-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wut5TwaO8bd2QpiSlBWARU2vosyW2J+MkDze9WhhtluYYh/e87R0aLCMisTJm64C +Szax6JV/D6UnQvoAPfc8w== 0000950134-03-013523.txt : 20031014 0000950134-03-013523.hdr.sgml : 20031014 20031014165358 ACCESSION NUMBER: 0000950134-03-013523 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030831 FILED AS OF DATE: 20031014 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERVOICE INC CENTRAL INDEX KEY: 0000764244 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 751927578 STATE OF INCORPORATION: TX FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15045 FILM NUMBER: 03940088 BUSINESS ADDRESS: STREET 1: 17811 WATERVIEW PKWY CITY: DALLAS STATE: TX ZIP: 75252 BUSINESS PHONE: 9724548000 FORMER COMPANY: FORMER CONFORMED NAME: INTERVOICE BRITE INC DATE OF NAME CHANGE: 19990827 FORMER COMPANY: FORMER CONFORMED NAME: INTERVOICE INC DATE OF NAME CHANGE: 19920703 10-Q 1 d09592e10vq.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER: 1-15045 INTERVOICE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 75-1927578 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 17811 WATERVIEW PARKWAY, DALLAS, TX 75252 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, WITH ZIP CODE) 972-454-8000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE ACT). YES [X] NO [ ] THE REGISTRANT HAD 34,326,487 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING AS OF SEPTEMBER 30, 2003. ================================================================================ INTERVOICE, INC. CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) AUGUST 31, 2003 FEBRUARY 28, 2003 --------------- ----------------- (UNAUDITED) ASSETS Current Assets Cash and cash equivalents $ 37,014 $ 26,211 Trade accounts receivable, net of allowance for doubtful accounts of $2,619 in fiscal 2004 and $2,527 in fiscal 2003 22,568 25,853 Inventory 8,568 8,895 Prepaid expenses and other current assets 4,607 5,277 --------- --------- 72,757 66,236 --------- --------- Property and Equipment Building 16,830 16,708 Computer equipment and software 34,882 32,660 Furniture, fixtures and other 2,700 2,667 Service equipment 9,151 8,744 --------- --------- 63,563 60,779 Less allowance for depreciation 43,867 40,406 --------- --------- 19,696 20,373 Other Assets Intangible assets, net of accumulated amortization of $32,924 in fiscal 2004 and $32,218 in fiscal 2003 7,881 9,326 Goodwill 3,401 3,401 Other assets 1,174 1,655 --------- --------- $ 104,909 $ 100,991 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 10,995 $ 12,513 Accrued expenses 12,288 12,705 Customer deposits 8,321 9,061 Deferred income 25,313 25,478 Current portion of long term borrowings 3,333 3,333 Income taxes payable 10,513 6,240 --------- --------- 70,763 69,330 Long term borrowings 13,111 15,778 Other long term liabilities 327 856 Deferred income taxes 62 44 Stockholders' Equity Preferred Stock, $100 par value--2,000,000 shares authorized: none issued Common Stock, no par value, at nominal assigned value--62,000,000 shares authorized: 34,310,684 issued and outstanding in fiscal 2004, 34,111,101 issued and outstanding in fiscal 2003 17 17 Additional capital 66,330 65,144 Accumulated deficit (42,236) (46,768) Accumulated other comprehensive loss (3,465) (3,410) --------- --------- Stockholders' equity 20,646 14,983 --------- --------- $ 104,909 $ 100,991 ========= =========
See notes to consolidated financial statements. INTERVOICE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, Except Per Share Data) Three Months Ended Six Months Ended ---------------------------------------------------- August 31, August 31, August 31, August 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Sales Systems $ 20,625 $ 17,905 $ 38,655 $ 39,540 Services 20,982 17,708 41,353 34,489 -------- -------- -------- -------- 41,607 35,613 80,008 74,029 -------- -------- -------- -------- Cost of goods sold Systems 11,271 17,099 22,484 33,217 Services 7,472 7,626 14,202 14,297 -------- -------- -------- -------- 18,743 24,725 36,686 47,514 -------- -------- -------- -------- Gross margin Systems 9,354 806 16,171 6,323 Services 13,510 10,082 27,151 20,192 -------- -------- -------- -------- 22,864 10,888 43,322 26,515 Research and development expenses 3,703 6,518 7,574 12,523 Selling, general and administrative expenses 13,091 18,401 26,562 36,094 Amortization of goodwill and acquisition related intangible assets 705 1,776 1,410 3,552 -------- -------- -------- -------- Income (loss) from operations 5,365 (15,807) 7,776 (25,654) Other income (expense) 139 (716) (47) (764) Interest expense (536) (1,555) (1,081) (3,020) -------- -------- -------- -------- Income (loss) before taxes and the cumulative effect of a change in accounting principle 4,968 (18,078) 6,648 (29,438) Income taxes (benefit) 1,372 (1,806) 2,116 (4,487) -------- -------- -------- -------- Income (loss) before the cumulative effect of a change in accounting principle 3,596 (16,272) 4,532 (24,951) Cumulative effect on prior years of a change in accounting principle --- --- --- (15,791) -------- -------- -------- -------- Net income (loss) $ 3,596 $(16,272) $ 4,532 $(40,742) ======== ======== ======== ======== Per Basic Share: Income (loss) before the cumulative effect of a change in accounting principle $ 0.11 $ (0.48) $ 0.13 $ (0.73) Cumulative effect on prior years of a change in accounting principle --- --- --- (0.47) -------- -------- -------- -------- Net income (loss) $ 0.11 $ (0.48) $ 0.13 $ (1.20) ======== ======== ======== ======== Per Diluted Share: Income (loss) before the cumulative effect of a change in accounting principle $ 0.10 $ (0.48) $ 0.13 $ (0.73) Cumulative effect on prior years of a change in accounting principle --- --- --- (0.47) -------- -------- -------- -------- Net income (loss) $ 0.10 $ (0.48) $ 0.13 $ (1.20) ======== ======== ======== ========
See notes to consolidated financial statements. INTERVOICE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED ------------------------ ------------------------ AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Operating activities Income (loss) before the cumulative effect of a change in accounting principle $ 3,596 $(16,272) $ 4,532 $(24,951) Adjustments to reconcile income (loss) before the cumulative effect of a change in accounting principle to net cash provided by operating activities: Depreciation and amortization 2,418 4,290 4,800 8,466 Other changes in operating activities 5,738 23,776 6,022 26,617 -------- -------- -------- -------- Net cash provided by operating activities 11,752 11,794 15,354 10,132 -------- -------- -------- -------- Investing activities Purchases of property and equipment (1,210) (1,847) (2,473) (2,448) Proceeds from sale of assets 14 --- 14 1,852 -------- -------- -------- -------- Net cash used in investing activities (1,196) (1,847) (2,459) (596) -------- -------- -------- -------- Financing activities Paydown of debt (1,833) (3,980) (2,667) (29,980) Debt issuance costs --- (386) --- (2,018) Borrowings --- --- --- 24,000 Exercise of stock options 907 42 907 130 -------- -------- -------- -------- Net cash used in financing activities (926) (4,324) (1,760) (7,868) Effect of exchange rates on cash (420) 515 (332) 817 -------- -------- -------- -------- Increase in cash and cash equivalents 9,210 6,138 10,803 2,485 Cash and cash equivalents, beginning of period 27,804 13,993 26,211 17,646 -------- -------- -------- -------- Cash and cash equivalents, end of period $ 37,014 $ 20,131 $ 37,014 $ 20,131 ======== ======== ======== ========
See notes to consolidated financial statements. INTERVOICE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ACCUMULATED OTHER --------------------- ADDITIONAL ACCUMULATED COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL ----------------------------------------------------------------------------------- Balance at February 28, 2003 34,111,101 $ 17 $ 65,144 $ (46,768) $ (3,410) $ 14,983 Net income --- --- --- 4,532 --- 4,532 Foreign currency translation adjustment --- --- --- --- (55) (55) Extension of stock options --- --- 279 --- --- 279 Exercise of stock options 199,583 --- 907 --- --- 907 ---------------------------------------------------------------------------------- Balance at August 31, 2003 34,310,684 $ 17 $ 66,330 $ (42,236) $ (3,465) $20,646 ==================================================================================
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED AUGUST 31, 2003 NOTE A - BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. The consolidated balance sheet at February 28, 2003 has been derived from audited financial statements at that date. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the unaudited August 31, 2003 and 2002 consolidated financial statements have been included. Operating results for the three and six month periods ended August 31, 2003 are not necessarily indicative of the results that may be expected for the year ending February 29, 2004 as they may be affected by a number of factors including the timing and ultimate receipt of orders from significant customers which continue to constitute a large portion of the Company's sales, the sales channel mix of products sold, and changes in general economic conditions, any of which could have an adverse effect on operations. In accordance with Statement of Financial Accounting Standards No. 130, the following comprehensive income disclosures are provided. Total comprehensive income (loss) for the second quarters of fiscal 2004 and 2003 was $3.4 million and $(15.3) million, respectively. For the six month periods ended August 31, 2003 and 2002, total comprehensive income (loss) was $4.5 million and ($38.7) million, respectively. Total comprehensive income (loss) is comprised of net income (loss), foreign currency translation adjustments, and, in fiscal 2003, adjustments to the carrying value of certain derivative instruments. Financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars at current and average exchange rates. Resulting translation adjustments are recorded as a separate component of stockholders' equity. Any transaction gains or losses are included in the accompanying consolidated statements of operations. NOTE B - CHANGE IN ACCOUNTING PRINCIPLE FOR GOODWILL AND OTHER INTANGIBLE ASSETS Effective March 1, 2002, the Company adopted Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets (the "Statements"). Statement No. 141 refines the definition of what assets may be considered as separately identified intangible assets apart from goodwill. Statement No. 142 provides that goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to impairment tests on at least an annual basis. In adopting the Statements in fiscal 2003, the Company first reclassified $2.7 million of intangible assets associated with its assembled workforce (net of related deferred taxes of $1.4 million) to goodwill because such assets did not meet the new criteria for separate identification. The Company then allocated its adjusted goodwill balance of $19.2 million to its then existing Enterprise and Networks divisions and completed the transitional impairment tests required by Statement No. 142. The fair values of the reporting units were estimated using a combination of the expected present values of future cash flows and an assessment of comparable market values. As a result of these tests, the Company determined that the goodwill associated with its Networks division was fully impaired, and, accordingly, it recognized a non-cash, goodwill impairment charge of $15.8 million as the cumulative effect on prior years of this change in accounting principle. This impairment resulted primarily from the significant decline in Networks sales and profitability during the fourth quarter of fiscal 2002 and related reduced forecasts for the division's sales and profitability. NOTE C - INVENTORIES Inventories consist of the following (in thousands):
August 31, 2003 February 28, 2003 --------------- ----------------- Purchased parts $ 4,020 $ 4,906 Work in progress 4,548 3,989 ------------- ------------- $ 8,568 $ 8,895 ============= =============
NOTE D - SPECIAL CHARGES During the quarter ended May 31, 2003, the Company reduced its workforce by 56 positions. In doing so, the Company incurred severance charges of approximately $1.4 million, with approximately $0.6 million, $0.2 million, and $0.6 million impacting cost of goods sold, research and development, and selling, general and administrative expenses, respectively. Virtually all such charges were paid during the first and second quarter of fiscal 2004. During the quarter ended August 31, 2003, the Company's chief financial officer resigned to pursue other opportunities. The Company incurred cash and non-cash charges totaling approximately $0.5 million and $0.3 million, respectively, during the quarter under the terms of a separation agreement executed in connection with the officer's resignation. Such charges are included in selling, general and administrative expenses for the quarter. All cash charges were paid as of August 31, 2003. During the first quarter of fiscal 2003, the Company incurred special charges of approximately $2.8 million, including $2.4 million for severance payments and related benefits, and $0.4 million for the closure of its leased facility in Chicago, Illinois. The severance and related costs were associated with a workforce reduction affecting 103 employees. During the first quarter of fiscal 2003, the Company also revised its estimates of severance charges originally recorded in the fourth quarter of fiscal 2002, reducing its accrual for such charges by $0.2 million. The net effect of all special charges activities for the quarter resulted in charges to cost of goods sold, research and development and selling, general and administrative expenses of $1.4 million, $0.5 million and $0.7 million, respectively. During the quarter ended August 31, 2002, the Company incurred special charges of approximately $10.1 million, including $2.8 million for severance payments and related benefits associated with a workforce reduction affecting approximately 120 employees, $0.4 million associated with the closing of a portion of its leased facilities in Manchester, United Kingdom, $2.2 million for the write down of excess inventories and $4.7 million associated with two loss contracts. The severance and related costs were associated with the Company's consolidation of its separate Enterprise and Networks divisions into a single, unified organizational structure. The downsizing of the leased space in Manchester followed from the Company's decision to consolidate virtually all of its manufacturing operations into its Dallas, Texas facilities. The inventory adjustments reflected the Company's continuing assessment of its inventory levels in light of short term sales projections, the decision to eliminate the UK manufacturing operation and the consolidation of the business units discussed above. The charges for loss contracts reflected the costs incurred during the second quarter on two contracts, which are expected to result in net losses to the Company upon completion. The charges included costs actually incurred during the quarter as well as an accrual of the amounts by which total contract costs were expected to exceed total contract revenue. Accrued expenses and other long-term liabilities at February 28, 2003 included amounts associated with certain special charges incurred during fiscal 2003, including those discussed above, and fiscal 2002. Activity during the first six months of fiscal 2004 related to such accruals was as follows (in thousands):
Accrued Balance Revisions Accrued Balance February 28, 2003 Payments to Estimates August 31, 2003 ----------------- ----------- ------------ --------------- Severance and related charges $ 466 $ (177) $ (116) $ 173 Future lease costs for properties no longer being used $ 1,896 $ (454) $ (13) $ 1,429
The Company expects to pay the balance of accrued severance and related charges during fiscal 2004 and to pay the balance of future lease costs over the remaining lease terms, which extend through June 2005. NOTE E - LONG-TERM BORROWINGS At August 31, 2003 and February 28, 2003 the Company's long-term debt was comprised of the following (in thousands):
August 31, 2003 February 28, 2003 --------------- ----------------- Mortgage loan, bearing interest payable monthly at the greater of 10.5% or the prime rate plus 2.0%; principal due May 28, 2005 $ 9,500 $ 10,500 Amortizing term loan, principal due in equal monthly installments of approximately $0.3 million through July 2005 with final payments totaling approximately $0.6 million in August 2005; interest payable monthly, accruing at a rate equal to the prime rate plus 2.75% (6.75% at August 31, 2003) 6,944 8,611 ---------- --------- Total debt outstanding 16,444 19,111 Less: current portion (3,333) (3,333) ---------- --------- Long-term debt, net of current portion $ 13,111 $ 15,778 ========== =========
MORTGAGE LOAN The Company's mortgage loan is secured by a first lien on the Company's Dallas headquarters and contains a covenant requiring the Company to have at least $5.0 million in net equity at the end of each of its fiscal quarters beginning with the quarter ending August 31, 2004. The mortgage loan also contains cross-default provisions with respect to the Company's term loan and revolving credit agreement, such that a default under the credit facility which leads to the acceleration of amounts due under the facility and the enforcement of liens against the mortgaged property also creates a default under the mortgage loan. The Company made an elective principal payment of $1.0 million during the quarter ended August 31, 2003. TERM LOAN AND REVOLVING CREDIT AGREEMENT In August 2002, the Company entered into a credit facility agreement with a lender which provided for an amortizing term loan of $10.0 million and a revolving credit commitment equal to the lesser of $25.0 million minus the principal outstanding under the term loan and the balance of any letters of credit ($18.1 million maximum at August 31, 2003) or a defined borrowing base comprised primarily of eligible U.S. and U.K. accounts receivable ($1.2 million maximum at August 31, 2003). Any advances under the revolver loan will accrue interest at the prime rate plus a margin of 0.5% to 1.5%, or at the London Inter-bank Offering Rate plus a margin of 3% to 4%. The Company may request an advance under the revolver loan at any time during the term of the revolver agreement so long as the requested advance does not exceed the then available borrowing base. The Company has not requested an advance under the revolver as of the date of this filing. The term loan and the revolving credit agreement expire on August 29, 2005. Borrowings under the credit facility are secured by first liens on the Company's personal property and by a subordinated lien on the Company's Dallas headquarters. The credit facility contains cross-default provisions with respect to the Company's mortgage loan, such that an event of default under the mortgage loan which allows the mortgage lender to accelerate the mortgage loan or terminate the agreement creates a default under the credit facility. The credit facility contains terms, conditions and representations that are generally customary for asset-based credit facilities, including requirements that the Company comply with certain significant financial and operating covenants. In particular, the Company was required to generate cumulative earnings before interest, taxes, depreciation and amortization, EBITDA, (as defined in the credit agreement) of at least $9.0 million for the twelve-month period ended August 31, 2003, and is required to generate minimum cumulative EBITDA of $15 million and $20 million for the 12-month periods ending November 30, 2003 and February 29, 2004, respectively, and $25 million for the 12-month periods ending each fiscal quarter thereafter. The Company is also required to maintain defined levels of actual and projected service revenues and is prohibited from incurring capital expenditures in excess of $4.0 million for any fiscal year except in certain circumstances and with the lender's prior approval. As of August 31, 2003, the Company was in compliance with all financial and operating covenants. NOTE F - INCOME TAXES For the six-months ended August 31, 2003, the Company recognized current income tax expense on the pretax income of certain foreign subsidiaries. The Company anticipates that any taxable income it earns during fiscal 2004 in its U.S. operations will be offset by net operating losses carried forward from prior years. Because the Company has provided a valuation reserve against all such potential net operating loss carryforward benefit in prior years, the Company does not expect and has not provided any net income tax expense or benefit for the six months ended August 31, 2003 related to its U.S. operations. During the first quarter of fiscal 2003, United States tax law was amended to allow companies which incurred net operating losses in 2001 and 2002 to carry such losses back a maximum of five years instead of the maximum of two years previously allowed. As a result of this change, the Company used $21.5 million of its then existing net operating loss carryforwards and $0.4 million of its then existing tax credit carryforwards and recognized a one-time tax benefit of $7.9 million, of which $2.2 million was recognized as additional capital associated with previous stock option exercises. Also during the first quarter of fiscal 2003, and as discussed in Note B, the Company reduced its deferred tax liabilities by $1.4 million in connection with the reclassification of its assembled workforce intangible asset to goodwill. As a result of this reduction in deferred tax liabilities, the Company increased the valuation allowance associated with its net deferred tax asset by $1.4 million. For the quarter ended August 31, 2002, the Company recognized a tax benefit on the pretax losses of certain foreign subsidiaries because the Company believed it would be able to realize the tax benefit of those losses by offsetting them against taxable income of a prior year. The Company did not recognize a current benefit associated with its domestic pretax losses, because it had exhausted its ability to offset such losses against taxable income of prior years, and the occurrence of losses prevented it from concluding that it was more likely than not that such benefit would be realized. NOTE G - EARNINGS PER SHARE AND STOCK COMPENSATION
Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, (in thousands except per share data) 2003 2002 2003 2002 ---------- ----------- ---------- ----------- Numerator: Income (loss) before the cumulative effect of a change in accounting principle $ 3,596 $ (16,272) $ 4,532 $ (24,951) Cumulative effect on prior years of a change in accounting principle --- --- --- (15,791) ------- ---------- ------- ---------- Net income (loss) $ 3,596 $ (16,272) $ 4,532 $ (40,742) ------- ---------- ------- ---------- Denominator: Denominator for basic earnings per share 34,195 34,067 34,153 34,053 Dilutive potential common shares Employee stock options 554 --- 661 --- Outstanding warrants 621 --- --- --- ------- ---------- ------- ---------- Denominator for diluted earnings per share 35,370 34,067 34,814 34,053 ------- ---------- ------- ---------- BASIC: Income (loss) before the cumulative effect of a change in accounting principle $ 0.11 $ (0.48) $ 0.13 $ (0.73) Cumulative effect on prior years of a change in accounting principle --- --- --- (0.47) ------- ---------- ------- ---------- Net income (loss) $ 0.11 $ (0.48) $ 0.13 $ (1.20) ======= ========== ======= ========== DILUTED: Income (loss) before the cumulative effect of a change in accounting principle $ 0.10 $ (0.48) $ 0.13 $ (0.73) Cumulative effect on prior years of a change in accounting principle --- --- --- (0.47) ------- ---------- ------- ---------- Net income (loss) $ 0.10 $ (0.48) $ 0.13 $ (1.20) ======= ========== ======= ==========
