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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1999
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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, 1999
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,
1999: $320,525,734
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 26, 1999:
28,811,257
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 1999 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.............................................................10
Manufacturing and Facilities...................................................10
Employees......................................................................11
ITEM 2. Properties.....................................................................11
ITEM 3. Legal Proceedings..............................................................11
ITEM 4. Submission of Matters to a Vote of Security Holders............................11
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters..........12
ITEM 6. Selected Financial Data........................................................12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................13
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.....................21
ITEM 8. Financial Statements and Supplementary Data....................................21
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................38
PART III
ITEM 10. Directors and Executive Officers of the Registrant.............................39
ITEM 11. Executive Compensation.........................................................39
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.................39
ITEM 13. Certain Relationships and Related Transactions.................................39
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............40
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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. More
recently, the Company has focused on systems for telecommunications service
providers to provision a variety of automated services such as processing
collect, debit and credit card calls, and advanced calling features such as
prepaid calling cards, voice and text messaging, one number personal numbering
plans and voice dialing. In the last year, the Company has increased its
emphasis on customer relationship management systems which provide companies
automated customer service, telemarketing capabilities and the ability to
generate sales without human interaction (i.e., v-commerce and e-commerce).
The Company's systems are sold under the trade names "OneVoice",
"AgentConnect" 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. AgentConnect systems improve call center efficiency by
automating routine customer service requests and providing telemarketing
capabilities 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. AgentConnect systems also are being utilized in v-commerce and
e-commerce environments to automate order processing and fulfillment. OneVoice
and AgentConnect applications currently function in a wide range of industries
including banking and financial services, cable TV, government, healthcare,
help desk, higher education, insurance, retail, wholesale distribution,
telecommunications, transportation, 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.
Such systems can incorporate either multiple voice processing modules of up to
96 voice and data channels per module or multiple units of the Company's NSP
5000 platform, which can provide up to 1400 voice and data channels per
platform. The Company's voice processing modules and/or NSP5000 platforms can be
connected by local or wide area networks for a single point of management,
control and redundancy. AgentConnect systems sell at list prices ranging from
approximately two hundred fifty thousand to millions of dollars and support from
four to 40 agent positions on a single voice processing module. Multiple
AgentConnect modules can be connected via a node adapter to form systems 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 are based on
the Company's NSP5000 platform and share the scalability attributes of the
Company's OneVoice systems.
In the Customer Premise Equipment (CPE) 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 (Telco) end-users. Since the Company's inception in 1984, the
number of worldwide installations of the Company's systems has grown to nearly
12,000 located in 52 countries. The CPE end-users to which the Company has sold
systems include Aetna, Bank of America, CitiBank, Fidelity Investments, BankOne,
First Union Corporation, J.C. Penney, Martin Marietta, Merrill Lynch, Microsoft,
National Data Corporation, National Westminster Bank U.K., Sears Roebuck and
Co., Social Security Administration, T U Electric, USAA and Wachovia Bank. The
Company's Telco end-users include Avantel (Mexico), Bell Canada, British
Telecom, CANTV (Venezuela), Codatel (Dominican Republic), CTC (Chile), CTI
(Argentina), Guatel (Guatemala), GTE, Qwest/LCI International, MCI/Worldcom,
Movilnet (Venezuela), NPT (People's Republic of China), Telcel (Venezuela),
Telecom Asia (Thailand), Sprint and Unicom (People's Republic of China). No
customer accounted for 10% of the Company's sales during fiscal 1999 or 1998.
Other than Siemens AG, one of the Company's resellers, which accounted for 10.2%
of the Company's total sales in fiscal
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1997, no customer represented 10% or more of the Company's aggregate sales
during fiscal 1997.
CALL AUTOMATION INDUSTRY
The number of telephone calls and, more recently, Internet inquiries
(whether voice-based or graphics-based) requesting information or requiring
operator assistance that must be handled by businesses, telecommunications
service providers and other organizations has increased dramatically in recent
years. Traditionally, consumers obtained information 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. Enterprises also have begun
to employ Customer Relationship Management (CRM) systems to enhance customer
retention through improved customer interaction to tighten the integration
between the enterprise and the customer. Such systems enhance customer service,
facilitate focused telemarketing initiatives and support v-commerce and
e-commerce capabilities to automate order processing and fulfillment.
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, enhanced
telecommunication services and calling features.
Call automation systems traditionally have been interfaced to public
telephony networks. Recently, the Internet has evolved to become a voice and
data communications network similar to public telephony networks. As a natural
extension of its product strategy, the Company has adapted its products to
permit customers to interface their call automation systems to the Internet in
addition to or simultaneously with public telephony networks. 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.
Call automation systems address one or more of the six basic markets below:
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 1999.
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 AgentConnect system
which accounted for approximately 5% of its system sales in fiscal 1999.
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 1999 sales into this market were not significant.
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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 1999 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 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 20% of system
sales in fiscal 1999.
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 1999 sales into this market were not significant.
The call automation industry has begun to experience a demand for CRM
systems that must simultaneously address customer needs in two or more of these
basic markets. Larger CPE end-users, for example, are beginning to consolidate
their customer service and telemarketing 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 AgentConnect product which
supports individuals who may simultaneously serve as customer service and
telemarketing representatives. AgentConnect systems deployed in such a manner
accounted for approximately 10% of the Company's systems sales in fiscal 1999.
The general public has become increasingly receptive to call automation,
having become familiar with such technology 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
Discount Brokerage
Bill Payment
401K/Employee Benefit
Health Care Plan Enrollment
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 has traditionally focused on the financial services market and
continues to evaluate a wide variety of potential industry specific or
"vertical" markets based on their potential for rapid acceptance of call
automation technology. As a result, the Company has diversified its focus to
include the telecommunications,
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human resource, and healthcare vertical markets.
PRODUCT STRATEGY
The Company's products are designed to assist its customers in achieving
the following objectives:
o Increase net profits 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. AgentConnect 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.
Both the OneVoice and AgentConnect systems can be simultaneously hosted by the
Company's NSP 5000 platform. Similarly, the OneVoice and AgentConnect systems
can simultaneously host multiple applications. This allows the Company's
customers to leverage and cost effectively expand their investments in their
OneVoice and/or AgentConnect systems. The Company also has adapted its NSP 5000
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
are 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,
allowing the Company to deliver 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, AgentConnect and
InControl Systems, is simultaneously compatible with all popular operating
systems, such as Windows NT, UNIX and OS/2. 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 InterSoft run time software.
Flexible Programming: The Company offers its customers a wide variety of
software features that can be included in the OneVoice, AgentConnect and
InControl systems. The Company's software is designed to support a number
of diverse product applications. The Company 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
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expanded from 24 to 1400 lines per platform by adding expansion cards
without software changes. Platforms 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.
AgentConnect modules are expandable from 4 to 40 lines per system and
multiple AgentConnect modules can be connected via a node adapter to
support up to a total of 128 agents.
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 on-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 and comprised more than 65% of the Company's sales in fiscal 1999. These
systems combine a variety of standard computer platforms and standard operating
systems with the Company's proprietary run time software, InterSoft, and Company
developed and third party developed voice processing 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 AgentConnect (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.
AgentConnect Systems
AgentConnect systems are ideal for regional or branch offices of large
businesses for provisioning integrated inbound and outbound CRM 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 in
both customer service and telemarketing environments. Internet connectivity also
supports the automation of Internet-based order processing and fulfillment.
AgentConnect systems deployed as CRM solutions accounted for 10% of the
Company's sales in fiscal 1999.
AgentConnect systems also can be utilized to provide outbound call
processing. AgentConnect systems deployed in such a manner accounted for 5% of
the Company's sales in fiscal 1999. A typical application of such a 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. 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
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The InControl system is similar in design to the OneVoice system and
utilizes much of the same proprietary hardware and software. InControl systems
provide telecommunications network operators with automated operator services
(such as processing prepaid and credit card calls) and revenue generating
enhanced telecommunication features (such as voice mail, short voice and text
message delivery, "one number" services and voice activated dialing). These
systems accounted for 20% of the Company's total sales in fiscal 1999.
InControl systems are comprised of the Company's 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 database 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.
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 the Company's systems, including:
VisualConnect ~: A feature which allows the Company's 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 the
Company's systems to store and retrieve large quantities of verbal
information received from many telephone lines.
DataConnect ~: A feature allowing the Company's 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 the Company's systems to
emulate central office signaling.
PulseDial Decoding ~: A feature which allows rotary phones to communicate
with the Company's 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
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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 the Company's 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.
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 the Company's 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, other than InterVoice, 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, Periphonics,
Brite Voice Systems and Edify. The principal competitors for the Company's
AgentConnect Systems include Davox, EIS and Lucent Technologies (formerly
Mosaix). The principal competitors for the Company's telecommunications products
include Lucent Technologies, Comverse 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 1999, approximately 53% and 47% of the Company's total
sales were attributable to direct sales to end-users and to sales to
distributors, respectively. The Company provides discounts to volume end-user
purchasers and its distributors reflecting decreased costs associated with such
sales. During fiscal 1999, sales to existing customers, as a percentage of the
Company's total sales, were 65%, the same as in fiscal year 1998, 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 1999 or
1998. One of the Company's resellers, Siemens AG, accounted for 10.2% of the
Company's total sales in fiscal 1997.
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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 1999,
approximately 60% and 40% 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, BankOne,
First Union Corporation, GTE, J. C. Penney, Qwest/LCI International, Martin
Marietta, MCI/Worldcom, Merrill Lynch, Microsoft, National Data Corporation,
National Westminster Bank U.K., Sears Roebuck & Co., Social Security
Administration, Sprint, TU Electric, USAA, and Wachovia Bank. 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's 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 EDS,
Fiserv, GTE, Norstan, Siemens Business Communications, Sprint, Symitar Systems
and Wiltel.
