As Filed with the Securities and Exchange Commission on April 24, 2008

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

 

 

 

Commission File Number: 1-15045

Intervoice, Inc.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:
(972) 454-8000

 

Securities registered pursuant to Section 12(b) of the Act:
None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of Each Class
Common Stock, No Par Value
Preferred Share Purchase Rights

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o     No þ

 

Aggregate Market Value of Common Stock held by non-affiliates as of August 31, 2007: $309,258,955

 

Number of Shares of Common Stock Outstanding as of April 21, 2008: 39,033,690

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Listed below are documents parts of which are incorporated herein by reference and the part of this Report into which such document is incorporated:

 

(1) Proxy Statement for the 2008 Annual Meeting of Shareholders — Part III.

 

 

TABLE OF CONTENTS

 

 

 

Intervoice, Inc. (NASDAQ: INTV), a Texas corporation formed in 1983, is a world leader in delivering natural, intuitive ways for people to interact, transact and communicate. Intervoice software and professional services provide innovative voice portal, IP (Internet Protocol) contact center, mobile messaging and self-service applications. More than 5,000 customers in 80 countries have relied on Intervoice, including many of the world’s leading financial and healthcare institutions, telecommunications companies, utilities, and governments. We offer our contact center and network service provider customers flexible, scalable, integrated software platforms, powerful development and reporting tools, customized and packaged software applications, comprehensive consulting services, and post-sale support.

 

Intervoice has long been an industry innovator, introducing the world’s first PC-based Interactive Voice Response (“IVR”) system in 1983. Now, 25 years later, Intervoice innovation includes multimedia communications providing end-to-end contact center solutions as well as a portfolio of IP-based messaging and call completion applications for network service providers. We are also an industry leader in the deployment of standards-based systems.

 

Intervoice is committed to delivering end-to-end solutions that are compliant with industry standards, are hardware independent, and integrate seamlessly with other systems and software. We support standards including VoiceXML (Voice eXtensible Mark-up Language), SCXML (State Chart eXtensible Mark-up Language) and CCXML (Call Control eXtensible Mark-up Language) for voice-enabled Web applications and contact center software architectures. We continuously assess evolving industry standards and are actively involved in industry associations such as the Eclipse Foundation, the VoiceXML Forum, and the Internet Engineering Task Force, as well as network-focused organizations such as the 3GPP (IMS), the GSM Association, TMIA, VMA and AVIOS.

 

Intervoice contact center software and professional consulting services allow businesses to build brand loyalty by enriching their customers’ user experiences while lowering their overall cost of operations. Our contact center customer base is among the largest in the industry with more than 20,000 deployments. We offer our customers the option of deploying solutions as a customer-premise sale or as a hosted service, an option that we feel is a competitive differentiator. Our Hosted Solutions group manages approximately 30,000 ports and 100 million minutes a month of self service applications through our network operations centers. For network service providers, Intervoice’s product and service suite includes next-generation IP-based voice messaging, text messaging, voice portal and payment systems — all revenue-generating services that meet their customers’ growing demands for enhanced mobile services and access from any device, any place and any time.

 

The foundation of Intervoice’s decades-long success is a corporate strategy influenced by six key market trends:

 

 

Intervoice’s strategy is not only guiding our development of standards-based products, but is also sharpening our focus on enabling more complex and intelligent customer interactions throughout the enterprise. We help network service providers accelerate the rate at which they can bring new subscriber offerings to market by providing tools that support third-party application development. In addition, we are bringing new levels of quality and personalization to speech self-service through our global consulting services group — one of the most experienced in the industry. Our focus on ensuring exceptional value and usability helps our contact center and network service provider customers enhance the experience of their customers while lowering costs and increasing revenues.

 

Our activities in both the contact center and network service provider markets are supported by shared resources in sales, operational support, research and development and administration. Our corporate headquarters is in Dallas, Texas, and we operate remote facilities in Florida and California. Our global presence extends throughout the world, including Europe, the Middle East, Africa, South America and Asia.

 

We sell our products through a direct sales force and through an established network of distributors, system integrators and channel partners. For the fiscal year ended February 29, 2008, we reported revenues of approximately $202.4 million, including $96.9 million of solution sales, $86.4 million of maintenance and related service revenues and $19.1 million of hosted solutions revenues. Sales to North American customers totaled $123.4 million or 61% of total sales for the year.

 

Intervoice also delivers unique value through the integration of industry-standard hardware, software, and professional services provided by our numerous alliance partners. These strategic relationships are an integral part of our product strategy and allow us to create voice automation and network services solutions tailored to fit each of our customer’s specific business needs. Key Intervoice technology alliance partners include BEA, Nuance, Intel/Dialogic, IBM and HP.

 

When we use the term “solutions sales” in this Annual Report, we mean the sale of hardware and/or software applications and the related integration, installation and testing of such custom applications. When we use the term “recurring services,” we mean the sale of maintenance and software upgrade offerings and the provision of customized solutions to customers on a hosted solutions (outsourced) basis.

 

Contact Center Solutions

 

Intervoice Voice Portal

 

Intervoice is a recognized market leader in the creation and deployment of voice portal solutions, which include traditional and standards-based IVR systems and other voice portal solutions for businesses. Our voice portal solutions allow organizations of all types to automate communications, reduce costs and improve interactions with customers, employees and business partners. Our solutions provide callers with access to information when, where, and how they want to receive it using speech-enabled and touch-tone interfaces that have been designed and optimized for usability — in other words, designed with the callers’ needs in mind. As speech recognition and text-to-speech technologies gain acceptance as natural user interfaces, our solutions allow for the automation of interactions previously seen as too complex for a traditional touch-tone interface. Businesses use our solutions to streamline access to account information, allow for secured access to sensitive information through voice verification, edit name and address information, and support workforce management activities. Enterprise-wide applications also enable customers to order products, activate accounts, pay bills, enroll for college courses, apply for jobs, execute securities trades, and recharge prepaid accounts and conduct many other increasingly complex interactions. All of these applications can be designed to give our customers the ability to offer their callers easy access to information and an exceptional user experience.

 

Intervoice Voice Portal is our advanced software-based platform that can be used to create, manage and deploy voice-based solutions. Intervoice Voice Portal delivers a flexible, modular and highly scalable design (built upon open industry standards including VoiceXML, SCXML, CCXML and others) that encourages the seamless

integration of Web and enterprise-based systems into intuitive speech-enabled solutions with a clear business return-on-investment (“ROI”).

 

Companies in a wide range of industries use our contact center solutions to drive operational efficiencies. Our software delivers a true end-to-end converged voice and data solution and supports best-of-class deployments through our alliance partnerships with the leading names in information technology.

 

Our self service solutions can be implemented individually to meet specific requirements or applied as a comprehensive solution to achieve enterprise-class voice automation results. The solutions include leading technologies, proven applications, an award-winning development environment, and intuitive management tools that are backed by comprehensive professional consultation services and technical support. The solutions can be deployed in a customer premise or hosted solutions environment.

 

Intervoice IP Contact Center

 

The Intervoice IP Contact Center provides an end-to-end solution for self-service IVR and speech applications with live assistance support through contact center agents. It seamlessly integrates traditional automatic call distribution (“ACD”) for routing phone calls as well as other contact types such as e-mail response and Web chat requests. All media types are handled with a single, consistent routing application and user interface for agents. The system also provides traditional computer telephony integration (“CTI”) functionality at a fraction of the cost of a traditional hardware-based implementation. Lastly, the distributed IP architecture takes advantage of the distributed corporate network to allow low-cost networking of agents regardless of their location — in a call center, branch office, or at home — creating a single virtual call center.

 

Horizontal Application Modules

 

Intervoice delivers voice automation applications and solutions through a spectrum of re-usable application modules and components that can be bundled together or used separately. Our solutions combine horizontal applications, server-side software modules and components with our world-class consulting services to deliver an exceptional user experience. Examples of Intervoice’s horizontal solutions include:

 

Survey Automation — provides an automated and confidential method of surveying customers, callers and clients

 

Auto-Attendant — provides an easy and automated way to self direct calls in place of a live operator

 

Locator Automation — a portal application that provides callers with detailed location information about nearby ATMs, stores or other destinations

 

Vertical Application Modules

 

Intervoice offers industry-specific vertical solutions, applications and repeatable components. Our pre-built components help accelerate the development and deployment of applications for faster ROI for our customers. Our offerings address needs in the following industries:

 

Banking & Financial Services

Healthcare

Public Sector

Retail & Manufacturing

Telecommunications

Transportation & Travel

Utilities

 

Network Service Provider Solutions

 

We offer network service providers an array of revenue generating solutions that include next generation IP-based messaging and media management applications, traditional Intelligent Network (“IN”)-based voice and

text messaging applications and prepaid payment solutions. To date, our network service provider solutions have primarily been sold to wireless network service providers in Latin America, Europe, Asia Pacific, the Middle East and Africa.

 

Media Exchange with HomeZone^tm

 

Media Exchange with HomeZone^tm is a flexible, IP-based multimedia enhanced services platform designed for mobile network operators and fixed line operators. Designed specifically for high availability, it includes a customizable mix of multimedia service options including next generation messaging, Web user interfaces, voice portal, calendar management and text to speech capabilities. Media Exchange offers touch tone and Web user interfaces.

 

Our Media Exchange solution helps network service providers accelerate the rate at which they can bring enhanced services to market. Our standards-based software platform incorporates tools which support third-party application development through the HomeZone, and gives subscribers easy access to enhanced services. Each unique combination of enhanced services allows network service providers to offer their subscribers a differentiated service that can enhance their brand, increase revenue per subscriber and increase subscriber loyalty and retention.

 

The Media Exchange with HomeZone suite of solutions includes the following packaged application options:

 

Voicemail MX — next-generation voice mail and unified messaging functionality offering a common message store and common data base

 

Video Mail — a store and forward video solution for messaging

 

Voice to MMS (“V2MMS”) — a media-independent message deposit and call completion utility that allows subscribers to record a voice message and have it delivered as a Multi-Media Message (“MMS”)

 

Traditional, IN-based Messaging

 

Our traditional, IN-based messaging solutions include voicemail, short message service (“SMS”) and missed-call notification. These solutions incorporate a range of advanced features, including intelligent call return, mailbox-to-mailbox messaging, universal mailboxes, missed-call alerts and conditional personal greetings. Our applications support network service providers in their efforts to build subscriber counts, loyalty and usage.

 

Portal

 

Our Media Exchange applications allow subscribers instant access to information content and entertainment services via a touch-tone user interface or through a Web browser. Portal applications include access to horoscope information, sports, weather, traffic and financial data and can be “branded” and customized to enhance subscriber loyalty and revenues.