Options to purchase 5,112,334 and 6,227,644 shares of common stock at an average exercise price of $9.21 and $8.44 were outstanding during the three and six month periods ended August 31, 2003, respectively, but were not included in the computation of diluted earnings per share for these periods as the effect would have been antidilutive because the options' exercise prices were greater than the average price of the Company's common shares during such periods. Warrants to purchase 621,304 shares at an exercise price of $4.0238 per share were not included in the calculation for the six months ended August 31, 2003 because they would have been antidilutive for the same reason. Options to purchase 5,538,165 and 5,537,517 shares of common stock at an average exercise price of $9.03 and warrants to purchase 621,304 shares of common stock at an exercise price of $4.0238 per share were outstanding during the three and six month periods ended August 31, 2002, respectively, but were not included in the computation of diluted earnings per share for these periods because the effect would have been antidilutive given the Company's loss for the quarter and six month period. In addition, the Company's convertible notes plus accrued interest were convertible at the option of the note holders into 1,617,342 shares at an exercise price of $6.184 per share during the three and six month periods ended August 31, 2002 but were excluded from the computation of diluted earnings per share for the quarter and six month period given the Company's loss for such periods. The convertible notes and related accrued interest were redeemed in full for cash in September 2002. The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations. Under APB 25, no compensation expense is recognized for stock option grants if the exercise price of the Company's stock option grants is at or above the fair market value of the underlying stock on the date of grant. The Company has adopted the pro forma disclosure features of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure". The following table illustrates the effect on net income and net income per share amounts if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share amounts):
Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, 2003 2002 2003 2002 ---------- ----------- ---------- ----------- Net income (loss), as reported $ 3,596 $ (16,272) $ 4,532 $ (40,742) Add stock compensation expense included in net income 279 -- 279 -- Less total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax (911) (608) (910) (1,193) ---------- ---------- ---------- ---------- Pro forma net income (loss) $ 2,964 $ (16,880) $ 3,901 $ (41,935) ========== ========== ========== ========== Net income (loss) per share: Basic - as reported $ 0.11 $ (0.48) $ 0.13 $ (1.20) Diluted - as reported $ 0.10 $ (0.48) $ 0.13 $ (1.20) Basic - pro forma $ 0.09 $ (0.50) $ 0.11 $ (1.23) Diluted - pro forma $ 0.08 $ (0.50) $ 0.11 $ (1.23)
The pro forma stock-based compensation expense and related per share data shown above are estimated using a Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of publicly traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different form those of publicly traded options, and because changes in the subjective input assumptions can materially affect the estimate of the fair value of stock-based compensation, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of such compensation. NOTE H - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS The Company operates as a single, integrated business unit. The Company's chief operating decision maker assesses performance and allocates resources on an enterprise wide basis. The Company's product line includes IVR/portal systems, messaging systems, payment systems, maintenance and related services, and managed services provided for customers on an outsourced or application service provider (ASP) basis. In prior years, the Company identified its sales of systems and related services as being sales to the Enterprise and Network markets. Generally sales of IVR/portal systems and related services were made to Enterprise customers, while sales of messaging and payment systems were made to Network customers. Going forward, the Company believes that product line distinction provides the most meaningful breakdown of quarterly and annual sales activity. The Company is not able to provide the historical breakdown of Network system sales into its messaging and payment systems components. The Company's net sales by product line for the three and six month periods ended August 31, 2003 and 2002 were as follows (in thousands):
Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- IVR/portal system sales (Enterprise system sales in fiscal 2003) $14,970 $11,258 $27,345 $23,568 Messaging system sales (included in Network system sales in fiscal 2003) 1,350 --- 3,143 --- Payment system sales (included in Network system sales in fiscal 2003) 4,305 --- 8,167 --- Network system sales --- 6,647 --- 15,972 ------- ------- ------- ------- Total system sales 20,625 17,905 38,655 39,540 ------- ------- ------- ------- Maintenance and related services sales 14,285 12,732 27,870 24,757 Managed service sales 6,697 4,976 13,483 9,732 ------- ------- ------- ------- Total services sales 20,982 17,708 41,353 34,489 ------- ------- ------- ------- Total Company sales $41,607 $35,613 $80,008 74,029 ======= ======= ======= =======
Amounts shown for the six months ended August 31, 2003 for IVR/Portal and Payment system sales reflect the reclassification of $0.5 million and $2.3 million, respectively, of sales originally classified as Messaging sales for the quarter ended May 31, 2003. GEOGRAPHIC OPERATIONS Revenues are attributed to geographic locations based on locations of customers. The Company's net sales by geographic area for the three and six month periods ended August 31, 2003 and 2002 were as follows (in thousands):
Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- North America $ 24,774 $ 20,657 $ 49,018 $ 43,080 Europe, Middle East and Africa 13,975 12,526 27,169 26,500 Pacific Rim 764 442 1,160 962 Central and South America 2,094 1,988 2,661 3,487 -------- -------- -------- -------- Total $ 41,607 $ 35,613 $ 80,008 $ 74,029 ======== ======== ======== ========
CONCENTRATION OF REVENUE There were no customers accounting for 10% or more of the Company's total sales during the three-month period ended August 31, 2003. Sales to one customer, O2, which has purchased both systems and managed services from the Company, accounted for approximately 11% of the Company's total sales for the three-month period ended August 31, 2002 and for 10% and 11% of the Company's total sales during the six-month periods ended August 31, 2003 and 2002, respectively. There were no other customers accounting for 10% or more of the Company's sales during the six month periods ended August 31, 2003 and 2002. NOTE I - CONTINGENCIES INTELLECTUAL PROPERTY MATTERS The Company provides its 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 the Company or its customers letters alleging that the Company's products do or might infringe upon the owners' intellectual property rights, and/or suggesting that the Company or its customers should negotiate a license or cross-license agreement with the owner. The Company's policy is to never knowingly infringe upon any third party's intellectual property rights. Accordingly, the Company forwards any such allegation or licensing request to its outside legal counsel for their review and, if appropriate, opinion. The Company generally attempts to resolve any such matter by informing the owner of its position concerning non-infringement or invalidity, and/or, if appropriate, negotiating a license or cross-license agreement. Even though the Company attempts to resolve these matters without litigation, it is always possible that the owner of the patent or copyrighted works will institute litigation. Owners of patent(s) and/or copyrighted work(s) have previously instituted litigation against the Company alleging infringement of their intellectual property rights, although no such litigation is currently pending against the Company. The Company currently has a portfolio of 62 patents, and it has applied for and will continue to apply for and receive a number of additional patents to reflect its technological innovations. The Company believes that its patent portfolio could allow it to assert counterclaims for infringement against certain owners of intellectual property rights if those owners were to assert claims of infringement against the Company. From time to time Ronald A. Katz Technology Licensing L.P. ("RAKTL") has sent letters to certain customers of the Company suggesting that the customer should negotiate a license agreement to cover the practice of certain patents owned by RAKTL. In the letters, RAKTL has alleged that certain of its patents pertain to certain enhanced services offered by network providers, including prepaid card and wireless services and postpaid card services. RAKTL has further alleged that certain of its patents pertain to certain call processing applications, including applications for call centers that route calls using a called party's DNIS identification number. As a result of the correspondence, an increasing number of the Company's customers have had discussions, or are in discussions, with RAKTL. Certain products offered by the Company can be programmed and configured to provide enhanced services to network providers and call processing applications for call centers. The Company's contracts with customers usually include a qualified obligation to indemnify and defend customers against claims that products as delivered by the Company infringe a third party's patent. None of the Company's customers have notified the Company that RAKTL has claimed that any product provided by the Company infringes any claims of any RAKTL patent. Accordingly, the Company has not been required to defend any customers against a claim of infringement under a RAKTL patent. The Company has, however, received letters from customers notifying the Company of the efforts by RAKTL to license its patent portfolio and reminding the Company of its potential obligations under the indemnification provisions of the applicable agreements in the event that a claim is asserted. In response to correspondence from RAKTL, a few customers have attempted to tender to the Company the defense of its products under contractual indemnity provisions. The Company has informed these customers that while it fully intends to honor any contractual indemnity provisions, it does not believe it currently has any obligation to provide such a defense because RAKTL does not appear to have made a claim that a Company product infringes a patent. Some of these customers have disagreed with the Company and believe that the correspondence from RAKTL can be construed as claim(s) against the Company's products. An affiliate of Verizon Communications, Inc., Cellco Partnership d/b/a Verizon Wireless, recently settled all claims of patent infringement asserted against it in the matter of RAKTL v. Verizon Communications, Inc. et al, No. 01-CV-5627, in U.S. District Court, Eastern District of Pennsylvania. Verizon Wireless had previously notified the Company of the lawsuit and referenced provisions in a contract for prepaid services which required a wholly owned subsidiary of the Company, Brite Voice Systems Inc., to indemnify Verizon Wireless against claims that its services infringe patents. The claims in the lawsuit made general reference to prepaid services and a variety of other services offered by Verizon Wireless and its affiliates but did not refer to Brite's products or services. The Company had informed Verizon Wireless that it could find no basis for an indemnity obligation under the expired contract and, accordingly, the Company did not participate in the defense or settlement of the matter. Even though RAKTL has not alleged that a product provided by the Company infringes a RAKTL patent, it is always possible that RAKTL may do so. In the event that a Company product becomes the subject of litigation, a customer could attempt to invoke the Company's indemnity obligations under the applicable agreement. As with most sales contracts with suppliers of computerized equipment, the Company's contractual indemnity obligations are generally limited to the products and services provided by the Company, and generally require the customer to allow the Company to have control over any litigation and settlement negotiations with the patent holder. The customers who have received letters from RAKTL generally have multiple suppliers of the types of products that might potentially be subject to claims by RAKTL. Even though no claims have been made that a specific product offered by the Company infringes any claim under the RAKTL patent portfolio, the Company has received opinions from its outside patent counsel that certain products and applications offered by the Company do not infringe certain claims of the RAKTL patents. The Company has also received opinions from its outside counsel that certain claims under the RAKTL patent portfolio are invalid or unenforceable. Furthermore, based on the reviews by outside counsel, the Company is not aware of any valid and enforceable claims under the RAKTL portfolio that are infringed by the Company's products. If the Company does become involved in litigation in connection with the RAKTL patent portfolio, under a contractual indemnity or any other legal theory, the Company intends to vigorously contest the claims and to assert appropriate defenses. An increasing number of companies, including some large, well known companies and some customers of the Company, have already licensed certain rights under the RAKTL patent portfolio. RAKTL has previously announced license agreements with, among others, AT&T Corp., Microsoft Corporation and International Business Machines Corporation. LITIGATION David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, originally filed 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 the Company during the period from October 12, 1999 through June 6, 2000 (the "Class Period"). Plaintiffs filed claims, which were consolidated into one proceeding, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 against the Company as well as certain named current and former officers and directors of the Company on behalf of the alleged class members. In the complaint, Plaintiffs claimed that the Company and the named current and former officers and directors issued false and misleading statements during the Class Period concerning the financial condition of the Company, the results of the Company's merger with Brite and the alleged future business projections of the Company. Plaintiffs asserted that these alleged statements resulted in artificially inflated stock prices. The Company believes that it and its officers and directors complied with their obligations under the securities laws, and vigorously defended the lawsuit. The Company responded to the complaint by filing a motion to dismiss the complaint in the consolidated proceeding. The Company asserted that the complaint lacked the degree of specificity and factual support to meet the pleading standards applicable to federal securities litigation. On this basis, the Company requested that the United States District Court for the Northern District of Texas dismiss the complaint in its entirety. Plaintiffs responded to the Company's request for dismissal. On August 8, 2002, the Court entered an order granting the Company's motion to dismiss the class action lawsuit. In the order dismissing the lawsuit, the Court granted plaintiffs an opportunity to reinstate the lawsuit by filing an amended complaint. Plaintiffs filed an amended class action complaint on September 23, 2002. The Company filed a motion to dismiss the amended complaint, and plaintiffs filed a response in opposition to the Company's motion to dismiss. On September 15, 2003, the Court granted the Company's motion to dismiss the amended class action complaint. Unlike the Court's prior order dismissing the original class action complaint, the order dismissing the amended complaint did not grant plaintiffs an opportunity to reinstate the lawsuit by filing a new amended complaint. On October 9, 2003, the Plaintiffs filed a notice of appeal to the Fifth Circuit Court of Appeals from the trial court's order of dismissal entered on September 15, 2003. OTHER MATTERS The Company is a defendant from time to time in lawsuits incidental to its business. Other than the matter discussed above, the Company is not a party to any lawsuit that potentially could be considered material to the Company's financial position or results of operations as of the date of this filing. There can be no assurance that expenses, including any potential settlements or judgments, related to any lawsuits that might arise in the future would not be material to the Company's financial position or results of operations. The Company has employment agreements with three executive officers. Two of these agreements require the Company to make termination payments to the officer of two times the officer's annual base compensation in the event the officer's services are terminated without cause or payments of up to 2.99 times the officer's annual compensation including bonuses in connection with a termination of the officer's services following a change in ownership of the Company, as defined in the agreement, prior to the expiration of the agreement. If both officers with such agreements were terminated for one of the preceding reasons during fiscal 2004, the cost to the Company would range from $1.2 million to $1.8 million. The third employment agreement requires that in the event the officer's services are terminated without cause, the Company either must make termination payments to the officer of one times the officer's annual base compensation and accelerate vesting on 33,333 shares of Company common stock covered by a stock option or make termination payments to the officer of two times the officer's annual base compensation. If the officer covered by this agreement were terminated during 2004, the Company would be required to make payments ranging from $0.2 million to $0.5 million. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY DISCLOSURES TO QUALIFY FORWARD LOOKING STATEMENTS This report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" located elsewhere herein regarding the Company's financial position, business strategy, plans and objectives of management of the Company for future operations, and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. In addition to important factors described elsewhere in this report, the Company cautions current and potential investors that the following important risk factors, among others, sometimes have affected, and in the future could affect, the Company's actual results and could cause such results during fiscal 2004, and beyond, to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company: - Prior to fiscal 2004, the Company experienced operating losses, and it may not operate profitably in the future. The Company incurred net losses of approximately $66.4 million, $44.7 million and $2.3 million in fiscal 2003, 2002 and 2001, respectively. Although the Company generated net income of $3.6 million and $4.5 million for the quarter and six months ended August 31, 2003, respectively, it may incur additional losses in the future, which could hinder the Company's ability to operate its current business. The Company may not be able to generate sufficient revenues from its operations to achieve or sustain profitability in the future. - The Company has significant obligations under its financing agreements. The Company has material indebtedness outstanding under a mortgage loan secured by the Company's office facilities in Dallas, Texas and under a senior secured term loan and revolving credit facility. The Company is required to make periodic payments of interest under each of these financing agreements and, in the case of the term loan, periodic payments of principal. In addition, the financing agreements contain significant financial covenants, operating covenants and default provisions. If the Company at any time defaults on any of its payment or other obligations under any financing agreement, the secured creditors can accelerate all indebtedness outstanding under the facilities and foreclose on substantially all of the Company's assets. Under such circumstances, the Company's cash position and liquidity would be severely impacted, and it is possible the Company would not be able to pay its debts as they come due. See "Liquidity and Capital Resources" in this Item 2 for a discussion of the Company's liquidity and ability to meet its obligations under its financing agreements. - The general economic climate remains uncertain. The Company's sales are largely dependent on the strength of the domestic and international economies and, in particular, on demand for telecommunications equipment, computers, software and other technology products. The market for telecommunications equipment has declined sharply over the last three years, and the markets for computers, software and other technology products also have declined. While the Company enjoyed revenue growth during its quarter ended August 31, 2003, there is still concern that demand for the types of products offered by the Company may remain soft for some period of time as a result of domestic and global economic and political conditions. - The Company is prone to quarterly sales fluctuations. Some of the Company's transactions are completed in the same fiscal quarter as ordered. The quantity and size of large sales (sales valued at approximately $2.0 million or more) during any quarter can cause wide variations in the Company's quarterly sales and earnings, as such sales are unevenly distributed throughout the fiscal year. The Company's accuracy in estimating future sales is largely dependent on its ability to successfully qualify, estimate and close system sales from its "pipeline" of sales opportunities during a quarter. No matter how promising a pipeline opportunity may appear, there is no assurance it will ever result in a sale. Accordingly, the Company's actual sales for any fiscal reporting period may be significantly different from any estimate of sales for such period. See the discussion entitled "Sales" in this Item 2 for a discussion of the Company's system for estimating sales and trends in its business. - The Company is subject to potential lawsuits and other claims. The Company is subject to certain potential lawsuits and other claims as discussed in "Note I - Contingencies" in Item 1 of Part I of this Quarterly Report on Form 10-Q. Except for the litigation discussed in Note I, the Company is not a party to any lawsuit that potentially could be considered material to the Company's financial position or results of operations as of the date of this filing. There can be no assurance that expenses, including any potential settlements or judgments, related to any lawsuits that might arise in the future would not be material to the Company's financial position or results of operations. - The Company faces intense competition based on product capabilities and experiences ever increasing demands from its actual and prospective customers for its products to be compatible with a variety of rapidly proliferating computing, telephony and computer networking technologies and standards. The ultimate success of the Company's products is dependent, to a large degree, on the Company allocating its resources to developing and improving products compatible with those technologies, standards and functionalities that ultimately become widely accepted by the Company's actual and prospective customers. The Company's success is also dependent, to a large degree, on the Company's ability to implement arrangements with other vendors with complementary product offerings to provide actual and prospective customers greater functionality and to ensure that the Company's products are compatible with the