International Distribution
The Company's products are currently sold in 52 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), Norstan (Canada), Phonetix (Canada), Promotora Kranon (Mexico),
Siemens AG (Worldwide) and Switch (Chile). 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 and Sao Paulo to support its Canadian and
Brazilian 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 increased 13% in fiscal 1999, decreased 14% in fiscal
1998 and increased 36% in fiscal 1997, respectively, and, as a percentage of
total sales, were 18% in fiscal 1999, 21% in fiscal 1998 and 24% in fiscal 1997.
Sales to the Americas (excluding the United States) constituted 55%, 54% and 47%
of international sales in fiscal 1999, 1998 and 1997, respectively. Sales to
Europe constituted 26%, 25% and 34% of international sales in fiscal 1999, 1998
and 1997, respectively. Sales to the Pacific Rim constituted 19%, 21% and 19% of
international sales in fiscal 1999, 1998, and 1997, 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. A discussion of the Company's sales
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by geographical area for fiscal 1999, 1998 and 1997 is found in Note K to the
Consolidated Financial Statements located in Item 8 of this report.
BACKLOG
The Company's backlog at February 28, 1999, 1998, and 1997 was
approximately $27 million, $17 million and $11.4 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.
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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,
1999, the Company owned 34 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
34 patents, and has applied and will continue to apply for a number of
additional patents. The Company believes that its patent portfolio could allow
it to assert counterclaims for infringement against certain owners of
intellectual property rights if those owners were to sue the Company for
infringement. In certain situations, it might be beneficial for the Company to
cross license certain of its patents for other patents which are relevant to the
call automation industry.
The Company believes that software companies and technology companies,
including the Company and other companies in the Company's industry, may become
increasingly subject to infringement claims. Such claims may require the Company
to enter into costly license agreements, or result in even more costly
litigation. To the extent the Company requires a licensing arrangement, the
arrangement may not be available at all, or, if available, may be very expensive
or even prohibitively expensive. As with any legal proceeding, there is no
guarantee that the Company will prevail in any litigation instituted against the
Company asserting infringement of intellectual property rights. To the extent
the Company suffers an adverse judgment, it might have to pay substantial
damages, discontinue the use and sale of infringing products, repurchase
infringing products from the Company's customers pursuant to indemnity
obligations, expend significant resources to acquire non-infringing
alternatives, and/or obtain licenses to the intellectual property that has been
infringed upon. As with licensing arrangements, non-infringing substitute
technologies may not be available, and if available, may be very expensive, or
even prohibitively expensive, to implement. Accordingly, for all of the
foregoing reasons, a claim of infringement could ultimately have a material
adverse effect on the Company's business, financial condition and results of
operations.
MANUFACTURING AND FACILITIES
The Company's manufacturing operations consist primarily of the final
assembly, 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
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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, 1999, the Company had 722 employees.
MERGER WITH BRITE VOICE SYSTEMS, INC. AND RELATED FINANCING
The Offer
On May 3, 1999, the Company, through a wholly-owned subsidiary,
InterVoice Acquisition Subsidiary III, Inc. (the "Purchaser"), commenced an all
cash tender offer (the "Offer") for the purchase of 9,158,155 shares, or
appropriately 75%, of the outstanding common stock of Brite Voice Systems, Inc.
("Brite"), at a price of $13.40 per share. The Offer is conditioned upon, among
other things, there being validly tendered and not withdrawn prior to the
expiration of the Offer, at least 9,158,155 Brite shares and the Company
securing the necessary debt financing for the Offer, as described below. The
Offer will expire on June 1, 1999, unless extended.
The Merger
The Offer is being made pursuant to an Acquisition Agreement and Plan
of Merger, dated as of April 27, 1999 (the "Merger Agreement"), by and among the
Company, the Purchaser and Brite pursuant to which, as soon as practicable after
the completion of the Offer and satisfaction or waiver, if permissible, of all
conditions to the merger, the Purchaser will be merged with and into Brite, with
Brite surviving the merger and thereby becoming a wholly-owned subsidiary of the
Company (the "Merger"). At the effective time of the Merger (the "Effective
Time"), each outstanding Brite share other than Excluded Shares (as herein
defined) will be canceled and converted into the right to receive the merger
consideration. The relative proportions of the cash and stock components of the
merger consideration are affected by (i) the unexpended proceeds from the debt
financing described below after completion of the Offer, if any, and (ii) the
Company's desire not to issue more than approximately 19.9% of its common stock
as part of the merger consideration, since the issuance of a greater number of
shares would require the Company to obtain shareholder approval under applicable
listing requirements of the Nasdaq National Market. Accordingly, the merger
consideration will be calculated differently depending upon whether the
Purchaser purchases at least 9,158,155 Brite shares in the Offer. Method (1)
will be used if Purchaser purchases 9,158,155 Brite shares or more in the Offer,
thereby utilizing all available cash in the Offer; Method (2) will be used if
Purchaser purchases less than 9,158,155 Brite shares in the Offer and,
consequently, has cash available to apply toward the purchase of the remaining
Brite shares in the Merger.
Method (1) If the Purchaser purchases 9,158,155 Brite shares
or more in the Offer, each Brite share then outstanding (other than
Excluded Shares) will be converted into the right to receive that
number of shares of Company Common Stock equal to $13.40 divided by the
average closing price (the "Average Trading Price") of the Company's
common stock on the Nasdaq for the 25 trading days immediately
preceding the Effective Time of the Merger. The Average Trading Price
must be at least equal to the Lower Collar (as defined below) and may
not exceed $14.00.
Method (2) If the Purchaser purchases less than 9,158,155
Brite shares in the Offer, each Brite share then outstanding (other
than Excluded Shares) will be converted into the right to receive (a)
an amount in cash equal to the quotient of (w) the difference between
(i) the product of $13.40 multiplied by 9,158,155 Brite shares and (ii)
the aggregate purchase price for the number of Brite shares actually
purchased in the Offer, divided by (x) a number of Brite shares equal
to (A) the total number of Brite shares issued and outstanding
immediately prior to the Effective Time (B) less the Excluded Shares
(C) plus the Dissenting Shares (as herein defined) (such quotient
referred to as the "Cash Amount"), plus (b) that number of shares of
the Company's common stock equal to the quotient of (y) the difference
between $13.40 and the Cash Amount, divided by (z) the Average Trading
Price.
The term "Dissenting Shares" means Brite shares held by
stockholders who properly perfect their dissenters' rights, if any,
under Kansas law.
The term "Excluded Shares" means (i) Brite shares owned by the
Company, Brite and their subsidiaries, and (ii) Dissenting Shares.
The term "Lower Collar" means $8.00, except that if a Lower
Collar of $8.00 would otherwise result in the Company issuing more than
5,719,877 shares of common stock, representing approximately 19.9% of
its outstanding common stock, in the Merger, the Lower Collar will be
an amount per share equal to the product of (i) $8.00 multiplied by
(ii) a fraction of which (A) the numerator is the total number of
shares of the Company's common stock that would be issued in the Merger
if the Lower Collar were $8.00 and (B) the denominator is 5,719,877.
Brite is a NASDAQ-listed public company headquartered in
Heathrow, Florida that designs, integrates, assembles, markets and
supports voice processing and call processing systems and services
which incorporate prepaid/postpaid applications, voice response, voice
recognition, voice/facsimile messaging, audiotex and interactive
computer applications into both standard products and customized market
solutions.
Debt Financing
In order to finance the Offer, the Company has entered into a
commitment letter (the "Commitment Letter") with Bank of America National Trust
and Savings Association ("Bank of America") and Banc of America Securities LLC
("Montgomery Securities") pursuant to which, subject to the terms and conditions
thereof, Bank of America will provide the Purchaser financing in an aggregate
amount of up to $150 million (the "Facilities").
The Facilities will be guaranteed by the Company and each material
existing and future direct and indirect domestic subsidiary of the Company,
excluding the Purchaser; provided that Brite and its subsidiaries will not be
required to guarantee the Facilities until the consummation of the Merger. Bank
of America has committed to lend the full amount of the Facilities upon the
terms and subject to the conditions set forth in the Commitment Letter, and Banc
of America Securities has agreed to use its best efforts to form a syndicate of
financial institutions (the "Lenders") reasonably acceptable to the Company,
Purchaser and Bank of America, upon the terms and subject to the conditions set
forth in the Commitment Letter.
Pursuant to the Commitment Letter, the Facilities are expected to
consist of: (i) a $125 million tender facility (the "Term Loan Facility") which
will be available to the Purchaser in order to fund the Offer and the Merger and
(ii) a $25 million revolving credit facility (the "Revolving Credit Facility").
The following is a summary of the principal terms of the Facilities
based upon the Commitment Letter. This summary is qualified in its entirety by
reference to the Commitment Letter, a copy of which has been filed as an exhibit
to the Schedule 14D-1 filed with the Commission in connection with the Offer.
The Commitment Letter provides that the commitments under the
Commitment Letter will terminate unless the Facilities are closed on or prior to
June 30, 1999. The Facilities will mature on August 31, 2003, and the Term Loan
Facility will be subject to quarterly amortization with the first payment due on
May 31, 2000. In addition, the Facilities will be subject to certain mandatory
prepayments and commitment reductions tied to the sale of assets, the issuance
of debt, the issuance of equity and the generation of excess cash flow for a
fiscal year. Certain of these prepayment and commitment reduction requirements
are limited by the satisfaction of certain financial ratios.
