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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1998
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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, 1998
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:
(972) 454-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
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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 26, 1998: $181,164,727
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 26, 1998:
13,869,070
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 1998 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............................................................................... 2
Markets................................................................................................ 3
Product Strategy....................................................................................... 4
Products and Services.................................................................................. 5
Competition............................................................................................ 7
Distribution........................................................................................... 7
Backlog................................................................................................ 9
Proprietary Rights..................................................................................... 9
Manufacturing and Facilities........................................................................... 10
Employees.............................................................................................. 10
ITEM 2. Properties............................................................................................. 10
ITEM 3. Legal Proceedings...................................................................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders.................................................... 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................. 11
ITEM 6. Selected Financial Data................................................................................ 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 12
ITEM 8. Financial Statements and Supplementary Data............................................................ 19
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 34
PART III
ITEM 10. Directors and Executive Officers of the Registrant..................................................... 35
ITEM 11. Executive Compensation................................................................................. 35
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................................... 35
ITEM 13. Certain Relationships and Related Transactions......................................................... 35
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 36
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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. More recently, the Company has focused on
systems for telecommunications network operators which provide a variety of
automated services such as processing collect and credit card calls, and
advanced calling features such as prepaid calling cards, voice and text
messaging, one numbering personal numbering plans and voice dialing.
The Company's systems are sold under the trade names "OneVoice",
"InterDial" and "InControl". 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. OneVoice and
InterDial 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. InControl
systems provide enhanced services for telecommunications networks by automating
calls which utilize alternate billing methods, and provide new, revenue
generating calling features and services. The Company's products include
software development tools designed to support a number of diverse product
applications and to simplify system customization.
OneVoice systems sell at list prices ranging from approximately twenty
five thousand to millions of dollars and support from two to thousands of voice
and data channels. Scalability is a distinguishing factor for all OneVoice
systems, which can incorporate either multiple modules of up to 96 voice and
data channels per module or the Company's NSP 5000 platform which can provide up
to 1400 voice and data channels in a single system. The Company's OneVoice
modules and/or NSP5000 platforms can be connected by local or wide 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. InControl systems sell at list prices
ranging from approximately two hundred fifty thousand to millions of dollars and
support from 96 to thousands of ports per system. InControl systems share the
scalability attributes of the Company's OneVoice systems as multiple NSP 5000
platforms can be connected by a local or wide area network to provide single
system appearance, management control and redundancy.
In the customer premise equipment market, the Company sells its
products directly and through more than 130 domestic and international
distributors. The Company generally sells its products directly to
telecommunications end-users. Since the Company's inception in 1984, the number
of worldwide installations of the Company's systems has grown to over 9,700 in
50 countries. The customer premise equipment end-users to which the Company has
sold systems include Aetna, Bank of America, CitiBank, Fidelity Investments,
First Chicago, First Union Corporation, J.C. Penney, Martin Marietta, Merrill
Lynch, Microsoft, National Data Corporation, National Westminster Bank U.K.,
NationsBank, Sears Roebuck and Co., Social Security Administration, The New
England, TU Electric, USAA and Wachovia Bank. The Company's telecommunications
end-users include Avantel (Mexico), Bell Canada, British Telecom, CANTV
(Venezuela), Codatel (Dominican Republic), CTC (Chile), CTI (Argentina), Guatel
(Guatemala), GTE, LCI International, MCI Telecommunications, Movilnet
(Venezuela), NPT (People's Republic of China), Telcel (Venezuela), Telecom Asia
(Thailand), Sprint and Unicom (Peoples Republic of China). No customer accounted
for 10% of the Company's sales during fiscal 1998. Other than Siemens AG, one of
the Company's resellers, which accounted for 10.2% of the Company's total sales
in fiscal 1997, and MCI Telecommunications, which accounted for 11.2% of the
Company's total sales in fiscal 1996, no customer represented 10% or more of the
Company's aggregate sales during fiscal 1997 or 1996.
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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 call automation systems, callers receive accurate
responses to routine service requests allowing customer service representatives
to work on other important tasks requiring their personal expertise. In certain
system applications, such as credit limit requests, callers may prefer dealing
with a call automation system rather than an individual in order to preserve
privacy and confidentiality. The Company believes that such systems provide
better service to more customers without additional staff, improve customer and
employee retention, and can result in significant cost savings to the Company's
customers. Telecommunications network operators utilize such systems at a
significant cost savings to automate calls which formerly required operator
assistance. These systems also make possible high margin, revenue generating,
advanced telecommunication services and calling features.
The Internet has evolved to become a voice and data communications
network similar to public switched networks. The Company's products permit
customers to interface their call automation systems to the Internet, a natural
extension of the Company's product strategy. The Company's products, in
conjunction with the Internet, make it possible for users of multimedia personal
computers to access information and data in any combination of voice, graphic
and image formats.
The Company believes that the call automation industry can be divided into
six basic system markets:
Interactive information 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's VisualConnect
product makes possible multi-media applications utilizing the Internet.
The Company participates in this market with its OneVoice systems which
accounted for approximately 65% of its system sales in fiscal 1998.
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
notification, delinquent bill collecting and the telemarketing of goods
and services. The Company addresses this market with its InterDial system
which accounted for approximately 10% of its system sales in fiscal 1998.
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. The Company's products are
capable of performing as automated call directing systems, but the
Company's fiscal 1998 sales into this market were not significant.
Enterprise-based voice mail enables callers to leave, exchange and
retrieve electronic voice and text messages 24-hours a day, seven days a
week. The Company's products are capable of performing as voice mail
systems, but the Company's fiscal 1998 sales into this market were not
significant.
Network-based Enhanced Calling Services allows telecommunications
network operators to automate calls formerly requiring operator assistance
and to provide revenue generating, advanced calling features such as
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voice and text messaging, prepaid and postpaid calling cards, one number
personal numbering plans and voice dialing. The Company participates in
this market with its InControl systems which accounted for approximately
25% of system sales in fiscal 1998.
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
Company's products are capable of performing as audiotex systems, but the
Company's fiscal 1998 sales into this market were not significant.
The call automation industry has begun to experience a demand for systems
that can simultaneously address customer needs in two or more of these basic
markets. Larger customer premise equipment end-users, for example, are beginning
to consolidate their customer service and tele-marketing functions into
multi-purpose call centers which handle both in-bound and out-bound calls. This
consolidation has created a need for the Company's multi-purpose call automation
products which support individuals who may simultaneously serve as customer
service and telemarketing representatives. 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 general public has become increasingly receptive to call
automation, 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/Commercial Brokerage
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 Subsidies
Telecommunications Automated Operator Services
Advanced Calling Features
Messaging
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 call automation
technology. The Company has traditionally focused on the financial services
market. More recently, the Company has diversified its focus to include the
telecommunications, human resource, healthcare and call center vertical markets.
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PRODUCT STRATEGY
The Company's products are designed to assist its customers in
achieving the following objectives:
o Increase net revenues by reducing costs
o Improve customer and/or employee service
o Provide product and service differentiation
The Company believes that its OneVoice and InControl systems enable 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. 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 their agents.
As mentioned earlier, 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. This
allows the Company's customers to leverage and cost effectively expand their
investments in their OneVoice and InterDial systems. The Company also has
adapted its OneVoice Software Agent Platform to host its InControl system to
address the growing telecommunications market. The InControl system provides
network based automated operator services and advanced, revenue generating
applications for telecommunications companies.
The Company focuses its development efforts on call automation
technology. Industry standard computer platforms and operating systems are
leveraged to allow the Company to take advantage of third party hardware and
software technology advances. This strategy offers customers the option to
select the computer platform and operating system of their preference should
they wish compatability with other enterprise systems.
The Company has developed a variety of call processing functions and
features characterized by the following factors:
Host Computer Platform Independence: The Company's hardware and
software is designed to be independent of the host computer platform
through compliance with industry standards. The same hardware and software
can operate on computer platforms produced by a variety of manufacturers.
The Company delivers its systems integrated with the computer platform of
its customers' choice instead of dictating a specific computer platform.