increased variety of technologies and standards. The principal competitors for the Company's systems include Avaya, IBM, Nortel, Aspect Communications, Security First, Comverse Technology, Lucent Technologies and UNISYS. Many of the Company's competitors have greater financial, technological and marketing resources than the Company has. Although the Company has committed substantial resources to enhance its existing products and to develop and market new products, it may not be successful. - The Company may not be able to retain its customer base and, in particular, its more significant customers. The Company's success depends substantially on retaining its significant customers. The loss of one of the Company's significant customers could negatively impact the Company's results of operations. The Company's installed base of customers generally is not contractually obligated to place further systems orders with the Company or to extend their services contracts with the Company at the expiration of their current contracts. - The Company may not be successful in transitioning its products and services to an open, standards-based business model. The Company has historically provided complete, bundled hardware and software systems using internally developed components to address its customers' total business needs. Increasingly, the markets for the Company's products are requiring a shift to the development of products and services based on an open, standards-based architecture such as the J2EE and Microsoft's(R).NET environments utilizing VoiceXML and/or SALT standards. Such an open, standards-based approach allows customers to independently purchase and combine hardware components, standardized software modules, and customization, installation and integration services from individual vendors deemed to offer the best value in the particular class of product or service. In such an environment, the Company believes it may sell less hardware and fewer bundled systems and may become increasingly dependent on its development and sale of software application packages, customized software and consulting and integration services. This shift will place new challenges on the Company's management to transition its 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. If the Company is unsuccessful in resolving one or more of these challenges, the Company's revenues and profitability could decline. - The Company will incur substantial expenses to transition its products and services to an open, standards-based business model. The Company anticipates that it will incur substantial research and development expenses and other expenses to adapt its organization and product and service offerings to an open, standards-based business model. If the Company is unable to accurately estimate the future expenses associated with these strategic initiatives, or if the Company must divert its resources to fund other strategic or operational obligations, the Company's ability to fund the strategic initiatives and to operate profitably will be adversely affected. - The Company's reliance on significant vendor relationships could result in significant expense or an inability to serve its customers if it loses these relationships. Although the Company generally uses standard parts and components for its products, some of its components, including semi-conductors and, in particular, digital signal processors manufactured by Texas Instruments, are available only from a small number of vendors. Likewise, the Company licenses speech recognition technology from a small number of vendors. As the Company continues to migrate to open, standards-based systems, it will become increasingly dependent on its component suppliers and software vendors. To date, the Company has been able to obtain adequate supplies of needed components and licenses in a timely manner. If the Company's significant vendors are unable or cease to supply components or licenses at current levels, the Company may not be able to obtain these items from another source or at historical prices. Consequently, the Company would be unable to provide products and to service its customers or to generate historical operating margins, which would negatively impact its business and operating results. - If third parties assert claims that the Company's products or services infringe on their technology and related intellectual property rights, whether the claims are made directly against the Company or against the Company's customers, the Company could incur substantial costs to defend these claims. If any of these claims is ultimately successful, a third party could require the Company to pay substantial damages, discontinue the use and sale of infringing products, expend significant resources to acquire non-infringing alternatives, and/or obtain licenses to use the infringed intellectual property rights. Moreover, where the claims are asserted with respect to the Company's customers, additional expenses may be involved in indemnifying the customer and/or designing and providing non-infringing products. - The Company is exposed to risks related to its international operations that could increase its costs and hurt its business. The Company's products are currently sold in more than 75 countries. The Company's international sales, as a percentage of total Company sales, were 40% and 42% in fiscal quarters ended August 31, 2003 and 2002, respectively. International sales are subject to certain risks, including: - fluctuations in currency exchange rates; - the difficulty and expense of maintaining foreign offices and distribution channels; - tariffs and other barriers to trade; - greater difficulty in protecting and enforcing intellectual property rights; - general economic and political conditions in each country; - loss of revenue, property and equipment from expropriation; - import and export licensing requirements; and - additional expenses and risks inherent in conducting operations in geographically distant locations, including risks arising from customers speaking different languages and having different cultural approaches to the conduct of business. - The Company's inability to properly estimate costs under fixed price contracts could negatively impact its profitability. Some of the Company's contracts to develop application software and customized systems provide for the customer to pay a fixed price for its products and services regardless of whether the Company's costs to perform under the contract exceed the amount of the fixed price. If the Company is unable to estimate accurately the amount of future costs under these fixed price contracts, or if unforeseen additional costs must be incurred to perform under these contracts, the Company's ability to operate profitably under these contracts may be adversely affected. The Company has realized significant losses under certain customer contracts in the past and may experience similar significant losses in the future. - The Company's inability to meet contracted performance targets could subject it to significant penalties. Many of the Company's contracts, particularly for managed services, foreign contracts and contracts with telecommunication companies, include provisions for the assessment of liquidated damages for delayed project completion and/or for the Company's failure to achieve certain minimum service levels. The Company has had to pay liquidated damages in the past and may have to pay additional liquidated damages in the future. Any such future liquidated damages could be significant. - Increasing consolidation in the telecommunications and financial industries could affect the Company's revenues and profitability. The majority of the Company's significant customers are in the telecommunications and financial industries, which are undergoing increasing consolidation as a result of merger and acquisition activity. This activity involving the Company's significant customers could decrease the number of customers purchasing the Company's products and/or delay purchases of the Company's products by customers that are in the process of reviewing their strategic alternatives in light of a pending merger or acquisition. If the Company has fewer customers or its customers delay purchases of the Company's products as a result of merger and acquisition activity, the Company's revenues and profitability could decline. - Any failure by the Company to satisfy its registration, listing and other obligations with respect to the common stock underlying certain warrants could result in adverse consequences. Subject to certain exceptions, the Company is required to maintain the effectiveness of the registration statement that became effective June 27, 2002 covering the common stock underlying certain warrants to purchase up to 621,304 shares of the Company's common stock at a price of $4.0238 per share until the earlier of the date the underlying common stock may be resold pursuant to Rule 144(k) under the Securities Act of 1933 or the date on which the sale of all the underlying common stock is completed. The Company is subject to various penalties for failure to meet its registration obligations and the related stock exchange listing for the underlying common stock, including cash penalties. The warrants are also subject to anti-dilution adjustments. - The occurrence of force majuere events could impact the Company's results from operations. The occurrence of one or more of the following events could potentially cause the Company to incur significant losses: acts of God, war, riot, embargoes, acts of civil or military authorities, acts of terrorism or sabotage, shortage of supply or delay in delivery by Intervoice's vendors, the spread of SARS or other diseases, fire, flood, explosion, earthquake, accident, strikes, radiation, inability to secure transportation, failure of communications, failure of utilities or similar events. SALES. The Company's total sales for the second quarter and first six months of fiscal 2004 were $41.6 million and $80.0 million, respectively, an increase of $6.0 million (17%) and $6.0 million (8%), respectively, as compared to the same periods of fiscal 2003. Total system sales increased $2.7 million (15%) for the second quarter of fiscal 2004 as compared to the same period of fiscal 2003, while service sales increased $3.3 million (18%) for the same time frames. For the six-month period ended August 31, 2003, total system sales decreased $0.9 million (2%) as compared to the same period of fiscal 2003, while services sales increased $6.9 million (20%) for the same time frames. Services sales during the second quarter and first six months of fiscal 2004 included $2.1 million and $4.0 million, respectively, relating to services performed for an international managed services customer for which the Company recognizes revenue on a cash basis. There were no revenues from this customer during the first six months of fiscal 2003. The Company operates as a single, integrated business unit. The Company's chief operating decision maker assesses performance and allocates resources on an enterprise wide basis. The Company's product line includes IVR/portal systems, messaging systems, payment systems, maintenance and related services, and managed services provided for customers on an outsourced or application service provider basis. In prior years, the Company has identified its sales of systems and related services as being sales to the Enterprise and Network markets. Generally sales of IVR/portal systems and related services were made to Enterprise customers, while sales of messaging and payment systems were made to Network customers. Going forward, the Company believes that product line distinction provides the most meaningful breakdown of quarterly and annual sales activity. The Company is not able to provide the historical breakdown of Network system sales into its messaging and payment systems components. The Company's net sales by product line for the three and six months ended August 31, 2003 and 2002 were as follows (in thousands):
Three Months Ended Six Months Ended ---------------------------- --------------------------- August 31, August 31, August 31, August 31 2003 2002 2003 2002 ----------- ----------- ----------- ----------- IVR/portal system sales (Enterprise system sales in fiscal 2003) $ 14,970 $ 11,258 $ 27,345 $ 23,568 Messaging system sales (included in Network system sales in fiscal 2003) 1,350 --- 3,143 --- Payment system sales (included in Network system sales in fiscal 2003) 4,305 --- 8,167 --- Network system sales --- 6,647 --- 15,972 ----------- ----------- ----------- ----------- Total system sales 20,625 17,905 38,655 39,540 ----------- ----------- ----------- ----------- Maintenance and related services sales 14,285 12,732 27,870 24,757 Managed service sales 6,697 4,976 13,483 9,732 ----------- ----------- ----------- ----------- Total services sales 20,982 17,708 41,353 34,489 ----------- ----------- ----------- ----------- Total Company sales $ 41,607 $ 35,613 $ 80,008 $ 74,029 =========== =========== =========== ===========
Amounts shown for the six months ended August 31, 2003 for IVR/Portal and Payment system sales reflect the reclassification of $0.5 million and $2.3 million, respectively, of sales originally classified as Messaging sales for the quarter ended May 31, 2003. As identified in the preceding chart, the Company's sale of IVR/portal systems for the quarter and six months ended August 31, 2003 grew $3.7 million (33%) and $3.8 million (16%), respectively, over corresponding periods for fiscal 2003. These gains were offset, particularly for the six month period, by softness in the sales of messaging and payment systems. The sale of such systems continues to be affected by the decline in the market for telecommunication equipment which the Company has experienced over the past two years. The Company believes that the market for network products will remain soft through fiscal 2004. The increase in services sales results from a combination of growth in the sale of maintenance and related services and the impact of the cash basis managed services recognized during the second quarter and first six months of fiscal 2004 as compared to the same periods for fiscal 2003. The Company recognized revenues from the cash basis managed services customer referred to above totaling $1.9 million and $2.1 million during the quarters ended May 31, 2003, and August 31, 2003, respectively. The Company anticipates earning up to $1.8 million in additional managed service revenues from this customer under its current contract, which expires November 30, 2003, but the timing of any such revenue recognition remains uncertain. The Company has begun negotiations with its customer regarding a potential extension of the contract, but the Company cannot predict the outcome of such negotiations at this time. Sales to one customer, O2, which has purchased both systems and ASP managed services from the Company, accounted for approximately 9% and 11% of the Company's total sales during the quarters ended August 31, 2003 and 2002, respectively and for approximately 10% and 11% of the Company's total sales during the six-month periods ended August 31, 2003 and 2002, respectively. There were no other customers accounting for 10% or more of the Company's sales during the three or six month periods ended August 31, 2003 and 2002. International sales comprised 40% of the Company's total sales during the second quarter of fiscal 2004, down slightly from 42% during the second quarter of fiscal 2003. For the first six months of fiscal 2004, international sales comprised 39% of the Company's total sales, down from 42% during the same period of fiscal 2003. International sales for the second quarter of fiscal 2004 were up $1.9 million over fiscal 2003 second quarter amounts and were even with prior year amounts for the six month period ended August 31, 2003, but declined as a percentage of total sales as the Company's North American sales grew at a faster rate. The Company uses a system combining estimated sales from its service and support contracts, its backlog of committed systems orders and its "pipeline" of systems sales opportunities to estimate sales and trends in its business. For the quarter ended August 31, 2003, sales from service and support contracts, including contracts for managed services, comprised approximately 50% of the Company's total sales, while sales from beginning systems backlog comprised approximately 35% of total sales and sales from the quarter's pipeline activity comprised approximately 15% of total sales. For the quarter ended August 31, 2002, sales from service and support contracts, sales from beginning systems backlog and sales from the quarter's pipeline activity comprised approximately 50%, 32% and 18% of total sales, respectively. The Company's service and support contracts range in original duration from one month to five years, with most managed service contracts having initial terms of two to three years and most maintenance and related contracts having initial terms of one year. Because many of the longer duration contracts give customers early cancellation privileges, the Company does not consider its book of services contracts to be reportable backlog, and a portion of the potential revenue reflected in the contract values may never be realized. Nevertheless, it is easier for the Company to estimate service and support sales than to estimate systems 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. The Company's backlog is made up of customer orders for systems for which it has received complete purchase orders and which the Company expects to ship within twelve months. At August 31, 2003, May 31, 2003, February 28, 2003 and November 30, 2002, the Company's backlog of systems sales was approximately $30.1 million, $29.5 million, $33.5 million and $29.5 million, respectively. The Company's pipeline of opportunities for systems sales is the aggregation of its sales opportunities, with each opportunity evaluated for the date the potential customer will make a purchase decision, competitive risks, and the potential amount of any resulting sale. No matter how promising a pipeline opportunity may appear, there is no assurance it will ever result in a sale. While this pipeline may provide the Company some sales guidelines in its business planning and budgeting, pipeline estimates are necessarily speculative and may not consistently correlate to revenues in a particular quarter or over a longer period of time. While the Company knows the amount of systems backlog available at the beginning of a quarter, it must speculate on its pipeline of systems opportunities for the quarter. The Company's accuracy in estimating total systems sales for the next fiscal quarter is, therefore, highly dependent upon its ability to successfully estimate which pipeline opportunities will close during the quarter. SPECIAL CHARGES. During the quarter ended August 31, 2003, the Company's chief financial officer resigned to pursue other opportunities. The Company recorded cash and non-cash charges totaling approximately $0.5 million and $0.3 million, respectively, during the quarter under the terms of a separation agreement executed in connection with the resignation. The charges were included in selling, general and administrative expenses for the quarter. All cash charges were paid during the quarter. During the quarter ended May 31, 2003, the Company reduced its workforce by 56 positions. In doing so, the Company incurred severance charges of approximately $1.4 million, with approximately $0.6 million, $0.2 million, and $0.6 million impacting cost of goods sold, research and development, and selling, general and administrative expenses, respectively. During the quarter ended August 31, 2002, the Company incurred special charges of approximately $10.1 million, including $2.8 million for severance payments and related benefits associated with a workforce reduction affecting approximately 120 employees, $0.4 million associated with the closing of a portion of its leased facilities in Manchester, United Kingdom, $2.2 million for the write down of excess inventories and $4.7 million associated with two loss contracts. The severance and related costs were associated with the Company's consolidation of its separate Enterprise and Networks divisions into a single, unified organizational structure. The downsizing of the leased space in Manchester followed from the Company's decision to consolidate virtually all of its manufacturing operations into its Dallas, Texas facilities. The inventory adjustments reflected the Company's continuing assessment of its inventory levels in light of short term sales projections, the decision to eliminate the UK manufacturing operation and the consolidation of the business units discussed above. The charges for loss contracts reflected the costs incurred during the second quarter on two contracts, which were expected to result in net losses to the Company upon completion. The charges included costs actually incurred during the quarter as well as an accrual of the amounts by which total contract costs were expected to exceed total contract revenue. The net effect of all special charges for the second quarter of fiscal 2003 was to increase cost of goods sold, research and development and selling, general and administrative expenses by $7.7 million, $0.4 million and $2.0 million, respectively. During the quarter ended May 31, 2002, the Company incurred special charges of approximately $2.8 million, including $2.4 million for severance payments and related benefits, and $0.4 million for the closure of its leased facility in Chicago, Illinois. The severance and related costs were associated with a workforce reduction affecting 103 employees. During the first quarter of fiscal 2003, the Company also revised its estimates of severance charges originally recorded in the fourth quarter of fiscal 2002, reducing its accrual for such charges by $0.2 million. The net effect of all special charges activities for the first quarter of fiscal 2003 was to increase cost of goods sold, research and development and selling, general and administrative expenses by $1.4 million, $0.5 million and $0.7 million, respectively. COST OF GOODS SOLD. Cost of goods sold for the second quarter and first six months of fiscal 2004 was approximately $18.7 million or 45.0% of sales and $36.7 million or 45.9% of sales, respectively. This compares to $24.7 million or 69.4% of sales and $47.5 million or 64.2% of sales for the second quarter and first six months of fiscal 2003. As described above, the Company incurred special charges to cost of goods sold during the first six months of fiscal 2004 totaling $0.6 million or 0.8% of sales. It incurred special charges to cost of goods sold totaling $7.7 million or 21.6% of sales during the second quarter of fiscal 2003 and $9.1 million or 12.3% of sales during the first six months of fiscal 2003. Cost of goods sold on system sales was $11.3 million (54.6%) and $22.5 million (58.1%) for the second quarter and first six months of fiscal 2004, respectively, as compared to $17.1 million (95.5%) and $33.2 million (84.0%) for the same periods of fiscal 2003. This decrease results from the Company's cost cutting initiatives as well as from differences in the sales channel mix over the time frames. In addition, the second quarter fiscal 2003 Special Charges related to loss contracts and inventory writedowns, discussed in Special Charges above, adversely affected systems cost of goods sold in fiscal 2003. Cost of goods sold on service sales was $7.5 million (35.6%) and $14.2 million (34.3%) for the second quarter and first six months of fiscal 2004, respectively, as compared to $7.6 million (43.1%) and $14.3 million (41.4%) for the same periods of fiscal 2003. This improvement resulted from a combination of efficiency gains, as the Company served a larger customer base while holding costs in fiscal 2004 to fiscal 2003 levels, and the effect on the calculation of the cash basis managed services revenue recognized during the second quarter and first six months of fiscal 2004. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the second quarter and first six months of fiscal 2004 were approximately $3.7 million, or 8.9% of total Company sales, and $7.6 million, or 9.5% of sales, respectively. During the second quarter and first six months of the previous fiscal year, research and development expenses were $6.5 million, or 18.3% and $12.5 million or 16.9%, respectively, of the Company's total sales. The Company incurred R&D charges described above in "Special Charges" totaling $0.4 million (1.1% of total sales) during the second quarter of fiscal 2003, and $0.2 million (0.3%) and $0.9 million (1.2%) during the first six months of fiscal 2004 and fiscal 2003, respectively. Expenses were down from fiscal 2003 as a result of the Company's cost reduction initiatives and the reassignment of certain resources from R&D to direct customer service activities (cost of goods sold) in connection with the Company's fiscal 2003 reorganization. Research and development expenses include the design of new products and the enhancement of existing products. The Company's research and development spending is focused in four key areas. First, software tools are being developed to aid in the development, deployment and management of customer applications incorporating speech recognition and text to speech technologies. Next, hardware and software platforms are being developed which interface with telephony networks and an enterprise's internal data network. Such platforms are being developed to operate in traditional enterprise networks as well as newer network environments such as J2EE and Microsoft's .NET. Third, "voice browsers" based on open standards such as SALT and VoiceXML are being developed. Voice browsers incorporate speech recognition technologies and perform the task of formatting a user's verbal query into an inquiry that can be acted upon and/or responded to by an enterprise system. Finally, research and development activities are focusing on modularization of key hardware and software elements. This is increasingly important in a standards-based, open systems architecture as modularization will allow for interchange of commodity elements to reduce overall systems cost and for the Company's best of breed and core technology strengths to be leveraged into new applications and vertical markets. The Company expects to maintain a strong commitment to research and development to remain at the forefront of technology development in its markets, which is essential to the continued improvement of the Company's position in the industry. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses during the second quarter and first six months of fiscal 2004 were approximately $13.1 million, or 31.5% of total Company sales, and $26.6 million, or 33.2% of sales, respectively. SG&A expenses during the second quarter and first six months of fiscal 2003 were $18.4 million, or 51.7% and $36.1 million or 48.8%, respectively, of the Company's total sales. The Company incurred SG&A charges described above in "Special Charges" totaling $0.8 million (1.9%) and $2.0 million (5.6%) during the second quarter of fiscal 2004 and 2003, respectively, and $1.4 million (1.8%) and $2.7 million (3.6%) during the first six months of fiscal 2004 and 2003, respectively. SG&A expenses have decreased from the same periods last year primarily as a result of cost control initiatives implemented by the Company. AMORTIZATION OF ACQUIRED INTANGIBLE ASSETS AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. Effective March 1, 2002, the Company adopted Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets (the "Statements"). Statement No. 141 refines the definition of what assets may be considered as separately identified intangible assets apart from goodwill. Statement No. 142 provides that goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, but will be subject to impairment tests on at least an annual basis. In adopting the Statements in fiscal 2003, the Company first reclassified $2.7 million of intangible assets associated with its assembled workforce (net of related deferred taxes of $1.4 million) to goodwill because such assets did not meet the new criteria for separate identification. The Company then allocated its adjusted goodwill balance of $19.2 million to its then existing Enterprise and Networks divisions and completed the transitional impairment tests required by Statement No. 142. The fair values of the reporting units were estimated using a combination of the expected present values of future cash flows and an assessment of comparable market values. As a result of these tests, the Company determined that the goodwill associated with its Networks division was fully impaired, and, accordingly, it recognized a non-cash, goodwill impairment charge of $15.8 million as the cumulative effect on prior years of this change in accounting principle. This impairment resulted primarily from the significant decline in Networks sales and profitability during the fourth quarter of fiscal 2002 and related reduced forecasts for the division's sales and profitability. Effective August 1, 2002, the Company combined its divisions into a single integrated organizational structure in order to address changing market demands and global customer requirements. During the fourth quarter of fiscal 2003, and as described in the Company's Annual Report on Form 10-K/A for the year ended February 28, 2003, the Company recognized impairment charges of $16.7 million to reduce the carrying value of its intangible assets other than goodwill to their fair value. As a result of the reduction in carrying value, amortization expense related to these assets totaled $0.7 million and $1.4 million for the second quarter and first six months of fiscal 2004, down from $1.8 million and $3.6 million for the second quarter and first six months fiscal 2003. The estimated amortization expense for the balance of fiscal 2004 and for each of the next four fiscal years is as follows (in thousands): Balance of fiscal year ending February 29, 2004 $ 1,519 Fiscal 2005 $ 1,656 Fiscal 2006 $ 1,170 Fiscal 2007 $ 1,101 Fiscal 2008 $ 1,101
INTEREST EXPENSE. Interest expense was $0.5 million and $1.1 million during the second quarter and first six months of fiscal 2004, versus $1.6 and $3.0 million for the same periods of fiscal 2003. The reduction relates to two factors. First, the Company's outstanding debt as of the beginning of fiscal 2004 totaled $19.1 million, a 36% reduction from the $30.0 million balance outstanding at the beginning of fiscal 2003. Second, the fiscal 2003 expense included $0.3 million relating to the final amortization of costs under certain interest rate swap arrangements terminated by the Company during fiscal 2002 and $0.7 million for the write off of debt issuance costs associated with a term loan and revolving credit agreement retired as part of the Company's fiscal 2003 debt restructuring activities. There were no such expenses during the first six months of fiscal 2004. INCOME TAXES (BENEFIT). For the six-months ended August 31, 2003, the Company recognized current income tax expense on the pretax income of certain foreign subsidiaries. The Company anticipates that any taxable income it earns during fiscal 2004 in its U.S. operations will be offset by net operating losses carried forward from prior years. Because the Company has provided a valuation reserve against all such potential net operating loss carryforward benefit in prior years, the Company does not expect and has not provided any net income tax expense or benefit for the six months ended August 31, 2003 related to its U.S. operations. During the first quarter of fiscal 2003, United States tax law was amended to allow companies which incurred net operating losses in 2001 and 2002 to carry such losses back a maximum of five years instead of the maximum of two years previously allowed. As a result of this change, the Company used $21.5 million of its then existing net operating loss carryforwards and $0.4 million of its then existing tax credit carryforwards and recognized a one-time tax benefit of $7.9 million, of which $2.2 million was recognized as additional capital associated with previous stock option exercises. Also during the first quarter of fiscal 2003, and as discussed above in "Amortization of Acquired Intangible Assets and Cumulative Effect of a Change in Accounting Principle", the Company reduced its deferred tax liabilities by $1.4 million in connection with the reclassification of its assembled workforce intangible asset to goodwill. As a result of this reduction in deferred tax liabilities, the Company increased the valuation allowance associated with its net deferred tax asset by $1.4 million. For the quarter ended August 31, 2002, the Company recognized a tax benefit on the pretax losses of certain foreign subsidiaries because the Company believed it would be able to realize the tax benefit of those losses by offsetting them against taxable income of a prior year. The Company did not recognize a current benefit associated with its domestic pretax losses, because it had exhausted its ability to offset such losses against taxable income of prior years, and the occurrence of losses prevented it from concluding that it was more likely than not that such benefit would be realized. INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). The Company generated operating income of $5.4 million and net income of $3.6 million during the second quarter of fiscal 2004. During the second quarter of fiscal 2003, the Company generated an operating loss of $15.8 million and a net loss of $16.3 million. For the six months ended August 31, 2003, the Company generated operating income of $7.8 million and net income of $4.5 million compared to an operating loss of $25.7 million, a loss before the cumulative effect of a change in accounting principle of $25.0 million and a net loss of $40.7 million for the six month period ended August 31, 2002. As described above in "Amortization of Acquired Intangible Assets and Cumulative Effect of a Change in Accounting Principle", the Company recorded a $15.8 million charge during the first quarter of fiscal 2003 as the cumulative effect on prior years of a change in accounting principle in connection with its adoption of Statements of Financial Accounting Standards No. 141 and No. 142. The Company's improved financial performance for the quarter and six months ended August 31, 2003 over similar periods for fiscal 2003 reflects the significant reduction in special charges, which in fiscal 2003 included the Company's extensive restructuring activities, a reduction in the level of ongoing operating expenses as a result of such restructuring and the growth in the Company's services revenues in fiscal 2004. LIQUIDITY AND CAPITAL RESOURCES. The Company had approximately $37.0 million in cash and cash equivalents at August 31, 2003, while borrowings under the Company's long-term debt facilities totaled $16.4 million. The Company's cash balances increased $9.2 million during the three months ended August 31, 2003, with operating activities providing $11.8 million of cash, net investing activities using $1.2 million of cash and net financing activities using $0.9 million of cash. Operating cash flow for the quarter ended August 31, 2003 was favorably impacted by the Company's continued profitability in the quarter, including its collection of $2.1 million from an international managed services customer for which the Company recognizes revenue on a cash basis, and by its related continuing focus on operating expense control and balance sheet management. The Company improved its days sales outstanding (DSOs) of accounts receivable to 49 days, down significantly from the May 31, 2003 level of 62 days. Inventories were up $0.7 million from ending first quarter balances but were still $0.3 million below ending fiscal 2003 levels. Operating cash flow for the second quarter also benefited from the receipt of $2.2 million in fiscal 2002 tax refunds relating to the Company's UK subsidiary. For sales of certain of its more complex, customized systems (generally ones with a sales price of $0.5 million or more), the Company recognizes revenue based on a percentage of completion methodology. Unbilled receivables accrued under this methodology totaled $5.1 million (22.6% of total net receivables) at August 31, 2003, up $0.2 million from February 28, 2003. The Company expects to bill and collect unbilled receivables as of August 31, 2003 within the next twelve months. While the Company continues to focus on the level of its investment in accounts receivable, it now generates a significant percentage of its sales, particularly sales of enhanced telecommunications services systems, 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, the Company may offer selected customers such payment terms. In all cases, however, the Company only recognizes revenue at such time as its system or service fee is fixed or determinable, collectibility is probable and all other criteria for revenue recognition have been met. In some limited cases, this policy may result in the Company recognizing revenue on a "cash basis", limiting revenue recognition on certain sales of systems and/or services to the actual cash received to date from the customer, provided that all other revenue recognition criteria have been satisfied. The Company's federal income tax returns for its fiscal years 2000 and 2001 are currently being audited by the Internal Revenue Service. The Company has tentatively agreed to proposed adjustments from the IRS challenging certain positions taken by the Company on those returns. Although resolution of the issues is still pending, it is probable that as a result of these proposed adjustments, the Company will lose the ability to carry back approximately $5.4 million in net operating losses generated in fiscal 2001. If this occurs, the Company will be required to repay up to $2.1 million of refunds previously received from the IRS plus accrued interest. The Company recorded a charge for these probable adjustments as part of its fiscal 2003 net tax provision. The Company expects final resolution of the issue and cash settlement with the IRS to occur during the second half of fiscal 2004. Any net operating losses which ultimately cannot be carried back to prior years under the settlement with the IRS may be carried forward to future years. The Company's wholly owned subsidiary, Brite Voice Systems, Inc. ("Brite") has filed a petition in the United States Tax Court seeking a redetermination of a Notice of Deficiency issued by the IRS to Brite. The amount of the proposed deficiency is $2.4 million before interest or penalties and relates primarily to a disputed item in Brite's August 1999 federal income tax return. The Company and the IRS have reached a tentative agreement that eliminates the proposed deficiency and, in fact, results in the Company receiving a small net refund. The Company expects final resolution of this matter to occur during the third quarter of fiscal 2004. The Company used $1.2 million of cash to purchase additional equipment during the quarter ended August 31, 2003 and used $0.8 million of cash to make scheduled principal payments under its term loan. It also used $1.0 million to make a discretionary principal payment of a portion of its mortgage loan. At August 31, 2003, the Company had $16.4 million in outstanding debt, including $9.5 million under a mortgage loan and $6.9 million under a term note and related revolving credit facility. The Company is required to make periodic payments under these financing agreements and is also subject to significant financial and operating covenants contained in these debt agreements as further described below. MORTGAGE LOAN Interest on the Company's mortgage loan accrues at the greater of 10.5% or the prime rate plus 2.0% and is payable monthly. The outstanding principal under this loan is due in May 2005. The mortgage loan is secured by a first lien on the Company's Dallas headquarters and contains a covenant requiring the Company to have at least $5.0 million in net equity at the end of each of its fiscal quarters beginning with the quarter ending August 31, 2004. The mortgage loan also contains cross-default provisions with respect to the Company's term loan and revolving credit agreement, such that a default under the credit facility which leads to the acceleration of amounts due under the facility and the enforcement of liens against the mortgaged property also creates a default under the mortgage loan. TERM LOAN AND REVOLVING CREDIT AGREEMENT The Company's credit facility agreement provides for an amortizing term loan of $10.0 million and a revolving credit commitment equal to the lesser of $25.0 million minus the principal outstanding under the term loan and the balance of any letters of credit ($18.1 million maximum at August 31, 2003) or a defined borrowing base comprised primarily of eligible U.S. and U.K. accounts receivable ($1.2 million maximum at August 31, 2003). The term loan principal is due in equal monthly installments of approximately $0.3 million through July 2005 with final payments totaling approximately $0.6 million due in August 2005. Interest on the term loan is also payable monthly and accrues at a rate equal to the then prevailing prime rate of interest plus 2.75% (6.75% as of August 31, 2003). Any advances under the revolver loan will accrue interest at the prime rate plus a margin of 0.5% to 1.5%, or at the London Inter-bank Offering Rate plus a margin of 3% to 4%. The Company may request an advance under the revolver loan at any time during the term of the revolver agreement so long as the requested advance does not exceed the then available borrowing base. The Company has not requested an advance under the revolver as of the date of this filing. The term loan and the revolving credit agreement expire on August 29, 2005. Borrowings under the credit facility are secured by first liens on the Company's personal property and by a subordinated lien on the Company's Dallas headquarters. The credit facility contains cross-default provisions with respect to the Company's mortgage loan, such that an event of default under the mortgage loan which allows the mortgage lender to accelerate the mortgage loan or terminate the agreement creates a default under the credit facility. The credit facility contains terms, conditions and representations that are generally customary for asset-based credit facilities, including requirements that the Company comply with certain significant financial and operating covenants. In particular, the Company was required to generate cumulative earnings before interest, taxes, depreciation and amortization, EBITDA, (as defined in the credit facilities) of at least $9.0 million for the twelve-month period ended August 31, 2003, and is required to generate minimum cumulative EBITDA of $15 million and $20 million for the 12-month periods ending November 30, 2003 and February 29, 2004, respectively, and $25 million for the 12-month periods ending each fiscal quarter thereafter. The Company is also required to maintain defined levels of actual and projected service revenues and is prohibited from incurring capital expenditures in excess of $4.0 million for any fiscal year except in certain circumstances and with the lender's prior approval. As of August 31, 2003, the Company was in compliance with all financial and operating covenants. The Company is considering the refinancing or early retirement of some or all of the amounts outstanding under its mortgage loan and/or its term loan and revolving credit agreement. Under its existing agreements, the Company must pay a 1% prepayment fee in connection with any retirement of amounts outstanding under its mortgage loan that occur prior to May 30, 2004. The Company may prepay amounts outstanding under its term loan without penalty, but the Company is subject to fees of up to $0.5 million should it terminate its revolving credit facility prior to August 2005. The Company has $0.9 million in unamortized debt issue costs included in prepaid expenses and other noncurrent assets as of August 31, 2003 which it expects to expense over the term of the related indebtedness. The non-cash amortization of such costs may be accelerated in the event the Company completes a refinancing or early repayment of its debt. The Company is under no obligation to amend its debt agreements and has made no formal decisions regarding any such amendment as of the date of this filing. FUTURE COMPLIANCE WITH COVENANTS The Company believes its cash reserves and internally generated cash flow along with any cash availability under its revolver loan will be sufficient to meet its operating cash requirements for the next twelve months. In order to meet the increasing EBITDA requirements in its credit agreements as described above, however, the Company will have to sustain the average operating results it has achieved for the six months ended August 31, 2003. To comply with the minimum cumulative EBITDA covenant for the next twelve months, the Company may not incur a loss before interest, taxes, depreciation and amortization in excess of $0.5 million for the quarter ending November 30, 2003, and it must generate average EBITDA of at least $3.7 million per quarter for the two-quarter period ending February 29, 2004, average EBITDA of at least $5.7 million per quarter for the three-quarter period ending May 31, 2004, and average EBITDA of at least $6.3 million for the four-quarter period ending August 31, 2004. The Company generated EBITDA of $7.9 million and $12.5 million for the quarter and six months ended August 31, 2003, respectively. A reconciliation of net income to EBITDA for the quarter and six months ended August 31, 2003 follows (in thousands):
Quarter Six Months Ended Ended August 31, 2003 August 31,2003 --------------- -------------- Net income $ 3,596 $ 4,532 Add back EBITDA elements Interest 536 1,081 Taxes 1,372 2,116 Depreciation and amortization 2,418 4,800 ------------ ------------ EBITDA $ 7,922 $ 12,529 ============ ============
If the Company is not able to achieve the required EBITDA levels and maintain compliance with its other various debt covenants, the lenders have all remedies available to them under the terms of the various loan agreements, including, without limitation, the ability to declare all debt immediately due and payable and to enforce security interests. Under such circumstances, the Company's cash position and liquidity would be severely impacted, and it is possible the Company would not be able to continue its business. IMPACT OF INFLATION The Company does not expect any significant short-term impact of inflation on its financial condition. Technological advances should continue to reduce costs in the computer and communications industries. Further, the Company presently is not bound by long term fixed price sales contracts. The absence of such contracts reduces the Company's exposure to inflationary effects. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISKS The Company invests 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 this investment. At August 31, 2003, the Company's outstanding long-term debt was comprised of the following (in thousands):
August 31, 2003 --------------- Mortgage loan, bearing interest payable monthly at the greater of 10.5% or the prime rate plus 2.0%; principal due May 28, 2005 $ 9,500 Amortizing term loan, principal due in equal monthly installments of approximately $0.3 million through July 2005 with final payments totaling approximately $0.6 million in August 2005; interest payable monthly, accruing at a rate equal to the prime rate plus 2.75% (6.75% at August 31, 2003) 6,944 -------- $ 16,444 ========
The following table provides information about the Company's credit agreements that are sensitive to changes in interest rates. For the credit agreements, the table presents cash flows for scheduled principal payments and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on rates in effect as of August 31, 2003.