The amounts borrowed pursuant to the Revolving Credit Facility and the
Term Loan Facility will bear interest at a rate equal to either the London
Interbank Offer Rate ("LIBOR") plus the applicable margin or the Alternate Base
Rate (to be defined as the higher of (i) the Bank of America prime rate or (ii)
the federal funds rate plus 0.50%) plus the applicable margin. The applicable
margin during the period from the closing of the Facilities until receipt of the
Company's Form 10-Q for the quarter ended November 30, 1999 will be 2.50% and
1.25% for LIBOR and Alternate Base Rate loans, respectively. Thereafter, the
applicable margin in each case will be determined in accordance with a schedule
to the Facilities and will be determined by reference to a ratio of the
Company's funded debt to EBITDA (as defined in the Facilities).
The Facilities will contain certain representations and warranties,
certain negative and affirmative covenants, certain conditions and events of
default which are customarily required for similar financings. Such covenants
will include, among others, restrictions and limitations on liens and negative
pledges; limitations on mergers, consolidations and sales of assets; limitations
on incurrence of debt; limitations on dividends, stock redemptions and the
redemption and/or prepayment of other debt; limitations on investments and
acquisitions (other than the acquisition of the Company); and limitations on
capital expenditures. Key financial covenants based on the Company's
consolidated financial statements include minimum net worth, maximum leverage
ratio and minimum fixed charge coverage ratio. The funding of the Facilities
will be subject to customary closing conditions.
The Facilities will require a first priority perfected security
interest in (i) all of the capital stock of each of the domestic subsidiaries of
the Company (including, without limitation, the Purchaser), and 65% of the
capital stock of each first tier foreign subsidiary of the Company, which
capital stock shall not be subject to any other lien or encumbrance and (ii)
subject to permitted liens, all other present and future material assets and
properties of Brite and its material domestic subsidiaries (including, without
limitation, accounts receivable and proceeds, inventory, real property,
machinery and equipment, contracts, trademarks, copyrights, patents, license
rights and general intangibles), including, without limitation, Brite and its
subsidiaries; provided that Brite and its subsidiaries shall not be required to
pledge such assets and properties until completion of the Merger. All capital
stock of Brite owned by the Purchaser or the Company shall be pledged as
collateral for the Facilities.
In connection with the Facilities, the Borrower has agreed to pay the
Lenders certain commitment, underwriting, administrative and termination fees,
to reimburse the Lenders for reasonable out-of-pocket fees and expenses, whether
or not the Facilities close, and to provide certain indemnities, as is customary
for commitments such as the Facilities.
The Company anticipates that indebtedness incurred through borrowings
under the Facilities in connection with the Offer and the Merger will be repaid
from a variety of sources, which may include funds generated internally by the
Company and its subsidiaries and following the Merger, funds generated by the
Company, bank financings, and the public or private sale of debt or equity
securities. No decision has been made concerning the method the Company will
employ to repay such indebtedness.
Upon consummation of the Merger, the Purchaser will be merged into
Brite, which will then be obligated as the borrower under the Facilities.
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,
3,000, 3,000, 2,000 and 4,000 square feet of office space in London, Singapore,
Sao Paulo, 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
Commencing in fiscal 1997, Lucent Technologies ("Lucent") 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,
and the Company and Lucent did not have any discussions or exchange any
correspondence concerning their respective patent portfolios during fiscal 1999.
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.
In the event that the tender offer and subsequent merger with Brite Voice
Systems, Inc. are consummated (see "Item 1, Business-Merger with Brite Voice
Systems, Inc and Related Financing."), the definitive loan documentation
evidencing the debt facilities to finance the transaction will contain a
contractual limitation on the Company restricting its ability to pay a dividend
in cash or property, although the Company will be permitted to declare a stock
dividend.
High and low share prices as reported in the Nasdaq National Market are
shown below for the Company's fiscal quarters during fiscal 1999 and 1998. Share
prices have been restated to reflect a two for one stock split in the form of a
100% stock dividend paid January 11, 1999.
Fiscal 1999 Fiscal 1998
----------- -----------
Quarter High Low Quarter High Low
------- ---- --- ------- ---- ---
1st $ 7.44 $ 4.38 1st $ 6.25 $ 4.19
2nd 11.94 6.50 2nd 5.69 4.19
3rd 15.09 7.25 3rd 5.31 4.44
4th 18.12 10.19 4th 5.38 3.38
There were approximately 1,000 shareholders of record and approximately
12,500 beneficial shareholders of the Company at May 26, 1999. On May 26, 1999
the closing price of the Common Stock was $11.13.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes included elsewhere herein and 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, 1999 are derived from the
consolidated financial statements of InterVoice, Inc., which financial
statements have been audited by Ernst & Young LLP, independent auditors. The
consolidated financial statements as of February 28, 1999 and 1998, and for each
of the three years in the period ended February 28, 1999 and the report of Ernst
& Young LLP thereon, are included elsewhere herein.
FISCAL YEAR ENDED FEBRUARY 29/28
---------------------------------------------------------------------------------
1999 1998** 1997*** 1996 1995****
---- ------ ------- ---- --------
Net Sales $ 136,904,131 $ 102,307,713 $ 104,845,692 $ 97,103,054 $ 76,265,228
Income (Loss) from Operations 29,148,484 (8,427,179) 17,548,615 25,054,742 9,304,113
Net Income (Loss) 20,192,916 (5,139,846) 12,760,481 17,259,358 2,533,580
Total Assets 111,486,193 84,893,475 109,239,759 89,726,806 62,718,565
Long Term Debt 5,000,000 -- -- -- --
Per Diluted Common Share:
Net Income (Loss) .68 (.17) .39 .53 .08
Cash Dividend -- -- -- -- --
Shares used in Per Diluted Common
Share Calculation* 29,772,504 31,032,672 33,182,320 32,798,866 33,519,312
*The number of diluted common shares have been restated to reflect a 2 for 1
stock split in the form of a 100% stock dividend paid January 11, 1999.
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**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 $0.08 per share.
***Fiscal 1997 income from operations and net income were impacted by charges
totaling approximately $1.8 million and $1.3 million, respectively, or $0.04 per
share, resulting from a non-recurring litigation settlement. Without this
charge, net income for fiscal 1997 would have been $0.43 per share.
****Fiscal 1995 income from operations and net income were impacted by a
non-recurring charge totaling approximately $10.5 million, or $0.32 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 $0.40 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 2000, 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
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as Siemens AG, an InterVoice distributor, which accounted for over ten
percent of the Company's total sales during fiscal 1997) 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.
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 banking 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.
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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 28
----------------------
1999 1998* 1997**
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of goods sold 39.6 47.8 38.3
Gross Margin 60.4 52.2 61.7
Research and development expenses 9.7 12.4 11.1
Selling, general and administrative expenses 29.4 41.4 32.2
Non-recurring expenses -- 6.6 1.7
Operating income (loss) 21.3 (8.2) 16.7
Other income - net (.3) .8 .6
Income (loss) before taxes 21.0 (7.4) 17.3
Income taxes (benefit) 6.3 (2.4) 5.2
Net Income (loss) 14.7% (5.0%) 12.1%
*See discussion of fiscal 1998 in Item 6, Selected Financial Data. Had it not
been impacted by 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% 39.3%, 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
Premises 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 adopted the American Institute of
Certified 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. The adoption of SOP 97-2 resulted in the Company not recognizing revenue
in the same fiscal quarter that certain systems are shipped. The adoption of
SOP 97-2 also resulted in the Company recognizing revenue during a fiscal
15
18
quarter from systems shipped in previous fiscal periods. Accordingly, the
adoption of SOP 97-2 delayed by 60 to 90 days the Company's recognition of
approximately $3 million in sales during the fourth quarter of fiscal 1998, the
first fiscal quarter of adoption. The adoption of SOP 97-2 did not result in a
material increase or decrease in the Company's aggregate sales during its fiscal
1999.
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. The Company continued its tightened
practices during its fiscal 1999.
Worldwide sales in fiscal 1999 increased 34%, declined 2% in fiscal 1998
and increased 8% in fiscal 1997. Worldwide CPE sales increased 35% in fiscal
1999, decreased 1% in fiscal 1998 and increased 15% in fiscal year 1997.
Worldwide Telco sales increased 53% in fiscal 1999 and declined 15% and 19% in
fiscal 1998 and 1997. CPE sales constituted 71%, 70% and 69% of the Company's
total sales in fiscal years 1999, 1998 and 1997, respectively, while Telco sales
made up 19%, 17% and 19% of the Company's total sales during the same time
periods. System maintenance contracts now cover 4,000 end users and sales of
such contracts comprised 10%, 13% and 12% of the Company's total sales in fiscal
1999, 1998, and 1997, respectively.
Domestic CPE sales in fiscal 1999, 1998 and 1997 increased 37%, 11% and
36%, respectively, 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 1999 increased 29%, decreased 37% in fiscal
1998 and increased 30% in fiscal 1997. 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 1998 and 1997 for the
same reasons as the increase in domestic CPE sales. International CPE sales
constituted 10% of the Company's total CPE sales in fiscal years 1999 and 1998
and 24% of such sales in fiscal 1997.
Telco sales increased in fiscal 1999 as a result of the hiring and training
of new and existing sales, service and support personnel and of the expansion of
marketing programs. 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.
International Telco sales constituted 40%, 62% and 39% of the Company's total
Telco sales in fiscal years 1999, 1998 and 1997, respectively.
Prices for the Company's products have remained stable, as measured by
price per line shipped, during fiscal 1999, 1998 and 1997 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 1% of total sales are
denominated in foreign currencies.
COST OF GOODS SOLD
Fiscal 1999 cost of goods sold was 40% of total sales, compared to 47.8% in
fiscal 1998 and 38.3% in fiscal 1997. The decrease in fiscal 1999 was the result
of increased sales and the Company's efforts to control costs and expenses. The
increase in cost of goods sold during fiscal 1998 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.