 

Payment

 

We provide a range of products and services that allows network service providers to offer prepaid services. Providers can offer prepaid telephony services to facilitate subscriber acquisition and usage in selected markets where subscribers prefer to pay by cash or where collection might be an issue. We support a wide range of prepaid services, including prepaid calling cards, prepaid residential, prepaid wireless and automated operator services. Our prepaid solutions integrate seamlessly with other telco-grade, revenue-generating applications, including our messaging and portal solutions.

 

Intelligent Network Prepaid can be deployed to provide enhanced flexibility and efficiency in both wireline and wireless networks. Network service providers can use IN Prepaid solutions to manage rapid subscriber growth, provide cost-effective roaming, and boost subscriber satisfaction.

Consulting Services

 

Intervoice offers the services of solution engineers, designers, developers and other consulting services specialists who provide our customers the benefit of the experience we have gained in the development of thousands of custom touch-tone and speech-enabled solutions. We offer customers a single source for needs assessment and application design, voice user interface (“VUI”) design, system integration, project management, effective training and optimization of their custom solution. With more than 150 solution-services experts worldwide and 25 years of experience designing, deploying and managing voice and multi-modal applications for contact center and network service provider customers across functions and industries, this team also possesses one of the highest concentrations of industry-recognized leaders in human factors and voice user interface design.

 

Our focus on caller habits, preferences and needs allows us to generate customized dialogue and call flows, as well as innovative integration and presentation of data across all channels, thus helping our customers maximize personalization, resulting in increased customer satisfaction. Customers using Intervoice consulting services can access our industry-unique Center for User Experience (“CUE”) testing lab, caller goal completion rate analysis and our Usability Grade Testing Metric that helps measure a voice application’s ease of use. Our consulting services are designed to reduce the time and cost of speech automation deployments, improve customer communication and satisfaction, and drive higher return-on-investment performance through increased transaction resolution rates.

 

Recurring Services

 

Maintenance and Software Support

 

Intervoice offers the services and support needed to keep our solutions running at peak efficiency. We understand our customers’ requirements to protect their investment through world-class technical support that is accessible, effective and responsive to their business requirements and objectives.

 

Our RealCare^® Services portfolio gives customers a choice of comprehensive plans to ensure the performance of their Intervoice solution — including 24x7x365 responsive and proactive services to help minimize or prevent service-impacting events. Our RealCare Advantage maintenance programs offer three levels of services in order to provide customers with choices when it comes to support. Our maintenance offerings include software support services as a subscription-based service that provides convenient, cost-effective software upgrades. In addition, we offer value-added services such as application consulting support and remote application monitoring to further support our customers’ operations. Maintenance is part of Intervoice’s ongoing commitment to provide immediate access to the people and information our customers need to keep their operations running smoothly.

 

Hosted Solutions

 

Intervoice Hosted Solutions offer our customers a comprehensive portfolio of contact center applications delivered through our unique approach to hosted services. We offer a suite of hosted solutions designed to give contact centers and network service providers access to leading-edge applications while reducing the cost and risk of deploying state-of-the-art voice automation. In addition, Intervoice offers enhanced services such as Management, Monitoring and Hosted Security Services. Hosted applications also enable incremental and rapid integration of emerging technologies, as well as easier migration to speech-enabled services employing VoiceXML and next-generation network environments such as 2.5G, 3G, GPRS, IN and SIP-based VoIP.

 

Intervoice supports approximately 100 million minutes per month supplying hosted solutions for some of the world’s largest financial institutions, enterprises and network service providers with highly stringent network uptime and performance demands. Intervoice supports these customers from secure, integrated network operations centers locations in Orlando, Florida and Dallas, Texas in the U.S. We also have hosting agreements with Verizon and AT&T which enable us to deploy our solutions and services in most developed countries in the world.

 

Intervoice provides the platform, software and professional services that contact centers and network service providers need to develop, deliver and support interactive speech-enabled technologies.

The contact center market confronts three ongoing challenges — to continuously improve customer service, increase user satisfaction and build brand loyalty — all while controlling the cost of communications. Automated communications are increasingly the norm for cost-conscious enterprises, and after initial reluctance, consumers are beginning to show a preference for well-designed self-service voice solutions that can speed them through the call process. Organizations in a wide range of industries are responding to customer demand for speed and easy access by deploying converged speech and data technologies. Intervoice’s products and services have continued to evolve to meet the needs of the contact center marketplace.

 

Network service providers seek innovative, next-generation, high-demand services that can generate immediate subscriber acceptance and an accelerated ROI while keeping capital and operational expenditures to a minimum. Network service providers view “hot” consumer services such as contextual messaging, multimedia messaging, location based services, video, personal alerts, visual voicemail, and other enhanced services as clear opportunities to increase their subscriber base, solidify brand loyalty and stimulate network usage. Intervoice network solutions are designed to support the needs of both wireline and wireless network service providers for rapid-return, low-risk features that extend and enhance the useful life of their existing network infrastructure.

 

The markets we serve are fragmented and highly competitive. The principal competitive factors in our markets include breadth and depth of software and services, product features, product scalability, consulting services, maintenance services, pricing, and the ability to create and maintain a reference-able customer base. Our major competitors in our contact center market are Nortel, Genesys (a subsidiary of Alcatel-Lucent), Cisco and Avaya. All four of these companies are larger than Intervoice and focus on a larger portfolio of products beyond voice automation and contact routing. In addition, with respect to consulting services, we also compete with one of our alliance partners, Nuance Communications, a supplier of embedded advanced speech recognition and text-to-speech licenses.

 

We believe that our long history in the industry coupled with our unmatched speech-enabled product line, our professional consulting services, and our extensive customer base allow us to compete favorably in this market. The market is evolving rapidly, however, and we anticipate intensified competition not only from our traditional competitors but also from emerging vendors with non-traditional technologies and solutions, such as unified communications offerings. There is also continued competition from small venture-funded companies that attempt to build market share by targeting the installed base of larger established companies such as Intervoice.

 

Competition in our network service provider market ranges from large telecommunication suppliers offering turnkey, multi-application solutions to niche companies that specialize in a particular enhanced service such as messaging, video or content delivery. Our primary competitors in this market are Comverse Technology, Alcatel-Lucent and Unisys, each of which provides a suite of enhanced services. Other companies that compete with us in various niche geographic and/or product markets include Tecnomen, Movius, Acision and Mobeon.

 

We believe that, with our current suite of integrated and interoperable payment, messaging and portal services, our standards- and IP-based platform, our flexible business models, and our consulting services, we compare favorably with our competition. Nevertheless, we anticipate that competition will continue to grow from existing and new competitors, some of which may have greater financial, technological and marketing resources and greater market share than Intervoice.

 

We market our products directly, with a global sales force, and through more than 100 domestic and international distributors. We enter into arrangements with distributors to broaden distribution channels, to increase our sales penetration in specific markets and industries and to provide certain customer services. We select distributors based on their access to the markets, industries and customers that are candidates for Intervoice products. Our direct sales force consisted of approximately 80 personnel at February 29, 2008, including area vice presidents, regional sales directors and sales representatives worldwide. During fiscal 2008, approximately 68% of our solutions sales were attributable to direct sales to end-users and 32% came from sales to distributors.

Our major domestic distributors include Fiserv (multiple business units), Black Box, DDV, Siemens Business Communications, Symitar Systems, Verizon and Vexis. Our major international distributors include Ericsson (worldwide), Huawei (worldwide), Information Technologies Australia (Australia), Beijing Eable (China), IVRS (Hong Kong, China), Loxbit (Thailand), NextCom K.K. (Japan), Black Box (Canada), OLTP (Venezuela and the Caribbean), Promotora Kranon (Mexico), Siemens AG (Worldwide), Switch (Chile), Tatung (Taiwan), Telia Promotor (Sweden), Voice Outsourcing (Latin America and the Caribbean) and Wittel (Brazil).

 

Intervoice subsidiaries maintain offices in the U.K., Germany, Switzerland, the Netherlands, the United Arab Emirates, and South Africa to support sales throughout Europe, the Middle East and Africa. Company offices located in Singapore and China support sales in the Pacific Rim. We support Latin American sales from our Dallas headquarters and through a regional office in Brazil.

 

Our international revenues were 39% of total revenues in fiscal 2008, 35% of total revenues in fiscal 2007 and 45% of total revenues in fiscal 2006. See “Risk Factors” under Item 1A for a discussion of risks attendant to our international operations.

 

See “Sales” in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information on sales by product line and geographic area and concentration of revenue.

 

Our solutions backlog at February 29/28, 2008, 2007 and 2006, which does not include the contracted value of future maintenance and hosted solutions to be recognized, was approximately $66 million, $54 million, and $34 million, respectively. Our service and support contracts range in original duration from one month to five years, with most hosted solutions contracts having initial terms of two to three years and most maintenance and related contracts having initial terms of one year. Because many of the longer duration contracts give customers early cancellation privileges, we do not consider our book of services contracts to be reportable backlog, as a portion of the potential revenue reflected in the contract values may never be realized. At February 29, 2008, a portion of our backlog related to long-term projects and cash basis customers. We generally expect all projects in our existing backlog to be initiated within fiscal 2009 and most of such backlog to be recognized as revenue during fiscal 2009. Approximately 12% of such backlog could revenue subsequent to fiscal 2009. Some of our sales are completed in the same fiscal quarter as ordered. Thus, our backlog at any particular date may not be indicative of actual sales for any future period.

 

Research and development expenses were approximately $19 million, $24 million and $18 million during fiscal 2008, 2007 and 2006, respectively, and included the design of new products and the enhancement of existing products.

 

Our research and development spending is focused in six key areas. First, we are developing software tools to aid in the development and deployment of customer applications incorporating speech recognition, text-to-speech, and other rich media technologies for enterprises and wireless and wireline providers. Next, we are developing server-based application software platforms for operations and management of contact center, speech and call completion applications. We will use these software platforms for deployment and management of enterprise, wireless and wireline network operator applications. Third, we are developing media servers, “voice browsers,” and call processing infrastructure based on open standards such as VoiceXML, CCXML and SCXML. These media servers are VoIP enabled, allowing operation in soft-switch and hybrid PSTN and VoIP networks. Fourth, we are developing packaged, speech enabled applications for the network operator and enterprise markets. These include vertical and horizontal applications that are designed to greatly enhance customer return-on-investment by providing many commonly used configurable functions that can be deployed more quickly than custom applications. Fifth, we are developing software and tools designed to provide integration of live agent positions in a customer contact center setting. This software covers a broad range of functions including agent call-screen transfer, workflow management, full call recording, agent and supervisor management systems and reporting and various integration functions. Finally, we are developing modular productivity and communications applications for

wireless and wireline applications including speech driven voice mail, voice activated dialing, and enhanced personal information management.