Fiscal ------------------------------- 2004 2005 2006 ------ ------ ------- (Dollars in thousands) Long-term debt-variable rate U.S. $1,667 $3,333 $11,444 Projected weighted average interest rate 9.1% 9.5% 9.9%
FOREIGN CURRENCY RISKS The Company transacts business in certain foreign currencies including, particularly, the British pound and the Euro. The Company's primary software application development, research and development and other administrative activities are conducted from offices in the United States and the United Kingdom, and its primary manufacturing operations are conducted in the United States. Virtually all sales arranged through the Company's U.S. offices are denominated in U.S. dollars, which is the functional and reporting currency of the U.S. entity. Sales arranged through the Company's U.K. subsidiary are denominated in various currencies, including the British pound, the U.S. dollar and the Euro; however, the U.K. subsidiary's functional currency is the British pound. For the fiscal year ended February 28, 2003, sales originating from the Company's U.K. subsidiary represented approximately 34% of consolidated sales. This percentage is expected to remain materially unchanged for fiscal 2004. As a result of its international operations, the Company is subject to exposure from adverse movements in certain foreign currency exchange rates. The Company has not historically used foreign currency options or forward contracts to hedge its currency exposures because of variability in the timing of cash flows associated with its larger contracts where payments are tied to the achievement of project milestones, and it did not have any such hedge instruments in place at August 31, 2003. Rather, the Company attempts to mitigate its foreign currency risk by transacting business in the functional currency of each of its major subsidiaries, thus creating natural hedges by paying expenses incurred in the local currency in which revenues will be received. At August 31, 2003, the Company had an intercompany balance payable to its U.K. subsidiary totaling approximately $32.9 million. The Company considers such intercompany balance to be a long-term investment, as defined under the guidance of Statement of Financial Accounting Standards No. 52 - Foreign Currency Translation, and management has no plans within the foreseeable future to pay amounts owed to its U.K. subsidiary. Accordingly, foreign exchange fluctuations on the balance are recorded as a component of accumulated other comprehensive loss in the statement of stockholders' equity. As noted above, the Company's 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, the Company's sales are negatively affected upon the translation of U.K. operating results to the reporting currency. The effect of these changes on the Company's operating profits varies depending on the level of British pound denominated expenses and the U.K. subsidiary's overall profitability. For the fiscal year ended February 28, 2003, the result of a hypothetical, uniform 10% strengthening in the value of the U.S. dollar relative to the British pound and the Euro would have been a decrease in sales of approximately $3.4 million and a reduction in the net loss of approximately $1.3 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. The Company's 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. ITEM 4 CONTROLS AND PROCEDURES The Company's chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of August 31, 2003. Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the chief executive officer and chief financial officer have concluded that the Company's current disclosure controls and procedures, as designed and implemented, are reasonably adequate to ensure that they are provided with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934. There has been no change in the Company's internal control over financial reporting identified in connection with that evaluation that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, originally filed 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 the Company during the period from October 12, 1999 through June 6, 2000 (the "Class Period"). Plaintiffs filed claims, which were consolidated into one proceeding, under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 against the Company as well as certain named current and former officers and directors of the Company on behalf of the alleged class members. In the complaint, Plaintiffs claimed that the Company and the named current and former officers and directors issued false and misleading statements during the Class Period concerning the financial condition of the Company, the results of the Company's merger with Brite and the alleged future business projections of the Company. Plaintiffs asserted that these alleged statements resulted in artificially inflated stock prices. The Company believes that it and its officers and directors complied with their obligations under the securities laws, and vigorously defended the lawsuit. The Company responded to the complaint by filing a motion to dismiss the complaint in the consolidated proceeding. The Company asserted that the complaint lacked the degree of specificity and factual support to meet the pleading standards applicable to federal securities litigation. On this basis, the Company requested that the United States District Court for the Northern District of Texas dismiss the complaint in its entirety. Plaintiffs responded to the Company's request for dismissal. On August 8, 2002, the Court entered an order granting the Company's motion to dismiss the class action lawsuit. In the order dismissing the lawsuit, the Court granted plaintiffs an opportunity to reinstate the lawsuit by filing an amended complaint. Plaintiffs filed an amended class action complaint on September 23, 2002. The Company filed a motion to dismiss the amended complaint, and plaintiffs filed a response in opposition to the Company's motion to dismiss. On September 15, 2003, the Court granted the Company's motion to dismiss the amended class action complaint. Unlike the Court's prior order dismissing the original class action complaint, the order dismissing the amended complaint did not grant plaintiffs an opportunity to reinstate the lawsuit by filing a new amended complaint. On October 9, 2003, the Plaintiffs filed a notice of appeal to the Fifth Circuit Court of Appeals from the trial court's order of dismissal entered on September 15, 2003. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held at 10:00 a.m., local time, on Wednesday, August 20, 2003 in Richardson, Texas. Proxies were solicited by the Board of Directors of the Company pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to the Board of Directors nominees as listed in the proxy statement and all such nominees were duly elected. The following persons are the nominees of the Board of Directors who were elected as directors at the annual meeting: David W. Brandenburg, Joseph J. Pietropaolo, George C. Platt, Grant A. Dove, Jack P. Reily and Gerald F. Montry. The number of votes cast for the election of each of the nominees for director, and the number of abstentions, were as follows: 31,292,627 votes for the election of David W. Brandenburg, with 148,818 abstentions; 30,853,920 votes for the election of Joseph J. Pietropaolo, with 587,525 abstentions; 28,074,065 votes for the election of George C. Platt, with 3,367,380 abstentions; 30,820,579 votes for the election of Grant A. Dove, with 620,866 abstentions; 30,923,340 votes for the election of Jack P. Reily, with 518,105 abstentions; and 31,300,485 votes for the election of Gerald F. Montry, with 140,960 abstentions. No votes were cast against the election of any nominee for director. The second matter voted on and approved by the shareholders, was a resolution to approve an amendment to the Company's Employee Stock Purchase Plan (the "Plan") to increase from 1,500,000 to 2,000,000 the aggregate number of shares authorized for issuance under the Plan. The number of votes cast for the adoption of the resolution to amend the Plan was 18,094,961, the number of votes cast against the adoption of the resolution to amend the Plan was 1,168,874 and the number of abstentions was 76,392. The last matter voted on and approved by the shareholders, was a resolution to approve the Company's 2003 Stock Option Plan. The number of votes cast for the adoption of the resolution to approve the 2003 Stock Option Plan was 17,029,724, the number of votes cast against the adoption of the resolution to approve the 2003 Stock Option Plan was 2,109,063 and the number of abstentions was 201,440. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Intervoice, Inc. Employee Stock Purchase Plan, as amended and restated effective June 24, 2003 (1). 10.2 Intervoice, Inc. 2003 Stock Option Plan. (1) 10.3 Employment Agreement with Craig E. Holmes effective August 27, 2003. (1) 31.1 Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1) 31.2 Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1) 32.1 Certification by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350. (1) 32.2 Certification by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350. (1) (b) Reports on Form 8-K 1. A report on Form 8-K was filed on June 10, 2003 to update first quarter fiscal 2004 revenue outlook and to announce intention to file a Form 10-K/A for the year ended February 28, 2003 and a separate Form 10- Q/A for the quarter ended November 30, 2002. 2. A report on Form 8-K was filed on June 26, 2003 to announce the upcoming resignation of Chief Financial Officer, Rob-Roy J. Graham, and to disclose terms of the related separation agreement. 3. A report on Form 8-K was filed on June 26, 2003 to announce the Company's first quarter fiscal 2004 earnings release. - --------------- (1) Filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERVOICE, INC. Date: October 14, 2003 By: /s/ MARK C. FALKENBERG ---------------------- Mark C. Falkenberg Chief Accounting Officer INDEX TO EXHIBITS
EXHIBITS NO. DESCRIPTION - -------- ----------- 10.1 Intervoice, Inc. Employee Stock Purchase Plan, as amended and restated effective June 24, 2003 (1). 10.2 Intervoice, Inc. 2003 Stock Option Plan. (1) 10.3 Employment Agreement with Craig E. Holmes effective August 27, 2003.(1) 31.1 Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1) 31.2 Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a). (1) 32.1 Certification by Chief Executive Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350. (1) 32.2 Certification by Chief Financial Officer of Periodic Report Pursuant to 18 U.S.C. Section 1350. (1)
- ---------------------- (1) Filed herewith. EX-10.1 3 d09592exv10w1.txt EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.1 INTERVOICE, INC. EMPLOYEE STOCK PURCHASE PLAN As amended and restated effective June 24, 2003 Section 1. Purpose. It is the purpose of the Plan to promote the interests of the Company and its shareholders by providing a method by which eligible employees may use voluntary payroll deductions to purchase shares of Common Stock at a discount, thereby affording them the opportunity to invest in the Company at a preferential price, and to acquire a proprietary interest in the Company and an increased personal interest in its continued success and progress. The Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Code and shall be construed accordingly. Section 2. Definitions. As used herein the following terms have the following meanings: (a) "Affiliate" means any corporation that is a subsidiary corporation of the Company within the meaning of Section 424(f) of the Code and that has been designated by the Committee as an Affiliate for purposes of the Plan. (b) "Board of Directors" means the Board of Directors of the Company. (c) "Code" means the United States Internal Revenue Code of 1986, as from time to time amended. (d) "Committee" means the Committee described in Section 4 hereof. (e) "Common Stock" means the Common Stock, no par value, of the Company. (f) "Company" means Intervoice, Inc. (g) "Compensation" for an option period means the total compensation of an employee for services rendered to the Company or any Affiliate. The Compensation of an employee who does not receive salary or wages computed in United States dollars shall be determined by converting such salary or wages into United States dollars in accordance with the Compensation Exchange Rate. (h) "Compensation Exchange Rate" means the New York foreign currency exchange rate as reported in The Wall Street Journal for the first business day immediately preceding the first business day of the applicable option period. (i) "Eligible Employee" means any employee of the Company or an Affiliate who is eligible to participate in the Plan pursuant to Section 5 hereof. (j) "Fair Market Value" means the closing sale price on the date in question (or, if there was no reported sale on such date, on the last preceding day on which any reported sale occurred) of the Common Stock on the NASDAQ National Market System or, if the Common Stock is not traded on the NASDAQ National Market System, such national stock exchange or stock market on which the Common Stock may from time to time be traded. (k) "Option" means any option to purchase shares of Common Stock granted by the Committee pursuant to the provisions of the Plan. (l) "Participant" means an Eligible Employee who elects to participate in the Plan pursuant to Section 6 hereof. (m) "Plan" means this Intervoice, Inc. Employee Stock Purchase Plan. Section 3. Number of Shares. The aggregate number of shares of Common Stock issued pursuant to Options granted under the Plan shall not exceed a total of 2,000,000 shares. The maximum number of shares of Common Stock available for sale under the Plan is subject to adjustment as provided in Section 13. The Common Stock to be delivered upon exercise of Options may consist of authorized but unissued shares of Common Stock or shares of Common Stock previously issued and reacquired by the Company. Section 4. Administration of the Plan. The Plan shall be administered by the Committee, which shall consist of three or more directors or executive officers of the Company. Each member of the Committee shall be appointed by and shall serve at the pleasure of the Board of Directors. The Board of Directors shall have the sole continuing authority to appoint members of the Committee both in substitution for members previously appointed and to fill vacancies however caused. The following provisions shall apply to the administration of the Plan by the Committee: (a) The Committee shall designate one of its members as Chairman and shall hold meetings at such times and places as it may determine. Each member of the Committee shall be notified in writing of the time and place of any meeting of the Committee at least two days prior to such meeting, provided that such notice may be waived by a 1 Committee member. A majority of the members of the Committee shall constitute a quorum and any action taken by a majority of the members of the Committee present at any duly called meeting at which a quorum is present (or action unanimously approved in writing) shall constitute action by the Committee. (b) The Committee may appoint a Secretary (who need not be a member of the Committee) who shall keep minutes of its meetings. The Committee may make such rules and regulations for the conduct of its business as it may determine. (c) The Committee shall have full authority, subject to the express provisions of the Plan to interpret the Plan, to provide, modify and rescind rules and regulations relating to it and to make all other determinations and perform such actions as the Committee deems necessary or advisable to administer the Plan. (d) No member of the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. Section 5. Eligible Employees. Each employee of the Company or an Affiliate who is employed by the Company or an Affiliate on the date his participation in the Plan is to become effective shall be eligible to participate in the Plan; provided, however, that: (a) An employee shall not be granted an Option if such employee would, immediately after grant of the Option, own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or any parent or subsidiary corporation of the Company (within the meaning of Section 424(e) and (f) of the Code). For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply, and stock which the employee may purchase under any outstanding options shall be treated as stock owned by the employee; and (b) No employee shall be granted an Option under the Plan which would permit such employee's rights to purchase shares of stock under all employee stock purchase plans of the Company and its parent and subsidiary corporations (within the meaning of Section 424(e) and (f) of the Code) to accrue (within the meaning of Section 423 (b) (8) of the Code) at a rate which exceeds U.S. $25,000 of fair market value of such stock (determined at the time such option is granted) for each calendar year during which any such option granted to such employee is outstanding at any time. For purposes of this Section 5, the term "employee" shall not include an employee whose customary employment is 20 hours or less per week or is for not more than five months in any calendar year. Section 6. Method of Participation. Each person who will be an Eligible Employee on any January 1 may elect to participate in the Plan by executing and delivering, on or before the immediately preceding December 31, a payroll deduction authorization as provided in this Section; provided, however, that an Eligible Employee who elects not to participate on a given January 1 shall not be eligible to participate in the Plan until the following January 1. Such Eligible Employee shall thereby become a Participant on such January 1 and shall remain a Participant until such Eligible Employee's participation is Terminated as provided in Section 10 or 11 hereof. The payroll deduction authorization executed by a Participant shall request withholding, by means of substantially equal payroll deductions over the period during which he or she is a Participant, of an amount which shall be no more than 10% nor less than 1 % of such Participant's Compensation for a given option period. A Participant may change the withholding rate of his or her payroll deduction authorization within such limits by delivering a new payroll deduction authorization form to the Company on or before the December 31 immediately preceding the option period with respect to which the change is to be effective, A Participant may not change the withholding rate of his or her payroll deduction authorization with respect to an option period at any time after the deadline set forth in the immediately preceding sentence. All amounts withheld in accordance with a Participant's payroll deduction authorization shall be credited to a withholding account for such Participant. No interest shall be payable on withholding accounts. Section 7. Grant of Options. The Plan will be implemented in twelve-month option periods beginning on the first day of each January and ending on the following December 31 until the Plan is terminated. Each Participant shall be granted an Option on the first day of each option period to purchase the number of whole shares of Common Stock determined by dividing (x) the aggregate payroll deduction authorized by such Participant for the option period by (y) 85% of the Fair Market Value per share of Common Stock on the first day of the option period. Each Option shall be exercisable as provided in Section 9 on the last business day of an option period. In no event shall the number of shares with respect to which an Option is granted to a Participant for a calendar year exceed that number of shares which has an aggregate Fair Market Value (determined on the date of grant) of U.S. $25,000, and the number of shares actually purchased by a Participant in a calendar year may not exceed this number. The Company shall reduce, on a substantially proportionate basis, the number of shares of Common Stock receivable by each Participant upon exercise of an Option in the event that the total number of shares then 2 available under the Plan is less than the total number of shares with respect to which all Participants exercise Options in such option period. Section 8. Option Price. The purchase price per share of Common Stock under each Option shall equal the lesser of (a) 85% of the Fair Market Value per share of Common Stock on the date of grant of the Option or (b) 85% of the Fair Market Value per share of Common Stock on the date on which the Option is exercised. If the Common Stock of the Company is not admitted to trading on any of the aforesaid dates for which closing prices of the stock are to be determined, then reference shall be made to the Fair Market Value of the stock on that date, as determined on such basis as shall be established or specified for the purpose by the Committee. Section 9. Exercise of Options. An employee who is a Participant in the Plan on the last business day of an option period shall be deemed automatically to have exercised the current installment of the Option granted to him or her for that option period. Upon such exercise, the Company shall apply the entire balance of the Participant's withholding account to the purchase of the maximum number of whole shares of Common Stock as determined under Section 7. For purposes of this Section 9, the balance in the withholding account of a Participant whose salary or wages are not computed in United States dollars shall be converted into United States dollars in accordance with the New York foreign currency exchange rate as reported in The Wall Street Journal for the last business day of the option period. Certificates representing shares of Common Stock purchased for a Participant under the Plan shall be issued and delivered to the Participant as soon as practicable after such shares are purchased; provided, however, that the obligation of the Company to deliver shares of Common Stock shall be postponed for such period of time as may be necessary to register or qualify the purchased shares under the Securities Act of 1933 and any applicable foreign or state securities law. A Participant shall possess none of the rights or privileges of a shareholder of the Company with respect to Common Stock purchased under the Plan unless and until certificates representing such shares have been issued. No fractional shares shall be issued upon exercise of any installment of an Option. Any balance remaining in a Participant's withholding account following exercise of an installment shall be returned to the Participant. The cash proceeds received by the Company upon exercise of an Option shall constitute general funds of the Company. Any unexercised portion of an Option shall expire and become null and void as of the end of the option period in which such Option was granted. Section 10. Cancellation of Option and Withdrawal From the Plan. A Participant who holds an Option under the Plan may at any time prior to exercise thereof pursuant to Section 9 cancel the remaining unexercised portion of such Option by written notice delivered to the Treasurer of the Company. Upon such cancellation, the balance in the Participant's withholding account shall be returned to such Participant and he or she shall cease to be a Participant. Partial cancellations shall not be permitted. A Participant may terminate his payroll deduction authorization as of any date by written notice delivered to the Treasurer of the Company and shall thereby cease to be a Participant as of such date. Partial termination of a payroll deduction authorization shall not be permitted, except to the extent expressly permitted by Section 6 of this Plan. Any Participant who voluntarily terminates his or her payroll deduction authorization prior to the last business day of an option period shall be deemed to have cancelled his or her Option for such option period. A Participant who withdraws from the Plan pursuant to this Section 10 may re-enroll as of any subsequent January 1 on which he or she is an Eligible Employee in accordance with the procedure set forth in Section 6 of this Plan; provided, however, that a Participant shall not be permitted to re-enroll in the Plan until a January 1 that is at least one month after the date of his or her withdrawal. Section 11. Termination of Employment. Upon the termination of a Participant's employment with the Company or an Affiliate for any reason, such person shall cease to be a Participant, the Option held by such Participant under the Plan shall be deemed cancelled, the balance of such Participant's withholding account shall be returned to such Participant (or, in the event of the Participant's death, to the executor or administrator of his or her estate) and he or she shall have no further rights under the Plan. All Participants shall have the same rights and privileges under the Plan. Notwithstanding the foregoing, nothing in the Plan shall confer upon any Participant any right to continue in the employ of the Company or an Affiliate or in any way interfere with the right of the Company or an Affiliate to terminate the employment of the Participant at any time, with or without cause. Transfers of employment among the Company and its Affiliates and approved leaves of absence not exceeding 90 days shall not be considered terminations of employment for purposes of this Plan. Section 12. Transferability. An Option granted under the Plan shall not be transferable by the Participant and shall be exercisable only by the Participant. 