RESEARCH AND DEVELOPMENT
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Fiscal 1999, 1998 and 1997 research and development expenses were
approximately $13.3 million, $12.7 million and $11.7 million, respectively.
Fiscal 1999 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; augmenting the Company's speech recognition and voice
verification capabilities; and the integration into the Company's product
offerings of the ESP product line purchased from Integrated Telephony Products,
Inc. and the computer telephony software suite purchased from Dronen Consulting,
Incorporated. Additionally, expenditures were made in fiscal 1999, 1998 and 1997
for the ongoing development of the Company's OneVoice systems (the Company's
call automation system), AgentConnect (the Company's customer relationship
management system), OneLink (a digital interface for analog switches), and
digital VocalCard software and hardware functionality. Research and development
expenses in fiscal 1998 and 1997 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, vertical industry application packages
(including applications targeted for the telecommunications industry),
enhancements to the telecommunications products obtained from the Company's
acquisition of the VoicePlex Corporation in the Company's fiscal 1994, 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 2000 it will maintain its strong commitment to research
and development to remain at 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 decreased to $40.3 million in
fiscal 1999 from $42.4 million in fiscal 1998. Such expenses were $33.7 million
in fiscal 1997. During fiscal 1999 the Company undertook measures to control
expenses, particularly selling, general and administrative expenses (see
discussion below in "Income (loss) from Operations"). During fiscal 1998 and
1997, the Company continued to hire and train new and existing sales, service
and support personnel and expand its marketing and advertising programs
worldwide, despite lower than anticipated sales.
OTHER INCOME AND EXPENSE
Other expense during fiscal 1999 was primarily interest paid on the
Company's borrowings under its revolving credit facility. Other income during
fiscal 1998 and 1997 was primarily interest income on cash and short term
investments. The increase in other income in fiscal 1998 versus fiscal 1997
reflected the Company's increased average cash balances.
INCOME (LOSS) FROM OPERATIONS
The Company generated operating income of $29.1 million and net income of
$20.2 million, respectively, in fiscal 1999. 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.
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 $6.8 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; and
$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. The
Company also provided $1.0 million for potential inventory obsolescence in light
of efforts to migrate customers to its internally developed NSP-5000 computing
platform from the Company's traditional computing platforms such as IBM PS-2
computers. As a result of such migration, the Company reviewed its on-hand
supply of traditional computer platforms and
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20
determined that a provision for obsolescence was necessary to allow for a
potential excess supply of traditional computer platforms of which the Company
had approximately $3.0 million on-hand at February 28, 1998. 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. In addition to acquiring the ESP product line and certain
other assets of Integrated Telephony Products, Inc. the Company acquired two
in-process research and development projects: 1)Call Flow and 2) Internet
Telephony Interfaces. Call Flow is a project to develop a Windows NT, GUI-based
telecommunications application development tool. Internet Telephony Interfaces
is a project to develop interfaces to allow text and voice messaging over the
Internet which will enable an end user to access voice messages, text messages
(such as email) and faxes either through traditional telecommunications networks
(with text messages and faxes being read to the end user using text-to-speech
technology) or through the Internet. The amount allocated to the purchased
research and development projects ($1.8 million) was expensed at the time of
acquisition as the Company determined that the purchased research and
development projects had not reached technological feasibility based on the
status of design and development activities that required further refinement and
testing. To determine the fair market value of the in-process research and
development projects, the Company used a risk adjusted income approach,
whereupon fair market value is a function of the future revenues expected to be
generated by an asset, net of all allocable expenses. In determining the amount
of the purchase price to allocate to the purchased research and development,
factors such as stage of completion and technological uncertainties were
considered by the Company in determining the present value of the future
benefits to be received. The development activities required to complete the
acquired in-process research and development projects include additional coding,
cross-platform porting and validation, quality assurance procedures and beta
testing. At the time of purchase, the estimated future cost of completing these
activities was expected to be approximately $1 million to be incurred over the
next 12 months. Actual costs incurred during fiscal 1999 were approximately $1.1
million. Revenue streams from the resulting products are expected to begin in
fiscal 2000 and were projected forward for five years in the risk adjusted
income analysis. A discount rate of 30% was used to determine the present value
of the cash flows related to the in-process research and development projects
which resulted in $1.8 million of assigned value. If these projects do not meet
with the Company's anticipated level of market acceptance, the Company may not
realize the value assigned to the purchased research and development. 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.
Adjusting for the one time charges and other items discussed above, the
Company would have generated operating income of approximately $2.0 million and
approximately $19.3 million in fiscal 1998 and 1997, respectively, and net
income of approximately $1.9 million and $14.0 million in fiscal 1998 and 1997,
respectively.
Fiscal 1999 operating income increased over fourteen times versus adjusted
operating income in fiscal 1998 as the result of increased sales and the
Company's measures to control costs and expenses, particularly selling, general
and administrative expenses. Operating income, adjusted for the one time charges
and other items discussed above, 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. Fiscal 1999 net income increased nearly ten times versus adjusted
net income in the previous fiscal year, and net income, adjusted for the one
time charges and other items discussed above, in fiscal 1998 and fiscal 1997
decreased 84% and 19%, respectively, versus the previous fiscal year for the
same reasons as operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $12.2 million in cash and cash equivalents at
February 28, 1999, while borrowings under the Company's credit facilities was
$5.0 million. 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 $10.0 million. Net income plus non-cash expense items totaled
$31.2 million while an increase in operating assets totaled $13.1 million to
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21
yield an operating cash flow of $18.1 million during fiscal 1999. The increase
in operating assets was primarily attributable to a $16.1 million increase in
accounts receivable. The increase in accounts receivable is due to increased
sales and a few large contracts with payment terms which extend beyond the dates
on which revenue is recognized for financial reporting purposes. Investment
activities totaling approximately $7.6 million during 1999 and included the
purchase of a computer telephony software suite from Dronen Consulting,
Incorporated for $3.6 million in cash and 75,000 shares of the Company's common
stock, valued at $1.5 million. Other purchases included 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 1999 included the repurchase of
294,000 shares of the Company's common stock, at a cost of approximately $5.9
million pursuant to an authorization by its Board of Directors during fiscal
1998. The Company believes that market conditions made such share repurchases of
value to its shareholders. Other financing activities included the receipt of
$7.4 million as proceeds from the exercise of employee stock options and the pay
down of $4.0 million on the Company's borrowings. As a result of cash generated
from operations and investment and financing activities, the Company experienced
an increase of its cash reserves of approximately $8.0 million during fiscal
1999.
The Company believes that its cash reserves and internally generated cash
flow will be sufficient to meet its operating cash requirements for the
foreseeable future. The Company reviews share repurchase and acquisition
opportunities from time to time and believes it has access to the financial
resources necessary to pursue attractive opportunities as they arise. 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 has negotiated a $20 million credit facility
with Bank of America which is scheduled to expire on November 18, 2001.
The Company completed a two for one stock split in the form of a 100% stock
dividend on January 11, 1999. Basic and diluted earnings per share have been
retroactively adjusted to reflect the stock split.
On April 27, 1999, the Company signed a definitive merger agreement to
acquire all of the outstanding shares of Brite Voice Systems, Inc. (Brite).
Pursuant to the agreement, InterVoice will pay Brite shareholders $13.40 per
Brite share, or based on approximately 12.3 million shares of Brite common stock
outstanding, total consideration of approximately $164.4 million. Of this total,
approximately $122.7 million, or $10.00 per Brite share, will be in cash and
approximately $41.7 million, or $3.40 per Brite share, will be in shares of
InterVoice common stock. The merger will be accounted for as a purchase business
combination.
The transaction will be executed in two steps, the first being an all cash
tender offer at $13.40 per share for approximately 9.2 million shares of Brite's
common stock. The second step will consist of a merger in which shares of Brite
common stock not purchased in the cash tender offer will be exchanged into
shares of InterVoice common stock. The ratio of exchange will be determined at
the time of the merger based on the average closing price of an InterVoice share
for the preceding twenty-five trading days. This transaction has been approved
by the Boards of Directors of Brite and InterVoice. The cash tender offer will
close on June 1, 1999. The closing of the transaction is subject to certain
customary conditions as described in the merger agreement.
In connection with this transaction, InterVoice has received a commitment
from Bank of America to provide senior secured credit facilities amounting to
$150 million, which will include a $125 million term loan facility and a $25
million revolving credit agreement. The term loan agreement will be subject to
scheduled repayments, as defined, during 2000-2003. The revolving credit
agreement will expire upon the earlier of the termination of the term loan, or
August 31, 2003. If the tender offer and merger are consummated and the debt
facilities are funded, the cash required to service the facilities could have a
material impact upon the operating cash requirements of the Company for the
foreseeable future.
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
material long term debt obligations, which should reduce the Company's exposure
to inflationary effects.
If the tender offer and subsequent merger with Brite is consummated (see
"Item 1. Business-Tender Offer for Brite Voice Systems, Inc."), the debt
facilities financing the transaction would be considered to be a material long
term debt obligation, which may expose the Company to inflationary effects
associated with such variable rate loans.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
---------------------------
FISCAL 1999 31-May-98 31-Aug-98 30-Nov-98 28-Feb-99
--------- --------- --------- ---------
Sales $ 30,000,337 $ 33,070,279 $ 35,010,205 $ 38,823,310
Income from Operations 4,703,322 6,857,125 8,505,311 9,082,726
Net income 3,002,588 4,429,140 5,506,708 7,254,480
Net income per share-diluted .11 .15 .18 .24
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-diluted .01 .07 .01 (0.28)
*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 $0.08 per diluted
share.
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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 by July 1999.
