the Company might
have. As with any legal proceeding, there is no guarantee that the Company will
prevail in any litigation asserted against the Company in connection with the
Lucent patents.
24
27
NOTE F - STOCKHOLDERS' EQUITY
Stock option plans are in effect under which shares of common stock may be
authorized for issuance by the Compensation Committee of the Board of Directors
as incentive stock options to key employees. Option prices per share are the
fair market value per share of stock, based on the closing per share price on
the date of grant. Generally, the options become exercisable at the rate of 33%
per year and are exercisable for six years from the date of grant.
Weighted Average
Exercise Price Per Share
------------------------
Balance at February 28, 1994 1,537,094
Granted 676,050 $7.63 to $14.50
Exercised (325,640) $1.06 to $12.63
Forfeited (64,841) $4.13 to $18.75
Balance at February 28, 1995 1,822,663
Granted 510,750 $14.75 to $22.00
Exercised (514.177) $2.06 to $18.75
Forfeited (164,912) $4.31 to $21.38
Balance at February 29, 1996 1,654,324 $13.52
Granted 603,300 $11.88 to $27.25 $21.57
Exercised (285,736) $2.06 to $19.25 $ 7.36
Forfeited (185,788) $7.63 to $26.25 $18.21
Balance at February 28, 1997 1,786,100 $16.74
At February 28, 1997, a total of 792,328 employee options were exercisable at
an average price of $13.02.
On April 9, 1997, the Board of Directors approved a plan to offer to the
holders of certain outstanding stock options, excluding the five most highly
compensated executive officers, the opportunity to cancel their existing
options and receive new options for the same number of shares but with an
exercise price per share at the then current fair market value and with new
vesting requirements. As a result, approximately 620,000 options with exercise
prices ranging from $11.88 to $27.25 per share were exchanged for new options
with an exercise price of $10.00 per share.
A stock option plan is in effect under which shares of common stock may be
issued by the Board of Directors as nonqualified stock options to
non-employees. Options are issued to non-employee directors in accordance with
a formula prescribed by the plan. Option prices per share are the fair market
value per share, based on the closing per share price on the date of grant.
Each option becomes exercisable within the period specified in the optionee's
agreement and are exercisable for 10 years from the date of grant.
Weighted Average
1990 Non-Employee Option Plan Shares Option Price Exercise Price Per Share
- ----------------------------- ------ ------------ ------------------------
Balance at February 28, 1994 24,600
Granted 26,000 $8.50
Exercised (6,600) $3.00 to $6.13
Forfeited (4,000) $15.13
------
Balance at February 28, 1995 40,000
Granted 12,000 $22.13
Exercised (2,000) $3.09
-------
Balance at February 29, 1996 50,000 $12.82
Granted 26,000 $13.94 $13.94
Exercised (22,000) $8.50 $ 8.50
Forfeited (4,000) $22.13 $22.13
-------
Balance at February 28, 1997 50,000 $22.13 $15.10
=======
At February 28, 1997, a total of 24,000 non-employee options were exercisable
at an average price of $14.85.
For all option plans at February 28, 1997, options for 632,133 shares of common
stock were available for future grant.
The Company has adopted an Employee Stock Purchase Plan under which an
aggregate of 200,000 shares of common stock may be issued. Options are issued
to eligible employees in accordance with a formula prescribed by the plan and
are exercised automatically at the end of a one year payroll deduction period.
Option prices are determined as 85% of the lower of the closing price per share
of the Company's common stock on the option
25
28
grant date or the option exercise date. At February 28, 1997, options for
70,637 shares of common stock were outstanding under the plan.
Weighted Average
Employee Stock Purchase Plan Shares Exercise Price Per Share
- ---------------------------- ------ ------------------------
Balance at February 28, 1994 58,916
Granted 68,763
Exercised (33,436)
Forfeited (25,480)
-------
Balance at February 28, 1995 68,763
Granted 48,061
Exercised (55,765)
Forfeited (12,998)
-------
Balance at February 29, 1996 48,061 $ 17.33
Granted 70,637 $ 14.39
Exercised (36,347) $ 11.43
Forfeited (11,714) $ 20.26
-------
Balance at February 29, 1996 70,637 $ 12.23
=======
Grant price per option outstanding $10.84 to $18.06
During fiscal 1996, the Company adopted a Restricted Stock Plan under which an
aggregate of 500,000 shares may be issued. Approximately 154,000 shares have
been allocated to five senior executives to be earned based on the achievement
of certain targeted share prices and the continued service of each executive for
a two year period after each target is met. The remaining shares are available
for annual grants to other key executives as a component of their annual bonuses
based on the achievement of targeted annual earnings per share objectives and
the completion of an additional two years of service after the grant. Activity
related to restricted stock during fiscal 1997 and 1996 is as follows:
Senior Executive Key Executive
Plan Plan
---------------- -------------
Balance at February 28, 1995 -- --
Granted 30,761 --
------ ------
Balance at February 28, 1996 30,761 --
Granted 30,761 4,787
Forfeited (9,228) (636)
------ ------
Balance at February 28, 1997 52,294 4,151
====== ======
The weighted average share price on the date of grant in fiscal 1997 was $21.27
for the Senior Executive Plan and $29.44 for the Key Executive Plan. Shares
forfeited in fiscal 1997 had been granted at a weighted average share price of
$21.80. At February 28, 1997, approximately 440,000 shares are reserved for
future restricted stock grants.