3 Section 13. Adjustments Upon Changes in Common Stock. In the event the Company shall effect a split of the Common Stock or declare a dividend payable in Common Stock, or in the event the outstanding Common Stock shall be combined into a smaller number of shares, the maximum number of shares as to which Options may be granted under the Plan shall be increased or decreased proportionately, and the Fair Market Value per share of Common Stock as of the date of grant of all outstanding Options shall be adjusted, for purposes of making the determination required by Section 8 of this Plan, in a manner deemed appropriate by the Board of Directors. In the event of a reclassification of Common Stock not covered by the foregoing, or in the event of a liquidation or reorganization of the Company, including a merger, consolidation or sale of assets, the Board of Directors shall make such adjustments, if any, as it may deem appropriate in the number, purchase price and kind of shares that are covered by Options theretofore granted under the Plan or that are otherwise subject to the Plan. The provisions of this Section shall only be applicable if, and only to the extent that, the application thereof does not conflict with any valid governmental statute, regulation or rule. Section 14. Amendment and Termination of the Plan. Subject to the right of the Board of Directors to terminate the Plan prior thereto, the Plan shall terminate when all or substantially all of the Common Stock reserved for purposes of the Plan has been purchased. No Options may be granted after termination of the Plan. The Board of Directors may alter or amend the Plan but may not without the approval of the shareholders of the Company and of any regulatory authorities having jurisdiction make any alteration or amendment thereof which operates (a) to increase the total number of shares of Common Stock which may be issued under the Plan (other than as provided in Section 13), (b) to modify the criteria for determining the employees (or class of employees) eligible to receive Options under the Plan or (c) to materially increase benefits accruing under the Plan to Participants who are subject to Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act"). No termination or amendment of the Plan shall adversely affect the rights of a Participant under an outstanding Option, except with the consent of such Participant. Section 15. Requirements of Law. The granting of Options and the issuance of Common Stock upon the exercise of an Option shall be subject to all applicable laws, rules and regulations and to such approval by governmental agencies as may be required. Section 16. Effective Date of Amended and Restated Plan. The amended and restated Plan shall become effective, as of the date of its adoption by the Board of Directors, if it is duly approved at the 2003 annual meeting of shareholders of the Company. The affirmative vote of the holders of at least a majority of the shares of Common Stock of the Company present or represented and voting on the proposal to approve the amended Plan at the annual meeting, shall be required to approve the amended and restated Plan. If the amended and restated Plan is not so approved, the terms of the Plan as in effect prior to the effective date of this amended and restated Plan shall remain in full force and effect. Section 17. Rule 16b-3 Compliance. Transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors adopted under the Exchange Act, some of which conditions are not set forth herein. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 4 EX-10.2 4 d09592exv10w2.txt 2003 STOCK OPTION PLAN Exhibit 10.2 INTERVOICE, INC. 2003 STOCK OPTION PLAN ARTICLE 1. ESTABLISHMENT AND PURPOSE 1.1 ESTABLISHMENT. Intervoice, Inc., a Texas corporation, hereby establishes the Intervoice, Inc. 2003 Stock Option Plan, as set forth in this document. 1.2 PURPOSE. The purposes of the Plan are to attract able persons to enter the employ of the Company, to encourage Employees to remain in the employ of the Company and to provide motivation to Employees to put forth maximum efforts toward the continued growth, profitability and success of the Company, by providing incentives to such persons through the ownership and performance of the Common Stock of Intervoice. A further purpose of the Plan is to provide a means through which Intervoice may attract able persons to become directors of Intervoice and to provide directors of Intervoice with additional incentive and reward opportunities designed to strengthen their concern for the welfare of Intervoice and its stockholders. Toward these objectives, Options may be granted under the Plan to Employees and Outside Directors on the terms and subject to the conditions set forth in the Plan. 1.3 EFFECTIVE DATE OF PLAN. This Plan shall be effective as of the date of its approval at the 2003 annual meeting of shareholders of Intervoice by the holders of at least a majority of the shares of Common Stock present or represented and voting on the proposal to approve this Plan at such meeting. If the Plan is not so approved, the Plan shall terminate and any Option granted hereunder shall be null and void. ARTICLE 2. DEFINITIONS 2.1 AFFILIATE. "Affiliate" means a "parent corporation" or a "subsidiary corporation" of Intervoice, as those terms are defined in Section 424(e) and (f) of the Code. 2.2 BOARD. "Board" means the Board of Directors of Intervoice. 2.3 CODE. "Code" means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto. 2.4 COMMITTEE. "Committee" means the Compensation Committee of the Board, or such other committee of the Board as may be designated by the Board to administer the Plan; provided that the Committee shall consist of two or more directors of Intervoice, all of whom are both a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act and an "outside director" within the meaning of the definition of such term as contained in Treasury Regulation Section 1.162-27(e)(3) interpreting Section 162(m) of the Code, or any successor definitions adopted. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board. 2.5 COMMON STOCK. "Common Stock" means the Common Stock, no par value per share, of Intervoice, or any stock or other securities of Intervoice hereafter issued or issuable in substitution or exchange for the Common Stock. 2.6 COMPANY. "Company" means Intervoice and its Affiliates. 2.7 CORPORATE CHANGE. A "Corporate Change" shall be deemed to have occurred for purposes of the Plan, upon (a) the dissolution or liquidation of Intervoice; (b) a reorganization, merger or consolidation of Intervoice with one or more corporations (other than a merger or consolidation effecting a reincorporation of Intervoice in another state or any other merger or consolidation in which the shareholders of the surviving corporation and their proportionate interests therein immediately after the merger or consolidation are substantially identical to the shareholders of Intervoice and their proportionate interests therein immediately prior to the merger or consolidation) (collectively, a "Corporate Change Merger"); (c) the sale of all or substantially all of the assets of Intervoice; or (d) the occurrence of a Change in Control. A "Change in Control" shall be deemed to have occurred for purposes of the Plan if (a) individuals who were directors of Intervoice immediately prior to a Control Transaction shall cease, within two years of such Control Transaction, to constitute a majority of the Board (or of the Board of Directors of any successor to Intervoice or to a company which has acquired all or substantially all its assets) other than by reason of an increase in the size of the membership of the applicable Board that is approved by at least a majority of the 1 individuals who were directors of Intervoice immediately prior to such Control Transaction or (b) any entity, person or Group acquires shares of Intervoice in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially 50% or more of the outstanding shares of Common Stock. As used herein, "Control Transaction" means (a) any tender offer for or acquisition of capital stock of Intervoice pursuant to which any person, entity or Group directly or indirectly acquires beneficial ownership of 20% or more of the outstanding shares of Common Stock, (b) any Corporate Change Merger of Intervoice, (c) any contested election of directors of Intervoice or (d) any combination of the foregoing, any one of which results in a change in voting power sufficient to elect a majority of the Board. As used herein, "Group" means persons who act "in concert" as described in Sections 13(d)(3) and/or 14(d)(2) of the Exchange Act. 2.8 EFFECTIVE DATE. "Effective Date" means the date an Option is determined to be effective by the Committee upon the grant of such Option to an Employee, or the date on which an Option is automatically granted to an Outside Director in accordance with Section 6.3. 2.9 EMPLOYEE. "Employee" means any person treated as an employee by Intervoice or an Affiliate. "Employee" shall not include an Outside Director or any other person treated by Intervoice or an Affiliate as an independent contractor. 2.10 EXCHANGE ACT. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto. 2.11 FAIR MARKET VALUE. "Fair Market Value" means the fair market value of the Common Stock, as determined in good faith by the Committee or, (i) if the Common Stock is traded in the over-the-counter market, the average of the representative closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for the date the Option is granted (or if there was no quoted price for such date of grant, then for the last preceding business day on which there was a quoted price), or (ii) if the Common Stock is traded in the NASDAQ National Market System, the average of the highest and lowest selling prices for such stock as quoted on the NASDAQ National Market System for the date the Option is granted (or if there are no sales for such date of grant, then for the last preceding business day on which there were sales), or (iii) if the Common Stock is listed on any national stock exchange, the average of the highest and lowest selling prices for such stock as quoted on such exchange for the date the Option is granted (or if there are no sales for such date of grant, then for the last preceding business day on which there were sales). 2.12 INTERVOICE. "Intervoice" means Intervoice, Inc., a Texas corporation, and any successor thereto. 2.13 OPTION. "Option" means an option to purchase shares of Common Stock granted to a Participant pursuant to Article 6. 2.14 OPTION AGREEMENT. "Option Agreement" means a written agreement between Intervoice and a Participant that sets forth the terms, conditions, restrictions and/or limitations applicable to an Option. 2.15 OUTSIDE DIRECTOR. "Outside Director" means an individual duly elected or chosen as a director of Intervoice who is not also an Employee. 2.16 PARTICIPANT. "Participant" means any Employee or Outside Director to whom an Option has been granted under the Plan. 2.17 PLAN. "Plan" means this Intervoice, Inc. 2003 Stock Option Plan. 2.18 RETIREMENT. "Retirement" means the termination of a Participant's employment or service on or after his or her 65th birthday. ARTICLE 3. PLAN ADMINISTRATION 3.1. RESPONSIBILITY OF COMMITTEE. Subject to the terms and provisions of the Plan, including, without limitation, Section 3.6, the Plan shall be administered by the Committee. The Committee shall have total and exclusive responsibility to control, operate, manage and administer the Plan in accordance with its terms; provided, however, that except as expressly provided herein the Committee shall have no authority to administer or interpret the provisions of the Plan relating to the grant of Options to Outside Directors. 3.2 AUTHORITY OF COMMITTEE. The Committee shall have all the authority that may be necessary or helpful to enable it to discharge its responsibilities with respect to the Plan. Without limiting the generality of the preceding sentence, the Committee shall have the exclusive right, subject to the provisions of Section 3.6, to: (a) 2 interpret the Plan and the Option Agreements executed hereunder; (b) determine eligibility for participation in the Plan; (c) decide all questions concerning eligibility for, and the size of, Options granted under the Plan; (d) construe any ambiguous provision of the Plan or any Option Agreement; (e) prescribe the form of the Option Agreements embodying Options granted under the Plan; (f) correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Option Agreement; (g) issue administrative guidelines as an aid to administer the Plan and make changes in such guidelines as it from time to time deems proper; (h) make regulations for carrying out the Plan and make changes in such regulations as it from time to time deems proper; (i) to the extent permitted under the Plan, grant waivers of Plan terms, conditions, restrictions and limitations; (j) accelerate the vesting of an Option granted to an Employee when such action or actions would be in the best interests of the Company; and (k) take any and all other actions it deems necessary or advisable for the proper operation or administration of the Plan. 3.3 DISCRETIONARY AUTHORITY. Subject to the provisions of Section 3.6, (i) the Committee shall have full discretionary authority in all matters related to the discharge of its responsibilities and the exercise of its authority under the Plan, including, without limitation, its construction of the terms of the Plan, and its determination of eligibility for participation under the Plan, and (ii) the decisions of the Committee and its actions with respect to the Plan shall be final, conclusive and binding on all persons having or claiming to have any right or interest in or under the Plan, including Participants and their respective estates, beneficiaries and legal representatives. 3.4 ACTION BY THE COMMITTEE. The Committee may act only by a majority of its members. Any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee. In addition, the Committee may authorize any one or more of its members to execute and deliver documents on behalf of the Committee. 3.5 DELEGATION OF AUTHORITY. Notwithstanding anything contained in the Plan to the contrary, the Committee may, in its discretion, delegate some or all of its authority under the Plan to any person or persons; provided, however, that any such delegation shall be in writing; and provided further that only the Committee may grant Options to Employees who are subject to Section 16 of the Exchange Act or who are "covered employees" within the meaning of Section 162(m) of the Code. 3.6 BOARD AUTHORITY. Notwithstanding the authority hereby delegated to the Committee to administer the Plan, the Board shall have sole and exclusive authority, subject to the express provisions of the Plan, to determine and interpret the terms, conditions, restrictions and/or limitations applicable to Options automatically granted to Outside Directors pursuant to Section 6.3 of the Plan and to make all other determinations and take any and all other actions it deems necessary or advisable with respect to such Options. The Board shall have no authority under the Plan to grant Options to Employees, which authority is vested exclusively in the Committee 3.7 LIABILITY; INDEMNIFICATION. No member of the Committee or the Board nor any person to whom authority has been delegated by the Committee, shall be personally liable for any action, interpretation or determination made in good faith with respect to the Plan or Options granted hereunder, and each member of the Committee and the Board shall be fully indemnified and protected by Intervoice with respect to any cost, expense or liability he or she may incur with respect to any such action, interpretation or determination, to the extent permitted by applicable law. ARTICLE 4. ELIGIBILITY All Employees are eligible to be selected to participate in the Plan and all Outside Directors will automatically participate in the Plan. Options granted to Outside Directors shall be made only in accordance with Section 6.3. The Committee shall select, from time to time, those Employees who, in the opinion of the Committee, can further the Plan's purposes. In making this selection, the Committee may give consideration to the functions and responsibilities of the Employee, his or her past, present and potential contributions to the growth and success of the Company and such other factors deemed relevant by the Committee. Once an Employee is so selected, the Committee shall determine the size of Option to be granted to the Employee and shall establish in the related Option Agreement the terms, conditions, restrictions and/or limitations applicable to the Option, in addition to those set forth in the Plan and the administrative rules and regulations, if any, established by the Committee. No Employee is entitled to receive an Option unless selected by the Committee. ARTICLE 5. SHARES SUBJECT TO THE PLAN. 5.1 AVAILABLE SHARES. The maximum number of shares of Common Stock that shall be available for grant of Options under the Plan shall not exceed 2,000,000, subject to adjustment as provided in Sections 5.2 and 5.3. Shares of Common Stock issued pursuant to the Plan may be shares of original issuance or treasury shares or a combination of the foregoing, as the Board, in its discretion, shall from time to time determine. 3 5.2 ADJUSTMENTS FOR RECAPITALIZATIONS AND REORGANIZATIONS. (a) The shares with respect to which Options may be granted under the Plan are shares of Common Stock as presently constituted, but if, and whenever, prior to the expiration or satisfaction of an Option theretofore granted, Intervoice shall effect a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend on Common Stock without receipt of consideration by Intervoice, the number of shares of Common Stock with respect to which such Option may thereafter be exercised or satisfied, as applicable, (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the exercise price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the exercise price per share shall be proportionately increased. (b) If Intervoice recapitalizes or otherwise changes its capital structure, thereafter upon any exercise of an Option theretofore granted the Participant shall be entitled to purchase under such Option, in lieu of the number of shares of Common Stock then covered by such Option, the number and class of shares of stock or other securities to which the Participant would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the Participant had been the holder of record of the number of shares of Common Stock then covered by such Option. (c) In the event of changes in the outstanding Common Stock by reason of recapitalizations, reorganizations, mergers, consolidations, combinations, separations (including a spin-off or other distribution of stock or property), exchanges or other relevant changes in capitalization occurring after the date of grant of any Option and not otherwise provided for by this Section 5.2, any outstanding Options and any Option Agreements evidencing such Options shall be subject to adjustment by the Committee at its discretion as to the number, price and kind of shares of Common Stock subject to, and other terms of, such Options to reflect such changes in the outstanding Common Stock. (d) In the event of any changes in the outstanding Common Stock provided for in this Section 5.2, the aggregate number of shares available for grant of Options under the Plan may be equitably adjusted by the Committee, whose determination shall be conclusive. Any adjustment provided for in this Section 5.2(d) shall be subject to any required stockholder action. (e) Notwithstanding the authority hereby delegated to the Committee or the Board to administer the Plan or any provision of the Plan including this Section 5.2, the Company will not reprice the Options under the Plan without prior approval by the shareholders of Intervoice. For purposes of this subsection 5.2(e), repricing Options shall include any of the following events: amending an Option to reduce the exercise price; canceling an Option and granting a new lower-priced Option; granting a new Option and canceling an old higher-priced Option; amending an Option to allow for the payment of a cash bonus upon Option exercise;; substituting restricted stock for underwater Options; or the buyback of underwater Options and issuance of new Options. 