Additionally, the Company has created a year 2000 project team to review
and test its information technology systems and non-information technology
systems and to resolve any century compliance issues that are found. The team
also is attempting to ensure that any replacements and upgrades to the Company's
systems are century compliant before they are implemented. In this regard, the
team is continuing to work with third party vendors to assess the year 2000
readiness of its technology systems. The year 2000 readiness of the Company's
technology systems is, therefore, partially dependent upon the accuracy of
disclosures and representations made by third party vendors, such as Oracle,
PeopleSoft, MicroSoft, IBM and Dell Computer. The Company anticipates that its
testing and remediation program for year 2000 issues with respect to
mission-critical systems should be substantially completed by August 1999.
Because most of the expenditures to replace and upgrade the Company's internal
systems have been made and will be incurred in the ordinary course of business,
(i.e., on a non-accelerated basis), the Company does not anticipate that it will
incur material incremental expenses in connection with its year 2000 remedial
efforts. As a result of the program to replace and upgrade its internal systems,
and the efforts of the year 2000 project team, the Company believes that its
internal 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 internal systems in a 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.
The Company has created a detailed year 2000 testing program for its
mission-critical systems. Systems which perform certain mission-critical
customer service applications are currently undergoing extensive century
compliance testing. The remaining mission-critical systems and applications are
scheduled for century compliance testing during the Company's second fiscal
quarter ending August 31, 1999. The commencement of the Company's fiscal year
2000 on March 1, 1999 helped to accelerate its year 2000 testing program,
particularly for mission-critical financial, manufacturing and order entry
applications which process dates that reflect the fiscal year end date (i.e.,
February 29, 2000).
In addition to assessing and testing internal business systems for year
2000 readiness issues, the Company is also in the process of reviewing its other
contingency plans for system failures that might arise in connection with the
millennium transition. The Company currently has certain disaster recovery
processes and procedures designed to allow it to continue critical business
operations in the event of a software or hardware failure, or the failure of
infrastructure services (i.e., electricity, telephone services, water transport,
internet services, etc.).
These disaster recovery processes and procedures generally involve manual
"work arounds" and alternate computerized solutions. The Company is in the
process of reviewing the adequacy of these processes and procedures in light of
potential century compliance issues. While the Company does not currently have a
full contingency plan for system failures that may occur in connection with the
year 2000, the Company believes that a satisfactory contingency plan can be
developed based, in part, on existing disaster recovery programs. To assist with
the development of a full contingency plan, the Company is in the process of
engaging a disaster recovery service company. As part of the contingency plan,
the Company will acquire an auxiliary power generator to help operate
mission-critical systems in the event of temporary power failures.
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 began designating certain products as such in June 1997. The
Company's assessment of its current products is partially dependent upon the
accuracy of disclosures and
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representations concerning century compliance made by its suppliers, such as
MicroSoft, IBM and Dell Computer. However, many of the Company's customers are
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.
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, the Company's earlier products which may not be completely century
compliant, the Company's performance and warranty obligations under customer
contracts, or issues arising from the customer's unique application or the
integration of the Company's products with other products. The Company has not
been a party to any proceeding involving its 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.
Based on recent discussions with current and potential customers, the
Company believes that the timing of purchases and implementations of call
processing systems may be influenced by year 2000 readiness issues. Year 2000
readiness issues might encourage some customers to purchase new call processing
systems, or upgrades to existing systems, in order to ensure that they have
century compliant current systems. On the other hand, some customers may have to
spend significant amounts to remedy year 2000 readiness issues with their
internal computer systems not related to their call processing systems. These
expenditures could cause customers to delay or forego purchases of other
computerized systems, such as call processing systems. Some customers may also
choose to delay the implementation or purchase of new or upgraded computer
systems, including call processing systems, in order to stabilize their internal
operations and reduce the risk of introducing new year 2000 issues. Accordingly,
the Company believes that year 2000 issues may simultaneously encourage certain
customers to purchase call processing systems prior to the year 2000, and may
cause other customers to delay their purchases of call processing systems. If
year 2000 concerns lead to a net reduction in the Company's revenues, such a
reduction could have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's current Credit Agreement provides for borrowings which
bear interest at variable rates based on either a prime rate or the London
Interbank Offering Rate. The Company had $5 million outstanding pursuant to the
Credit Agreement at the end of fiscal 1999. The Company currently believes that
the effect, if any, of reasonably possible near-term changes in interest rates
on the Company's financial position, results of operations, and cash flows
should not be material.
In the event that the tender offer and subsequent merger with Brite is
consummated (see "Item 1. Business-Merger with Brite Voice Systems, Inc. and
Related Financing"), both the Term Facility of $125.0 million and the Revolving
Credit Facility of $25.0 million will bear interest at variable interest rates
based on either a prime rate, the federal funds rate or the London Interbank
Offering Rate, plus an applicable margin. Due to the magnitude of this proposed
facility, the Company believes that the effect of any reasonably possible
near-term changes in interest rates on the Company's financial position, results
of operations, and cash flows may be material.
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, 1999 and for each of the
three years in the period ended February 28, 1999 follow:
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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, 1999 and 1998 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, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 28, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Dallas, Texas
April 7, 1999, except for Note O,
as to which the date is April 27, 1999
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InterVoice, Inc.
Consolidated Balance Sheets
February 28 February 28
ASSETS 1999 1998
- ---------------------------------------------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 12,195,612 $ 4,190,940
Accounts and notes receivable, net of allowance
for doubtful accounts of $1,305,581 in 1999 and
$368,005 in 1998 42,156,004 26,040,332
Inventory 11,704,428 9,343,338
Prepaid expenses and other current assets 4,454,456 4,490,813
Deferred income taxes 4,513,769 2,325,745
------------- -------------
75,024,269 46,391,168
PROPERTY AND EQUIPMENT
Building 16,300,325 16,249,914
Computer equipment 24,839,081 24,496,337
Furniture, fixtures and other 3,599,873 3,756,164
Service equipment 5,071,153 4,582,221
------------- -------------
49,810,432 49,084,636
Less allowance for depreciation 22,755,583 16,736,766
------------- -------------
27,054,849 32,347,870
OTHER ASSETS
Intangible assets, net of amortization
of $3,416,433 in 1999 and
$1,679,113 in 1998 9,407,075 6,154,437
------------- -------------
$ 111,486,193 $ 84,893,475
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 11,857,317 $ 10,491,913
Customer deposits 4,095,776 2,625,498
Deferred income 5,625,799 5,500,743
Short term borrowings -- 9,000,000
Income taxes payable 1,022,171 --
------------- -------------
22,601,063 27,618,154
DEFERRED INCOME TAXES 1,356,442 644,803
LONG TERM BORROWINGS 5,000,000 --
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: 28,681,102 issued and
outstanding in 1999 and 19,503,291 issued,
13,802,491 outstanding in 1998 14,324 9,726
Additional capital 1,026,802 44,314,685
Treasury stock - at cost -- (50,202,999)
Retained earnings 81,487,562 62,509,106
------------- -------------
82,528,688 56,630,518
------------- -------------
$ 111,486,193 $ 84,893,475
============= =============
See notes to consolidated financial statements.
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InterVoice, Inc.
Consolidated Statements Of Operations
Year Ended February 28
1999 1998 1997
----------------------------------------------------
Sales $ 136,904,131 $ 102,307,713 $ 104,845,697
Cost of Goods Sold 54,191,257 48,854,519 40,131,308
------------- ------------- -------------
Gross Margin 82,712,874 53,453,194 64,714,389
Research and development expenses 13,285,063 12,688,638 11,652,934
Selling, general and administrative expenses 40,279,321 42,374,242 33,712,840
Non recurring expense -- 6,817,493 1,800,000
------------- ------------- -------------
Income (Loss) From Operations 29,148,484 (8,427,179) 17,548,615
Other income - net (352,888) 783,643 680,644
------------- ------------- -------------
Income (Loss) Before Income Taxes (Benefit) 28,795,596 (7,643,536) 18,229,259
Income Taxes (Benefit)
Current 10,079,215 (546,949) 4,191,807
Deferred (1,476,535) (1,956,741) 1,276,971
------------- ------------- -------------
Income Taxes Benefit 8,602,680 (2,503,690) 5,468,778
------------- ------------- -------------
Net Income (Loss) $ 20,192,916 $ (5,139,846) $ 12,760,481
============= ============= =============
Net income (loss) per share - basic $ .72 $ (0.17) $ 0.39
============= ============= =============
Net Income (loss) per share - diluted $ .68 $ (0.17) $ 0.38
============= ============= =============
See notes to consolidated financial statements.
24
27
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 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) $ 65,509,106 $ 56,630,518
========== ======== ============ ============ ============= ============ =============
Issuance of stock to
purchase software 75,000 $ 38 $ 1,518,712 -- -- -- $ 1,518,750
Exercise of stock
options 783,680 411 7,444,497 -- -- -- 7,444,908
Tax benefit from
exercise of stock
options -- -- 2,612,234 -- -- -- 2,612,234
Purchase of treasury
stock, net (294,000) -- -- -- $ (5,870,638) -- (5,870,638)
Stock split in form of
100% dividend 14,313,931 $ 4,149 $(54,863,326) -- $ 56,073,637 $ (1,214,460) --
Net income -- -- -- -- -- 20,192,916 20,192,916
---------- -------- ------------ ------------ ------------- ------------ -------------
Balance at
February 28, 1999 28,681,102 $14,324 $ 1,026,802 $ -- -- $ 81,487,562 $ 82,528,688
========== ======== ============ ============ ============= ============ =============
See notes to consolidated financial statements.
25
28
InterVoice, Inc.