This is an important factor in vendor selection for many of the Company's
current and potential customers and 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, which is utilized by the Company's OneVoice, InterDial and
InControl Systems, is simultaneously compatible with the Windows NT,
UNIX and OS/2 operating systems. This operating software independence
allows the Company to give its customers freedom to choose an operating
system, an important factor in vendor selection for many of the Company's
current and potential customers. This operating software independence
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, InterDial and
InControl systems. The Company's software is designed to support a number
of diverse product applications. The Company's recently introduced a
graphical user interface (GUI) software development tool, InVision, which
simplifies the generation and customization of customer applications.
System Expandability/Networking: The Company's basic OneVoice system
can be expanded from two up to 96 lines per module. OneVoice and InControl
systems which utilize the NSP 5000 platform can be expanded from 24 to
1400 lines per system by adding expansion cards without software changes.
Systems can be interconnected via a local or wide area network to provide
simultaneous access for thousands of callers while maintaining control
from a single, networked workstation. 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, central office switches and to a wide variety of host
computers and enterprise systems.
The Company's products are designed and manufactured to be highly
reliable and to require minimum maintenance, most of which can be handled from
the Company's headquarters using on-line remote diagnostic and test
capabilities. The Company utilizes an independent service company with local
offices throughout the United States to perform domestic customer site service.
The Company electronically dispatches service technicians when customer
maintenance or repair is required. International distributors are generally
responsible for providing service for the systems they sell.
PRODUCTS AND SERVICES
OneVoice Systems
OneVoice systems are primarily focused on the customer premise
equipment market which comprised more than 65% of the Company's sales in fiscal
1998. These systems combine a variety of standard computer platforms and
standard operating systems together with the Company's proprietary run time
software, InterSoft, and Company developed and third party developed expansion
boards to perform call automation functions. Each OneVoice system utilizes the
same proprietary run time software, allowing the Company's customers to expand
their OneVoice systems via the addition of expansion cards or via the linkage of
multiple modules or systems through a local or wide 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 integrates compatible programmable add-in cards with
InterSoft runtime software to interface OneVoice and InterDial (see below)
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.
InterDial Systems
The Company's InterDial system is similar in design to the OneVoice
system and utilizes much of the same hardware and software. InterDial systems
provide outbound call processing and accounted for 10% of the Company's sales in
fiscal 1998. 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
algorithms also improve productivity by transferring a caller to a telemarketing
agent immediately upon completion of the agent's previous call.
InControl Systems
The InControl system is similar in design to the OneVoice system and
utilizes much of the same hardware and software. InControl systems
provide telecommunications network operators with automated operator services
(such as processing prepaid and credit card calls) and revenue generating
advanced telecommunication features (such as voice mail, short voice and text
message delivery, "one number" services and voice activated dialing). These
systems accounted for 25% of the Company's total sales in fiscal 1998.
InControl systems are comprised of the Company' Enhanced Service
Platform (ESP) suite of telecommunications applications running on the Company's
NSP 5000 Platform (see below). The ESP suite of applications is unique to the
industry as each application is driven from a customer data base common to the
entire suite. This allows the Company's customers to provide multiple services
to their end-users without the extensive data base maintenance required by stand
alone, single application, single data base competitive offerings. Initial
deployment of services and features as well as system expansions are
accomplished cost-effectively as a result of the NSP 5000 platform's scalability
attributes. InControl systems incorporate standards based signaling protocols,
such as signaling system seven (SS7), and can be linked together via local or
wide area networks to provide application control from a single workstation.
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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 support
both the OneVoice system and the InterDial systems. These systems combine PBX
functionalities with ISDN PRI capabilities to enable the transmission of both
voice and data on a single line to support agent query.
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 independent service providers.
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 independent service
providers' service technicians while monitoring and directing repair activities.
InterSoft
The Company's InterSoft run time software 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.
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.
InVision
InVision is the Company's proprietary, next-generation software tool
which aids in the development and testing of custom call automation
applications. InVision is based on a graphical user interface and allows
developers to visualize and hear the interaction between users and OneVoice or
InControl systems while developing custom applications. This user-friendly
development tool allows the Company's customers to expand the scope and use of
its systems. InterForm is the Company's proprietary, forms based software
program which also can be used by developers to generate and maintain custom
applications.
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Network Services Platform (NSP) 5000
The NSP 5000 platform is a Company proprietary design which utilizes a
stardards-based compact, modular passive backplane allowing high port density
per system, a critical factor for call center and telecommunications
applications. The passive backplane design allows for easy system expansion and
for the upgrade of standards-based system components, such as CPU's, as third
party technologies advance. The NSP 5000 can utilize any one of the following
operating systems: Unix, Windows NT or O/S2.
VocalCard
VocalCard, a standards based call 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.
FoneTower
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.
COMPETITION
The call automation industry is fragmented and highly competitive.
Based on industry surveys, no company participating in this industry has more
than a 10% market share. Technological advances are critical to industry
leadership and 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 Systems 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 Lucent
Technologies (including the former Octel), Comverse Technology (including the
former Boston Technology), Brite Voice Systems, Glenayre Technologies and
Periphonics. 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 call automation service bureaus. Some of these
competitors have greater financial, technological and marketing resources than
the Company.
DISTRIBUTION
The Company markets its products through both direct and indirect sales
channels. During fiscal 1998, approximately 51% and 49% of the Company's total
sales were attributable to direct sales to end-users and to sales to
distributors, respectively, compared to 53% and 47%, respectively, in fiscal
1997. The Company provides discounts to volume end-user purchasers and its
distributors reflecting decreased costs associated with such sales. During
fiscal 1998, sales to existing customers, as a percentage of the Company's total
sales, were 65%, the same as in fiscal year 1997, as the Company's 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 its total
sales as it focuses additional marketing efforts on its installed base. No
company accounted for 10% of total sales in fiscal 1998. One of the Company's
resellers, Siemens AG, accounted for 10.2% of the Company's total sales in
fiscal 1997 while MCI Telecommunications accounted for 11.2% of the Company's
sales in fiscal 1996.
United States Distribution
The Company sells its products directly to end-users and more than 85
distributors in the United States. This distributor network allows the Company
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 1998,
approximately 52% and 48% 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
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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 certain customer services relating to the Company's
products on the Company' behalf. Distributors are selected based on their access
to markets, industries and customers that are candidates for the Company's
products. The Company's major domestic distributors include Ameritech
Information Systems, EDS, Fiserv, Fujitsu, GTE, Information Technology, Inc.,
NEC West, Norstan, Rockwell International, Siemens Business Communications,
Sprint, Symitar Systems, U.S. Order and Wiltel.
International Distribution
The Company's products are currently sold in 50 countries. 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 AG (Germany
and Western Europe) and Switch (Chile). A subsidiary of the Company maintains
offices in London, Frankfurt and Munich to support sales by distributors
throughout the European Community, the Middle East and Africa. Company offices
in Singapore and Sydney support sales by distributors throughout the Pacific
Rim. The Company also maintains an office in Toronto to support its Canadian
distributors.
Most countries lag the United States in the development of their
customer premise equipment call automation markets. Government regulation of
telecommunications equipment and services, and the low penetration of digital
switches and touch-tone telephones, have limited sales of call automation
systems in many countries. Subject to differences in culture and business
practices, the Company anticipates that the international market for customer
premise equipment for call automation systems will grow as foreign countries
overcome regulatory, technological and other barriers which limit the use of
such systems. Recently, the Company has seen an accelerated demand for its
telecommunications products as a result of increased competition among
international network operators. 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; the Company's 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.
International sales decreased 14% in fiscal 1998 and increased 36% and
65% in fiscal 1997 and 1996, respectively and as a percentage of total sales,
were 21% in fiscal 1998, 24% in fiscal 1997 and 19% in fiscal 1996. Sales to the
Americas (excluding the United States) constituted 54%, 47% and 61% of
international sales in fiscal 1998, 1997 and 1996, respectively. Sales to Europe
constituted 25%, 34% and 20% of international sales in fiscal 1998, 1997 and
1996, respectively. Sales to the Pacific Rim constituted 21%, 19% and 19% of
international sales in fiscal 1998, 1997 and 1996, respectively. The decrease in
sales to Europe, as a percentage of international sales, in fiscal 1998 and the
increase in such sales in fiscal 1997 were primarily attributable to a large
sale to a European based, global telecommunications company during fiscal 1997.
This large sale also is primarily responsible for the decrease in international
sales during fiscal 1998. 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. A discussion of the Company's export
sales by geographical area for fiscal 1998, 1997 and 1996 is found in Note K to
the Consolidated Financial Statements located in Item 8 of this report.