5.3 ADJUSTMENTS FOR OPTIONS. The Committee shall have full discretion to determine the manner in which shares of Common Stock available for grant of Options under the Plan are counted. Without limiting the discretion of the Committee under this Section 5.3, unless otherwise determined by the Committee, for the purpose of determining the number of shares of Common Stock available for grant of Options under the Plan; (a) the grant of an Option shall reduce the number of shares available for grant of Options under the Plan by the number of shares subject to such Option and (b) if any Option is canceled or forfeited, or terminates, expires or lapses, for any reason, the shares then subject to such Option shall again be available for grant of Options under the Plan. ARTICLE 6. OPTIONS 6.1 GENERAL. All Options granted under this Plan shall be nonqualified stock options that are not intended to meet the requirements of Section 422(b) of the Code. 6.2 TERMS AND CONDITIONS OF OPTIONS. All Options granted under the Plan shall be subject to the terms, conditions, restrictions and limitations of the Plan. The Committee with respect to Options granted to Employees or the Board with respect to Options automatically granted to Outside Directors may, in its sole judgment, subject any Option or the Common Stock underlying such Option to such other terms, conditions, restrictions and/or limitations (including, but not limited to, the time and conditions of exercise or vesting of an Option and restrictions on transferability of any shares of Common Stock issued or delivered pursuant to the exercise of an Option), provided they are not inconsistent with the terms of the Plan. Options granted under the Plan need not be uniform. (a) Options granted to Employees under the Plan shall be exercisable in whole or in such installments and at such times as may be determined by the Committee . The price at which a share of Common Stock may be purchased upon exercise of an Option by an Employee shall be determined by the Committee, but 4 such exercise price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the Effective Date of the Option's grant. The term of each Option granted to an Employee shall be as specified by the Committee; provided, however, that unless otherwise designated by the Committee, no Options shall be exercisable later than 10 years from the Effective Date of the Option's grant. (b) Subject to the provisions of Section 6.3, the Board shall establish in the related Option Agreement the terms, conditions, restrictions and/or limitations applicable to Options granted to Outside Directors, provided they are not inconsistent with the terms of the Plan. 6.3 GRANTING OF OPTIONS. (a) OPTIONS GRANTED TO EMPLOYEES. With regard to each Option granted to an Employee, the Committee will determine the number of shares subject to the Option, the manner and time of the Option's exercise, the exercise price per share of Common Stock subject to the Option, and the duration of the Option. An Option granted to an Employee shall become exercisable on the date specified in the applicable Option Agreement with such Employee. An Employee is eligible to exercise an Option only if he or she remains in the service of the Company through the date on which the Option or portion of the Option is scheduled to become exercisable. (b) OPTIONS GRANTED TO OUTSIDE DIRECTORS. During the term of the Plan, each Outside Director shall be granted Options to purchase Common Stock under the Plan in accordance with the following terms and conditions: (i) Automatic Grants. (1) Outside Directors Initially Elected to Serve on the Board at an Annual Meeting of Shareholders. On the date of the first annual meeting of the shareholders of Intervoice at which an Outside Director is initially elected to serve on the Board commencing with the 2003 annual meeting of shareholders, such Outside Director shall be granted an Option to purchase 18,000 shares of Common Stock. Subject to subsection (b)(ii) of this Section, such Option shall become exercisable in full on the date of the annual meeting of the shareholders of Intervoice next following the date of grant of such Option. (2) Outside Directors Initially Elected by the Board of Directors to Fill a Vacancy on the Board. On any date after the 2003 annual meeting of the shareholders of Intervoice at which an Outside Director is elected by the Board to fill a vacancy on the Board, such Outside Director shall be granted an Option to purchase 18,000 shares of Common Stock. Subject to subsection (b)(ii) of this Section, such Option shall become exercisable in full on the date of the annual meeting of the shareholders of Intervoice next following the annual meeting of shareholders at which the Outside Director is first elected by the shareholders to serve on the Board. In no event shall an Outside Director receive an automatic grant of an Option under both this subsection and subsection (b)(i)(1). (3) Outside Directors Re-elected to Serve on the Board at an Annual Meeting of Shareholders. Each Outside Director re-elected to serve Intervoice as a director on the date of an annual meeting of the shareholders of Intervoice commencing with the 2003 annual meeting of shareholders, shall be granted, as of such date, an Option to purchase 10,000 shares of Common Stock. Subject to subsection (b)(ii) of this Section, such Option shall become exercisable in full on the date of the annual meeting of the shareholders of Intervoice next following the date of grant of such Option. (ii) Eligibility. An Option will become exercisable only if the Outside Director continues to serve Intervoice as a director through the date of the annual meeting of shareholders at which the Option is scheduled to become exercisable. (iii) Price. The exercise price of each share of Common Stock that may be purchased upon exercise of an Option granted to an Outside Director shall be 100% of the Fair Market Value of a share of Common Stock on the Effective Date of the Option's grant. (iv) Duration. Options granted to Outside Directors shall expire no later than 10 years from the Effective Date of the Option's grant, unless sooner terminated in accordance with the terms of the related Option Agreement and the Plan, including Section 6.5. 5 (v) Effectiveness of a Grant. Options granted to Outside Directors shall be granted automatically in accordance with the terms of this Section 6.3 without any further action by the Board. The Company shall reduce, on a substantially proportionate basis, the number of shares of Common Stock granted to an Outside Director under this Section 6.3 in the event that the total number of shares then available under the Plan is less than the total number of shares with respect to which all Outside Directors are granted Options on an Effective Date. 6.4 EXERCISE OF OPTIONS. (a) Subject to the terms and conditions of the Plan, Options shall be exercised by the delivery of a written notice of exercise to Intervoice, setting forth the number of shares of Common Stock with respect to which the Option is to be exercised, accompanied by full payment for such shares. (b) Upon exercise of an Option, the exercise price of the Option shall be payable to Intervoice in full in cash. (c) Payment of the exercise price of an Option may also be made, in the discretion of the Committee, by delivery to Intervoice or its designated agent of an executed irrevocable option exercise form together with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of the shares with respect to which the Option is exercised and deliver the sale or margin loan proceeds directly to Intervoice to pay for the exercise price and any required withholding taxes. (d) As soon as reasonably practicable after receipt of written notification of exercise of an Option and full payment of the exercise price and any required withholding taxes, Intervoice shall deliver to the Participant, in the Participant's name, a stock certificate or certificates in an appropriate amount based upon the number of shares of Common Stock purchased under the Option. 6.5 TERMINATION OF SERVICE. Each Option Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant's employment or service with the Company. Such provisions shall be determined in the sole discretion of the Committee with respect to an Option granted to an Employee or the Board with respect to an Option granted to an Outside Director, need not be uniform among all Options granted under the Plan and may reflect distinctions based on the reasons for termination of employment or service. Subject to Section 5.2 and Article 7, in the event that a Participant's Option Agreement does not set forth such termination provisions, the following termination provisions shall apply with respect to such Option: (a) RETIREMENT, DISABILITY OR DEATH. If the employment or service of a Participant shall terminate by reason of Retirement, permanent and total disability (within the meaning of Section 22(e)(3) of the Code) or death, outstanding Options held by the Participant may be exercised, to the extent then vested, no more than two years from the date of such termination of employment or termination of service, unless the Options in any way expressly provide for earlier termination. (b) OTHER TERMINATION. If the employment or service of a Participant shall terminate for any reason other than the reasons set forth in paragraph (a) above, whether on a voluntary or involuntary basis, outstanding Options held by the Participant may be exercised, to the extent then vested, no more than two years from the date of such termination of employment or termination of service, unless the Options in any way expressly provide for earlier termination. (c) TERMINATION FOR CAUSE. Notwithstanding paragraphs (a) and (b) above, if the employment or service of a Participant shall be terminated by reason of such Participant's fraud, dishonesty or performance of other acts detrimental to the Company, all outstanding Options held by the Participant shall immediately be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options. 6.6 MAXIMUM OPTION GRANTS. Notwithstanding any provision contained in the Plan to the contrary, the maximum number of shares of Common Stock for which Options may be granted under the Plan to any one Participant during a calendar year is 300,000 shares. ARTICLE 7. CORPORATE CHANGE Notwithstanding anything contained in the Plan to the contrary, in the event of a Corporate Change, unless otherwise provided in the related Option Agreement, all Options then outstanding shall become exercisable in full and all restrictions imposed on any Common Stock that may be delivered pursuant to the exercise of such Options shall be deemed satisfied. 6 ARTICLE 8. AMENDMENT AND TERMINATION The Board may at any time suspend, terminate, amend or modify the Plan, in whole or in part; provided, however, that no amendment or modification of the Plan shall become effective without the approval of such amendment or modification by the stockholders of Intervoice if Intervoice, on the advice of counsel, determines that such stockholder approval is necessary or desirable. Notwithstanding any provision of this Plan to the contrary, no such amendment or modification shall be made without receipt of the prior approval of the shareholders of Intervoice where such change would (a) increase the total number of shares of Common Stock which may be issued under the Plan (other than as provided in Section 5.2 of the Plan); (b) modify the criteria for determining the employees (or class of employees) eligible to receive Options under the Plan or (c) materially increase benefits accruing under the Plan to Participants who are subject to Section 16 of the Securities Exchange Act of 1934. Upon termination of the Plan, the terms and provisions of the Plan shall, notwithstanding such termination, continue to apply to Options granted prior to such termination. No suspension, termination, amendment or modification of the Plan shall adversely affect in any material way any Option previously granted under the Plan, without the consent of the Participant holding such Option (except that such consent shall not be required in the case of an amendment or modification required following a change in law or interpretation thereof to cause the Options under the Plan to continue to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code). ARTICLE 9. MISCELLANEOUS 9.1 OPTION AGREEMENTS. After the Committee grants an Option under the Plan to an Employee or upon an automatic grant of an Option to an Outside Director, Intervoice and the Participant shall enter into an Option Agreement setting forth the terms, conditions, restrictions and/or limitations applicable to the Option and such other matters as the Committee with respect to an Option granted to an Employee or the Board with respect to an Option automatically granted to an Outside Director may determine to be appropriate. The terms and provisions of the respective Option Agreements need not be identical. In the event of any conflict between an Option Agreement and the Plan, the terms of the Plan shall govern. 9.2 NONASSIGNABILITY. Except as otherwise provided in a Participant's Option Agreement, no Option granted under the Plan may be sold, transferred, pledged, exchanged, hypothecated or otherwise disposed of, other than by will or pursuant to the applicable laws of descent and distribution. Further, no such Option shall be subject to execution, attachment or similar process. Any attempted sale, transfer, pledge, exchange, hypothecation or other disposition of an Option not specifically permitted by the Plan or the Option Agreement shall be null and void and without effect. All Options granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant or, in the event of the Participant's legal incapacity, by his or her guardian or legal representative. 9.3 NO FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued pursuant to any Option granted under the Plan, and no payment or other adjustment shall be made in respect of any such fractional share. 9.4 WITHHOLDING TAXES. The Company shall be entitled to deduct from any payment made under the Plan, regardless of the form of such payment, the amount of all applicable income and employment taxes required by law to be withheld with respect to such payment, may require the Participant to pay to the Company such withholding taxes prior to and as a condition of the making of any payment or the issuance or delivery of any shares of Common Stock under the Plan and shall be entitled to deduct from any other compensation payable to the Participant any withholding obligations with respect to Options under the Plan. 9.5 REGULATORY APPROVALS AND LISTINGS. Notwithstanding anything contained in the Plan to the contrary, Intervoice shall have no obligation to issue or deliver shares of Common Stock under the Plan prior to (a) the obtaining of any approval from any governmental agency which Intervoice shall, in its sole discretion, determine to be necessary or advisable, (b) the admission of such shares to listing on the stock exchange or stock market on which the Common Stock may be listed and (c) the completion of any registration of any governmental body which Intervoice shall, in its sole discretion, determine to be necessary or advisable. 9.6 BINDING EFFECT. The obligation of Intervoice under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of Intervoice, or upon any successor corporation or organization succeeding to all or substantially all of the assets and business of Intervoice. The terms and conditions of the Plan shall be binding upon each Participant and his or her heirs, legatees, distributees and legal representatives. 7 9.7 SEVERABILITY. If any provision of the Plan or any Option Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan or such agreement, as the case may be, but such provision shall be fully severable and the Plan or such agreement, as the case may be, shall be construed and enforced as if the illegal or invalid provision had never been included herein or therein. 9.8 NO RESTRICTION OF CORPORATE ACTION. Nothing contained in the Plan shall be construed to prevent Intervoice or any Affiliate from taking any corporate action (including any corporate action to suspend, terminate, amend or modify the Plan) that is deemed by Intervoice or such Affiliate to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Options made or to be made under the Plan. No Participant or other person shall have any claim against Intervoice or any Affiliate as a result of such action. 9.9 NOTICES. All notices required or permitted to be given or made under the Plan or any Option Agreement shall be in writing and shall be deemed to have been duly given or made if (a) delivered personally, (b) transmitted by first class registered or certified United States mail, postage prepaid, return receipt requested, (c) sent by prepaid overnight courier service or (d) sent by telecopy or facsimile transmission, answer back requested, to the person who is to receive it at the address that such person has theretofore specified by written notice delivered in accordance herewith. Such notices shall be effective (a) if delivered personally or sent by courier service, upon actual receipt by the intended recipient, (b) if mailed, upon the earlier of five days after deposit in the mail or the date of delivery as shown by the return receipt therefor or (c) if sent by telecopy or facsimile transmission, when the answer back is received. Intervoice or a Participant may change, at any time and from time to time, by written notice to the other, the address that it or such Participant had theretofore specified for receiving notices. Until such address is changed in accordance herewith, notices hereunder or under an Option Agreement shall be delivered or sent (a) to a Participant at his or her address as set forth in the records of the Company or (b) to Intervoice at the principal executive offices of Intervoice clearly marked "Attention: Human Resources Department." 9.10 GOVERNING LAW. The Plan shall be governed and construed in accordance with the internal laws (and not the principles relating to conflicts of laws) of the State of Texas, except as superseded by applicable federal law. 9.11 NO RIGHT, TITLE OR INTEREST IN COMPANY ASSETS. No Participant shall have any rights as a stockholder of Intervoice as a result of participation in the Plan until the date of issuance of a stock certificate in his or her name. To the extent any person acquires a right to receive payments from the Company under the Plan, such rights shall be no greater than the rights of an unsecured creditor of the Company, and such person shall not have any rights in or against any specific assets of the Company. All of the Options granted under the Plan shall be unfunded. 9.12 RISK OF PARTICIPATION. Nothing contained in the Plan shall be construed either as a guarantee by Intervoice or its Affiliates, or their respective stockholders, directors, officers or employees, or the value of any assets of the Plan or as an agreement by Intervoice or its Affiliates, or their respective stockholders, directors, officers or employees, to indemnify anyone for any losses, damages, costs or expenses resulting from participation in the Plan. 9.13 NO GUARANTEE OF TAX CONSEQUENCES. No person connected with the Plan in any capacity, including, but not limited to, Intervoice and the Affiliates and their respective directors, officers, agents and employees, makes any representation, commitment or guarantee that any tax treatment, including, but not limited to, Federal, state and local income, estate and gift tax treatment, will be applicable with respect to any Options or payments thereunder made to or for the benefit of a Participant under the Plan or that such tax treatment will apply to or be available to a Participant on account of participation in the Plan. 9.14 OTHER BENEFITS. No Option granted under the Plan shall be considered compensation for purposes of computing benefits or contributions under any retirement plan of Intervoice or any Affiliate, nor affect any benefits or compensation under any other benefit or compensation plan of Intervoice or any Affiliate now or subsequently in effect. 9.15 CONTINUED EMPLOYMENT OR SERVICE. Nothing contained in the Plan or in any Option Agreement shall confer upon any Participant the right to continue in the employ of the Company, or interfere in any way with the rights of the Company to terminate his or her employment at any time, with or without cause. Further, participation in this Plan shall not give any Outside Director any right to continue as a director of Intervoice. 9.16 MISCELLANEOUS. Headings are given to the articles and sections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction of the Plan or any provisions hereof. The use of the masculine gender shall also include within its 8 meaning the feminine. Wherever the context of the Plan dictates, the use of the singular shall also include within its meaning the plural, and vice versa. IN WITNESS WHEREOF, this Plan has been executed this ____ day of June, 2003. INTERVOICE, INC. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 9 EX-10.3 5 d09592exv10w3.txt EMPLOYMENT AGREEMENT WITH CRAIG E. HOLMES Exhibit 10.3 INTERVOICE, INC. EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") executed as of September 5, 2003, and effective as of August 27, 2003, by and between Intervoice, Inc., a Texas corporation with its principal executive offices at 17811 Waterview Parkway, Dallas, Texas 75252 (the "Company"), and Craig E. Holmes (the "Employee"). W I T N E S S E T H: WHEREAS, the Employee and the Company desire to enter into this Agreement to provide for certain terms and conditions of Employee's employment by the Company. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the terms and conditions hereinafter set forth, the parties hereto agree as follows: 1. DEFINITIONS. In addition to the words and terms elsewhere defined in this Agreement, the following words and terms as used herein shall have the following meanings, unless the context or use indicates a different meaning: "Cause" means (a) any act by the Employee that is materially adverse to the best interests of the Company and which, if the subject of a criminal proceeding, could result in a criminal conviction for a felony or (b) the willful failure by the Employee to substantially perform his duties hereunder, which duties are within the control of the Employee (other than the failure resulting from the Employee's incapacity due to physical or mental illness), provided, however, that the Employee shall not be deemed to be terminated for Cause under this subsection (b) unless and until (1) after the Employee receives written notice from the Company specifying with reasonable particularity the actions of Employee which constitute a violation of this subsection (b) and (2) within a period of 30 days after receipt of such notice (and during which the violation is within the control of the Employee), Employee fails to reasonably and prospectively cure such violation. "Common Stock" means the Company's common stock, no par value per share. An "Event of Default" means the occurrence of any of the following events, unless remedied or otherwise cured within 30 days after the Company's receipt of written notice from the Employee of such event, (a) a breach by the Company of any of its express or implied obligations under this Agreement, (b) without his prior concurrence, the Employee is assigned any duties or responsibilities that are inconsistent with his position, duties, responsibilities or status at the commencement of the term of this Agreement, or his reporting responsibilities or titles in effect at such time are changed, (c) the Employee's base compensation is reduced or any other failure by the Company to comply 1 with Section 4, or (d) any change in any employee benefit plans or arrangements in effect on the date hereof in which the Employee participates (including without limitation any pension and retirement plan, savings and profit sharing plan, stock ownership or purchase plan, stock option plan, or life, medical or disability insurance plan), which would adversely affect the Employee's rights or benefits thereunder, unless such change occurs pursuant to a program applicable to all executive officers of the Company. 2. EMPLOYMENT. The Company hereby employs the Employee and the Employee hereby accepts employment on the terms and conditions set forth herein. 3. TERM. The initial term of this Agreement shall be from August 27, 2003 until August 31, 2005 unless sooner terminated in accordance with the provisions herein regarding termination. Subject to earlier termination as provided herein, the initial term of this Agreement shall be automatically extended for one (1) year from September 1, 2005, unless either the Employee or the Company gives written notice to the other of its intention not to extend this Agreement six months or more prior to August 31, 2005. 4. COMPENSATION. (a) Base Salary. For all services rendered by the Employee under this Agreement, the Company shall pay the Employee a base salary of $225,000 per year. Such salary shall be payable in equal semi-monthly installments in accordance with the customary payroll policies of the Company in effect at the time such payment is made, or as otherwise mutually agreed upon. Effective as of March 1 of each year during the term hereof, the Company's Chief Executive Officer, in consultation with the Compensation Committee of the Company, shall review Employee's performance for the prior fiscal year and make such adjustments in base salary from time to time at their discretion as the Employee and the Company may agree. (b) Annual Bonus. As of the date this Agreement is executed, the Company's executive officers are not eligible to earn a cash bonus as part of their compensation. If and when all of the Company's other executive officers become eligible to earn a cash bonus for any fiscal year or years, the Employee will also become eligible to earn a cash bonus for the same fiscal year or years. The terms of any plan for a cash bonus for any fiscal year during the term of this Agreement will be structured by the Company such that if the plan objectives are achieved at 100% (as 100% achievement is defined or otherwise described under the terms of any such plan for a cash bonus), Employee will earn a cash bonus equal to 50% of Employee's base salary for the full fiscal year, if the cash bonus plan is in effect for the full fiscal year, or, if the cash bonus plan is in effect for less than a full fiscal year, 50% of Employee's base salary for the number of months during the fiscal year that the cash bonus plan is in effect. 