Consolidated Statements of Cash Flows
Year Ended February 28/29
1999 1998 1997
------------------------------------------------
Operating Activities
Net income (loss) $ 20,192,916 $ (5,139,846) $ 12,760,481
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Purchased research and development -- 1,750,000 --
Depreciation and amortization 11,012,637 9,710,597 4,946,376
Deferred income taxes (benefit) (1,476,535) (1,956,741) 1,276,971
Provision for doubtful accounts 1,037,588 291,491 397,739
Provision for slow moving inventories 1,800,000 1,935,067 1,200,000
Disposal of equipment -- 595,760 89,447
Write off of intangible assets 168,789 2,802,423 --
Changes in operating assets and liabilities:
Accounts receivable (17,153,260) 7,174,924 (9,200,060)
Inventories (4,161,089) 36,980 (671,365)
Prepaid expenses and other assets 3,131,224 (420,265) (3,520,298)
Accounts payable and accrued expenses 1,586,092 (2,622,499) 1,097,596
Customer deposits 1,470,276 (778,241) 876,225
Deferred income 125,056 505,512 920,132
Other 917,951 493,634 595,407
------------ ------------ ------------
18,052,448 14,378,796 10,768,651
Investing Activities
Purchases of property and equipment (3,982,298) (9,239,831) (8,545,318)
Increase in other assets (3,639,748) (8,449,606) (4,346,102)
------------ ------------ ------------
(7,622,046) (17,689,437) (12,891,420)
Financing Activities
Borrowings under line of credit -- 9,000,000 --
Repayments on line of credit (4,000,000) -- --
Purchase of treasury stock 5,870,638 (26,199,754) --
Exercise of stock options (7,444,908) 539,311 2,710,817
------------ ------------ ------------
(2,425,780) (16,660,443) 2,710,817
------------ ------------ ------------
Increase (Decrease) In Cash and Cash Equivalents 8,004,672 (19,971,084) 588,048
Cash and Cash Equivalents, Beginning of Year 4,190,940 24,162,024 23,573,976
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 12,195,612 $ 4,190,940 $ 24,162,024
============ ============ ============
See notes to consolidated financial statements.
26
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF 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. 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 number personal numbering plans
and voice dialing. In the last year, the Company has increased its emphasis on
customer relationship management systems which provide companies automated
customer service, telemarketing capabilities and the ability to generate sales
without human interaction, (i.e., v-commerce and e-commerce). The Company's
products include software development tools designed to support a number of
diverse product applications and to simplify system customization. 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 market with cost determined on a first-in, first-out basis. Amounts
presented are net of inventory obsolescence reserves totaling $1,204,526 and
$1,360,000 at February 28, 1999 and 1998, 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 $9,260,774, $8,573,956 and $4,124,289 in fiscal 1999, 1998 and 1997,
respectively. The large increase in depreciation expense in fiscal 1998 versus
the prior fiscal year is associated with the purchase and implementation of a
new Oracle based, enterprise-wide management information system. This year 2000
compliant system is expected to support the Company's future growth.
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 $1,751,863,
$1,136,641 and $822,087 in fiscal 1999, 1998 and 1997, respectively. The
increase in amortization expense in fiscal 1999 versus prior fiscal years is
associated with the start of amortization of the assets purchased from
Integrated Telephony products, Inc. and Dronen Consulting, Incorporated (see
Note C).
Costs of internally developed software products and substantial enhancements to
existing software products are expensed until technological feasibility is
established, at which time any additional costs would be capitalized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86.
Technological feasibility of a computer software product is established when
the Company has completed all planning designing, coding, and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications
27
30
including functions, features, and technical performance requirements. No costs
have been capitalized to date for internally developed software products and
enhancements as the Company's current process for developing software is
essentially completed concurrently with the establishment of technological
feasibility. The Company capitalizes purchased software upon acquisition when
such software is technologically feasible or if it has an alternative future
use, such as use of the software in different products, resale of the purchased
software, or use of the software internally.
IMPAIRMENT OF ASSETS: The Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
REVENUE RECOGNITION: The Company recognizes revenue at the time of shipment for
sales of systems which do not require customization to be performed by the
Company. Subsequent to December 1, 1997, revenue for systems which require
customization to be performed 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). Progress toward completion is
measured using work hours or days incurred as a percentage of total estimated
hours or days for each contract. Unbilled receivables accrued under percentage
of completion contracts amounted to $5.8 million and $0 at February 28, 1999
and 1998, respectively. The completed contract method is used for smaller
systems. Prior to December 1, 1997, the Company recognized revenue on systems
requiring customization to be performed by the Company at the date of shipment
or at the point after shipment when the remaining obligations of the Company
became insignificant. The change in accounting was required by the American
Institute of Certified Public Accountant's Statement of Position 97-2 which was
required to be applied prospectively for transactions entered into after the
Company's December 1, 1997 date of adoption. No restatement of prior periods or
cumulative effect adjustment was permitted.
The Company recognizes revenue from services at the time the service is
performed or over the period of the contract for maintenance/support.
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.
RECLASSIFICATIONS: Certain prior year balances have been reclassified to
conform to current year presentation.
NOTE C - INTANGIBLE ASSETS
On September 15, 1998, the Company purchased a computer telephony software
suite from Dronen Consulting, Incorporated for $3,533,723 in cash and 75,000
shares of the Company's stock valued at $1,518,750. The transaction was
accounted for as an asset purchase. The full purchase price of $5,052,473 is
being amortized over the software suite's estimated useful life of five years.
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 two purchased research and development projects. The amount
allocated to the purchased research and development projects was expensed at
the time of acquisition as the Company determined that the purchased research
and development projects had not reached technological feasibility based on the
status of design and development activities that required further refinement
and testing. To determine the fair market value of the in-process research and
development projects, the Company used a risk adjusted income approach, in
which fair market value is a function of the future revenues expected to be
generated by an asset, net of all allocable expenses. In determining the amount
of the purchase price to allocate to the purchased research and development
projects, factors such as stage of completion and technological uncertainties
were considered by the Company in determining the present value of the future
benefits to be received. The development activities required to complete the
acquired in-process research and development
28
31
projects included additional coding, cross-platform porting and validation,
quality assurance procedures and beta testing. The estimated future cost of
completing these activities was expected to be approximately $1 million to be
incurred over the next 12 months. Revenue streams from the resulting products
are expected to begin in fiscal 2000 and were projected forward for five years
in the risk adjusted income analysis. 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).
In connection with the review of its portfolio of intangible assets during
fiscal 1998, the Company 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 $1.3 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 $1.5 million associated with
inefficient, stand alone system configuration software were written off as the
Company's new management information systems (see Note B) 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:
1999 1998
----------- -----------
Accounts payable $ 7,650,940 $ 7,766,531
Accrued compensation 3,018,566 1,575,534
Other 1,187,811 1,149,848
----------- -----------
$11,857,317 $10,491,913
=========== ===========
NOTE E - REVOLVING CREDIT AGREEMENT
The Company has an unsecured revolving credit agreement with Bank of America in
the amount of $20,000,000 which expires November 18, 2001. At February 28, 1999
and 1998, the Company had borrowed $5,000,000 and $9,000,000, respectively,
under the agreement at an average annual interest rate of 5.8% and 8.5%,
respectively. Interest under the credit arrangement accrues at a variable rate
indexed to the prime rate or an adjusted LIBOR rate. The fair value of this
debt approximates its carrying value at February 28, 1999 and 1998.
NOTE F - INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities are
as follows at February 28:
1999 1998
---------- -----------
Deferred tax assets:
Unicap $ 682,349 $ 83,713
Allowance for slow moving inventories 542,768 240,066
Deferred revenue 994,191 1,155,371
Accrued expenses 120,071 213,809
Allowance for doubtful accounts 383,691 139,566
Book over tax depreciation/amortization 2,650,410 2,227,807
Charitable contribution carryforward 327,057 955,800
Other 328,414 493,220
Valuation Allowance -- (955,800)
---------- -----------
Total deferred tax assets 6,028,951 4,553,552
---------- -----------
Deferred tax liabilities:
Capitalized Software 2,814,870 2,683,412
Prepaid assets 54,001 186,366
Other 2,752 2,831
---------- -----------
Total deferred tax liabilities 2,871,623 2,872,609
---------- -----------
Net deferred tax assets $3,157,328 $ 1,680,943
========== ===========
29
32
Details of the income tax provision are as follows:
1999 1998 1997
------------ ----------- ----------
Income tax provision (benefit):
Current:
Federal $ 9,232,485 $ (496,864) $4,137,807
State 846,730 (50,085) 54,000
------------ ----------- ----------
Total current 10,079,215 (546,949) 4,191,807
Deferred:
Federal (1,406,230) (1,805,826) 1,156,811
State (70,305) (150,915) 120,160
------------ ----------- ----------
Total deferred (1,476,535) (1,956,741) 1,276,971
------------ ----------- ----------
Total $ 8,602,680 $(2,503,690) $5,468,778
============ =========== ==========
A reconciliation of the United States Federal statutory rate to the Company's
effective tax rate is as follows:
1999 1998 1997
---- ---- ----
$ % $ % $ %
---------- ------ ---------- ------ ---------- ------
Federal income taxes at statutory rates 10,078,459 35.0 (2,598,802) (34.0) 6,380,240 35.0
Research and development tax credit (636,509) (2.2) (282,628) (3.7) 244,000 1.3
Tax exempt interest (509) -- (100,727) (1.3) (175,588) (1.0)
State taxes, net of federal benefit 597,693 2.1 (275,492) (3.6) 35,100 0.2
Foreign loss not benefited -- -- -- -- 132,684 0.7
Foreign sales corp. (benefit)/expense (193,609) (0.7) 24,107 0.3 (544,036) (3.0)
Write-off foreign subsidiary
stock/debt -- -- -- -- (792,517) (4.2)
Charitable contributions in excess of
statutory limitation -- -- 550,147 7.2 -- --
Charitable contributions not
previously benefited (628,743) (2.2) -- -- -- --
Change in valuation allowance (327,057) (1.1) -- -- -- --
Other (287,045) (1.0) 179,705 2.3 188,895 1.0
---------- ------ ---------- ------ ---------- ------
8,602,680 29.9 (2,503,690) (32.8) 5,468,778 30.0
========== ====== ========== ====== ========== ======
Income taxes, net of refunds, of $515,519, 2,175,000 and $6,587,097 were paid
in fiscal 1999, 1998 and 1997, respectively.