 

We expect to maintain a strong commitment to research and development so that we can remain at the forefront of technology development in our markets.

 

We believe our existing patent, copyright, license and other proprietary rights in our products and technologies are material to the conduct of our business. To protect these proprietary rights, we rely on a combination of patent, trademark, trade secret, copyright and other proprietary rights laws, nondisclosure safeguards and license agreements. As of February 29, 2008, we owned 92 patents and had 35 pending applications for patents in the United States. In addition, we have registered “Intervoice” as a trademark in the United States, which is part of our portfolio of 23 registered trademarks and service marks. Some of our patents and marks are also registered in certain foreign countries. Our software and other products are generally licensed to a customer under the terms of a non-exclusive, and generally nontransferable and perpetual license agreement that restricts the use of the software and other products to the customer’s internal purposes. Although our license agreements prohibit a customer from disclosing proprietary information contained in our products to any other person, it is technologically possible for our competitors to copy aspects of our products in violation of our rights. Furthermore, even in cases where we hold patents, the detection and policing of the unauthorized use of the patented technology are difficult. Moreover, judicial enforcement of copyrights may be uncertain, particularly in foreign countries. The unauthorized use of our proprietary information by our competitors could have a material adverse effect on our business, operating results and financial condition.

 

We generally provide our customers a qualified indemnity against the infringement of third party intellectual property rights. From time to time, various owners of patents and copyrighted works send us or our customers letters alleging that our products do or might infringe upon the owner’s intellectual property rights, and/or suggesting that we or our customers should negotiate a license or cross-license agreement with the owner. Our policy is to never knowingly infringe upon any third party’s intellectual property rights. Accordingly, we forward any such allegation or licensing request to our outside legal counsel for their review, analysis and, where appropriate, opinion. We generally attempt to resolve any such matter by informing the owner of our position concerning non-infringement or invalidity, and/or, if appropriate, negotiating a license or cross-license agreement. Even though we attempt to resolve these matters without litigation, it is always possible that the owner of a patent or copyrighted work will sue us. Other than the current litigation discussed in Item 3 — “Legal Proceedings,” no such litigation is currently pending against us. As noted above, we currently have a portfolio of 92 United States patents, and we have applied for and will continue to apply for and receive a number of additional patents to protect our technological innovations. We believe our patent portfolio could allow us to assert counterclaims for infringement against certain owners of intellectual property rights if those owners were to sue us for infringement. In certain situations, it might be beneficial for us to cross-license certain of our patents for other patents which are relevant to the call automation industry. See Item 3 — “Legal Proceedings” for a discussion of certain patent matters. See “Risk Factors” in Item 1A for a discussion of risks associated with claims of intellectual property infringement.

 

Our manufacturing operations consist primarily of the final assembly, integration and extensive testing of subassemblies, host computer platforms, operating software and our run time software. We currently use third parties to perform printed circuit board assembly, sheet metal fabrication and customer-site service and repair. Although we generally use standard parts and components for our products, some of our components, including semi-conductors and, in particular, digital signal processors manufactured by Texas Instruments, are available only from a small number of vendors. Likewise, we license speech recognition technology from a small number of vendors. As we continue to migrate to open, standards-based systems, we will become increasingly dependent on our component suppliers and software vendors. To date, we have been able to obtain adequate supplies of needed components and licenses in a timely manner, and we expect to continue to be able to do so. Nevertheless, if our significant vendors are unable to supply components or licenses at current levels, we may not be able to obtain these items from another source or at historical prices. In such situations, we would be unable to provide products and

services to our customers or generate historical operating margins, and our business and operating results would suffer.

 

As of April 21, 2008, we had 736 employees.

 

Our Internet website is www.intervoice.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are posted on our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).

 

 

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). All statements other than statements of historical facts included in this Form 10-K, including, without limitation, statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” located elsewhere in this report regarding our financial position, business strategy, plans and objectives of management for future operations, future sales and industry conditions, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. In addition to important factors described elsewhere in this Annual Report, we caution current and potential investors that the following important risk factors, among others, sometimes have affected, and in the future could affect, our actual results and could cause such results during fiscal 2009, and beyond, to differ materially from those expressed in any forward-looking statements made by or on behalf of Intervoice:

 

 

 

 

Due to these and other factors, our revenue and operating results are difficult to forecast and are prone to fluctuate, which may cause a decline in our stock price. Our expense levels are based in significant part on our expectations of future revenue, and we may not be able to reduce our expenses quickly to respond to a shortfall in projected revenue. Therefore, our failure to meet revenue expectations could seriously harm our business, operating results and financial condition. See the discussion entitled “Sales” in Item 7 of Part II for a discussion of our system for estimating sales and tracking sales trends in our business.

 

 

 

 

 

 

 

 

 

As a result of these and other risks, we may not realize anticipated benefits from our acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could result in a material adverse affect on our business, results of operations and financial condition.

 

 

 

None.

 

 

Intervoice owns approximately 225,000 square feet of manufacturing and office facilities in Dallas, Texas. We lease approximately 107,000 square feet of office space as follows:

 

 

 

Intellectual Property Matters

 

We generally provide our customers a qualified indemnity against the infringement of third party intellectual property rights. From time to time, various owners of patents and copyrighted works send us or our customers letters alleging that our products do or might infringe upon the owner’s intellectual property rights, and/or suggesting that we or our customers should negotiate a license or cross-license agreement with the owner. Our policy is to never knowingly infringe upon any third party’s intellectual property rights. Accordingly, we forward any such allegation or licensing request to our outside legal counsel for their review, analysis and, where appropriate, opinion. We generally attempt to resolve any such matter by informing the owner of our position concerning non-infringement or invalidity, and/or, if appropriate, negotiating a license or cross-license agreement. Even though we attempt to resolve these matters without litigation, it is always possible that the owner of a patent, trademark, or copyrighted work, or a user of our products who has been sued by such an owner, will sue us for infringement, under an indemnity or some other legal theory. Other than the current litigation discussed in “Pending Litigation” below, no such litigation is currently pending against us. We currently have a portfolio of 92 United States patents, and we have applied for and will continue to apply for and receive a number of additional patents to protect our technological innovations. We believe our patent portfolio could allow us to assert counterclaims for infringement against certain owners of intellectual property rights if those owners were to sue us for infringement.

 

From time to time Ronald A. Katz Technology Licensing L.P. (“RAKTL”) has sent letters to certain of our customers suggesting that the customer should negotiate a license agreement to cover the practice of certain patents owned by RAKTL. In the letters, RAKTL has alleged that certain of its patents pertain to certain enhanced services offered by network providers, including prepaid card and wireless services and postpaid card services. RAKTL has further alleged that certain of its patents pertain to certain call processing applications, including applications for call centers that route calls using a called party’s DNIS (dialed number identification service) number. As a result of the correspondence, many of our customers have entered into license agreements with RAKTL and many of our customers have had discussions, or are in discussions, with RAKTL.

 

We offer certain products that can be programmed and configured to provide enhanced services to network providers and call processing applications for call centers. Our contracts with customers usually include a qualified obligation to indemnify and defend customers against claims that products as delivered by Intervoice infringe a third party’s patent. At least one customer of our Edify Corporation (“Edify”) subsidiary who was sued in the RAKTL lawsuit (discussed below) has notified us that RAKTL has referenced, among other things, a number of different products including an Edify product in discussions of individual elements of certain claims of certain RAKTL patents. To date, we have not been required to defend any customers against a claim of infringement under a RAKTL patent. Based on information available to us, we do not believe that RAKTL has claimed any specific product provided by us infringes any claims of any RAKTL patent. We have, however, received letters from customers notifying us of the efforts by RAKTL to license its patent portfolio and reminding us of our potential obligations under the indemnification provisions of our agreements in the event that a claim is asserted.

Two of our customers who had previously attempted to tender the defense of their products to us informed us that they had entered into agreements to license certain rights under the RAKTL patents and demanded we indemnify them for unspecified amounts, including attorney’s fees, paid in connection with the license agreements. We notified these customers that we believe we do not have any indemnity obligation in connection with the license agreements. We have received no further response from either customer.

 

A number of customers, including customers of ours and Edify, have been sued as defendants in several lawsuits brought by RAKTL. Many of these cases have been consolidated for discovery purposes in the United States District Court for the Central District of California, Case No. ML07-1816-RGU (FFMx), (the “RAKTL Lawsuit”). Several of these defendants who are also customers have notified us or Edify of the lawsuits pursuant to the indemnity paragraphs of their respective sales agreements and have indicated to us that the lawsuits could potentially impact the defense and indemnity paragraphs of their respective sales agreements. One of these defendants who is a customer of an Intervoice reseller has sued us, but not yet served the complaint upon us, in a lawsuit discussed below in “Pending Litigation.” Neither we nor Edify believe that we have a current obligation to defend or indemnify any of these customers in connection with the current allegations made in the RAKTL lawsuits and when contacted we have requested that the customers provide additional information concerning the assertions made by RAKTL. As part of the discovery process in the litigation referenced above, the Company has received subpoenas from RAKTL calling for the production of certain materials and information related to specific defendants. The Company is currently responding to the subpoenas.

 

In response to the correspondence from, and litigation initiated by, RAKTL, a few of our customers and customers of Edify have attempted to tender to us the defense of our products under contractual indemnity provisions. We have informed these customers that, while we fully intend to honor any contractual indemnity provisions, we do not believe we currently have any obligation to provide such a defense because RAKTL does not appear to have made a claim, either in the correspondence or litigation, that any Intervoice product infringes a RAKTL patent. Some of these customers have disagreed with us and stated that they believe that the statements and allegations contained within correspondence and/or litigation pleadings filed by RAKTL can be construed as a claim against Intervoice products.

 

Even though no claims have been made by RAKTL that a specific product offered by Intervoice infringes any claim under the RAKTL patent portfolio, we have received opinions from our outside patent counsel that certain products and applications we offer do not infringe certain claims of the RAKTL patents. We have also received opinions from our outside counsel that certain claims under the RAKTL patent portfolio are invalid or unenforceable. Furthermore, based on the reviews by outside counsel, we are not aware of any valid and enforceable claims under the RAKTL portfolio that are infringed by our products. If we are ever served with the lawsuit discussed below in “Pending Litigation” or become involved in any other litigation in connection with the RAKTL patent portfolio, under a contractual indemnity or any other legal theory, we intend to vigorously contest the claims and to assert appropriate defenses.