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BACKLOG
The Company's backlog at February 28, 1998, February 28, 1997 and
February 29, 1996 was approximately $17 million, $11.4 million and $21.3
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, 1998, the Company owned 22 patents. In addition, the Company has
registered "InterVoice" as a trademark in the United States and in certain
foreign countries. The Company has also registered 24 trademarks and
servicemarks in the United States for other product and service names and has
registrations pending in the United States for various product and service
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 the unauthorized
use of the patented technology 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,
although 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 innovations. The Company currently has a portfolio of
22 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.
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MANUFACTURING AND FACILITIES
The Company's manufacturing operations consist primarily of the final
assembly, integration and extensive testing and quality control of
subassemblies, host computers platforms, operating software and the Company's
run time software. 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 26, 1998, the Company had 662 employees.
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,
1,000, 3,000, and 4,000 square feet of office space in London, Singapore,
Jacksonville (Florida), and Chicago, respectively.
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
have discussed the possibility of negotiations for a mutually satisfactory
cross-license agreement which would resolve the matter. There is no assurance
that the Company will 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 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.
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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 1998 and
1997.
Fiscal 1998 Fiscal 1997
----------- -----------
Quarter High Low Quarter High Low
------- ---- --- ------- ---- ---
1st $ 12 7/16 $ 8 1/2 1st $ 30 1/2 $ 21 3/4
2nd 10 5/8 8 5/8 2nd 22 12 1/4
3rd 10 1/2 9 3rd 15 3/4 11 3/16
4th 10 1/2 7 4th 14 7/8 10 1/2
There were approximately 1,000 shareholders of record and approximately
12,500 beneficial shareholders of the Company at May 26, 1998 On May 26, 1998
the closing price of the Common Stock was $13.06.
As partial consideration for the Company's purchase of the Enhanced
Services Platform product line from Integrated Telephone Products, Inc. ("ITP"),
the Company issued 60,465 shares of its common stock to ITP in a private
placement exempt from registration requirements of the Securities Act of 1933
pursuant to Section 4(2) promulgated thereunder.
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 in conjunction 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, 1998 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, 1998 and
1997, and for each of the years in the three-year period ended February 28, 1998
and the report of Ernst & Young LLP thereon, are included elsewhere herein.
FISCAL YEAR ENDED FEBRUARY 29/28
--------------------------------
1998* 1997** 1996 1995*** 1994
----- ------ ---- ------- ----
Net Sales $ 102,307,713* $ 104,845,692 $ 97,103,054 $ 76,265,228 $ 60,933,903
Income (Loss) from Operations (8,427,179)* 17,548,615** 25,054,742 9,304,113*** 16,988,225
Net Income (5,139,846)* 12,760,481** 17,259,358 2,533,580*** 11,705,501
Total Assets 84,893,475 109,239,759 89,726,806 62,718,565 74,218,417
Long Term Debt -- -- -- -- --
Net Income (Loss) per share:
Basic (.33)* .79 1.10 .16 .68
Diluted (.33)* .77 1.05 .15 .64
Shares used in per share
calculations:
Basic 15,516,336 16,154,836 15,670,718 16,124,637 17,207,154
Diluted 15,516,336 16,591,160 16,399,433 16,759,656 18,416,290
*Fiscal 1998 net sales, loss from operations and net loss were impacted by
adoption of the American Institute of Certified Public Accountants' Statement of
Position 97-2 (SOP 97-2), tightening of certain of the Company's credit
practices, non-recurring expense items and a non-recurring charge resulting from
a portion of the price paid by the Company to Integrated Telephony Products,
Inc. for its ESP product line having been attributed to in-process research and
development. Without these items, net sales in fiscal 1998 would have been
$107.8 million. Income from Operations would have been $2.6 million, and net
income would have been $2.4 million, or $0.15 per share.
**Fiscal 1997 income from operations and net income were impacted by charges
totaling approximately $1.8 million
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and $1.3 million, respectively, or $0.08 per share, resulting from a
non-recurring litigation settlement. Without this charge, net income for fiscal
1997 would have been $0.85 per share.
***Fiscal 1995 income from operations and net income were impacted by a
non-recurring charge totaling approximately $10.5 million, or $0.65 per share,
associated with a significant portion of the 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 1999, and beyond, to
differ materially from those expressed in any forward-looking statements made by
or on behalf of the Company:
o The Company faces intense competition based on product capabilities and
experiences ever increasing demands from its actual and prospective
customers for its products to be compatible with a variety of rapidly
proliferating computing, telephony and computer networking technologies
and standards. The ultimate success of the Company's products is
dependent, to a large degree, on the Company allocating its resources to
developing and improving products compatible with those technologies,
standards and functionalities that ultimately become widely accepted by
the Company's actual and prospective customers. The Company's success is
also dependent, to a large degree, on the Company's ability to implement
arrangements with other vendors with complementary product offerings to
provide actual and prospective customers greater functionality and to
ensure that the Company's products are compatible with the increased
variety of technologies and standards.
o Continued availability of suitable non-proprietary computing platforms and
system operating software that are compatible with the Company's products.
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.
o Increasing litigation with respect to the enforcement of patents,
copyrights and other intellectual property.
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), since
such customers generally are not contractually obligated to place further
orders with the Company.
o Legislative and administrative changes and, in particular, changes
affecting the telecommunications industry, such as the 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.
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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,
and 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 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 and earnings on a quarter to quarter
basis.
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 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 Mergers and acquisitions between companies in the telecommunications and
financial industries which could result in fewer companies purchasing the
Company's products for telecommunications and financial applications, and/
or delay such purchases by companies that are in the process of reviewing
their strategic alternatives in light of a merger or acquisition.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which the Company adopted for its
fiscal fourth quarter and fiscal year ended February 28, 1998. The Company
changed the method used to compute earnings per share and restated all prior
periods. Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options is excluded. Diluted earnings per share
includes the impact of stock options and restricted stock arrangements.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) and
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131), both effective for years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
financial statements and is not expected to have a significant impact on the
Company. SFAS 131 establishes standards for the manner in which public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. The Company is still evaluating
the impact that SFAS 131 will have on its future financial reporting.
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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
-------------------------
1998* 1997 1996
----- ---- ----
Sales 100% 100% 100%
Cost of goods sold 47.8 38.3 35.5
Gross Margin 52.2 61.7 64.5
Research and development expenses 12.4 11.1 10.0
Selling, general and administrative expenses 40.8 32.2 28.7
Non-recurring expenses 7.3 1.7** --
Operating income (8.2) 16.7** 25.8
Other income - net .8 .6 .5
Income (loss) before taxes (7.5) 17.3** 26.3
Income taxes (benefit) (2.4) 5.2 8.6
Net Income (loss) (5.0)% 12.1%** 17.7%
*See discussion of fiscal 1998 in Item 6, Selected Financial Data. Had it not
been impacted by the adoption of SOP 97-2, tightened credit practices,
non-recurring expense items and a charge for in-process research and
development, cost of goods sold, gross margin, research and development
expenses, selling, general and administrative expenses, operating income and net
income as a percentage of sales would have been 45.3%, 54.7%, 11.8%, 38.7%, 2.3%
and 2.2%, respectively.
**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.
SALES
Sales are derived primarily from the shipment of call 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.
Effective December 1, 1997 the Company elected to make an early
adoption of the American Institute of Public Accountants' Statement of Position
97-2 (SOP 97-2). Prior to the adoption of SOP 97-2, the Company's policy
provided for the recognition of revenue upon shipment, provided that the
Company's remaining obligations relating to system installation and testing were
not significant. With SOP 97-2, contract accounting was adopted for systems that
require Company customization and installation. Revenue for contracts for large
systems, generally greater than $500,000 in sales value, is recognized on the
percentage of completion method. Revenue for smaller systems is recognized on
the completed contract method, i.e., when all the Company's obligations have
been met. The requirements of SOP 97-2 only apply to sales which require
customization and/or installation by the Company, and such sales have
historically accounted for approximately 30% of the Company's aggregate annual
sales. As contemplated in disclosures made in the Company's Form 10-Q in each of
the first three quarters of the Company's fiscal 1998, adoption of SOP 97-2
delayed by 60 to 90 days the Company's recognition of approximately $3 million
in revenue in the fourth quarter of fiscal 1998. The adoption of SOP 97-2 will
result in the Company not recognizing revenue in the fiscal quarter that certain
systems are shipped. However, adoption of SOP 97-2 will also result in the
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Company recognizing revenue during a fiscal quarter from systems shipped in
previous fiscal periods. Accordingly, the Company cannot predict whether the
adoption of SOP 97-2 will result in a decrease or an increase in aggregate
revenues for any future fiscal quarter.
From time to time, the Company has agreed to amend customer purchase
orders to extend normal payment terms in exchange for accelerating delivery and
installation of systems, particularly systems not requiring customization. The
Company tightened this practice in its fourth quarter of fiscal 1998 to improve
cash flow. This decision resulted in an approximate $2.5 million decrease to
revenues during the quarter and fiscal year.
Worldwide sales in fiscal 1998 declined 2% from the immediately
preceding year, and increased 8% and 27% in fiscal 1997 and 1996, respectively.
Worldwide CPE sales decreased 1% in fiscal 1998 and increased 15% and 41% in
fiscal years 1997 and 1996, respectively. Worldwide Telco sales declined 15% and
19% in fiscal 1998 and 1997, respectively, and increased 5% in fiscal year 1996.
CPE sales constituted 70%, 69% and 65% of the Company's total sales in fiscal
years 1998, 1997 and 1996, respectively, while Telco sales made up 17%, 19% and
26% of the Company's total sales during the same time periods. Sales of system
maintenance contracts expanded to over 4,000 end users and comprised 13%, 12%
and 9% of the Company's total sales in fiscal 1998, 1997 and 1996, respectively.
Domestic CPE sales in both fiscal 1998 and 1997 increased 11% and 36%
in fiscal 1996 due to the Company's continued investment in the expansion of its
distribution channels and marketing and advertisement programs and in the hiring
and training of new and existing sales, service and support personnel.
International CPE sales in fiscal 1998 decreased 37%, and increased 30% and 62%
in fiscal 1997 and 1996, respectively. Decreased international sales in fiscal
1998 resulted from a poor Pacific Rim economic environment and a concentration
of the Company's sales efforts in Latin America on telecommunications
opportunities. International sales increased in fiscal 1997 and 1996 for the
same reasons as the increase in domestic CPE sales. International CPE sales
constituted 10%, 24% and 21% of the Company's total CPE sales in fiscal years
1998, 1997 and 1996, respectively.
The Company believes the decline in worldwide Telco sales during fiscal
1998 and 1997 was attributable to a soft domestic telecommunications market. The
Company believes the market softness was attributable, in part, particularly
during fiscal 1997, to temporary delays by some telecommunications companies in
implementing call automation solutions while they evaluated marketing and
investment strategies in light of new opportunities resulting from deregulation
under the Telecommunications Act of 1996 and judicial proceedings relating to
certain provisions of the Act. Telco sales increased in fiscal 1996 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 62%, 39% and 21% of the Company's total Telco sales in fiscal years
1998, 1997 and 1996, respectively.
Prices for the Company's products have remained stable, as measured by
price per line shipped, during fiscal 1998, 1997 and 1996 although the features
and functions per line shipped have become more robust. 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 1998, the Company experienced an increase in cost of
goods sold to 47.8% of total sales from 38.3% and 35.5% in fiscal 1997 and 1996,
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 1999 cost of goods sold, as
a percentage of sales, will be slightly lower than in fiscal 1998.
RESEARCH AND DEVELOPMENT
Fiscal 1998, 1997 and 1996 research and development expenses were
approximately $12.7 million, $11.7 million and $9.8 million, respectively.
Fiscal 1998 expenses included porting the Company's InterSoft run time software
to the UNIX and Windows NT operating systems; developing computer platform
independent voice automation hardware and software; the development of the NSP
5000 platform; the development of the InControl product line and InVision and
the integration of the ESP product line purchased from Integrated Telephony
Products,
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Inc. into the Company's InControl product offering. Additionally, expenditures
were made in fiscal 1998, 1997 and 1996 for the ongoing development of the
Company's OneVoice Software Agent Platform including OneVoice systems (the
Company's call automation 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 fiscal 1997 and
1998 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
telecommunications products obtained when the Company acquired VoicePlex
Corporation, 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 1999 it will maintain its strong commitment
to research and development at a targeted percentage of anticipated sales
slightly lower than in fiscal 1998. 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
$41.8 million in fiscal 1998 from $33.7 million in fiscal 1997 and approximately
$27.8 million in fiscal 1996 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 has undertaken measures to control
expenses, particularly selling, general and administrative expenses (see
discussion below in "Income (loss) from Operations"). Accordingly, the Company
expects, based on anticipated sales, that in fiscal 1999 selling, general and
administrative expenses, as a percentage of sales, will be slightly less than in
fiscal 1998.
OTHER INCOME
Other income is primarily interest income on cash and short term
investments. The increase in other income in fiscal 1998 versus fiscal 1997 and
in fiscal 1997 versus fiscal 1996 reflected the Company's increased average cash
balances.
INCOME (LOSS) FROM OPERATIONS
The Company incurred an operating loss and a net loss during fiscal
1998 of $8.4 million and $5.1 million, respectively. The Company generated
operating income of $17.5 million and net income of $12.8 million in fiscal year
1997. During fiscal 1996, the Company generated operating income of $25.1
million and net income of $17.3 million.
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 1998,
incurred non-recurring charges of approximately $7.4 million including the
following: $1.0 million associated with certain personnel matters, including the
resignation of the Company's former President and Chief Operating Officer; $1.0
million to provide for potential inventory obsolescence in the light of a
migration of the Company's customers to its NSP 5000 platform; $3.0 million to
write off certain intangible assets as a result of the Company's re-examination
of its product development and infrastructure requirements and $0.6 million to
write off certain accounts receivable deemed uncollectible. Additionally, the
Company wrote off as in-process research and development approximately $1.8
million of the purchase price paid to Integrated Telephony Products, Inc. for
its ESP product line. Also impacting operating income in fiscal 1998 was the
Company's adoption of the American Institute of Certified Public Accountants'
Statement of Position 97-2 (SOP 97-2) and a tightening of the Company's credit
practices to improve cash flow.
See Item 7 - "Sales".
The Company incurred a one time charge of approximately $1.8 million in
connection with the settlement of certain litigation during fiscal 1997.
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Adjusting for the one time charges and other items discussed above, the
Company would have generated operating income of approximately $2.6 million and
approximately $19.3 million in fiscal 1998 and 1997, respectively, and net
income of approximately $2.3 million and $14.0 million in fiscal 1998 and 1997,
respectively. Adjusted operating income in fiscal 1998 and fiscal 1997 decreased
87% and 23%, respectively, versus the previous fiscal year as the Company
increased its investment in sales, marketing, application engineering, and
research and development resources without a corresponding increase in the
Company's sales. These investments were made to continue to pursue opportunities
in the CPE and Telco markets. Adjusted net income for fiscal 1998 and fiscal
1997 decreased 84% and 19%, respectively, versus the previous fiscal year for
the same reasons as operating income decreased.
The Company has undertaken measures to control expenses, particularly
selling, general and administrative expenses. These expense control measures
have begun to reduce the Company's expenses and should begin to improve the
ratio of expenses to sales in future fiscal periods, based on the Company's
anticipated sales and assuming that expense levels are not unduly influenced by
unusually high one time expenses related to litigation matters, any potential
mergers or acquisitions, any major research and development efforts which are
not currently contemplated but which become necessary in light of market or
strategic requirements, or any other future contingencies which are not
currently contemplated by the Company. Any anticipated increases in operating
income and net income during fiscal 1999 are expected to be at a rate slightly
higher than the percentage increase in anticipated sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $4.2 million in cash and cash equivalents
at February 28, 1998, down from $24.2 million at February 28, 1997. While the
Company generated positive net cash from operations of approximately $14.4
million during fiscal 1998, investment activities (consisting of the acquisition
and purchase of fixed assets and third party software) and financing activities
(consisting primarily of the repurchase of shares of the Company's common stock)
together used approximately $43.4 million. Investment activities totaling
approximately $17.7 million during 1998 included purchasing the ESP product line
from Integrated Telephony Products, Inc., purchasing computing hardware and
software to update the Company's enterprise systems and to provide the
information systems infrastructure needed to support the Company's worldwide
growth. Expenditures were also made to acquire third party developed software to
be integrated into the Company's InterSoft software to allow the Company to
offer its customers greater functionality and to ensure the Company's products
comply with an increasing variety of hardware and software technologies and
standards. Financing activities during fiscal 1998 included the repurchase of
2,700,800 shares of the Company's common stock, at a cost of approximately $26.2
million pursuant to authorizations by its Board of Directors during fiscal 1997
and 1998 to repurchase up to an aggregate of 4,000,000 shares. The Company
believes that market conditions made such share repurchases of value to its
shareholders. As a result of these investment and financing activities, the
Company borrowed $9.0 million against its $15 million credit line from
NationsBank and experienced a reduction of its cash reserves of approximately
$20.0 million during fiscal 1998. Subsequent to the end of fiscal 1998, the
Company repurchased an additional 10,000 shares of the Company's stock at a cost
of $117,900. The Company reviews share repurchase and acquisition opportunities
from time to time and believes it has access to the financial resources
necessary to pursue attractive opportunities as they arise.
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 also believes it has access to other financial
resources to pursue any investment opportunities or financing requirements that
might arise in the foreseeable future. The Company is currently negotiating an
extension of its $15 million credit facility with NationsBank which is scheduled
to expire on June 30, 1998. As with any negotiation, there is no assurance that
the Company and NationsBank will agree to an extension of the credit facility,
however, the Company believes it has access to other potential sources for
credit facility financing if the facility with NationsBank is not renewed.
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.
17
20
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
------------------
FISCAL 1998 31-May-97 31-Aug-97 30-Nov-97 28-Feb-98
--------- --------- --------- ---------
Sales $ 24,742,283 $ 29,276,334 $ 25,545,358 $ 22,743,738*
Income (loss) from Operations 228,189 3,000,497 282,661 (11,938,526)*
Net Income (loss) 270,862 2,216,181 256,258 (7,883,147)*
Net Income (loss) per share-basic .02 .14 .02 (.55)*
Net Income (loss) per share-diluted .02 .14 .02 (.55)*
*Includes the impact of the adoption of SOP 97-2, tightened credit practices,
non-recurring expense items, and a charge for in-process research and
development (see discussion of fiscal 1998 in Item G, Selected Financial Data).
Without these items, sales for the quarter ended February 28, 1998 would have
been approximately $28.2 million and earnings would have been approximately
$0.16 per diluted share.
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 from Operations 5,797,049 6,158,964 1,655,513* 3,937,089
Net income 3,979,261 4,271,054 1,249,990* 3,260,176
Net income per share-basic .25 .27 .08* .20
Net income per share-diluted .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 diluted share.
YEAR 2000 COMPLIANCE
Many installed computer systems used by numerous companies to run a
variety of applications are not capable of processing date sensitive information
that falls beyond the twentieth century. Unless these computer systems are
replaced or upgraded prior to the year 2000 to process such date sensitive
information, the systems may experience severe operating difficulties or system
failures. Beginning in fiscal 1996, the Company initiated a program to replace
and upgrade its information systems to accommodate the Company's growth, improve
productivity and remediate any century compliance problems. This program should
be substantially completed before the year 2000. Additionally, the Company has
created a year 2000 project team to review its information systems and assess
and resolve any century compliance issues that are found. The team also is
attempting to ensure that any replacements and upgrades to the Company's
information systems are century compliant. As a result of the program to replace
and upgrade its information systems, and the efforts of the year 2000 project
team, the Company believes that its information systems will be century
compliant prior to the year 2000. However, there is no assurance that the
Company will identify and resolve any and all century compliance problems with
its information systems in timely manner, that the expenses associated with such
remedial efforts will not be significant, or that such problems will not have a
material adverse effect on the Company's business, operating results and
financial condition.
Based on a thorough review and testing of its software products and other
products, the Company believes that its current products are century compliant.
The Company's assessment of its current products is partially dependent upon the
accuracy of representations concerning century compliance made by its suppliers,
such as Microsoft and IBM. Many of the Company's customers are, however, using
earlier versions of the Company's software products and other products that may
not be century compliant. The Company has instituted programs to actively warn
these customers of the risks associated with using software and other products
which may not be century compliant, and to actively encourage such customers to
migrate to the Company's current products. In addition, the Company's products
are generally integrated with a customer's enterprise system, which involves
software products developed by other vendors. A customer may mistakenly believe
that century compliance problems with its enterprise system are attributable to
products provided by the Company. The Company may in the future be subject to
claims based on century compliance issues related to a customer's enterprise
system or other products provided by third parties, custom modifications to the
Company's products made by third parties, or issues arising from the integration
of the Company's products with other products. The Company has not been a party
to any proceeding involving its
18
21
products or services in connection with century compliance issues, however,
there is no assurance that the Company will not in the future be required to
defend its products or services in such proceedings against claims of century
compliance issues, and any resulting liability of the Company for damages could
have a material adverse effect on the Company's business, operating results and
financial condition.
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, 1998 and for each of the
three years in the period ended February 28, 1998 follow:
19
22
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
InterVoice, Inc.
We have audited the accompanying consolidated balance sheets of InterVoice, Inc.
and subsidiaries as of February 28, 1998 and 1997 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended February 28, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 28, 1998, 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.
As described in Note B, effective for transactions entered into after December
1, 1997, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position 97-2 "Software Revenue Recognition."
Ernst & Young LLP
Dallas, Texas
April 7, 1998
20
23
InterVoice, Inc.
Consolidated Balance Sheets
February 28, February 28,
ASSETS 1998 1997
- ---------------------------------------------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 4,190,940 $ 24,162,024
Accounts and notes receivable, net of allowance
for doubtful accounts of $368,004 in 1998 and
$250,950 in 1997 26,040,332 33,506,747
Inventory 9,343,338 11,315,385
Prepaid expenses and other current assets 4,490,813 3,894,498
Deferred income taxes 2,325,745 1,419,495
------------- -------------
46,391,168 74,298,149
PROPERTY AND EQUIPMENT
Building 16,249,914 16,140,989
Computer equipment 24,496,337 15,801,171
Furniture, fixtures and other 3,756,164 5,322,288
Service equipment 4,582,221 2,768,178
------------- -------------
49,084,636 40,032,626
Less allowance for depreciation 16,736,766 13,676,956
------------- -------------
32,347,870 26,355,670
OTHER ASSETS
Intangible assets, net of amortization
of $1,679,113 in 1998 and
$1,802,708 in 1997 6,154,437 8,585,940
------------- -------------
$ 84,893,475 $ 109,239,759
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 10,491,914 $ 12,954,975
Customer deposits 2,625,498 3,403,739
Deferred income 5,500,743 4,995,231
Short term borrowings 9,000,000 --
------------- -------------
27,618,155 21,353,945
DEFERRED INCOME TAXES 644,802 1,695,294
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock, $100 par value--2,000,000
shares authorized: none issued
Common Stock, no par value, at nominal
assigned value--62,000,000 shares
authorized: 19,503,291 issued,
13,802,491 outstanding in 1998
and 19,353,973 issued, 16,353,973
outstanding in 1997 9,726 9,667
Additional capital 44,314,685 43,028,780
Unearned compensation -- (493,634)
Treasury stock - at cost (50,202,999) (24,003,245)
Retained earnings 62,509,106 67,648,952
------------- -------------
56,630,518 86,190,520
------------- -------------
$ 84,893,475 $ 109,239,759
============= =============
See notes to consolidated financial statements.
21
24
InterVoice, Inc.
Consolidated Statements of Operations
Year Ended February 29/28
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
SALES $ 102,307,713 $ 104,845,697 $ 97,103,054
COST OF GOODS SOLD 48,854,519 40,131,308 34,468,112
------------- ------------- -------------
GROSS MARGIN 53,453,194 64,714,389 62,634,942
Research and development expenses 12,688,638 11,652,934 9,757,972
Selling, general and
administrative expenses 41,774,242 33,712,840 27,822,228
Non recurring expense 7,417,493 1,800,000 --
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (8,427,179) 17,548,615 25,054,742
Other income - net 783,643 680,644 532,065
------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) (7,643,536) 18,229,259 25,586,807
INCOME TAXES (BENEFIT)
Current (546,949) 4,191,807 8,371,856
Deferred (1,956,741) 1,276,971 (44,407)
------------- ------------- -------------
INCOME TAXES BENEFIT (2,503,690) 5,468,778 8,327,449
------------- ------------- -------------
NET INCOME (LOSS) $ (5,139,846) $ 12,760,481 $ 17,259,358
============= ============= =============
Net income (loss) per share - basic $ (0.33) $ 0.79 $ 1.10
============= ============= =============
Net income (loss) per share - diluted $ (0.33) $ 0.77 $ 1.05
============= ============= =============
See notes to consolidated financial statements.
22
25
InterVoice, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Common Stock
------------------------- Additional Unearned Treasury Retained
Shares Amount Capital Compensation Stock Earnings Total
-----------------------------------------------------------------------------------------------
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 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
Exercise of stock
options 97,622 33 752,805 -- -- -- 752,838
Tax benefit from
exercise of
stock options -- -- 246,653 -- -- -- 246,653
Issuance of restricted
stock, net of forfeitures (8,769) (4) (213,523) 493,634 -- -- 280,107
Issuance of stock to
purchase software 60,465 30 499,970 -- -- -- 500,000
Purchase of treasury
stock, net (2,700,800) -- -- -- (26,199,754) -- (26,199,754)
Net loss -- -- -- -- -- (5,139,846) (5,139,846)
-----------------------------------------------------------------------------------------------
Balance at February 28, 1998 13,802,491 $ 9,726 $ 44,314,685 $ -- $(50,202,999) $ 62,509,106 $ 56,630,518
===============================================================================================
See notes to consolidated financial statements.
23
26
InterVoice, Inc.
Consolidated Statements of Cash Flows
Year Ended February 28/29
------------------------------------------
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (5,139,846) $ 12,760,481 $ 17,259,358
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Purchased research and
development 1,750,000 -- --
Depreciation and amortization 9,710,597 4,946,376 4,393,988
Compensation expense 493,634 595,407 145,447
Deferred income taxes (benefit) (1,956,741) 1,276,971 (44,407)
Provision for doubtful accounts 291,491 397,739 173,928
Provision for slow moving inventories 1,935,067 1,200,000 752,090
Disposal of equipment 595,760 89,447 11,669
Write off of intangible assets 2,802,423 -- --
Changes in operating assets and
liabilities:
Accounts receivable 7,174,924 (9,200,060) (7,279,317)
Inventories 36,980 (671,365) (3,657,122)
Prepaid expenses and other assets (420,265) (3,520,298) (288,339)
Accounts payable
and accrued expenses (2,622,499) 1,097,596 2,258,010
Customer deposits (778,241) 876,225 1,395,750
Deferred income 505,512 920,132 710,251
Income taxes payable -- -- (459,505)
------------ ------------ ------------
14,378,796 10,768,651 15,371,801
INVESTING ACTIVITIES
Purchases of property and equipment (9,239,831) (8,545,318) (4,601,288)
Increase in other assets (8,449,606) (4,346,102) (2,944,569)
(Increase) decrease in notes receivable -- -- 161,508
------------ ------------ ------------
(17,689,437) (12,891,420) (7,384,349)
FINANCING ACTIVITIES
Short term borrowings 9,000,000 -- --
Purchase of treasury stock (26,199,754) -- --
Exercise of stock options 539,311 2,710,817 5,309,572
------------ ------------ ------------
(16,660,443) 2,710,817 5,309,572
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,971,084) 588,048 13,297,024
Cash and cash equivalents, beginning of year 24,162,024 23,573,976 10,276,952
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,190,940 $ 24,162,024 $ 23,573,976
============ ============ ============
See notes to consolidated financial statements.
24
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS
The Company develops, sells and services call automation systems with a
traditional emphasis on allowing individuals to interact with computer databases
using their telephones, personal computers, credit card terminals or voice. The
Company's "OneVoice" and "InterDial" systems are used by a variety of
enterprises to disseminate and receive information efficiently, allowing
multiple callers simultaneous access to computer databases 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 agent if the call is
answered and the called party remains on the phone. More recently, the Company
has focused on its "InControl" systems which provide call automation and
enhanced calling features to telecommunications operators. All of the Company's
systems 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.
CASH AND CASH EQUIVALENTS: Cash equivalents include investments in highly liquid
securities with a maturity of three months or less at the time of acquisition.
The carrying amount of these securities approximates fair market value.
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
$1,360,000 and $166,000 at February 28, 1998 and 1997, 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. The range of useful lives by major category are: buildings: 5 to 40
years; computer equipment: 3 to 5 years; furniture, fixtures and other: 5 years;
and service equipment: 3 years. Depreciation expense totaled $6,305,410,
$4,124,289 and $2,834,613 in fiscal 1998, 1997 and 1996, 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 $2,199,314,
$822,087 and $647,261 in fiscal 1998, 1997 and 1996, respectively. The increase
in amortization expense in fiscal 1998 versus prior fiscal years is associated
with completion of the implementation and commencement of amortization of the
Company's new enterprise systems.
REVENUE RECOGNITION: The Company recognizes revenue for sales of systems which
do not require customization by the Company at the time of shipment. Subsequent
to December 1, 1997, revenue for systems which require customization by the
Company are recognized by the contract method of accounting using percentage of
completion for larger, more complex systems (generally over a $500,000 sales
price) and the completed contract method for smaller systems. Prior to December
1, 1997, the Company recognized revenue on systems requiring customization at
the date of shipment or at the point after shipment when the remaining
obligations of the Company became insignificant. This change in accounting was
required by the American Institute of CPA's Statement of Position 97-2 which was
adopted by the Company as of December 1, 1997 and is required to be applied
prospectively for transactions entered into after that date.
25
28
The Company recognizes revenue from services at the time the service is
performed or over the period of the contract for maintenance/support.
EARNINGS PER SHARE: Effective with the fiscal year ended February 28, 1998, the
Company adopted Statement of Financial Accounting Standards No. 128 (SFAS No.
128). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of stock options.
Diluted earnings per share is similar to the previously reported fully diluted
earnings per share. Earnings per share for all periods have been restated to
conform to the SFAS 128 requirements.
RECLASSIFICATIONS: Certain prior year balances have been reclassified to conform
to current year presentation.
NOTE C - INTANGIBLE ASSETS
The Company purchased the Enhanced Services Platform (ESP) product line and
certain other assets from Integrated Telephony Products, Inc. on February 26,
1998 in a transaction accounted for as a purchase. This purchase price of
$5,188,071 was comprised of $4,612,500 in cash, Company common stock valued at
$500,000 and other direct acquisition costs totaling $75,571. 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 $1,155,000 charge, net of taxes, to the Company's operations in
fiscal year 1998. The remaining purchase price was allocated, based on
appraisals, to software ($3,113,643), net tangible assets ($324,428), and
deferred tax assets ($595,000).
The Company reviewed its portfolio of intangible assets during fiscal
1998 and wrote off certain items as a result of re-examining its human resource
allocation, product development plans and infrastructure requirements.
Previously capitalized third party product development costs totaling
approximately $1.4 million were written off in line with the Company's strategy
to narrow its product development focus. Previously capitalized third party
development costs of approximately $1.6 million associated with inefficient,
stand alone system configuration software were written off as the Company's new
enterprise systems have enabled it to develop and integrate system configuration
capabilities which, previously, were addressed by the stand alone system.
NOTE D - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at February 28:
1998 1997
---- ----
Accounts payable $ 7,766,531 $ 10,094,466
Accrued compensation 1,575,534 1,572,875
Other 1,149,849 1,287,634
--------------- ---------------
$ 10,491,914 12,954,975
=============== ===============
NOTE E - REVOLVING CREDIT AGREEMENT
The Company has an unsecured revolving credit agreement with NationsBank in the
amount of $15,000,000 which expires June 30, 1998. All borrowings under the
agreement accrue interest at the bank's prime rate. At February 28, 1998, the
Company had borrowed $9,000,000 under the agreement at an average annual
interest rate of 8.5%.
26
29
NOTE F - 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. Significant components of the Company's deferred tax
assets and liabilities are as follows at February 28:
1998 1997
---- ----
Deferred tax assets:
Allowance for slow moving inventories $ 240,066 $ 62,956
Deferred revenue 1,155,371 738,667
Accrued expenses 213,809 133,410
Allowance for doubtful accounts 139,566 69,782
Book over tax depreciation/amortization 2,227,807 406,846
Charitable contributions carryforword 955,800 --
Valuation allowance (955,800) --
Sales returns reserve 493,025 295,815
Other 83,908 74,750
----------- -----------
Total deferred tax assets 4,553,552 1,782,226
----------- -----------
Deferred tax liabilities:
Capitalized Software 2,683,412 1,814,368
Prepaid assets 186,366 240,826
Other 2,831 2,831
----------- -----------
Total deferred tax liabilities 2,872,609 2,058,025
----------- -----------
Net deferred tax assets (liabilities) $ 1,680,943 $ (275,799)
=========== ===========
A valuation allowance has been established against the Company's charitable
contribution carryforward due to statutory limitations that make its future
realization uncertain.
Domestic and foreign income before taxes, and details of the income tax
provision are as follows:
1998 1997 1996
---- ---- ----
Income (loss) before taxes:
Domestic $ (7,640,210) $ 18,610,597 $ 26,671,904
Foreign (3,326) (381,338) (1,085,097)
------------ ------------ ------------
$ (7,643,536) $ 18,229,259 $ 25,586,807
============ ============ ============
Income tax provision (benefit):
Current:
Federal $ (496,864) $ 4,137,807 $ 8,050,856
State (50,085) 54,000 321,000
------------ ------------ ------------
Total current (546,949) 4,191,807 8,371,856
Deferred:
Federal (1,805,826) 1,156,811 (40,982)
State (150,915) 120,160 (3,425)
------------ ------------ ------------
Total deferred (1,956,741) 1,276,971 (44,407)
------------ ------------ ------------
Total $ (2,503,690) $ 5,468,778 $ 8,327,449
============ ============ ============
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate is as follows:
1998 1997 1996
---- ---- ----
$ % $ % $ %
- - - - - -
Federal income taxes at statutory rates (2,598,802) (34) 6,380,240 35 8,955,382 35
Research and development tax credit (282,628) (3.7) 244,000 1.3 (388,000) (1.5)
Tax exempt interest (100,727) (1.3) (175,588) (1.0) -- --
State taxes, net of federal benefit (275,492) (3.6) 35,100 .2 259,000 1.0
Foreign loss not benefited -- -- 132,684 .7 380,576 1.5
Foreign sales corp. (benefit)/expense 24,107 .3 (544,036) (3.0) (521,208) (2.0)
Write-off foreign subsidiary
stock/debt -- -- (792,517) (4.2) -- --
Charitable Contributions in excess of
statutory limitation 550,147 7.2 -- -- -- --
Other 179,705 2.3 188,895 1.0 (358,301) (1.5)
----------- ------- ----------- ------ ----------- ------
(2,503,690) (32.8) 5,468,778 30.0 $ 8,327,449 32.5
=========== ======= =========== ====== =========== ======
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30
Income taxes, net of refunds, of $2,175,000, $6,587,097 and $7,240,945 were
paid in fiscal 1998, 1997 and 1996, respectively.
NOTE G- 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. The Company has granted options at various dates with terms
under which the options become exercisable at the rate of 20%, 25% or 33% per
year. Options becoming exercisable at 33% per year are exercisable for six or
ten years after the date of grant. Options becoming exercisable at 20% or 25%
per year are exercisable for ten years after the date of grant.
OPTION PRICE WEIGHTED AVERAGE EXERCISE
SHARES PER SHARE PRICE PER SHARE
------ ------------ --------------------------
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
Granted 603,300 $11.88 to $27.25 $21.57
Exercised (285,736) $2.06 to $19.25 $18.21
Forfeited (185,788) $7.63 to $26.25 $16.74
-----------
Balance at February 28, 1997 1,786,100
Granted 1,055,745 $7.50 to $11.38 $9.96
Exercised (49,195) $3.28 to $8.50 $7.03
Forfeited (1,092,006) $2.06 to $27.25 $18.40
-----------
Balance at February 28, 1998 1,700,644
===========
A total of 589,518 and 702,328 employee options were exercisable at average
prices of $11.96 and $13.02 at February 28, 1998 and 1997, respectively.
A stock option plan is in effect under which nonqualified stock options 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, 1995 40,000
Granted 12,000 $22.13
Exercised (2,000) $3.09
Forfeited (4,000) $22.125
--------
Balance at February 29, 1996 46,000
Granted 26,000 $13.94 $13.94
Exercised (22,000) $8.50 $ 8.50
--------
Balance at February 28, 1997 50,000
Granted 30,000 $9.75 $9.75
--------
Balance at February 28, 1998 80,000
========
28
31
A total of 50,000 and 24,000 non-employee options were exercisable at average
prices of $14.38 and $14.85 at February 28, 1998 and 1997, respectively.
For all option plans at February 28, 1998, options for 638,394 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 grant date or the option exercise date.
Employee Stock Purchase Plan
- ---------------------------- Weighted Average
Shares Exercise Price per share
------ ------------------------
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 28, 1997 70,637 $12.23
Granted 82,212 $10.40
Exercised (48,427) $9.63
Forfeited (22,210) $15.20
--------
Balance at February 28, 1998 82,212 $8.84
========
Grant price per option outstanding $9.93 to $11.25
During fiscal 1996, the Company adopted a Restricted Stock Plan under which an
aggregate of 500,000 shares may be issued. 92,285 shares have been allocated to
three 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 bases on
the achievement of targeted annual earnings per share objectives and the
completion of an additional two years of service after the grant. Restrictions
have lapsed for all shares granted in fiscal 1996. Activity related to
restricted stock during fiscal 1998, 1997 and 1996 is as follows:
Senior Executive Plan Key Executive 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
Forfeited (7,690) (1,079)
--------
Balance at February 28, 1998 44,604 3,072
======== ========
The weighted average share price on the date of grant in fiscal and 1997 was
$21.27 for the Senior Executive Plan and $29.44 for the Key Executive Plan.
Shares forfeited in fiscal 1998 and 1997 had been granted at a weighted average
share price of $22.34 and $21.80, respectively. At February 28, 1998,
approximately 452,000 shares are reserved for future restricted stock grants.
Subsequent to February 28, 1998, the Company adopted a stock option plan under
which an aggregate of 500,000 shares of common stock may be issued. Under the
plan, the Board of Directors may issue non-qualified stock options to Company
employees and non-employees Directors. 280,000 stock options were issued
pursuant to the plan on March 26, 1998.
29
32
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, 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
Net 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 1998,
1997 and 1996, respectively: risk-free interest rates of 6.48%, 6.39% and 6.02%;
stock price volatility factors of .49, .66 and .74; and expected option lives of
4.3 years, 4.1 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
1998 and 1997 was 3.95 and 11.82, respectively.
Required Pro Forma Disclosures:
1998 1997 1996
---- ---- ----
Net income (loss) $(8,726,923) 10,795,850 $16,242,620
Income (loss) per share basic $(0.56) $0.67 $1.04
Income (loss) per share diluted $(0.56) $0.67 $1.00
As required by FAS 123, only awards granted after fiscal 1995 have been included
in determining the amount of additional compensation expense for those years. As
such the effects of applying FAS 123 on fiscal 1998, 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 three, two or
one years of awards, respectively, will be considered.
Options Outstanding at February 28, 1998:
Weighted Average Weighted average
Exercise Prices Shares exercise price remaining contractual life in years
--------------- ------ -------------- -----------------------------------
$3.13 - $10.00 1,236,662 $9.33 7.32
$11.00 - $15.13 348,344 $12.68 3.17
$18.75 - $40.00 277,850 $21.33 4.11
-----------
1,862,856
===========
Options Exercisable at February 28, 1998:
Weighted average Weighted average
Exercise Prices Shares exercise price remaining contractual life in years
--------------- ------ -------------- -----------------------------------
$3.31 - $10.00 297,653 $7.33 1.48
$11.63 - $15.13 299,544 $12.68 2.27
$18.75 - $22.13 124,533 $21.20 4.00
---------
721,730
=========
30
33
NOTE H -TREASURY STOCK
Pursuant to authorizations by the Company's Board of Directors during fiscal
1997 and 1998, the Company repurchased 2,700,800 shares of its common stock at
an average price of $9.70 per share during fiscal 1998.
NOTE I - NON-RECURRING EXPENSES
During fiscal 1998, the Company incurred non-recurring expenses of approximately
$7.4 million including the following: $1.0 million associated with certain
personnel matters, including the resignation of the Company's former President
and Chief Operating Officer, $1.0 million related to inventory obsolescence,
$3.0 million related to intangible assets, and $0.6 million related to accounts
receivable. Additionally, the Company wrote off as in-process research and
development approximately $1.8 million of the purchase price paid to Integrated
Telephony Products, Inc. for its ESP product line.
The Company incurred a one time charge of approximately $1.8 million in
connection with the settlement of certain litigation during fiscal 1997.
NOTE J - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
YEAR ENDED FEBRUARY 28/29
-------------------------
1998 1997 1996
---- ---- ----
Numerator:
Net income (loss) $(5,139,846) $12,760,481 $17,259,358
=========== =========== ===========
Denominator:
Denominator for basic earnings per share
weighted average shares outstanding 15,516,336 16,154,836 15,670,718
Effect of dilutive securities:
Employee stock options -- 403,509 720,413
Non-vested restricted stock -- 32,816 8,302
----------- ----------- -----------
Dilutive potential common shares -- 436,325 728,715
----------- ----------- -----------
Denominator for diluted earnings per share 15,516,336 16,591,160 16,399,433
=========== =========== ===========
Net income (loss) per common shares - basic $ (0.33) $ 0.79 $ 1.10
=========== =========== ===========
Net income (loss) per common share - diluted $ (0.33) $ 0.77 1.05
=========== =========== ===========
Options to purchase 1,862,856 shares of common stock at an average exercise
price of $14.19 per share were outstanding at February 28, 1998 but were not
included in the computation of diluted earnings per share as the effect would
have been anti-dilutive due to the net loss for the year ended February 28,
1998. Options to purchase 1,145,069 and 460,500 shares of common stock at
average exercise prices of $21.79 and $21.46, respectively, were outstanding
during fiscal 1997 and fiscal 1996, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares and, therefore,
the effect would have been anti-dilutive.
NOTE K - 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) 1998 1997 1996
- -------------- ---- ---- ----
The Americas (Excluding
the United States) $11,489 $11,622 $11,126
Pacific Rim 4,372 4,769 3,507
Europe, The Middle East
and Africa 5,419 8,372 3,620
------- ------- -------
TOTAL $21,280 $24,763 $18,253
======= ======= =======
No customer accounted for 10% or more of the Company's sales during fiscal 1998.
One customer, Siemens AG, one of the Company's resellers, accounted for 10.2% of
the Company's sales during fiscal 1997. During fiscal 1996, MCI
Telecommunications accounted for 11.2% of the Company's total sales.
31
34
NOTE L - CONCENTRATIONS OF CREDIT RISK
The Company sells systems directly to end-users and distributors primarily in
the banking and financial, telecommunications, human resource, healthcare 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 M - 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 $854,000, $759,000, and $524,000 in
fiscal 1998, 1997 and 1996, respectively.
NOTE N - 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 have
discussed the possibility of negotiations for 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 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.
32
35
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 28,1998 Deducted from asset accounts:
Allowance for doubtful accounts $ 250,950 $ 291,491 $ (174,437)(A) $ 368,004
Allowance for slow moving inventories 166,000 1,935,067 (741,067)(B) 1,360,000
----------- ----------- ----------- -----------
Total $ 416,950 $ 2,226,558 $ (915,504) $ 1,728,004
=========== =========== =========== ===========
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
=========== =========== =========== ===========
- -----------------------------
(A) Accounts written off.
(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.
33
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
37
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
entitled "Certain Transactions" in the Definitive Proxy Statement. Such
information is incorporated herein by reference.
35
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements and financial
statement schedule of InterVoice, Inc. and subsidiaries are included
in Items 8 and 14(a), respectively.
Page
----
(1) Financial Statements:
Report of Independent Auditors................................................................ 20
Consolidated Balance Sheets at February 28, 1998 and February 28, 1997........................ 21
Consolidated Statements of Operations for the three years ended
February 28, 1998........................................................................ 22
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended February 28, 1998.............................................. 23
Consolidated Statements of Cash Flows for the three years ended
February 28, 1998........................................................................ 24
Notes to Consolidated Financial Statements.................................................... 25
(2) Financial Statement Schedules
II Valuation and Qualifying Accounts.......................................................... 33
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, 1998.
36
39
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, 1998
37
40
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, 1998
- -------------------------------- Directors and Chief
Daniel D. Hammond Executive Officer
/s/ ROB-ROY J.GRAHAM Chief Financial Officer, May 28, 1998
- -------------------------------- Chief Accounting Officer
Rob-Roy J. Graham and Controller
(Principal Accounting Officer)
/s/ JOSEPH J. PIETROPAOLO Director May 28, 1998
- --------------------------------
Joseph J. Pietropaolo
/s/ GEORGE C. PLATT Director May 28, 1998
- --------------------------------
George C. Platt
/s/ GRANT A. DOVE Director May 28, 1998
- --------------------------------
Grant A. Dove
38
41
INDEX TO EXHIBITS
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
3.1 o Articles of Incorporation, as amended, of Registrant (7)
3.2 o 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 o Registrant's 1984 Incentive Stock Option Plan, as amended (1)
10.2 o Second Amended and Restated Employment Agreement dated as of
June 21, 1996, effective as of March 1, 1996 by and between the
Company and Daniel D. Hammond (10)
10.3 o 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 o Amended and Restated Rights Agreement dated as of December 12,
1994 between the Registrant and KeyCorp Shareholders Services,
Inc. (formerly Society National Bank), as Rights Agent (5)
10.5 o The InterVoice, Inc. 1990 Incentive Stock Option Plan, as
amended (10)
10.6 o The InterVoice, Inc. 1990 Nonqualified Stock Option Plan for
Non-Employees, as amended (4)
10.7 o Amendment to the 1984 Incentive Stock Option Plan (2)
10.8 o InterVoice, Inc. Employee Stock Purchase Plan (7)
10.9 o Second Amended and Restated Employment Agreement dated as of
June 21, 1996, effective as of March 1, 1996 by and between the
Company and Michael W. Barker (10)
10.10 o 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 o InterVoice, Inc. Employee Savings Plan (6)
10.12 o Merger Agreement dated August 31, 1994 among the Company,
InterVoice Acquisition Corp., VoicePlex Corporation and certain
shareholders of VoicePlex Corporation. (8)
10.13 o InterVoice, Inc. Restricted Stock Plan (9)
10.14 o Separation Agreement dated as of December 5, 1996 between the
Company and Richard Herrmann (10)
10.15 o Letter concerning resignation of Michael W. Barker (11)
10.16 o Consulting Services Agreement and General Release with Michael
W. Barker dated February 24, 1998. (12)
10.17 o Assets Purchase Agreement executed as of December 16, 1997 (and
first and second Amendments thereto) among InterVoice
Acquisition Subsidiary, Inc., ABC Telecom, Inc. (formerly known
as Integrated Telephone, Products, Inc.) and David Lifshitz (12)
10.18 o Loan Agreement dated as of November 3, 1997 by and between
NationsBank of Texas, N.A., a national banking association
("Bank") and InterVoice, Inc.; together with a Renewal,
Extension and Modification Agreement dated as of April 30, 1998, (12)
10.19 o Employment Agreement dated as of October 8, 1997 by and between
the Company and Eric L. Pratt (12)
42
23. o Consent of Independent Auditors (12) .
27.1 - 27.8 o Restated Financial Data Schedules (12)
27.9 o Financial Data Schedule (12)
- -----------------
(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 1994
Quarterly Report on form 10-Q for the quarter ended May 31, 1993,
filed with the SEC on July 1, 1993.
(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) Incorporated by reference to exhibits to the Company's 1997 Annual
Report on Form 10-K for the fiscal year ended February 28, 1997,
filed with the SEC on May 29, 1997.
(11) Incorporated by reference to exhibits to the Company's Form 10-Q for
the fiscal quarter ended November 30, 1997, filed with the SEC on
January 14, 1998.
(12) Filed herewith.