NOTE G - STOCKHOLDERS' EQUITY
STOCK SPLIT
The Company executed a two-for-one stock split in the form of a stock dividend
during fiscal 1999 in which one share of common stock was issued on January 11,
1999 to each holder of stock as of the record date of December 28, 1998. In
connection with the stock split, 14,313,931 shares were issued; 5,994,800
shares from treasury and 8,319,131 newly issued shares. All per share and
weighted average share amounts have been restated to reflect this stock split.
EMPLOYEE INCENTIVE OPTION PLANS
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
30
33
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, 1996 3,322,248
Granted 1,208,600 $5.94 to $13.63 $10.79
Exercised (571,472) $1.03 to $9.63 $9.11
Forfeited (371,576) $3.82 to $13.13 $8.37
----------
Balance at February 29, 1997 3,587,800
Granted 2,121,490 $3.75 to $5.69 $4.98
Exercised (98,390) $1.64 to $4.25 $3.52
Forfeited (2,184,012) $1.03 to $13.63 $9.20
----------
Balance at February 28, 1998 3,426,888
Granted 881,200 $4.50 to $4.88 $4.85
Exercised (1,320,956) $1.66 to $9.38 $4.95
Forfeited (150,314) $3.75 to $13.94 $4.94
----------
Balance at February 28, 1999 2,836,818
==========
A total of 627,923 and 1,178,028 employee options were exercisable at average
prices of $8.54 and $5.98 at February 28, 1999, and 1998, respectively.
1998 EMPLOYEE NON-QUALIFIED PLAN
During fiscal 1999, the Company adopted a stock option plan under which shares
of common stock may be authorized for issuance by the Compensation Committee of
the Board of Directors as non-qualified stock options to key employees. Option
prices per share are the fair market value per share of stock, based on the
closing price per share on the date of grant. The Company has granted options
at various dates with terms under which the options become exercisable at a
rate of 25% or 33% per year and are exercisable for a period of ten years after
the date of grant.
Weighted Average
Shares Option Price Exercise Price Per Share
------ ------------ ------------------------
Balance at February 28, 1998 --
Granted 1,029,500 $4.88 to $13.13 $6.29
Forfeited (50,000) $4.88 to $11.31 $6.61
---------
Balance at February 28, 1999 979,500
=========
As of February 28, 1999, no options were exercisable under this plan.
1990 NON-EMPLOYEE OPTION PLAN
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 is exercisable for 10 years from the date of grant.
Weighted Average
Shares Option Price Exercise Price Per Share
------ ------------ ------------------------
Balance at February 29, 1996 92,000
Granted 52,000 $6.97 $6.97
Exercised (44,000) $4.25 $4.25
-------
Balance at February 28, 1997 100,000
Granted 60,000 $4.88 $4.88
-------
Balance at February 28, 1998 160,000
Granted 32,000 $9.00 $9.00
Exercised (65,000) $3.06 to $7.56 $5.32
-------
Balance at February 28, 1999 127,000
=======
31
34
A total of 95,000 and 100,000 non-employee options were exercisable at average
prices of $7.00 and $7.19 at February 28, 1999 and 1998, respectively.
For all option plans at February 28, 1999, options for 508,802 shares of common
stock were available for future grant.
EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted an Employee Stock Purchase Plan under which an
aggregate of 1,000,000 shares of common stock may be issued. Options are
granted 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 beginning either December 1 or June 1 and ending on the following
November 30 and May 31, respectively. 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.
Shares Weighted Average
------ Exercise Price per share
------------------------
Balance at February 28, 1996 96,122 $ 7.37
Granted 141,274 $ 6.12
Exercised (72,694) $ 4.86
Forfeited (23,428) $ 8.61
-------
Balance at February 28, 1997 141,274
Granted 164,424 $ 4.42
Exercised (96,854) $ 4.10
Forfeited (44,420) $ 6.46
-------
Balance at February 28, 1998 164,424
Granted 88,468 $ 8.61
Exercised (128,164) $ 9.25
Forfeited (36,260) $ 4.51
-------
Balance at February 28, 1999 88,468
=======
Grant price per option outstanding $5.71 or $11.24
As of February 28, 1999, no options were exercisable under this plan.
RESTRICTED STOCK PLAN
During fiscal 1996, the Company adopted a Restricted Stock Plan under which an
aggregate of 1,000,000 shares may be issued. 184,570 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 on the achievement of targeted annual earnings per share objectives and
the completion of an additional two years of service after the grant. Activity
related to restricted stock during fiscal 1999, 1998 and 1997 is as follows:
Senior Executive Plan Key Executive Plan
--------------------- ------------------
Balance at February 28, 1996 61,522 --
Granted 61,522 9,574
Forfeited (18,456) (1,272)
------- -----
Balance at February 28, 1997 104,588 8,302
Forfeited (15,380) (2,158)
------- -----
Balance at February 28, 1998 89,208 6,144
Granted 46,914 --
------- -----
Balance at February 28, 1999 136,122 6,144
======= =====
32
35
The weighted average share price for grants during fiscal year 1997 was $10.64
for the Senior Executive Plan and $14.72 for the Key Executive Plan. Shares
forfeited in fiscal 1998 and 1997 had been granted at a weighted average share
price of $11.17 and $10.90, respectively. There was no activity for this plan
during fiscal 1999. At February 28, 1999, approximately 857,086 shares are
reserved for future restricted stock grants.
OTHER STOCK AWARD PLAN DISCLOSURES
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 1999,
1998 and 1997, respectively: risk-free interest rates of 5.38%, 6.48% and
6.39%; stock price volatility factors of .75, .49 and .66; and expected option
lives of 3.52 years, 4.3 years and 4.1 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 1999, 1998 and 1997 was 3.26, 1.98 and 5.91, respectively.
Required Pro Forma Disclosures:
1999 1998 1997
---- ---- ----
Net income (loss) $15,472,916 $(8,726,923) $10,795,850
Income (loss) per share basic $0.55 $(0.28) $0.34
Income (loss) per share diluted $0.52 $(0.28) $0.33
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 1999, 1998 and 1997
results are not necessarily representative of the additional compensation
expense which will be included in future years' pro forma disclosures as more
than two years of awards will be considered.
Options Outstanding at February 28, 1999
Weighted Average Weighted average
Exercise Prices Shares Exercise price Remaining contractual life in years
--------------- --------- ---------------- -----------------------------------
$3.06 - $5.00 2,804,712 $ 4.90 8.40
$5.68 - $9.38 593,976 7.40 8.00
$10.38 - $13.63 633,098 $10.77 3.44
---------
4,031,786
=========
Options Exercisable at February 28, 1999
Weighted average Weighted average
Exercise Prices Shares Exercise price Remaining contractual life in years
--------------- ------- ---------------- ------------------------------------
$3.06 - $5.00 238,817 $4.68 6.77
$5.68 - $9.38 78,906 $7.37 5.26
$10.38 - $13.63 405,200 $10.68 3.14
-------
722,923
=======
PREFERRED SHARE PURCHASE RIGHTS
One Preferred Share Purchase Right is attached to each outstanding share of the
Company's common stock. The rights will become exercisable upon the earlier to
occur of ten days after the first public announcement that a person or group has
acquired beneficial ownership of 20 percent or more, or ten days after a person
or group 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
eight-hundredth of a share of Series A Preferred Stock for $37.50, subject to
adjustment. If the Company is acquired in a business combination transaction
while the
33
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rights are outstanding, each right will entitle its holder to purchase, for
$37.50, common shares of the acquiring company having a market value of $75. In
addition, if a person or group acquires beneficial ownership of 20 percent or
more of the Company's outstanding common stock, each right will entitle its
holder (other than such person or members of such group) to purchase, for
$37.50, a number of shares of the Company's common stock having a market value
of $75. Furthermore, at any time after a person or group acquires beneficial
ownership of 20 percent or more (but less than 50 percent) of 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 $0.00125. 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.
NOTE H - TREASURY STOCK
Pursuant to authorizations by the Company's Board of Directors, the Company
repurchased 294,000 and 2,700,800 shares of its common stock during fiscal 1999
and 1998, respectively, at an average price per share of $19.97 and $9.70,
respectively. All shares held in treasury were reissued as a part of the
two-for-one stock split paid in the form of a stock dividend which took place
on January 11, 1999.
NOTE I - NON-RECURRING EXPENSES
During fiscal 1998, the Company incurred non-recurring expenses of
approximately $6.8 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, and $3.0 million to write off certain
intangible assets (see Note B). 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 (see
Note C).
The Company incurred a one-time charge of approximately $1.8 million in
connection with the settlement of certain litigation during fiscal 1997.
NOTE J - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
YEAR ENDED FEBRUARY 28/29
1999 1998 1997
---------- ------------ -----------
Numerator:
Net income (loss) for basic and diluted earnings per share: 20,192,916 ($ 5,139,846) $12,760,481
========== ============ ===========
Denominator:
Denominator for basic earnings per share
weighted average shares outstanding 27,990,907 31,032,672 32,309,672
Effect of dilutive securities:
Employee stock options 1,781,597 -- 807,018
Non-vested restricted stock -- -- 65,632
---------- ------------ -----------
Dilutive potential common shares 1,781,597 -- 872,650
---------- ------------ -----------
Denominator for diluted earnings per share 29,772,504 31,032,672 33,182,322
========== ============ ===========
Net income (loss) per common shares - basic $ 0.72 $ (0.17) $ 0.39
========== ============ ===========
Net income (loss) per common share - diluted $ 0.68 $ (0.17) $ 0.38
========== ============ ===========
Options to purchase 633,098, 3,725,712, and 2,290,138 shares of common stock at
average exercise prices of $10.77, $7.10, and $10.90, respectively, were
outstanding at February 28, 1999, 1998, and 1997, respectively, but were not
included in the computations of diluted earnings (loss) per share because the
effect would have been anti-dilutive to the calculations. For 1999 and 1997,
the anti-dilution is due to options' exercise prices which were greater than
the average market prices of the common shares. For 1998, the anti-dilution is
due to the net loss for the year ended February 28, 1998.
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37
NOTE K - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which requires the reporting of certain financial information by operating
segment and geographic area. InterVoice is comprised of a single operating
segment which develops, sells and services call automation systems. The
Company's Chief Operating Decision Maker (CODM) assesses performance and
allocates resources on an enterprise-wide basis. Therefore, no separately
reportable operating segments exist.
The CODM monitors revenues based on customer markets, including Customer Premise
Equipment (CPE), Telecommunications (Telco) and geographic area. The CPE market
includes interactive voice response and customer relationship management systems
such as the Company's OneVoice and AgentConnect products. The Telco customer
market focuses on systems for telecommunications network operators and includes
the Company's InControl product. CPE and Telco revenues are shown exclusive of
system maintenance and software license fee revenues. The Company's net revenues
by customer market and geographic area were as follows (in thousands):
Net Revenues by Customer Market: 1999 1998 1997
------------------------------------
Customer Premise Equipment $ 97,427 $ 71,921 $ 72,286
Telecommunications 26,163 17,067 20,115
Other 13,314 13,320 12,445
------------------------------------
Total $136,904 $102,308 $104,846
====================================
Geographic Area Net Revenues: 1999 1998 1997
------------------------------------
United States $112,740 $ 81,028 $ 80,083
The Americas (excluding the U.S.)* 13,384 11,489 11,622
Pacific Rim* 6,332 4,372 4,769
Europe, Middle East and Africa* 4,448 5,419 8,372
------------------------------------
Total $136,904 $102,308 $104,846
====================================
*Represent export sales from the United States
No customer accounted for 10% or more of the Company's sales during fiscal 1999
or 1998. One customer, Siemens AG, one of the Company's resellers, accounted
for 10.2% of the Company's sales during fiscal 1997.
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 $798,000, $854,000, and $759,000 in
fiscal 1999, 1998 and 1997, respectively.
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NOTE N - CONTINGENCIES
Commencing in fiscal 1997, Lucent Technologies ("Lucent") 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, and the Company and Lucent did not have any discussions or exchange any
correspondence concerning their respective patent portfolios during fiscal 1999.
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.
NOTE O - SUBSEQUENT EVENT
On April 27, 1999, the Company signed a definitive merger agreement to acquire
all of the outstanding shares of Brite Voice Systems, Inc. (Brite). Pursuant to
the agreement, InterVoice will pay Brite shareholders $13.40 per Brite share,
or based on approximately 12.3 million shares of Brite common stock
outstanding, total consideration of approximately $164.4 million. Of this
total, approximately $122.7 million, or $10.00 per Brite share, will be in cash
and approximately $41.7 million, or $3.40 per Brite share, will be in shares of
InterVoice common stock. The merger will be accounted for as a purchase
business combination.
The transaction will be executed in two steps, the first being an all cash
tender offer at $13.40 per share for approximately 9.2 million shares of
Brite's common stock. The second step will consist of a merger in which shares
of Brite common stock not purchased in the cash tender offer will be exchanged
into shares of InterVoice common stock. The ratio of exchange will be
determined at the time of the merger based on the average closing price of an
InterVoice share for the preceding twenty-five trading days. This transaction
has been approved by the Boards of Directors of Brite and InterVoice. The cash
tender offer will close on June 1, 1999. The closing of the transaction is
subject to certain customary conditions as described in the merger agreement.
In connection with this transaction, InterVoice has received a commitment from
Bank of America to provide senior secured credit facilities amounting to $150
million, which will include a $125 million term loan facility and a $25 million
revolving credit agreement. The term loan agreement will be subject to scheduled
repayments, as defined, during 2000-2003. The revolving credit agreement will
expire upon the earlier of the termination of the term loan, or August 31, 2003.
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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, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 368,004 $ 1,037,588 $ (100,011)(A) $ 1,305,581
Allowance for slow moving inventories 1,360,000 1,800,000 (1,955,474)(B) 1,204,526
Total $ 1,728,004 $ 2,837,588 $ (2,055,485) $ 2,510,107
=========== =========== ============ ===========
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 $ (951,504) $ 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
=========== =========== ============ ===========
- ------------------------------------------
(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.
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40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
41
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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements and financial
statement schedule of InterVoice, Inc. and subsidiaries are included
in Items 8 and 14(a), respectively.
Page
----
(1) Financial Statements:
Report of Independent Auditors..............................................22
Consolidated Balance Sheets at February 28, 1999 and February 28, 1998......23
Consolidated Statements of Operations for the three years ended
February 28, 1999......................................................24
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended February 28, 1999............................25
Consolidated Statements of Cash Flows for the three years ended
February 28, 1999......................................................26
Notes to Consolidated Financial Statements...............................27-36
(2) Financial Statement Schedules
II Valuation and Qualifying Accounts.......................................37
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, 1999.
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, 1999
40
43
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, 1999
- --------------------------------------------- Directors and Chief
Daniel D. Hammond Executive Officer
/s/ ROB-ROY J. GRAHAM Chief Financial Officer, May 28, 1999
- --------------------------------------------
Rob-Roy J. Graham Chief Accounting Officer
and Controller
(Principal Accounting Officer)
/s/ JOSEPH J. PIETROPAOLO Director May 28, 1999
- --------------------------------------------
Joseph J. Pietropaolo
/s/ GEORGE C. PLATT Director May 28, 1999
- --------------------------------------------
George C. Platt
/s/ GRANT A. DOVE Director May 28, 1999
- --------------------------------------------
Grant A. Dove
/s/ DAVID W. BRANDENBURG Director May 28, 1999
- --------------------------------------------
David W. Brandenburg
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INDEX TO EXHIBITS
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
3.1 Articles of Incorporation, as amended, of Registrant (2)
3.2 Second Restated Bylaws of Registrant, as amended (1)
10.1 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 (8)
10.2 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 (8)
10.3 Amended and Restated Rights Agreement dated as of December 12, 1994 between the
Registrant and KeyCorp Shareholder Services, Inc. (as successor to Society National Bank),
as Rights Agent (4)
10.4 The InterVoice, Inc. 1990 Incentive Stock Option Plan, as amended (8)
10.5 The InterVoice, Inc. 1990 Nonqualified Stock Option Plan for Non-Employees, as
amended (3)
10.6 The InterVoice, Inc. Employee Stock Purchase Plan (6)
10.7 InterVoice, Inc. Employee Savings Plan (5)
10.8 InterVoice, Inc. Restricted Stock Plan (7)
10.9 Employment Agreement dated as of September 1, 1998 between the Company and David
W. Berger (9)
10.10 Employment Agreement dated as of September 16, 1998 between the Company and
Rob-Roy J. Graham (9)
10.11 InterVoice, Inc. 1998 Stock Option Plan (9)
10.12 Assets Purchase Agreement dated as of September 15, 1998 between the Company and
Dronen Consulting, Incorporated (9)
10.13 Amended and Restated Loan Agreement dated as of November 18, 1998 between the
Company and NationsBank, N.A. (10)
10.14 Amended and Restated Promissory Note dated as of November 18, 1998 executed by
the Company in favor of NationsBank, N.A. (10)
10.15 Acquisition Agreement and Plan of Merger dated as of April 27, 1999, by and among
the Company, InterVoice Acquisition Subsidiary III, Inc. ("Acquisition
Subsidiary") and Brite Voice Systems, Inc. ("Brite") (11)
10.16 Stockholders' Agreement dated as of April 27, 1999, by and among the Company,
Acquisition Subsidiary and certain stockholders of Brite named therein (11)
10.17 Commitment Letter dated as of April 26, 1999, by and among the Company, Acquisition
Subsidiary, Bank of America National Trust and Savings Association and NationsBanc
Montgomery Securities LLC (11)
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23 Consent of Independent Auditors (12)
27 Financial Data Schedules (12)
- -----------------------
(1) 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.
(2) Incorporated by reference to exhibits to the Company's 1995 Annual Report
on form 10-K for the fiscal year ended February 28, 1995, filed with the
SEC on May 30, 1995.
(3) 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.
(4) Incorporated by reference to exhibits to Form 8-A/A (Amendment No. 1) filed
with the SEC on December 15, 1994.
(5) 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.
(6) Incorporated by reference to exhibits to Registration Statement on Form S-8
filed with the SEC on November 30, 1998, Registration Number 333-68103.
(7) 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.
(8) Incorporated by reference to exhibits to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 1998, filed with the SEC
on May 29, 1998.
(9) Incorporated by reference to exhibits to the Company's quarterly report on
Form 10-Q for the quarter ended August 31, 1998, filed with the SEC on
October 14, 1998.
(10) Incorporated by reference to exhibits to the Company's quarterly report on
Form 10-Q for the quarter ended November 31, 1998, filed with the SEC on
January 14, 1999.
(11) Incorporated by reference to exhibits to the Schedule 14D-1 filed by the
Company and Acquisition Subsidiary with the SEC on May 3, 1999, as amended
on May 5, 1999 and May 10, 1999, File No. S-40824.
(12) Filed herewith.
Exhibits furnished upon request
43