 

From time to time Phoenix Solutions, Inc. (“Phoenix”) has sent letters to certain of our customers suggesting that the customer should negotiate a license agreement to cover the practice of certain patents owned by Phoenix. In the letters, Phoenix has alleged that certain of its patents pertain to certain speech recognition technology. Certain products we offer can be programmed and configured to utilize speech recognition technology. Our contracts with customers usually include a qualified obligation to indemnify and defend customers against claims that our products infringe a third party’s patent. None of the customers contacted by Phoenix have notified us that Phoenix has expressly claimed or identified any product provided by us that infringes any claims of any Phoenix patent. In a lawsuit initiated by Phoenix against Sony Electronics, Inc. (“Sony”) that is discussed below in “Pending Litigation,” we were joined to the lawsuit by Sony alleging that we had breached the UCC representation of non-infringement. In no instance has any allegation been made by Phoenix that any product supplied by us infringes any claims of a Phoenix patent and as such we have refused to assume any such defense. We have, however, received letters from customers notifying us of the efforts by Phoenix to license its patent portfolio and reminding us of our potential obligations under the indemnification provisions of the applicable agreements in the event that a claim is asserted against a product or system we provided.

We have received letters from Webley Systems (“Webley”), a division of Parus Holdings, Inc. (“Parus”), and its counsel alleging that certain patents cover one or more of our products and services. In the letters, Parus offers a license to the patents. As a result of the correspondence, we conducted discussions with Parus. We have not had any recent discussions with Parus. Based on reviews by our outside counsel, we are not currently aware of any valid and enforceable claims under the Webley patents that are infringed by our products or services.

 

Pending Litigation

 

David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v. InterVoice-Brite, Inc., et al., No. 3-01CV1071-K, pending in the United States District Court, Northern District of Texas, Dallas Division:

 

Several related class action lawsuits were filed in the United States District Court for the Northern District of Texas on behalf of purchasers of common stock of Intervoice during the period from October 12, 1999 through June 6, 2000 (the “Class Period”). Plaintiffs have filed claims, which were consolidated into one proceeding, under Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 against us as well as certain named current and former officers and directors of Intervoice on behalf of the alleged class members. In the complaint, Plaintiffs claim that we and the named current and former officers and directors issued false and misleading statements during the Class Period concerning the financial condition of Intervoice, the results of the merger with Brite and the alleged future business projections of Intervoice. Plaintiffs have asserted that these alleged statements resulted in artificially inflated stock prices.

 

The District Court dismissed the Plaintiffs’ complaint because it lacked the degree of specificity and factual support to meet the pleading standards applicable to federal securities litigation. The Plaintiffs appealed the dismissal to the United States Court of Appeals for the Fifth Circuit, which affirmed the dismissal in part and reversed in part. The Fifth Circuit remanded a limited number of issues for further proceedings in the District Court.

 

On September 26, 2006, the District Court granted the Plaintiffs’ motion to certify a class of people who purchased Intervoice stock during the Class Period. On November 14, 2006, the Fifth Circuit granted our petition to appeal the District Court’s decision to grant Plaintiffs’ motion to certify a class. On January 8, 2008, the Fifth Circuit vacated the District Court’s class-certification order and remanded the case to the District Court for further consideration in light of the Fifth Circuit’s decision in Oscar Private Equity Investments v. Allegiance Telecom, Inc. The parties have filed additional briefing in the District Court regarding class certification and are awaiting the District Court’s ruling. The District Court granted Plaintiffs’ motion for leave to file a second amended complaint and we moved to dismiss portions of that amended complaint. On March 14, 2008, the District court granted that motion in part and denied it in part. We have largely completed the production of documents in response to the Plaintiffs’ requests for production. We believe that we and our officers and directors complied with the applicable securities laws and will continue to vigorously defend the case.

 

Phoenix Solutions, Inc. vs. Sony Electronics, Inc., Case No. C07-2112 (MHP), pending in the United States District Court for the Northern District of California, San Francisco Division: On December 13, 2006, Phoenix Solutions, Inc. (“Phoenix”) filed suit against Sony in the United States District Court for the Central District of California for infringement of U.S. Patent Nos. 6,615,172, 6,633,846, 6,665,640 and 7,050,977. On February 9, 2007, Sony filed its answer to Phoenix’s claims of infringement, denied any liability and filed a counterclaim alleging that the patents were neither valid nor infringed by Sony. On February 26, 2007, Sony filed a third party complaint against the Company for alleged breach of warranty of title and the warranty against infringement related to the claims of infringement made by Phoenix against Sony. In its third party complaint, Sony seeks to recover actual damages suffered by it in the event a final judgment is entered against Sony or it is otherwise liable for any damages, fees or costs arising out of the claims of patent infringement made by Phoenix against the Sony interactive voice response system. On April 9, 2007, the Company filed its motion to dismiss the third party complaint. The trial court transferred the case to the United States District Court for the Northern District of California, San Francisco Division, and the case is now styled Phoenix Solutions, Inc. vs. Sony Electronics, Inc., Case No. C07-2112 (MHP). Phoenix and Sony settled their respective claims against one another and the trial court has dismissed such claims. Sony continues to assert its third party claims against the Company. The trial court has denied both the Company’s motion to dismiss and Sony’s motion to transfer the case to a Florida court. The Company intends to vigorously defend itself against any and all claims made against it.

On January 28, 2008, Webster Bank, National Association (“Webster”) filed suit in the United States District Court for the District of Connecticut against us and several other entities, including an Intervoice reseller, related to patent infringement claims made against Webster by RAKTL, Webster Bank, National Association v. Intervoice, Inc., et al., Civil No. 3:08-CV-00147-AHN. Even though approximately three months have elapsed since the lawsuit was filed, Webster has yet to serve us with a copy of the Complaint. Until if and when we are served, we have no obligation to appear or defend ourselves in the case. We have repeatedly advised Webster that RAKTL has not alleged that our products infringe any RAKTL patents, that Webster has no contractual relationship or other relationship with us which could support any of the claims being made in the lawsuit, and that prosecution of the suit against Intervoice by Webster could impose liability upon Webster under federal rules for filing a lawsuit without a reasonable basis in law or in fact. If served with the suit and forced to respond, we will vigorously defend ourselves and assert all defenses and affirmative claims for relief against Webster available to us.

 

 

Not applicable.

 

 

Common Stock

 

Our outstanding shares of common stock are quoted on the NASDAQ National Market under the symbol INTV. We have not paid any cash dividends since our incorporation. We do not anticipate paying cash dividends in the foreseeable future.

 

High and low share prices as reported on the NASDAQ National Market are shown below for our fiscal quarters during fiscal 2008 and 2007.

 

 

 

On April 21, 2008, there were 558 shareholders of record of Intervoice common stock. The closing price of our common stock on that date was $6.97.

Securities Authorized for Issuance Under Equity Compensation Plans

 

We have maintained multiple compensation plans to provide for the issuance of our common stock to officers and other employees. These plans consisted of the 1990 Employee Stock Option Plan, 1999 Stock Option Plan, 1990 Non-Employee Stock Option Plan, 2003 Stock Option Plan, 2005 Stock Incentive Plan and the 2007 Stock Incentive Plan, which have been approved by the shareholders, and the 1998 Employee Non-Qualified Stock Option Plan which has not been approved by the shareholders. The following table sets forth information regarding outstanding options and shares of common stock reserved for future issuance as of February 29, 2008. The 2007 Stock Incentive Plan replaced all other plans (except for awards already outstanding) and became the sole plan from which equity based awards could be granted.

 

 

 

 

During fiscal 1999, we adopted a stock option plan, which was not approved by security holders, under which shares of common stock could 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 were the fair market value per share of stock based on the average of the high and low price per share on the date of grant. We granted options at various dates with terms under which options became exercisable at a rate of 25% or 33% per year and were exercisable for a period of ten years after the grant date. This plan is no longer a plan under which options can be granted.

Stock Performance Graph

 

The following graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) to our shareholders during the five-year period ended February 29, 2008 as well as an overall broad stock market index, the NASDAQ Market Index, and a peer group index for the Company, the index for SIC Code 3661 — Telephone and Telegraph Apparatus. The stock performance graph assumes $100 was invested on March 1, 2003 in our common stock and in each such index.

 

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG INTERVOICE, INC.,
NASDAQ MARKET INDEX AND SIC CODE INDEX

 

 

ASSUMES $100 INVESTED ON MAR. 1, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING FEB. 29, 2008

 

COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS

 

 

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes included in Item 8 and in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in Item 7.

 

 

 

 

 

Critical Accounting Policies

 

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use estimates and projections that affect the reported amounts and related disclosures and that may vary from actual results. We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment. If

actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements.

 

Revenue Recognition

 

We recognize revenue from the sale of hardware and software solutions, from the delivery of recurring maintenance and software support associated with installed solutions and from the provision of our enterprise and network solutions on a hosted solutions basis. Our policies for revenue recognition follow the guidance in Statement of Position No. 97-2 “Software Revenue Recognition,” as amended (“SOP 97-2”), SEC Staff Accounting Bulletin No. 104 (“SAB 104”) and EITF 00-21 “Revenue Arrangements with Multiple Deliverables.” If contracts include multiple elements, each element of the arrangement is separately identified and accounted for based on the relative fair value of such element as evidenced by vendor specific objective evidence. In situations where vendor specific objective evidence exists for all undelivered elements, but does not exist for one or more of the delivered elements, the residual method is used. In these cases, the vendor specific objective evidence of fair value of the undelivered elements is deferred and the residual is recognized as revenue related to the delivered elements. Revenue is not recognized on any element of the arrangement if undelivered elements are essential to the functionality of the delivered elements.

 

Sale of Hardware and Software Solutions:  Many of our sales are of customized software or customized hardware/software solutions. Such solutions incorporate newly designed software and/or standard building blocks of hardware and software which have been significantly modified, configured and assembled to match unique customer requirements defined at the beginning of each project. We account for sales of these customized solutions using contract accounting principles, following the relevant guidance in Statement of Position No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), under either the percentage of completion (“POC”) or completed contract methodology, as further described below. In other instances, particularly in situations where we sell to distributors or where we are supplying only additional product capacity (i.e., similar hardware and software solutions to what is already in place) for an existing customer, we may sell solutions that do not require significant customization. In those situations, we recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, our fee is fixed or determinable, and collectibility is probable. Typically, this is at shipment when there is no installation obligation or at the completion of minor post-shipment installation obligations.

 

Generally, we use POC accounting for our more complex custom solutions. In determining whether a particular sale qualifies for POC treatment, we consider multiple factors including the value of the contract and the degree of customization inherent in the project. For a project accounted for under the POC method, we recognize revenue as work progresses over the life of the project based on a comparison of actual labor hours worked to current estimates of total labor hours required to complete the project. We review and update project estimates on a quarterly basis.

 

The terms of most POC projects require customers to make interim progress payments during the course of the project. These payments and a written customer acknowledgement at the completion of the project, usually following a final customer test phase, document the customer’s acceptance of the project. In some circumstances, the passage of a contractually defined time period or the customer’s use of the solution in a live operating environment may also constitute final acceptance of a project.