One Preferred Share Purchase Right is attached to each outstanding share of the
Company's common stock. If a person or group acquires beneficial ownership of
20 percent or more, or announces a tender offer that would result in beneficial
ownership of 20 percent or more of the Company's outstanding common stock, the
rights become exercisable and each right will entitle its holder to purchase
one four-hundredth of a share of Series A Preferred Stock for $75, subject to
adjustment. If the Company is acquired in a business combination transaction
while the rights are outstanding, each right will entitle its holder to
purchase, for $75, common shares of the acquiring company having a market value
of $150. In addition, if a person or group acquires beneficial ownership of 20
percent or more of the Company's outstanding common stock, each right will
entitle its holder (other than such person or members of such group) to
purchase, for $75, a number of shares of the Company's common stock having a
market value of $150. Furthermore, at any time after a person or group acquires
beneficial ownership of 20 percent or more (but less than 50 percent) of the
Company's 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 the Company's common stock on a one-for-one
basis. At any time prior to the acquisition of such a 20 percent position, the
Company can redeem each right for .25 cents. The Board of Directors is also
authorized to reduce the 20 percent thresholds referred to above to not less
than 10 percent. The rights expire in the year 2001.
Because the Company has elected to continue to apply the provisions of APB 25
for expense recognition purposes in the primary financial statements, Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", ("FAS 123") requires disclosure of pro forma information which
provides the effects on Net income and Income per share as if the Company had
accounted for its employee stock awards under fair value methods prescribed by
FAS 123. The fair value of the Company's employee stock awards was estimated
using a Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 1997 and 1996, respectively: risk-free interest rates of
6.39% and 6.02%; stock price volatility factors of .66 and .74; and expected
option lives of 4.06 years and 3.2 years. The Company does 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
1997 was 11.82.
26
29
Pro Forma Required Disclosures:
1997 1996
--------- ---------
Net income ..... $ 10,795,850 $ 16,242,620
Income per share $ .67 $ 1.00
As required by FAS 123, only awards granted in fiscal 1996 and 1997 have been
included in determining the amount of additional compensation expense for those
years. As such, the effects of applying FAS 123 on fiscal 1997 and 1996 results
are not necessarily representative of the additional compensation expense which
will be included in future years' pro forma disclosures as more than two years
of awards will be considered.
The following table provides information related to all option plans at
February 28, 1997, excluding the impact of the exchange of options on April 9,
1997, as previously described.
Options Outstanding Weighted Average
- ------------------- Weighted Average Remaining Contractual
Exercise Prices Shares Exercise Price Life In Years
- ------------------- ------ ---------------- ---------------------
$ 2.06 - $10.84 363,474 $ 7.38 2.36
$11.63 - $15.13 536,078 $ 12.85 4.41
$17.38 - $27.25 1,007,185 $ 21.79 6.47
---------
1,906,737
=========
Options Exercisable
- -------------------
$ 2.06 - $10.84 236,652 $ 6.17 2.26
$11.63 - $15.13 330,360 $ 12.69 2.70
$17.38 - $27.25 249,316 $ 20.20 3.61
---------
816,328
=========
Pursuant to an authorization by the Company's Board of Directors during fiscal
1995, in July, 1994, the Company repurchased 3,000,000 shares of its common
stock at an average price of $8.00 per share.
NOTE G - GEOGRAPHIC OPERATIONS AND MAJOR CUSTOMERS
The Company's operations involve a single industry segment: the development,
sale and service of call automation systems.
Export sales, summarized by geographic area, are as follows:
(In Thousands) 1997 1996 1995
- -------------- ---- ---- ----
The Americas (Excluding
the United States) $11,622 $11,126 $ 6,606
Pacific Rim 4,769 3,507 2,461
Europe, The Middle East
and Africa 8,372 3,620 1,978
------- ------- -------
TOTAL $24,763 $18,253 $11,045
======= ======= =======
One customer, Siemens AG, an InterVoice distributor, accounted for 10.2% of
the Company's sales during fiscal 1997. During fiscal 1996 and 1995, MCI
Telecommunications accounted for 11.2% and 11.7% of the Company's total sales,
respectively.