2 (c) Bonus. In addition to the Employee's annual base salary and other benefits provided for in this Agreement, the Company may pay to the Employee on an annual basis a discretionary bonus in an amount to be approved by the Board of Directors of the Company; provided, however, in no event shall the bonus payable hereunder, if any, exceed Employee's annual base salary provided for in Section 4(a). (d) Benefits. The Employee shall be entitled to participate in or receive benefits under any employee benefit plan or arrangement made available by the Company in the future to its executive officers and key management personnel, subject to and on a basis consistent with the terms, conditions and overall administration of such plan or arrangement. Nothing paid to the Employee under any plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the salary and bonuses (if any) payable to the Employee pursuant to Subsections 4(a), (b) and (c). (e) Stock Option. In consideration of the Employee's execution of this Agreement, the Company has granted effective August 27, 2003 an option to purchase an aggregate of 100,000 shares of the Company's Common Stock to the Employee pursuant to the Company's 2003 Stock Option Plan (the "Stock Option"). The exercise price per share for the Stock Option is based on the arithmetic average of the high and low trading prices for the Company's Common Stock on the Nasdaq National Market on August 27, 20003. The Stock Option will vest in three equal amounts on each of the first three anniversaries of the date the Stock Option was granted. The Stock Option will be subject to the terms and conditions of the stock option agreement attached as Exhibit A to this Agreement (the "Stock Option Agreement"). (f) Expenses. Upon receipt of itemized vouchers, expense account reports, and supporting documents submitted to the Company in accordance with the Company's procedures from time to time in effect, the Company shall reimburse Employee for all reasonable and necessary travel, entertainment, and other reasonable and necessary business expenses incurred ordinarily and necessarily by Employee in connection with the performance of his duties hereunder. (g) Vacation. For vacation purposes, the Employee shall be subject to the Company's standard vacation policy based on his years of employment with the Company. 5. POSITION, DUTIES, EXTENT OF SERVICES AND SITUS. (a) Position and Duties. Employee shall serve as the Executive Vice President and Chief Financial Officer of the Company, and report directly to the Company's Chief Executive Officer and, subject to the authority of the Company's Chief Executive Officer and Board of Directors, shall have such powers and duties as may from time to time be prescribed by the Company's Chief Executive Officer and/or Board of Directors, provided that such duties are reasonable and customary for an Executive Vice President and Chief Financial Officer of a public company. (b) Extent of Services and Situs. The Employee shall devote substantially all of his business time, attention, and energy to the business and affairs of the Company and shall not during the term of his employment under this Agreement engage in any other business activity which could 3 constitute a conflict of interest, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage. This shall not be construed as preventing the Employee from managing his current investments or investing his assets in such form or manner as will not require any services on the part of the Employee in the operation and the affairs of the companies in which such investments are made, subject to the provisions of Sections 6 and 27. The Employee shall not be required to change the principal place of his employment to a location which is more than 15 miles further away from his principal residence than such principal place of employment at the time of the execution of this Agreement: 6. COVENANT NOT TO COMPETE. (a) The Employee acknowledges that (i) as a result of his position and tenure with the Company he will receive specialized and unique training and knowledge concerning the Company, its business, its customers and the industry in which it competes, (ii) the Company's business, in large part, depends upon its exclusive possession and use of the Proprietary Information (as defined in Section 27), (iii) the Company is entitled to protection against the unauthorized disclosure or use by Employee of the Proprietary Information or the training and knowledge received by the Employee and (iv) he has received in this Agreement good and valuable consideration for the covenants he is making in this Section 6 and in Section 27. The Company and the Employee acknowledge and agree that the covenants contained in this Section 6 and in Section 27 are reasonably necessary for the protection of the Company and are reasonably limited with respect to the activities they prohibit, their duration, their geographical scope and their effects on the Employee and the public. The parties acknowledge that the purpose and effect of the covenants are to protect the Company from unfair competition by the Employee. (b) Except as provided in the last sentence of this Section 6(b), during the period in which the Employee renders services to the Company under this Agreement and for twelve (12) months thereafter, the Employee shall not, without the written consent of the Company, own, manage, operate, control, serve as an officer, director, employee, partner or consultant of or be connected in any way with or have any interest in any corporation, partnership, proprietorship or other entity which carries on business activities in competition with the Company's activities in any state of the United States or in any foreign country in which the Company has sold or installed its products or systems or has definitive plans to sell or install its products at any time prior to or at the time of the date of termination of the Employee's employment; except that the Employee may own up to 1% of the shares of any publicly-owned corporation, provided that none of his other relationships with such corporation violates such covenant. Notwithstanding the foregoing, the provisions of this Section 6 shall not apply if the Employee's employment with the Company is terminated during the term of this Agreement by the Company, unless the Employee is terminated in accordance with Section 7 or for Cause in accordance with Subsection 9(a). (c) The Company and the Employee hereby agree that in the event that the noncompetition covenants contained herein should be held by any court or other constituted legal authority of competent jurisdiction to be effective in any particular area or jurisdiction only if said covenants are modified to limit their duration, geographical area or scope, then the parties hereto will consider Section 6 to be amended and modified with respect to that particular area or jurisdiction so 4 as to comply with the order of any such court or other constituted legal authority and, as to all other jurisdictions or political subdivisions thereof, the noncompetition covenants contained herein will remain in full force and effect as originally written. The Company and the Employee further agree that in the event that the noncompetition covenants contained herein should be held by any court or other constituted legal authority of competent jurisdiction to be void or otherwise unenforceable in any particular area or jurisdiction notwithstanding the operation of this Section 6(c), then the parties hereto will consider this Section 6 to be amended and modified so as to eliminate therefrom that particular area or jurisdiction as to which such noncompetition covenants are so held void or otherwise unenforceable, and, as to all other areas and jurisdictions covered by the noncompetition covenants, the terms and provisions hereof shall remain in full force and effect as originally written. (d) Employee recognizes and acknowledges that the Company would suffer irreparable harm and substantial loss if Employee violated any of the terms and provisions of this Section 6 or Section 27 and that the actual damages which might be sustained by the Company as the result of any breach of this Section 6 or Section 27 would be difficult to ascertain. Employee agrees, at the election of the Company and in addition to, and not in lieu of, the Company's right to terminate Employee's employment and to seek all other remedies and damages which the Company may have at law and/or equity for such breach, that the Company shall be entitled to an injunction restraining Employee from breaching any of the terms or provisions of this Section 6 or Section 27. 7. COMPENSATION IN THE EVENT OF DISABILITY. (a) Disability. If the Employee becomes disabled during the term of this Agreement the Company shall cause to be paid to the Employee an amount equal to his base salary in effect at the time of disability under Subsection 4(a), for the shorter of the duration of the disability or the remainder of the term of this Agreement and, subject to the provisions of Sections 22 and 25, with no liability on its part for further payments to the Employee during the duration of the disability. Subject to Subsection 7(b) below, full compensation shall be reinstituted upon his return to employment and resumption of his duties. For purposes of this Subsection 7(a) the Employee shall be deemed "disabled" when he is unable, for a period of 90 consecutive days, to perform his normal duties of employment due to bodily injury or disease or any other physical or mental disability. (b) Complete Disability. The Company shall have the right to terminate the Employee's employment under this Agreement prior to the expiration of the term upon the "Complete Disability" of the Employee as hereinafter defined (provided, however, that upon any termination by the Company for Complete Disability the Company shall comply with its obligations pursuant to Section 10 of this Agreement). The term "Complete Disability" as used in this Subsection 7(b) shall mean (i) the total inability of the Employee, despite any reasonable accommodations required by law, due to bodily injury or disease or any other physical or mental incapacity, to perform the services provided for hereunder for a period of 120 days, in the aggregate, within any given period of 180 consecutive days during the term of this Agreement in addition to any statutorily required leave of absence, and (ii) where such inability will, in the opinion of a qualified physician (reasonably acceptable to Employee), be permanent and continuous during the remainder of his life. 5 8. COMPENSATION IN THE EVENT OF DEATH. If the Employee dies during the term of this Agreement, the Company shall pay to such person as the Employee shall designate in a notice filed with the Company, or, if no such person shall be designated, to his estate as a death benefit, the Remaining Compensation, and otherwise, comply with the Company's obligations under Section 10 (other than the Company's obligations under subsection 10(ii)), in addition to any payments the Employee's spouse, beneficiaries, or estate may be entitled to receive pursuant to any pension or employee benefit plan or life insurance policy maintained by the Company, and, except for any obligations of the Company under Sections 22 and 25, all other obligations of the Company hereunder shall cease at the time of the Employee's death. 9. TERMINATION. (a) Upon at least 30 days' prior written notice to the Employee, the Company may terminate the Employee's employment with the Company under this Agreement only for Cause or in accordance with Section 7 and, subject to the provisions of Sections 7, 22 and 25 (and Section 10 solely with respect to a termination pursuant to Section 7), with no liability on its part for further payments to the Employee. The Company may effect a termination for Cause pursuant to this Subsection 9(a) only by the affirmative vote of a majority of the members of the Board of Directors of the Company. In voting upon such termination for Cause, if the Employee is later elected as a member of the Board of Directors of the Company, then he may not vote on, and will not be considered present for any purpose with respect to, a matter presented to the Board of Directors of the Company pursuant to this Subsection 9(a). (b) The Employee may terminate his employment with the Company under this Agreement by giving at least 90 days' prior written notice of his desire to terminate employment to the Board of Directors of the Company. If the Employee's employment with the Company under this Agreement is terminated pursuant to this Subsection 9(b), the Employee will continue to accrue and receive his base salary in effect at the time pursuant to Subsection 4(a) through the date of termination with no liability on the part of the Company for further payments to the Employee, subject to the provisions of Sections 22 and 25. (c) If the Employee's employment with the Company is terminated by the Company without Cause or if the Employee terminates his employment with the Company following the occurrence of an Event of Default which has not been waived in writing by the Employee, the Employee will continue to accrue and receive his base salary in effect at the time pursuant to Subsection 4(a) through the date of termination and will be entitled to receive the benefits provided for under Section 10 with no liability on the part of the Company for further payments to the Employee, subject to the provisions of Sections 7, 22 and 25. 6 10. COMPENSATION AFTER CERTAIN TERMINATIONS. If the Employee's employment with the Company is terminated at any time for any reason during the term of this Agreement other than (a) termination by the Company for Cause in accordance with Subsection 9(a) or (b) termination at the election of the Employee pursuant to Subsection 9(b), then, (i) within five days after the date of such termination, the Remaining Compensation (as herein defined) shall become due and payable and shall be paid to the Employee in a single lump sum in cash, and (ii) except for a termination of this Agreement caused by the Employee's death and subject to the last sentence of this Section 10, thirty-three thousand three hundred thirty three (33,333) shares of Common Stock covered by the Stock Option described in subsection 4(e), that are not then exercisable by the Employee shall, notwithstanding the provisions of any other agreement, become immediately exercisable at the close of business on such date of termination and remain exercisable until they are exercised or otherwise would expire in accordance with the terms of the Stock Option Agreement. For purposes of this Section 10, the "Remaining Compensation" shall mean the annual base salary payable to the Employee for one calendar year pursuant to Subsection 4 (a) at the time of termination. For any termination for which the Remaining Compensation becomes due and payable to Employee or his estate, the Company will pay, for a period of twelve (12) months following the month in which the termination of employment occurs, for the Company's group health insurance coverage for Employee and any covered dependents as in effect on such date of termination, to the same extent as if the Employee had continued as an employee; provided, however, that the Company's obligation in this regard shall terminate at such earlier date as the Employee and the Employee's family members who are then under the Company's coverage have become eligible and qualified for comparable coverage (including any preexisting-condition requirements) under another employer's plan. To receive this coverage, the Employee must make a COBRA election in accordance with the Company's policy for COBRA elections. The Company may, in its sole discretion, and in lieu of accelerating the date that 33,333 shares of Common Stock become exercisable under the Stock Option pursuant to subsection 10 (ii) above, send a written notice to Employee on such date of termination that it will pay, and pay, within five (5) business days of such date of termination, the Employee an amount in a single lump sum in cash equal to the annual base salary payable to the Employee for one calendar year pursuant to subsection 4(a), which payment will be in addition to the Company's obligation to pay the Employee the Remaining Compensation. 11. MITIGATION. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by the Employee as the result of employment by another employer after the date of termination of Employee's employment with the Company, or otherwise. 7 12. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior negotiations, agreements, and understandings relating to such subject matter, and may be modified or amended only by an instrument in writing signed by the parties hereto. 13. LAW TO GOVERN. This Agreement is executed and delivered in the State of Texas and shall be governed, construed and enforced in accordance with the laws of the State of Texas. 14. ASSIGNMENT. This Agreement is personal to the parties, and neither this Agreement nor any interest herein may be assigned (other than by will or by the laws of descent and distribution) without the prior written consent of the parties hereto nor be subject to alienation, anticipation, sale, pledge, encumbrance, execution, levy, or other legal process of any kind against the Employee or any of his beneficiaries or any other person. Notwithstanding the foregoing, the Company shall be permitted to assign this Agreement to any corporation or other business entity succeeding to substantially all of the business and assets of the Company by merger, consolidation, sale of assets, or otherwise, if the Company obtains the assumption of this Agreement by such successor. 15. BINDING AGREEMENT. Subject to the provisions of Section 14 of this Agreement, this Agreement shall be binding upon and shall inure to the benefit of the Company and the Employee and their respective representatives, successors, and assigns. 16. REFERENCES AND GENDER. All references to "Sections" and "Subsections" contained herein are, unless specifically indicated otherwise, references to sections and subsections of this Agreement. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of either gender shall include the other gender where appropriate. 17. WAIVER. No waiver of any right under this Agreement shall be deemed effective unless the same is set forth in writing and signed by the party giving such waiver, and no waiver of any right shall be deemed to be a waiver of any such right in the future. 18. NOTICES. 8 Except as may be otherwise specifically provided in this Agreement, all notices required or permitted hereunder shall be in writing and will be deemed to be delivered when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or deposited with Federal Express courier service for next day delivery, addressed to the party or parties at 17811 Waterview Parkway, Dallas, Texas 75252, or at such other addresses as may have theretofore been specified by written notice delivered in accordance herewith. 19. OTHER INSTRUMENTS. The parties hereto covenant and agree that they will execute such other and further instruments and documents as are or may become necessary or convenient to effectuate and carry out the terms of this Agreement. 20. HEADINGS. The headings used in this Agreement are used for reference purposes only and do not constitute substantive matter to be considered in construing the terms of this Agreement. 21. INVALID PROVISION. Any clause, sentence, provision, section, subsection, or paragraph of this Agreement held by a court of competent jurisdiction to be invalid, illegal, or ineffective shall not impair, invalidate, or nullify the remainder of this Agreement, but the effect thereof shall be confined to the clause, sentence, provision, section, subsection, or paragraph so held to be invalid, illegal or ineffective. 22. RIGHTS UNDER PLANS AND PROGRAMS. Anything in this Agreement to the contrary notwithstanding, no provision of this Agreement is intended, nor shall it be construed, to reduce or in any way restrict any benefit to which the Employee may be entitled under any other agreement, plan, arrangement, or program providing benefits for the Employee. 23. MULTIPLE COPIES. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same instrument. The terms of this Agreement shall become binding upon each party from and after the time that he or it executed a copy hereof. In like manner, from and after the time that any party executes a consent or other document, such consent or other document shall be binding upon such parties. 24. WITHHOLDING OF TAXES. The Company may withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as shall be required pursuant to any law or government regulation or ruling. 9 25. LEGAL FEES AND EXPENSES. The Company shall pay and be responsible for all legal fees and expenses which the Employee may incur as a result of the Company's failure to perform under this Agreement or as a result of the Company or any successor contesting the validity or enforceability of this Agreement. 26. SET OFF OR COUNTERCLAIM. Except with respect to any claim against or debt or other obligation of the Employee properly recorded on the books and records of the Company, there shall be no right of set off or counterclaim against, or delay in, any payment by the Company to the Employee or his beneficiaries provided for in this Agreement in respect of any claim against or debt or other obligation of the Employee, whether arising hereunder or otherwise. 27. ASSIGNMENT, PROTECTION AND CONFIDENTIALITY OF PROPRIETARY INFORMATION. Employee acknowledges and agrees that all items of the Company's Proprietary Information constitute valuable, special and unique assets and trade secrets of its business, which provide to the Company a competitive advantage over others who do not have access thereto and access to which is essential to the performance of Employee's duties hereunder. Employee shall not, during the term of this Agreement or thereafter, use or disclose any Proprietary Information that is not otherwise publicly available, in whole or in part, for his benefit or for the benefit of any other person or party, except for the Company. As used herein, "Proprietary Information" includes, but is not limited to, customer lists and prices, whether current or prospective, product designs or other product information, experimental developments and other research and development information, testing processes, marketing studies and research activities, and any other trade secrets concerning the Company, its shareholders, officers, directors, employees, business prospects, customers, transactions, finances, affairs, opportunities, operations, properties or assets. The Employee further agrees that all inventions, devices, compounds, processes, formulas, techniques, improvements and modifications which he may develop, in whole or in part, during the term of his employment or through or with the facilities, equipment or resources of the Company shall be and remain the sole and exclusive property of the Company. The Employee agrees to deliver to the Company at any time the Company may request, all memoranda, notes, plans, records, reports, and other documents (including copies thereof and all embodiments thereof whether in computerized form or any other medium) relating to the business or affairs of the Company or its subsidiaries which he may then possess or have under his control. Employee shall maintain in good condition all tangible and other forms of Proprietary Information in Employee's custody or control until his obligations under the preceding sentence are satisfied. Employee agrees to execute all documents and take such other actions as may be required to comply with this Section. 10 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. INTERVOICE, INC. By: /s/ DAVID W. BRANDENBURG ----------------------------------- Name: David W. Brandenburg Title: Chairman of the Board and Chief Executive Officer /s/ CRAIG E. HOLMES --------------------------- CRAIG E. HOLMES 11 EX-31.1 6 d09592exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATION I, David W. Brandenburg, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Intervoice, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2003 /s/ David W. Brandenburg ------------------------ David W. Brandenburg Chief Executive Officer and Chairman EX-31.2 7 d09592exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 CERTIFICATION I, Craig E. Holmes, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Intervoice, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 14, 2003 /s/ Craig E. Holmes ------------------------------ Craig E. Holmes Executive Vice President and Chief Financial Officer EX-32.1 8 d09592exv32w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Intervoice, Inc. (the "Company") on Form 10-Q for the period ended August 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David W. Brandenburg, Chief Executive Officer and Chairman of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 14, 2003 /s/ David W. Brandenburg ------------------------ David W. Brandenburg Chief Executive Officer and Chairman EX-32.2 9 d09592exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Intervoice, Inc. (the "Company") on Form 10-Q for the period ended August 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Craig E. Holmes, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: October 14, 2003 /s/ Craig E. Holmes ------------------------------- Craig E. Holmes Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----