 

We use completed contract accounting for smaller custom projects not meeting the POC thresholds described above. We also use completed contract accounting in situations where the technical requirements of a project are so complex or are so dependent on the development of new technologies or the unique application of existing technologies that our ability to make reasonable estimates is in doubt or in situations where a sale is subject to unusual “inherent hazards.” Such hazards are unrelated to, or only incidentally related to, our typical activities and include situations where completion of the contract is subject to pending litigation, or where the solutions produced are subject to condemnation or expropriation risks. These latter situations are extremely rare. For all completed contract sales, we recognize revenue upon customer acceptance as evidenced by a written customer acknowledgement, the passage of a contractually defined time period or the customer’s use of the solution in a live operating environment.

We generate a significant percentage of our sales, particularly sales of network solutions, outside the United States. Customers in certain countries are subject to significant economic and political challenges that affect their cash flow, and many customers outside the United States are generally accustomed to vendor financing in the form of extended payment terms. To remain competitive in markets outside the United States, we may offer selected customers such payment terms. In all cases, however, we only recognize revenue at such time as our solutions or service fee is fixed or determinable, collectibility is probable and all other criteria for revenue recognition have been met. In some limited cases, this policy causes us to recognize revenue on a “cash basis,” limiting revenue recognition on certain sales of solutions and/or services to the actual cash received to date from the customer, provided that all other revenue recognition criteria have been satisfied.

 

Sale of Maintenance and Software Support:  We recognize revenue from maintenance and software support when the services are performed or ratably over the related contract period. All significant costs and expenses associated with maintenance contracts are expensed as incurred. This approximates a ratable recognition of expenses over the contract period.

 

Sale of Hosted Solutions:  We provide enhanced communications solutions to some customers on an outsourced basis through our hosted solutions business. While specific arrangements can vary, we generally build a customized solution to address a specific customer’s business needs and then own, monitor, and maintain that system, ensuring that it processes the customer’s business transactions in accordance with defined specifications. For our services, we generally receive a one-time setup fee paid at the beginning of the contract and a service fee paid monthly over the life of the contract. Most contracts range from 12 to 36 months in length.

 

We combine the setup fee and the total service fee to be received from the customer and recognize revenue ratably over the term of the hosted solutions contract. We capitalize the cost of the computer system(s) and related applications used to provide the service and depreciate such costs over the contract life (for assets unique to the individual contract) or the life of the equipment (for assets common to the general hosted solutions operations or for assets whose useful lives are shorter than the related contract term). We expense all labor and other period costs required to provide the service as we incur them.

 

Loss Contracts:  We update our estimates of the costs necessary to complete all customer contracts in process on a quarterly basis. Whenever current estimates indicate that we will incur a loss on the completion of a contract, we immediately record a provision for such loss as part of the current period cost of goods sold.

 

Stock-Based Compensation

 

We adopted SFAS No. 123R, “Share-Based Payment,” effective March 1, 2006 using the modified prospective application method. Determining the amount and classification of expense for stock-based compensation, as well as the associated impact to the balance sheets and statements of cash flows, requires us to develop estimates of the fair value of stock-based compensation expenses using fair value models. The most significant assumptions used in calculating the fair value include the expected volatility, expected lives and estimated forfeiture rates for employee stock option grants.

 

We use a weighted average of the implied volatility, the most recent one-year volatility and the median historical volatility for the period of the expected life of the option to determine the expected volatility to be used in our fair value calculation, with the median historical volatility receiving the heaviest weighting of the three factors. We believe that this is the best available estimate of expected volatility. The expected lives of options are determined based on our historical stock option exercise experience. We believe the historical experience method is the best estimate of future exercise patterns currently available. Estimated forfeiture rates are derived from historical forfeiture patterns. We believe the historical experience method is the best estimate of forfeitures currently available. Changes to these assumptions or changes to our stock-based compensation plans, including the number of awards granted, could impact our stock-based compensation expense in future periods. We update these assumptions annually or as circumstances arise which would indicate the need for them to be updated more often.

 

In addition to stock options, we also grant restricted stock units. These units are valued using the fair market value of the stock on the date of grant. Restricted stock units may vest based solely upon service requirements or the

restricted stock units may contain additional performance requirements that serve to accelerate vesting if requisite criteria are met.

 

Intangible Assets and Goodwill

 

Intangible Assets:  Intangible assets are comprised of separately identifiable intangible assets arising out of our fiscal 2007 acquisition of certain assets of Nuasis, our fiscal 2006 acquisition of Edify and our fiscal 2000 acquisition of Brite, and certain capitalized purchased software. We amortize intangible assets using the straight-line method over each asset’s estimated useful life. Such lives range from 18 months to 12 years. We review our intangible assets for possible impairment when events and circumstances indicate that the assets might be impaired and the undiscounted projected cash flows associated with such assets are less than the carrying amounts of the assets. In those situations, we recognize an impairment loss on the intangible asset equal to the excess of the carrying amount of the asset over the asset’s fair value, generally based upon discounted estimates of future cash flows.

 

We expense the cost of internally developed software products and substantial enhancements to existing software products for sale until technological feasibility is established, after which point any additional costs are capitalized. Technological feasibility of a computer software product is established when we have completed all planning, designing, coding, and testing activities necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. No costs have been capitalized to date for internally developed software products and enhancements as our current process for developing software is essentially completed concurrent with the establishment of technological feasibility. We capitalize purchased software upon acquisition when such software is technologically feasible or if it has an alternative future use, such as use of the software in different products or resale of the purchased software.

 

Goodwill:  Goodwill is attributable to our fiscal 2006 acquisition of Edify and our fiscal 2000 purchase of Brite. Under the provisions of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is presumed to have an indefinite life and is not subject to annual amortization. We do, however, perform an impairment test on our goodwill balance on at least an annual basis, as of the beginning of our fourth fiscal quarter, and more frequently if we identify triggering events on an interim basis. Our impairment review follows the two-step approach defined in SFAS No. 142. The first step compares the fair value of Intervoice with its carrying amount, including goodwill. If the fair value exceeds the carrying amount, goodwill is considered not impaired. If the carrying amount exceeds fair value, we compare the implied fair value of goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, we recognize an impairment loss in an amount equal to the lesser of that excess or the carrying amount of goodwill.

 

Income Taxes

 

We record an income tax provision for the anticipated tax consequences of the reported results of operations. In accordance with SFAS 109, “Accounting for Income Taxes,” the provision for income taxes is computed using the asset and liability method and reflects the tax impact of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. We provide a valuation allowance for deferred tax assets in circumstances where we do not consider realization of such assets to be more likely than not. This is a subjective assessment that requires us to consider current, past and expected profitability trends to determine if it is more likely than not that we will realize the benefit of deferred tax assets. These analyses are performed on a jurisdiction by jurisdiction basis and as a result we continue to provide valuation allowances on state deferred tax assets.

 

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. FIN 48 requires companies to determine that it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. FIN 48 also provides guidance on the derecognition of tax benefits, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also requires significant additional disclosures regarding uncertain

tax positions. FIN 48 is effective for years beginning after December 15, 2006 and we adopted FIN 48 in the first quarter of fiscal 2008 on a prospective basis.

 

As required by FIN 48, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, we applied FIN 48 to all tax positions for which the statute of limitations remained open.

 

Results of Operations

 

The following table presents certain items as a percentage of sales for our last three fiscal years.

 

 

Sales

 

Intervoice is a leading provider of converged voice and data solutions and related services. As used in this report, solutions sales include the sale of hardware and/or software applications and the related consulting services associated with designing, integrating, and installing custom applications to address customers’ business needs. Recurring services include a suite of maintenance and software upgrade offerings and the provision of customized solutions to customers on a hosted solutions (outsourced) basis. Our solutions product line includes voice portal, messaging, and payment solutions.

Our net sales by product line for fiscal 2008, 2007 and 2006 were as follows (in millions):

 

 

We assign revenues to geographic locations based on the location of the customer. Our net sales by geographic area for fiscal 2008, 2007 and 2006 were as follows (in millions):

 

 

International sales constituted 39% of total sales in fiscal 2008, 35% of total sales in fiscal 2007 and 45% of total sales in fiscal 2006.

 

Sales of voice portal solutions decreased in fiscal 2008 from fiscal 2007. All geographies except Europe reflected decreases in voice portal solution sales, with Latin America reflecting the largest dollar decrease. Fiscal 2007 Latin America solutions revenues included significant transactions further described below that were not repeated in fiscal 2008. Sales of voice portal solutions increased significantly in fiscal 2007 from fiscal 2006. All geographies except Europe reflected increases in voice portal solution sales during this period, with the largest increase reflected in North America. This increase includes sales to former Edify customers for the full year of fiscal 2007 including approximately $4.6 million recognized under an approximately $7.3 million sale to a major U.S. satellite television provider. We acquired Edify in the fourth quarter of fiscal 2006. Fiscal 2007 also included $2.5 million of revenue from a cash basis customer based in the Central and South American market as well as $3.5 million from a follow on order for incremental capacity from the same customer which was recognized on an accrual basis. Based on the uncertain political situation in this customer’s country, during the fourth quarter of fiscal 2007, we returned to the cash basis of accounting for any future activity with this customer. In addition, the portion of our voice portal revenues which are associated with book-and-ship channel sales and capacity upgrades has decreased in fiscal 2008 from that reported in fiscal 2007 as a result of several significant upgrade sales in 2007 that were not repeated in 2008. In addition, our sales team was refocused on certain strategic customer relationships during fiscal 2008.

 

Messaging solution sales for fiscal 2008 included $9.1 million recognized under a $10.3 million media exchange contract entered into in February 2007. Messaging solution sales in fiscal 2008 also included approximately $7.0 million of revenue from a cash basis customer in the Latin American market as well as sales of additional capacity to other existing customers. Fiscal 2006 included recognition of approximately $6.2 million under the first two contracts for our new advanced messaging product. Sales of messaging solutions decreased in fiscal 2007 from fiscal 2006. The largest decreases were reflected in the Middle East, Africa and Latin America,

where fiscal 2007 did not include any contracts of comparable size to the first two media exchange contracts recognized during fiscal 2006.

 

Our sales of payment solutions continue to primarily reflect sales of capacity upgrades to existing clients in the Middle East and Africa, Latin America and the Pacific Rim.

 

The 3.8% increase in maintenance and related services revenues in fiscal 2008 as compared to fiscal 2007 is comprised of increases of $1.6 million (32.4%) in maintenance revenues on messaging solutions and $2.0 million (2.7%) in maintenance revenues on voice portal solutions, offset by $0.4 million (11.3%) in maintenance revenues on payment solutions. The 29.2% increase in maintenance and related service revenues in fiscal 2007 as compared to fiscal 2006 is comprised of increases of $19.6 million (35.3%) in maintenance revenues on voice portal solutions offset, in part, by decreases of $0.8 million (8.5%) in maintenance revenues on messaging and payment solutions. This increase in fiscal 2007 resulted primarily from a full year of revenues related to our acquisition of Edify, which occurred in the fourth quarter of fiscal 2006.