27
30
NOTE H - CONCENTRATIONS OF CREDIT RISK
The Company sells systems directly to end-users and distributors primarily in
the banking and financial, telecommunications, human resource, heathcare and
call center vertical markets. Credit is extended based on an evaluation of a
customer's financial condition and a deposit is generally required. The Company
has made a provision for credit losses in these financial statements, which
have been less than 1% of sales in the periods reported.
NOTE I - EMPLOYEE BENEFIT PLAN
The Company sponsors an employee savings plan which qualifies under section
401(k) of the Internal Revenue Code. All full time employees who have completed
three months of service are eligible to participate in the plan. The Company
matches 50% of employee contributions up to 6% of the employee's eligible
compensation. Company contributions totaled $759,000, $524,000 and $405,000 in
fiscal 1997, 1996 and 1995, respectively.
NOTE J - ACQUISITION
The Company acquired VoicePlex Corporation on August 31, 1994. The acquisition
was accounted for by the purchase method of accounting. This purchase price of
$12,277,992 was comprised of $7,954,749 in cash, Company common stock valued at
$2,980,406 and other direct acquisition costs totaling $1,342,837. The
allocation of the purchase price among the identifiable tangible and intangible
assets was based on the fair market value of those assets using a risk adjusted
income approach.
Based on appraised value, a portion of the purchase price was allocated to
purchased research and development which had not reached technological
feasibility and had no alternative future use. This allocation resulted in a
$10,541,918 charge, net of taxes, to the Company's operations in fiscal year
1995. The remaining purchase price was allocated, based on appraisals, to
software ($746,121), net tangible assets ($470,619), deferred taxes ($351,457),
and assembled workforce ($167,877).
28
31
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
INTERVOICE, INC.
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ----------- ----------------------------- ------------ ----------
Additions
-----------------------------
(1) (2)
Balance at Charged to Charged to Balance at
Beginning Cost and Other Accounts Deductions - End of
Description of Period Expenses - Describe Describe Period
----------- ---------- ----------- -------------- ------------ ----------
Year ended February 28,1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 746,027 $ 397,740 $ (892,817)(A) $ 250,950
Allowance for slow moving inventories 1,350,000 1,200,000 (2,384,000)(C) 166,000
---------- ----------- ----------- ----------
Total $2,096,027 $ 1,597,740 $(3,276,817) $ 416,950
========== =========== =========== ==========
Year ended February 29,1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 585,439 $ 173,930 $ (13,342)(A) $ 746,027
Allowance for slow moving inventories 1,110,267 752,090 (512,357)(B) 1,350,000
---------- ----------- ----------- ----------
Total $1,695,706 $ 926,020 $ (525,699) $2,096,027
========== =========== =========== ==========
Year ended February 28,1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 192,000 $ 481,938 $ (88,499)(A) $ 585,439
Allowance for slow moving inventories 677,256 660,000 (226,989)(B) 1,110,267
---------- ----------- ----------- ----------
Total $ 869,256 $ 1,141,938 $ (315,488) $1,695,706
========== =========== =========== ==========
- --------------------------------
(A) Accounts written off. Includes approximately $520,000 associated with
shut down of foreign subsidiary in fiscal 1997.
(B) Scrapped material.
(C) Includes approximately $1,700,000 reclassified to accumulated depreciation
associated with reclassification of inventory into fixed assets. Also
includes approximately $700,000 of scrapped material.
29
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in the sections
entitled "Election of Directors" and "Executive Officers" in the Company's
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.
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, except for the information captioned "Report of the Compensation
Committee" and "Performance Graph", is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the section
captioned "Certain Transactions" in the Definitive Proxy Statement. Such
information is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements and financial
statement schedules of InterVoice, Inc. and subsidiaries are included
in Items 8 and 14(a), respectively.
Page
----
(1) Financial Statements:
Report of Independent Auditors ................................... 17
Consolidated Balance Sheets at February 28, 1997
and February 29, 1996........................................ 18
Consolidated Statements of Income for the three years
ended February 28, 1997 ..................................... 19
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended February 28, 1997 ................. 20
Consolidated Statements of Cash Flows for the three
years ended February 28, 1997 ............................... 21
Notes to Financial Statements .................................... 22
(2) Financial Statement Schedule:
II Valuation and Qualifying Accounts ............................ 29
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 14 are set forth in the
Index to Exhibits accompanying this report.
(b) No reports on Form 8-K were filed by the Company during the quarter
ended February 28, 1997.
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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.
INTERVOICE, INC.
By: /s/ DANIEL D. HAMMOND
----------------------------------
Daniel D. Hammond
Chairman of the Board of Directors
and Chief Executive Officer
Dated: May 28, 1997
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36
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.
Signature Title Date
--------- ----- ----
/s/ DANIEL D. HAMMOND Chairman of the Board of May 28, 1997
-------------------------- Directors and Chief
Daniel D. Hammond Executive Officer
/s/ MICHAEL W. BARKER President and Chief May 28, 1997
-------------------------- Operating Officer
Michael W. Barker
/s/ ROB-ROY J.GRAHAM Chief Financial Officer, May 28, 1997
-------------------------- Chief Accounting Officer
Rob-Roy J. Graham and Controller
(Principal Accounting Officer)
/s/ JOSEPH J. PIETROPAOLO Director May 28, 1997
--------------------------
Joseph J. Pietropaolo
/s/ GEORGE C. PLATT Director May 28, 1997
--------------------------
George C. Platt
/s/ GRANT A. DOVE Director May 28, 1997
--------------------------
Grant A. Dove
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INDEX TO EXHIBITS
Exhibit Sequentially
No. Description Numbered Page
- ------- ----------- -------------
3.1 -- Articles of Incorporation, as amended, of Registrant (3)
3.2 -- Second Restated Bylaws of Registrant, as amended (2)
4.1 -- Registration Rights Agreement dated August 31, 1994, among the Company,
Sohail Sattar and Steven E. Polsky and other shareholders of VoicePlex
Corporation. (8)
10.1 -- Registrant's 1984 Incentive Stock Option Plan, as amended (1)
10.2 -- Second Amended and Restated Employment Agreement dated as of June 21,
1996, effective as of March 1, 1996 by and between the Company and Danil
D. Hammond (10)
10.3 -- First Amendment to Amended and Extended Employment Agreement dated as
of June 25, 1996 and effective as of March 1, 1996 by and between the
Company and Daniel D. Hammond (10)
10.4 -- Amended and Restated Rights Agreement dated as of December 12, 1994
between the Registrant and KeyCorp Shareholders Services, Inc. (formerl
Society National Bank), as Rights Agent (5)
10.5 -- The InterVoice, Inc. 1990 Incentive Stock Option Plan, as amended (10)
10.6 -- The InterVoice, Inc. 1990 Nonqualified Stock Option Plan for
Non-Employees, as amended (4)
10.7 -- Amendment to the 1984 Incentive Stock Option Plan (2)
10.8 -- InterVoice, Inc. Employee Stock Purchase Plan (7)
10.9 -- Amended and Restated Employment Agreement dated as of June 21, 1996,
effective as of March 1, 1996 by and between the Company and Michel
W. Barker (10)
10.10 -- First Amendment to Amended and Extended Employment Agreement dated as
of June 25, 1996 and effective as of March 1, 1996 by and between the
Company and Michael W. Barker (10)
10.11 -- InterVoice, Inc. Employee Savings Plan (6)
10.12 -- Merger Agreement dated August 31, 1994 among the Company, InterVoice
Acquisition Corp., VoicePlex Corporation and certain shareholders of
VoicePlex Corporation. (8)
10.13 -- InterVoice, Inc. Restricted Stock Plan (9)
10.14 -- Separation Agreement dated as of December 5, 1996 between the Company
and Richard Herrmann (10)
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11. -- Computation of Per Share Earnings (10)
23. -- Consent of Independent Auditors (10)
27. -- Financial Data Schedule (10)
- -------------
(1) Incorporated by reference to exhibits to the Company's Registration
Statement on Form S-2 under the Securities Act of 1933, Registration No.
33-30847.
(2) Incorporated by reference to exhibits to the Company's 1991 Annual
Report on Form 10-K for the fiscal year ended February 28, 1991, filed
with the Securities and Exchange Commission (SEC) on May 29, 1991, as
amended by Amendment No. 1 on Form 8 to Annual Report on Form 10-K,
filed with the SEC on August 1, 1991.
(3) 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.
(4) Incorporated by reference to exhibits to the Company's Registration
Statement on form S-8 filed on April 6, 1994, with respect to the
Company's 1990 Nonqualified Stock Option Plan for Non-Employees,
Registration Number 33-77590.
(5) Incorporated by reference to exhibits to Form 8-A/A (Amendment No 1)
filed with the SEC on December 15, 1994.
(6) Incorporated by reference to Exhibits to the Company's 1994 Annual
Report on Form 10-K for the fiscal year ended February 28, 1994, filed
with the SEC on May 31, 1994.
(7) Incorporated by reference to exhibits to Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on December
1, 1993, Registration Number 33-72494.
(8) Incorporated by reference to exhibits to the Company's current report
on Form 8-K dated September 13, 1994, and the Amendment thereto or Form
8K/A dated October 27, 1994.
(9) 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.
(10) Filed herewith.
Exhibits furnished upon request
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