 

The 7.7% decrease in hosted solutions revenues in fiscal 2008 compared to fiscal 2007 is comprised of growth of $2.0 million in North America offset by a $3.6 million decline in revenue from our international customers. The 19.1% decrease in hosted solutions revenues in fiscal 2007 as compared to fiscal 2006 is comprised of growth of $2.1 million (16.2%) in revenues from our North American enterprise customers offset by reductions of $7.0 million (55.7%) from our international network customers. We recognized revenues totaling $3.0 million in fiscal 2007 and $8.3 million in fiscal 2006 under a single long-term international hosted solutions contract with a U.K. based network operator. This contract expired in July 2006. International hosted solutions revenues included $1.1 million, $1.4 million and $2.0 million for fiscal 2008, 2007 and 2006, respectively, relating to services performed for an international hosted solutions customer for which we recognize revenue on a cash basis.

 

No customer accounted for 10% of our total sales during fiscal 2008 and 2007. We have historically made significant sales of solutions, maintenance and hosted solutions, including the hosted solutions described above, to a U.K. based network operator. Such combined sales accounted for 10% of our total sales during fiscal 2006. No other customer accounted for 10% or more of our sales during such period.

 

We are prone to quarterly sales fluctuations. Some of our transactions are completed in the same fiscal quarter as ordered. The quantity and size of large sales (sales valued at approximately $1.0 million or more) during any quarter can cause wide variations in our quarterly sales and earnings, as such sales are unevenly distributed throughout the fiscal year. We use a system combining estimated sales from our recurring services contracts, “pipeline” of solution sales opportunities, and backlog of committed solution orders to estimate sales and trends in our business. For the years ended February 29, 2008, February 28, 2007 and 2006 sales were sourced as follows:

 

 

Our service and support contracts range in original duration from one month to five years, with most hosted solutions contracts having initial terms of two to three years and most maintenance and related contracts having initial terms of one year. Because many of the contracts give customers early cancellation privileges, we do not consider our book of services contracts to be reportable backlog, as a portion of the potential revenue reflected in the contract values may never be realized if customers elect to cancel, notwithstanding that many of our hosted solutions contracts contain provisions that provide for early termination fees to be paid by the customer if they cancel. Nevertheless, it is easier for us to estimate service and support revenues than to estimate solution sales for the next quarter because the service and support contracts generally span multiple quarters and revenues recognized under each contract are generally similar from one quarter to the next.

Our backlog is made up of customer orders for solutions for which we have received complete purchase orders. At February 29, 2008, and February 28, 2007 and 2006, our backlog of solutions sales was approximately $65.7 million, $54.1 million and $33.9 million, respectively. We generally expect all projects in our existing backlog to be initiated within fiscal 2009 and most of such backlog to be recognized as revenue during fiscal 2009. However, some of our larger, more complex network projects may extend for longer periods. Approximately 12% of our backlog could revenue subsequent to fiscal 2009. The accuracy of any estimate of future sales is dependent, in part, on our ability to project the amount of revenue to be contributed from beginning solutions backlog during any fiscal quarter. Our ability to estimate the amount of backlog that will be converted to revenue in any fiscal quarter can be affected by factors outside of our control, including changes in project timing requested by our customers and cash collections from certain international customers. Approximately 15% of our solutions backlog at February 29, 2008 relates to customers for which revenue is recognized on a cash basis which impacts the time between project completion and revenue recognition.

 

Our pipeline of opportunities for solutions sales is the aggregation of our sales opportunities for which we have not received a purchase order, with each opportunity evaluated for the date the potential customer will make a purchase decision, competitive risks, and the potential amount of any resulting sale. No matter how promising a pipeline opportunity may appear, there is no assurance it will ever result in a sale. Accordingly, upward or downward trends in our total pipeline are not considered meaningful from a financial analysis perspective. While we incorporate an estimate of sales from our pipeline into our business planning and budgeting, pipeline estimates are necessarily speculative and may not consistently correlate to solutions sales in a particular quarter or over a longer period of time. While we know the amount of solutions backlog available at the beginning of a quarter, we must speculate on our pipeline of solutions opportunities for the quarter. Our accuracy in estimating total solutions sales for the next fiscal quarter is, therefore, highly dependent upon our ability to successfully estimate which pipeline opportunities will close during the quarter.

 

To compete effectively in our target markets in fiscal 2009 and beyond, we believe we must continue to transition our products and services to an open, standards-based business model. We have historically provided complete, bundled hardware and software systems using internally developed components to address our customers’ total business needs. Increasingly, the markets for our products are requiring a shift to the development of products and services based on an open, standards-based architecture utilizing VoiceXML, CCXML and SCXML standards. Such an open, standards-based approach allows customers to independently purchase and combine hardware components, standardized software modules, and customization, installation and integration services from individual vendors deemed to offer the best value in the particular class of product or service. In such an environment, we believe we may sell less hardware and fewer bundled systems and may become increasingly dependent on our development and sale of software application packages, customized software and consulting and integration services. This shift will place new challenges on our management to transition our products and to hire and retain the mix of personnel necessary to respond to this business environment, to adapt to the changing expense structure that the new environment may tend to foster, and to increase sales of services, customized software and application packages to offset reduced sales of hardware and bundled systems.

 

Restructuring and Other Charges

 

Fiscal 2008

 

During fiscal 2008, we incurred approximately $1.9 million of charges in connection with two severance and organizational changes in regard to integration and consolidation activities related to prior period acquisitions affecting approximately 45 positions. In addition, we incurred approximately $0.4 million in connection with facilities charges regarding our Orlando facility, and approximately $0.4 million in corporate restructuring and related legal and professional fees. We also reversed a facilities related charge of approximately $0.3 million.

The following table summarizes the effect on reported operating results by financial statement category of all such charges for fiscal 2008 (in millions):

 

 

Of this amount, approximately $0.2 million remained accrued at February 29, 2008.

 

On May 31, 2007, we became aware of the intention of a shareholder, David W. Brandenburg, to solicit proxies to elect an alternate slate of nominees to our seven-member Board of Directors. On June 22, 2007, three existing Board members resigned at the request of the Company to enable three nominees from the alternate slate to join the Board of Directors promptly following the directors’ resignation. The Governance Agreement, which contemplated the election of the nominees from the alternate slate to the Board of Directors, was approved by the Board of Directors after the resignations. We completed the re-election of our Board of Directors at our Annual Shareholder Meeting held on July 23, 2007. Legal and other expenses of approximately $0.7 million incurred during this process, including reimbursement of approximately $0.4 million to Mr. Brandenburg, the Chairman of our Board of Directors, were reported in selling, general and administrative expense in our Consolidated Statements of Operations for the fiscal quarter ended August 31, 2007.

 

Fiscal 2007

 

During fiscal 2007, we incurred approximately $2.5 million of charges in connection with three severance and organizational changes affecting approximately 55 positions. In addition, we incurred approximately $1.2 million in facilities charges in connection with the elimination of redundant office leases. The following table summarizes the effect on reported operating results by financial statement category of all such charges for fiscal 2007 (in millions):

 

 

All amounts related to these charges have been paid.

 

Fiscal 2006

 

During fiscal 2006, we incurred approximately $1.9 million in charges in connection with restructuring expenses for severance and organizational changes affecting approximately 50 persons made at the time of the acquisition of Edify. The following table summarizes the effect on reported operating results by financial statement category of all such charges for fiscal 2006 (in millions):

 

 

All amounts related to these charges have been paid.

Cost of Goods Sold

 

Cost of goods sold was comprised of the following for fiscal 2008, 2007 and 2006 (in millions):

 

 

During fiscal 2008, 2007 and 2006, we incurred charges to cost of goods sold totaling $0.4 million (0.2% of sales), $1.0 million (0.5% of sales) and $0.5 million (0.3% of sales), respectively, as described in the preceding “Restructuring and other charges” section. Cost of goods sold for fiscal 2008 and fiscal 2007 included approximately $1.2 million and $0.9 million, respectively, of stock compensation expense, resulting from the adoption of SFAS No. 123R, which requires us to include compensation expense in our financial statements related to share-based awards. A significant portion of our solutions cost of goods sold is comprised of labor costs that are fixed over the near term as opposed to direct material and license/royalty costs that vary directly with sales volume. The increase in solutions cost of goods sold as a percentage of sales in fiscal 2008 as compared to fiscal 2007 resulted primarily from continued activity on a $10.3 million media exchange contract entered into in February 2007. During fiscal 2008, our Research and Development organization incurred a total of $4.2 million of cost specifically related to this project which are reported in solutions cost of goods sold. As a result, we recognized no net margin on the $9.1 million of revenue recognized on this project and we recorded approximately $0.5 million of additional loss provision related to this contract during fiscal 2008. The increase in solutions cost of goods sold as a percentage of solutions sales in fiscal 2007 as compared to fiscal 2006 resulted primarily from the recording of a loss provision of approximately $1.9 million related to the $10.3 million media exchange contract referred to above. Progress on this percentage of completion project resulted in approximately $0.8 million of revenue on which we recognized no net margin during fiscal 2007. In addition, we recognized no net margin on approximately $0.7 million and $6.2 million of revenue recognized in fiscal 2007 and fiscal 2006, respectively, on the first two contracts for our advanced messaging product — media exchange for networks.

 

Our services cost of goods sold in fiscal 2008 increased in both dollar amount and percentage of services revenue as compared to fiscal 2007. These increases relate to the increase in services revenues as well as the commencement of certain recurring costs related to certain hosted solutions projects that were incurred prior to the commencement of service to customers. During fiscal 2007, our services cost of goods sold increased in dollar amount and remained relatively unchanged as a percentage of services revenues as compared to fiscal 2006 levels. The increase in actual costs related to the increase in services revenues.

 

Research and Development Expenses

 

Research and development expenses for fiscal 2008, 2007 and 2006 were as follows (in millions):

 

 

Research and development expenses include the design of new products and the enhancement of existing products. Research and development expenses for fiscal 2008 and 2007 included approximately $0.7 million and $0.6 million, respectively, of stock compensation expense resulting from our adoption of SFAS No. 123R, which requires us to include compensation expense in our financial statements related to share-based awards. Research and development expenses are lower during fiscal 2008 compared to fiscal 2007 because approximately $4.2 million related specifically to the large media exchange contract discussed above are reported in cost of goods sold rather than research and development expenses in our Consolidated Statements of Operations. The decrease also reflects cost savings resulting from restructuring activities undertaken. Fiscal 2007 included a full year of the impact of the

acquisition of Edify as well as the addition of resources to support the technology acquired from Nuasis in September 2006. We incurred charges of $0.5 million (0.2% of sales), $0.3 million (0.2% of sales) and $0.2 million (0.1% of sales) in fiscal 2008, 2007 and 2006, respectively, as described in “Restructuring and other charges” above.

 

Our research and development spending is focused in six key areas. First, we are developing software tools to aid in the development and deployment of customer applications incorporating speech recognition, text-to-speech, and other rich media technologies for enterprises and wireless and wireline providers. Next, we are developing server-based application software platforms for operations and management of contact center, speech and call completion applications. We will use these software platforms for deployment and management of enterprise, wireless and wireline network operator applications. Third, we are developing media servers, “voice browsers,” and call processing infrastructure based on open standards such as VoiceXML, CCXML and SCXML. These media servers are VoIP enabled, allowing operation in soft-switch and hybrid PSTN and VoIP networks. Fourth, we are developing packaged applications for the network operator and enterprise markets. These include vertical and horizontal applications that are designed to greatly enhance customer return-on-investment by providing many commonly used configurable functions that can be deployed more quickly than custom applications. Fifth, we are developing software and tools designed to provide integration of live agent positions in a customer contact center setting. This software covers a broad range of functions including agent call-screen transfer, workflow management, full call recording, agent and supervisor management systems and reporting and various integration functions. Finally, we are developing modular productivity and communications applications for wireless and wireline applications including speech driven voice mail, voice activated dialing, and enhanced personal information management.

 

We expect to maintain a strong commitment to research and development so that we can remain at the forefront of technology development in our markets.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for fiscal 2008, 2007 and 2006 were as follows (in millions):

 

 

Selling, general and administrative expenses for fiscal 2008 decreased as compared to fiscal 2007. Salaries, commissions and related charges were down approximately $2.7 million, marketing expenses were down approximately $0.8 million and rent was down approximately $0.8 million. These decreases reflect the cost savings achieved from the acquisition integration, restructuring and facilities consolidation activities undertaken over the past few years. These decreases were offset by an increase of approximately $1.0 million in depreciation, which reflects a full year of depreciation related to our SAP system. Selling, general and administrative expenses for fiscal 2008 and 2007 included approximately $3.3 million and $3.5 million, respectively, of stock compensation expense resulting from our adoption of SFAS No. 123R, which requires us to include compensation expense in our financial statements related to share-based awards. Fiscal 2007 reflects a full year of the impact of the acquisition of Edify which affected salaries, commissions and related expenses. Sales and marketing expenses increased approximately $11.1 million from fiscal 2006 to fiscal 2007. In addition, depreciation expense increased by approximately $1.4 million for the same period, largely as a result of the start of depreciation related to the SAP system which went into production during the third quarter of fiscal 2007. We incurred charges in connection with the Audit Committee and SEC investigations of approximately $0.2 million, or 0.1% of total sales during fiscal 2008, $1.7 million, or 0.9% of total sales during fiscal 2007 and $1.1 million, or 0.7% of total sales during fiscal 2006. Expenses also included charges of $1.8 million (0.9% of total sales), $2.4 million (1.2% of total sales) and $1.2 million (0.7% of total sales) in fiscal 2008, 2007 and 2006, respectively, as described in “Restructuring and other charges” above.

 

Settlement provision

 

Fiscal 2007 includes approximately $0.9 million of expense related to an expected payment to the SEC. Such payment, consisting of disgorgement of approximately $0.7 million and prejudgment interest of approximately $0.2 million, was made during fiscal 2008.

Amortization of Acquisition Related Intangible Assets

 

In connection with our purchase of certain assets from Nuasis in fiscal 2007, our purchase of Edify in fiscal 2006 and Brite in fiscal 2000, we recorded intangible assets and goodwill totaling $1.9 million, $35.5 million and $103.8 million, respectively. The separately identifiable intangible assets were assigned useful lives ranging from 18 months to 10 years. For fiscal 2008, 2007 and 2006, we recognized amortization expenses related to these intangible assets as follows (in millions):

 

 

At February 29, 2008, we had $7.1 million in remaining net intangible assets other than goodwill which will be subject to amortization in future periods. The estimated amortization expense attributable to our intangible assets for each of the next five years is as follows (in millions):

 

 

We conducted our required annual test of goodwill impairment during the fourth quarters of fiscal 2008, 2007 and 2006. No impairment of goodwill was indicated.

 

Interest Income

 

Interest income was approximately $1.7 million, $1.5 million and $2.2 million in fiscal 2008, 2007 and 2006, respectively. During the fourth quarter of fiscal 2006, we used approximately $34.3 million of cash in connection with our acquisition of Edify. As a result, we earned less interest income in fiscal 2007 than in fiscal 2006.

 

Other Income (Expense), Net

 

Other income (expense), net during fiscal 2008, 2007 and 2006 totaling approximately $0.1 million, ($0.3) million and $0.1 million, respectively, was comprised primarily of foreign currency transaction gains and losses. Fiscal 2007 also includes approximately $0.6 million primarily resulting from the sale of MetLife common stock acquired as a result of MetLife’s demutualization which partially offsets the foreign currency loss reported in fiscal 2007.

 

Income Taxes (Benefit)

 

We recognized income tax expense of $2.4 million (30% of pretax income), an income tax benefit of $0.2 million (11% of pretax loss) and an income tax benefit of $5.3 million (47% of pretax income) for fiscal 2008, 2007 and 2006, respectively. The fiscal 2008 percentage differs from the U.S. statutory rate of 35% primarily as a result of the release of valuation allowances totaling approximately $1.0 million previously maintained against certain U.K. deferred tax assets and other permanent differences. The fiscal 2007 percentage differs from the U.S. statutory rate of 35% primarily as a result of the geographic mix of our operating results in foreign markets with varying tax rates. The fiscal 2006 percentage differs from the U.S. statutory rate of 35% primarily as a result of the release of valuation allowances previously maintained against certain U.S. deferred tax assets and the favorable resolution of certain tax contingencies during the year offset, in part, by additional tax expense incurred on the repatriation of certain foreign earnings, all as further discussed below.

 

On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA provides for a deduction of 85% of certain foreign earnings that are repatriated, as defined in the AJCA. During the fourth quarter of fiscal 2006, we elected to repatriate $10.3 million from our U.K. subsidiary pursuant to the provisions of the AJCA. In doing so, we incurred related income tax expense of approximately $1.0 million.

At February 28, 2006, we reversed $4.4 million of valuation allowance associated with certain of our U.S. federal deferred tax assets based on our assessment that is was more likely than not that we would realize the benefit of certain deferred tax assets.

 

For the year ended February 28, 2006, we reported profits on both our consolidated and U.S. operations, and we used net operating losses and credits carried forward from previous years and the reversal of certain temporary differences to offset some of our U.S. taxable income, providing an income tax benefit of $0.6 million.

 

During fiscal 2006, we resolved various tax contingencies arising out of our U.S., U.K., German and Middle East and Africa operations. The resolution of all such items resulted in a $3.2 million reduction in our tax expense for fiscal 2006 and was associated with the completion of audits of certain of our international tax returns and with the closing of certain tax periods due to the passage of time.

 

During fiscal 2008, we generated enough U.S. taxable income to fully utilize the U.S. federal net operating loss carryforwards totaling $1.3 million at the end of fiscal 2007. Because these federal net operating loss carryforwards arose from the exercise of employee stock options and were being offset with a full valuation allowance, the benefit from the reversal of the valuation allowance related to such carryforwards increased equity and did not reduce the tax provision. There are no remaining federal net operating loss carryforwards. In addition, we utilized $1.3 million of current year income tax deductions associated with the exercise of employee stock options to reduce U.S. and U.K. taxable income. These deductions are reflected as an increase in additional capital.

 

During fiscal 2007, we utilized $8.8 million of U.S. federal net operating loss carryforwards arising from employee stock option exercises and foreign currency tax benefits to reduce our U.S. federal taxable income. In addition, we utilized current year income tax deductions associated with the exercise of employee stock options to reduce U.S. and U.K. taxable income. The tax effect of these tax deductions totaled $3.8 million and is reflected as an increase in additional capital.

 

As a result of our adoption of FIN 48, we recognized a cumulative effect adjustment of $2.5 million, increasing our liability for unrecognized tax benefits and related penalties and interest by $0.3 million, decreasing our non-current deferred tax assets by $2.2 million, and reducing the March 1, 2007, balance of retained earnings by $2.5 million. The amount of unrecognized tax benefits as of March 1, 2007, was $3.6 million.

 

We conduct business globally and, as a result, we or one or our subsidiaries, file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.K., Germany, Canada and the United States. During fiscal 2008, the Internal Revenue Service (“IRS”) commenced an examination of our U.S. federal income tax return for fiscal 2006 which we anticipate will be completed during late fiscal 2009 or early fiscal 2010. Although we believe our tax estimates and our tax positions are reasonable, the final outcome of the IRS audit and any future tax audits could differ materially from our filed positions.

 

With few exceptions, we are no longer subject to U.S. federal or major non-U.S. income tax examinations for years before fiscal 2005, and state and local income tax examinations for years before fiscal 2004. With respect to our U.S. federal, state and local net operating loss (“NOL”) carryforwards, we have years open under statutes of limitations back to fiscal 2002, where tax authorities may not adjust income tax liabilities for these years, but can reduce NOL carryforwards and other tax carryforwards to future open tax years.

 

As of February 29, 2008, our unrecognized tax benefits totaled $3.6 million, of which $0.7 million, if recognized, would affect our effective tax rate. We also recognize potential interest and penalties related to unrecognized tax benefits as interest expense and penalty expense, respectively. For the year ending February 29, 2008, we have accrued less than $0.2 million for the potential payment of interest and penalties related to uncertain tax positions. We do not anticipate a significant change to the total amount of unrecognized tax benefits over the next twelve months.

 

Income (Loss) From Operations and Net Income (Loss)

 

We generated income (loss) from operations of $6.2 million, ($3.1) million and $9.0 million for fiscal 2008, 2007 and 2006, respectively. We generated net income (loss) of $5.5 million, ($1.7) million and $16.5 million

during fiscal 2008, 2007 and 2006, respectively. Of income before income taxes for fiscal 2008, $4.2 million and $3.7 million were attributable to domestic and foreign operations, respectively. In fiscal 2007, $0.9 million and ($2.8) million of income (loss) before income taxes were attributable to domestic and foreign operations, respectively. In fiscal 2006, $5.8 million and $5.4 million were attributable to domestic and foreign operations, respectively. In fiscal 2007, our loss was primarily attributable to the increased research and development and other operating expenses to support the two acquisition activities undertaken late in fiscal 2006 and in fiscal 2007 and the increased investment in sales initiatives and marketing rebranding efforts to increase sales as well as stock-based compensation expense, loss provisions for a contract and the status of settlement discussions with the SEC.

 

Liquidity and Capital Resources

 

At February 29, 2008 and February 28, 2007, we had $38.7 million and $28.2 million, respectively, in cash and cash equivalents, and we had no debt outstanding. This significant increase in cash resulted from good cash collections resulting in little change to the trade accounts receivable balance in a period of increasing revenues, a lower level of capital expenditures and a focus on cost saving initiatives.

 

Operating cash flows for fiscal 2008 were impacted by net income of $5.5 million in fiscal 2008 as compared to net loss of $1.7 million for fiscal 2007, an increase in customer deposits of approximately $3.9 million and decreases in accounts payable and accrued liabilities. We paid approximately $0.9 million of previously accrued amounts to the SEC in connection with our previously disclosed settlement with the SEC and related Audit Committee investigation. Operating cash flows for fiscal 2007 were impacted by increases in accounts receivable and inventory. Our accounts receivable at February 28, 2007 included approximately $2.7 million from a Venezuelan customer. Given the delays that we experienced in collection of this receivable, we returned to the cash basis of accounting for all future transactions with this customer. Our days sales outstanding of accounts receivable was 63 days at February 29, 2008, down from 70 days at February 28, 2007. Days sales outstanding at February 28, 2007 was affected by the timing of billings combined with the effect of the delayed collection of the Venezuelan receivable.

 

For sales of certain of our more complex, customized solutions, we recognize revenue based on a percentage of completion methodology. Unbilled receivables accrued under this methodology totaled $8.4 million (22.7% of total net receivables) at February 29, 2008, as compared to $7.3 million (19.7% of total net receivables) at February 28, 2007. We expect to bill and collect unbilled receivables as of February 29, 2008 within the next twelve months.

 

We generate a significant percentage of our sales, particularly sales of network solutions, outside the United States. Customers in certain countries are subject to significant economic and political challenges that affect their cash flow, and many customers outside the United States are generally accustomed to vendor financing in the form of extended payment terms. To remain competitive in markets outside the United States, we may offer selected customers such payment terms. In all cases, however, we only recognize revenue at such time as our solution or service fee is fixed or determinable, collectibility is probable and all other criteria for revenue recognition have been met. In some limited cases, due to political or economic uncertainties we recognize revenue on a “cash basis,” limiting revenue recognition on certain sales of solutions and/or services to the actual cash received to date from the customer, provided that all other revenue recognition criteria have been satisfied.

 

We used $8.0 million of cash in net investing activities during fiscal 2008. Of this amount, we used $2.9 million to purchase equipment to expand our hosted solutions business, $1.0 million for costs in connection with our SAP implementation, and the remaining $4.1 million for replacement and expansion of our computing infrastructure and other capital purchases. Actual capital expenditures are dependent, in part, on the level of expenditures made in connection with expansion of our hosted solutions business. We used $16.9 million in net investing activities during fiscal 2007. Of this amount, we used $0.9 million for payment of expenses related to the acquisition of Edify, $2.4 million in the purchase of certain assets from Nuasis, $3.1 million to purchase equipment to expand our hosted solutions business, $7.3 million for costs in connection with our SAP implementation and the remaining $3.2 million for replacement and expansion of our computing infrastructure and other capital purchases. We used $47.8 million of cash in net investing activities during fiscal 2006. Of this amount, we used $34.3 million in the purchase of Edify, $4.1 million to purchase equipment to expand our hosted solutions business, $5.7 million for

costs in connection with our SAP implementation, and the remaining $3.7 million for replacement and expansion of our computing infrastructure and other capital purchases.

 

During fiscal 2008, our financing activities used $0.3 million in net cash flow. Our option holders exercised options for 0.5 million shares of common stock and, in so doing, provided us with $2.4 million of cash. We repurchased 0.4 million shares of common stock, using $3.2 million. Financing activities also included approximately $0.5 million related to excess tax benefits resulting from the exercise of stock options. During fiscal 2007, our financing activities provided $2.4 million in net cash flow. Our option holders exercised options for 0.3 million shares of common stock and, in so doing, provided us with $0.7 million of cash. Financing activities also included approximately $1.7 million related to excess tax benefits resulting from the exercise of stock options. During fiscal 2006, our financing activities provided $3.9 million in net cash flow. Our option holders exercised options for 0.7 million shares of common stock and, in so doing, provided us with $3.2 million of cash. In addition, warrant holders exercised warrants for 0.6 million shares of common stock and provided us with $2.5 million in cash. We used $1.7 million of cash during fiscal 2006 to repay all remaining debt under our credit agreement.

 

Letter of Credit Facility

 

In February 2006, we terminated our existing line of credit and entered into a new letter of credit line with the lender. The letter of credit line provides that the lender will issue letters of credit not to exceed the principal amount of $2.0 million. At February 29, 2008, letters of credit totaling approximately $0.5 million were outstanding. These letters of credit were issued by a bank to guarantee our performance under long-term international hosted solutions contracts and related proposals. These letters of credit expire during fiscal 2009. Any draft actually paid by the lender will bear interest at a rate of one-fourth of one percent (0.25%) above the prime rate until the amount is repaid. This agreement contains certain representations and warranties, certain negative and affirmative covenants, and certain conditions and events of default which are customarily required for similar financings. As of February 29, 2008, we were in compliance with all such covenants.

 

Off-Balance Sheet Arrangements

 

The operating lease payments shown below, in the Summary of Future Obligations, were our only off-balance sheet arrangements at February 29, 2008.

 

Summary of Future Obligations

 

The following table summarizes our obligations and commitments as of February 29, 2008, to be paid in future periods (in millions):

 

 

Most of our purchases are executed under cancelable purchase orders. The firm purchase commitments shown above are comprised of non-cancelable commitments for certain communications charges, inventory purchases and royalties. The expected timing of payments of the firm purchase commitments discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different.

 

We adopted the provisions of FIN 48 on March 1, 2007. As of February 29, 2008, we have $3.6 million in uncertain tax positions, net of federal benefit. Because of the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, these uncertain tax positions are not reflected in the contractual obligations table.

We believe our cash reserves and internally generated cash flow will be sufficient to meet our operating cash requirements for at least the next twelve months.

 

Impact of Inflation

 

We do not expect any significant short-term impact of inflation on our financial condition. Technological advances should continue to reduce costs in the computer and communications industries. Further, we presently are not bound by long-term fixed price sales contracts. The absence of such contracts should reduce our exposure to inflationary effects.

 

Selected Quarterly Financial Data

 

 

 

 

 

Recent Accounting Pronouncements

 

See Note B — Significant Accounting Policies in our Notes to Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on our financial statements.

 

 

Interest Rate Risks

 

We invest cash balances in excess of operating requirements in short-term securities that generally have maturities of 90 days or less. The carrying value of these securities approximates market value, and there is no long-term interest rate risk associated with these investments.

 

Foreign Currency Risks

 

We transact business in certain foreign currencies including, particularly, the British pound and the Euro. Our primary software application development, research and development and other administrative activities are conducted from offices in the United States and the United Kingdom, and our primary manufacturing operations are conducted in the United States. Virtually all sales arranged through our U.S. offices are denominated in U.S. dollars, which is the functional and reporting currency of our U.S. entity. Sales arranged through our U.K. subsidiary are denominated in various currencies, including the British pound, the U.S. dollar and the Euro; however, the U.K. subsidiary’s functional currency is the British pound.

 

For the fiscal year ended February 29, 2008, sales originating from our U.K. subsidiary represented approximately 28% of consolidated sales. As a result of our international operations, we are subject to exposure from adverse movements in certain foreign currency exchange rates. We have not historically used foreign currency options or forward contracts to hedge our currency exposures because of variability in the timing of cash flows associated with our larger contracts, and we did not have any such hedge instruments in place at February 29, 2008. Rather, we attempt to mitigate our foreign currency risk by generally transacting business in the functional currency of each of our major subsidiaries, thus creating natural hedges by paying expenses incurred in the local currency in which revenues will be received.

 

As noted above, our operating results are exposed to changes in certain exchange rates including, particularly, those between the U.S. dollar, the British pound and the Euro. When the U.S. dollar strengthens against the other currencies, our sales are negatively affected upon the translation of U.K. operating results to the reporting currency. The effect of these changes on our operating profits varies depending on the level of British pound denominated expenses and the U.K. subsidiary’s overall profitability. For the fiscal year ended February 29, 2008, the result of a hypothetical, uniform 10% strengthening in the value of the U.S. dollar relative to the British pound and the Euro would have been a decrease in sales of approximately $2.9 million and an increase in net income of approximately $1.5 million. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales and/or operating expenses, changes in exchange rates also could affect the volume of sales or the foreign currency sales price as competitors’ products become more or less attractive. This sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency prices.

 

 

The Report of Independent Registered Public Accounting Firm Grant Thornton LLP and the Consolidated Financial Statements of Intervoice as of February 29, 2008 and for the year then ended, and the Report of Independent Registered Public Accounting Firm Ernst & Young LLP and the Consolidated Financial Statements of Intervoice as of February 28, 2007 and for each of the two years in the period ended February 28, 2007 follow.

Report of Independent Registered Public Accounting Firm

 

Stockholders and Board of Directors

Intervoice, Inc.

 

We have audited the accompanying consolidated balance sheet of Intervoice, Inc. as of February 29, 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the year then ended. Our audit of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether 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 audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at February 29, 2008, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 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 for therein.

 

As discussed in Note I to the consolidated financial statements, the Company changed its method of accounting for unrecognized tax benefits as of March 1, 2007, in connection with the adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of February 29, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated April 24, 2008 expressed an unqualified opinion thereon.

 

/s/ GRANT THORNTON LLP

 

Dallas, Texas

April 24, 2008

 

Report of Independent Registered Public Accounting Firm

 

Stockholders and Board of Directors

Intervoice, Inc.

 

We have audited the accompanying consolidated balance sheet of Intervoice, Inc. as of February 28, 2007 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended February 28, 2007. Our audits also included the financial statement schedule listed in the index at Item 15(a) for the years ended February 28, 2007 and 2006. These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intervoice, Inc. at February 28, 2007 and the consolidated results of its operations and its cash flows for each of the two years in the period ended February 28, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

As discussed in Note B and Note J to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation effective March 1, 2006.

 

/s/ ERNST & YOUNG LLP

 

Dallas, Texas

May 8, 2007

INTERVOICE, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

 

See notes to consolidated financial statements.

INTERVOICE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See notes to consolidated financial statements.

INTERVOICE, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME