-----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, H0333I6afKpSqo+N1+MuP2/ZJ9htOMeaqHJfVfjp4wP5e7heZyonzwZGVl/NsgcB +0fItuTFLlPc6OXJIhiRYg== 0000950134-03-010131.txt : 20030724 0000950134-03-010131.hdr.sgml : 20030724 20030715161529 ACCESSION NUMBER: 0000950134-03-010131 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030531 FILED AS OF DATE: 20030715 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: 03787429 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 d07359e10vq.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 MAY 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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) 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 34,111,101 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING AS OF MAY 31, 2003. ITEM 1 FINANCIAL STATEMENTS InterVoice, Inc. Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data) ASSETS May 31, 2003 February 28, 2003 - --------------------------------------------------------- ------------ ----------------- (Unaudited) Current Assets Cash and cash equivalents $ 27,804 $ 26,211 Trade accounts receivable, net of allowance for doubtful accounts of $2,744 in fiscal 2004 and $2,527 in fiscal 2003 26,290 25,853 Inventory 7,827 8,895 Prepaid expenses and other current assets 5,689 5,277 -------- -------- 67,610 66,236 -------- -------- Property and Equipment Building 16,747 16,708 Computer equipment and software 34,171 32,660 Furniture, fixtures and other 2,761 2,667 Service equipment 9,293 8,744 -------- -------- 62,972 60,779 Less allowance for depreciation 42,434 40,406 -------- -------- 20,538 20,373 Other Assets Intangible assets, net of amortization of $32,172 in fiscal 2004 and $32,218 in fiscal 2003 8,624 9,326 Goodwill 3,401 3,401 Other assets 1,368 1,655 -------- -------- $101,541 $100,991 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 11,939 $ 12,513 Accrued expenses 12,404 12,705 Customer deposits 8,824 9,061 Deferred income 26,366 25,478 Current portion of long term borrowings 3,333 3,333 Income taxes payable 7,036 6,240 -------- -------- 69,902 69,330 Long term borrowings 14,944 15,778 Other long term liabilities 585 856 Deferred income taxes 91 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: 34,111,101 issued and outstanding in fiscal 2004 and fiscal 2003 17 17 Additional capital 65,144 65,144 Accumulated deficit (45,832) (46,768) Accumulated other comprehensive loss (3,310) (3,410) -------- -------- Stockholders' equity 16,019 14,983 -------- -------- $101,541 $100,991 ======== ========
See notes to consolidated financial statements. 2
InterVoice, Inc. Consolidated Statements of Operations (Unaudited) (In Thousands, Except Per Share Data) Three Months Ended ------------------------------------- May 31, 2003 May 31, 2002 ----------------- --------------- Sales Systems $18,031 $ 21,635 Services 20,371 16,781 ------- -------- 38,402 38,416 ------- -------- Cost of goods sold Systems 11,213 16,118 Services 6,731 6,671 ------- -------- 17,944 22,789 ------- -------- Gross margin Systems 6,818 5,517 Services 13,640 10,110 ------- -------- 20,458 15,627 Research and development expenses 3,870 6,005 Selling, general and administrative expenses 13,471 17,693 Amortization of acquisition related intangible assets 705 1,776 ------- -------- Income (loss) from operations 2,412 (9,847) Other income (expense) (187) (48) Interest expense (545) (1,465) ------- -------- Income (loss) before taxes 1,680 (11,360) Income taxes (benefit) 744 (2,681) ------- -------- Income (loss) before the cumulative effect of a change in accounting principle 936 (8,679) Cumulative effect on prior years of a change in accounting principle -- (15,791) ------- -------- Net income (loss) $ 936 (24,470) ======= ======== Per Basic Share: Income (loss) before the cumulative effect of a change in accounting principle $ 0.03 $ (0.26) Cumulative effect on prior years of a change in accounting principle -- (0.46) ------- -------- Net income (loss) $ 0.03 $ (0.72) ======= ======== Per Diluted Share: Income (loss) before the cumulative effect of a change in accounting principle $ 0.03 $ (0.26) Cumulative effect on prior years of a change in accounting principle -- (0.46) ------- -------- Net income (loss) $ 0.03 $ (0.72) ======= ========
See notes to consolidated financial statements. 3
InterVoice, Inc. Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Three Months Ended ------------------------------ May 31, 2002 May 31, 2003 ------------ ------------ Operating activities Income (loss) before the cumulative effect of a change in accounting principle $ 936 $ (8,679) Adjustments to reconcile income (loss) before the cumulative effect of a change in accounting principle to net cash provided by (used in) operating activities: Depreciation and amortization 2,382 4,176 Other changes in operating activities 284 2,841 ------- -------- Net cash provided by (used in) operating activities 3,602 (1,662) ------- -------- Investing activities Proceeds from sale of assets -- 1,852 Purchases of property and equipment (1,263) (601) ------- -------- Net cash provided by (used in) investing activities (1,263) 1,251 ------- -------- Financing activities Paydown of debt (834) (26,000) Debt issuance costs -- (1,632) Borrowings -- 24,000 Exercise of stock options -- 88 ------- -------- Net cash used in financing activities (834) (3,544) ------- -------- Effect of exchange rates on cash 88 302 ------- -------- Increase (decrease) in cash and cash equivalents 1,593 (3,653) Cash and cash equivalents, beginning of period 26,211 17,646 ------- -------- Cash and cash equivalents, end of period $27,804 $ 13,993 ======= ========
See notes to consolidated financial statements. 4
InterVoice, Inc. Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (In Thousands, Except Share Data) Accumulated Common Stock 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 -- -- -- 936 -- 936 Foreign currency translation adjustment -- -- -- -- 100 100 ---------- ---------- ---------- ---------- ---------- ---------- Balance at May 31, 2003 34,111,101 $ 17 $ 65,144 $ (45,832) $ (3,310) $ 16,019 ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MAY 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 May 31, 2003 and 2002 consolidated financial statements have been included. Operating results for the three-month period ended May 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 first quarter of fiscal 2004 and 2003 was $1.0 million and $(23.4) 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. 6 NOTE C - INVENTORIES Inventories consist of the following (in thousands):
May 31, 2003 February 28, 2003 ------------ ----------------- Purchased parts $3,884 $4,906 Work in progress 3,943 3,989 ------ ------ $7,827 $8,895 ====== ======
NOTE D - SPECIAL CHARGES Accrued expenses and other long-term liabilities at February 28, 2003 included amounts associated with certain special charges incurred during fiscal 2003 and fiscal 2002. Activity during the first quarter of fiscal 2004 related to such accruals was as follows (in thousands):
Accrued Balance Revisions Accrued Balance February 28, 2003 Payments to Estimates May 31, 2003 ----------------- -------- ------------ --------------- Severance and related charges $ 466 $ (81) $ (27) $ 358 Future lease costs for properties no longer being used $1,896 $ (229) $ -- $1,667
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. 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. At May 31, 2003, approximately $0.7 million of the charges remained unpaid. The majority of such remaining charges are expected to be paid during the second quarter of fiscal 2004. In June 2003, the Company announced that its chief financial officer will resign from the Company in July 2003 to pursue other opportunities. The Company expects to record cash and non-cash charges totaling approximately $0.5 million and $0.3 million, respectively, during the second quarter of fiscal 2004 under the terms of a separation agreement executed in connection with the officer's resignation. 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. 7 NOTE E - LONG-TERM BORROWINGS At May 31, 2003 and February 28, 2003 the Company's long-term debt was comprised of the following (in thousands):
May 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 $ 10,500 $ 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% (7.0% at May 31, 2003) 7,777 8,611 -------- -------- Total debt outstanding 18,277 19,111 Less: current portion (3,333) (3,333) -------- -------- Long-term debt, net of current portion $ 14,944 $ 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. 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 ($17.2 million maximum at May 31, 2003) or a defined borrowing base comprised primarily of eligible U.S. and U.K. accounts receivable ($0.4 million maximum at May 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 virtually all of 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 is initially required to have EBITDA (as defined in the credit facility) in minimum cumulative amounts on a monthly basis through August 31, 2003. While lower amounts are allowed within each fiscal quarter, the Company must generate 8 cumulative EBITDA of $9.0 million for the twelve-month period ending August 31, 2003. Thereafter, the Company is required to have 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 beginning on or after March 1, 2003 except in certain circumstances and with the lender's prior approval. As of May 31, 2003, the Company was in compliance with all financial and operating covenants. NOTE F - INCOME TAXES During the three-month periods ended May 31, 2003 and 2002, the Company recognized current income tax expense on the pretax income of certain foreign subsidiaries. During the same periods, the Company incurred domestic pretax losses. The Company did not recognize current income tax benefits as a result of such losses, however, because the existence of recent domestic losses prevented it from concluding that it was more likely than not that such benefits would be realized. 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. NOTE G - EARNINGS PER SHARE AND STOCK COMPENSATION
(in thousands, except per share data) May 31, 2003 May 31, 2002 ------------ ------------ Numerator: Income (loss) before the cumulative effect of a change in accounting principle $ 936 $ (8,679) Cumulative effect on prior years of a change in accounting principle -- (15,791) ------- -------- Net income (loss) $ 936 $(24,470) ------- -------- Denominator: Denominator for basic earnings per share 34,111 34,039 Dilutive potential common shares -- Employee stock options 249 -- ------- -------- Denominator for diluted earnings per share 34,360 34,039 ------- --------
9 Basic: Income (loss) before the cumulative effect of a change in accounting principle $0.03 $(0.26) Cumulative effect on prior years of a change in accounting principle -- (0.46) ----- ------ Net income (loss) $0.03 $(0.72) ===== ====== Diluted: Income (loss) before the cumulative effect of a change in accounting principle $0.03 $(0.26) Cumulative effect on prior years of a change in accounting principle -- (0.46) ----- ------ Net income (loss) $0.03 $(0.72) ===== ======
Options to purchase 4,847,606 shares of common stock at an average exercise price of $8.62 per share and warrants to purchase 621,304 shares at an exercise price of $4.0238 per share were outstanding at May 31, 2003 but were not included in the computation of diluted earnings per share for the first quarter of fiscal 2004 because the options' prices were greater than the average market price of the Company's common shares during such period and, therefore, the effect would have been antidilutive. Options to purchase 4,378,654 shares of common stock at an average exercise price of $10.17 per share and warrants to purchase 621,304 shares at an exercise price of $4.0238 per share were outstanding at May 31, 2002 but were not included in the computation of diluted earnings per share for the first three months of fiscal 2003 because the effect would have been antidilutive given the Company's loss for the quarter. In addition, the Company's then outstanding 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 as of May 31, 2002 but were similarly excluded from the computation of diluted earnings per share for the quarter. Such notes and accrued interest were subsequently repaid in full. 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 May 31, ---------------------------- 2003 2002 ---------- ---------- Net income (loss), as reported $ 936 $ (24,470) Less: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax (1) 585 ---------- ---------- Pro forma net income (loss) $ 937 $ (25,055) ========== ========== Net income (loss) per share: Basic and diluted - as reported $ 0.03 $ (0.72) Basic and diluted - pro forma $ 0.03 $ (0.74)
10 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 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 months ended May 31, 2003 and 2002 were as follows (in thousands):
MAY 31 ---------------------- 2003 2002 ------- ------- IVR/portal system sales (Enterprise system sales in fiscal 2003) $11,906 $12,310 Messaging system sales (included in Network system sales in fiscal 2003) 4,600 -- Payment system sales (included in Network (system sales in fiscal 2003) 1,525 -- Network system sales -- 9,325 ------- ------- Total system sales 18,031 21,635 ------- ------- Maintenance and related services sales 13,586 12,025 Managed service (ASP) sales 6,785 4,756 ------- ------- Total services sales 20,371 16,781 ------- ------- Total Company sales $38,402 $38,416 ======= =======
GEOGRAPHIC OPERATIONS Revenues are attributed to geographic locations based on locations of customers. The Company's net sales by geographic area for the three-month periods ended May 31, 2003 and 2002 were as follows (in thousands):
MAY 31 ---------------------- 2003 2002 ------- ------- North America $24,245 $22,423 Europe, Middle East and Africa 13,194 13,974 Pacific Rim 396 520 Central and South America 567 1,499 ------- ------- Total $38,402 $38,416 ======= =======
CONCENTRATION OF REVENUE One customer, O2, has purchased both systems and ASP managed services from the Company. Such combined purchases accounted for approximately 11% of the Company's total sales during the three-month periods ended May 31, 2003 and 2002. Under the terms of its managed services contract with O2 and at current exchange rates, the Company will recognize revenues of $1.0 million per month through July 2003 and $0.7 million per month from August 2003 through July 2005. The amount received under 11 the agreement may vary based on future changes in the exchange rate between the dollar and the British pound. There were no other customers accounting for 10% or more of the Company's sales during the three months ended May 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 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 sue the Company for infringement. 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 12 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. In the matter of Aerotel, Ltd. et al, v. Sprint Corporation, et al, Cause No. 99-CIV-11091 (SAS), pending in the United States District Court, Southern District of New York, Aerotel, Ltd., has sued Sprint Corporation alleging that certain prepaid services offered by Sprint are infringing Aerotel's U.S. Patent No. 4,706,275 ("275 patent"). According to Sprint, the suit originally focused on land-line prepaid services not provided by the Company. As part of an unsuccessful mediation effort, Aerotel also sought compensation for certain prepaid wireless services provided to Sprint PCS by the Company. As a result of the mediation effort, Sprint requested that the Company provide a defense and indemnification to Aerotel's infringement claims, to the extent that they pertain to any wireless prepaid services offered by the Company. In response to this request, the Company provided certain assistance to Sprint's counsel in defending against such claims, to the extent they dealt with issues unique to the system and services provided by the Company. Furthermore, the Company and Sprint recently entered into an agreement to settle and release the Company from any obligations to Sprint in connection with the Aerotel litigation. Under the agreement, the Company will make certain payments, which are not significant to the Company's consolidated financial position, to Sprint. PENDING LITIGATION David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, pending in the United States District Court, Northern District of Texas, Dallas Division: Several related class action lawsuits were filed in the United States District Court for the Northern District of Texas on behalf of purchasers of common stock of the Company during the period from October 12, 1999 through June 6, 2000 the ("Class Period"). Plaintiffs have filed claims, which were consolidated into one proceeding, under Sections 10(b) and 20(a) of the 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 claim 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 13 the Company. Plaintiffs have 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 intends to defend the lawsuit vigorously. The Company responded to this 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 complaint on September 23, 2002. The Company has filed a motion to dismiss the amended complaint, and plaintiffs have filed a response in opposition to the Company's motion to dismiss. At the direction of the Court, the parties attended a mediation with a neutral third-party mediator during June 2003. The mediation did not result in a settlement. All discovery and other proceedings not related to the dismissal have been stayed pending resolution of the Company's request to dismiss the amended complaint. TELEMAC ARBITRATION On March 28, 2003 the Company announced a settlement of an arbitration proceeding in the Los Angeles, California, office of JAMS initiated by Telemac Corporation ("Telemac") against the Company, InterVoice Brite Ltd. and Brite Voice Systems, Inc., JAMS Case No. 1220026278. Telemac's allegations arose out of the negotiation of an Amended and Restated Prepaid Phone Processing Agreement between Telemac and Brite Voice Systems Group, Ltd., and certain amendments thereto, under which Telemac licensed prepaid wireless software for use in the United Kingdom under agreement with O2, formerly BT Cellnet, a provider of wireless telephony in the United Kingdom. The terms of the settlement included a cash payment to Telemac, which was not significant to the Company's consolidated financial condition. OTHER MATTERS The Company is a defendant from time to time in lawsuits incidental to its business. Based on currently available information, the Company believes that resolution of all known lawsuits, including the matters described above, is uncertain, and there can be no assurance that future costs related to such matters would not be material to the Company's financial position or results of operations. The Company has employment agreements with two executive officers. Each agreement requires 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 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. 14 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: o The Company has experienced recent operating losses and 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 $0.9 million for the quarter ended May 31, 2003, 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. o The Company is obligated to make periodic payments of principal and interest 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 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. The Company may, from time to time, have additional indebtedness outstanding under its revolving credit facility. If the Company at any time defaults on any of its payment obligations or other obligations under any financing agreement, the creditors under the applicable agreement will have all rights available under the agreement, including acceleration, termination and enforcement of security interests. The financing agreements also have certain qualified cross-default provisions, particularly for acceleration of indebtedness under any one of the financing agreements. 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. o The Company's financing agreements include significant financial and operating covenants and default provisions. In addition to the payment obligations, the Company's senior secured term loan and revolving credit facility and its mortgage loan facility contain significant financial covenants, operating covenants and default provisions. If the Company does not comply with any of these covenants and default provisions, the Company's secured lenders can accelerate all indebtedness outstanding under the facilities and foreclose on substantially all of the Company's assets. In order for the Company to comply with the escalating minimum EBITDA requirements in its senior secured credit facility, the Company will have to continue to increase revenues and/or lower expenses in future quarters. See "Liquidity and Capital Resources" in this Item 2 for a discussion of the Company's minimum EBITDA covenant. o General business activity has declined. 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. In addition, there is concern that demand for the types of products offered by the Company will remain soft for some period of time as a result of domestic and global economic and political conditions. 15 o 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. o The Company is subject to potential and pending lawsuits and other claims. The Company is subject to certain potential and pending lawsuits and other claims discussed in Item 1 "Legal Proceedings" in Part II of this Quarterly Report on Form 10-Q and in Item 3 "Legal Proceedings" in Part I of the Company's Annual Report on Form 10-K/A for the year ended February 28, 2003. The Company believes that the pending lawsuit to which it is a party is without merit and intends to defend such matter vigorously. The Company may not prevail in the litigation. An adverse judgment in the litigation or any other matter, as well as the Company's expenses relating to its defense of a given matter, could have consequences materially adverse to the Company. o The Company faces intense competition based on product capabilities and experiences ever increasing demands from its actual and prospective customers for its products to be compatible with a variety of rapidly proliferating computing, telephony and computer networking technologies and standards. The ultimate success of the Company's products is dependent, to a large degree, on the Company allocating its resources to developing and improving products compatible with those technologies, standards and functionalities that ultimately become widely accepted by the Company's actual and prospective customers. The Company's success is also dependent, to a large degree, on the Company's ability to implement arrangements with other vendors with complementary product offerings to provide actual and prospective customers greater functionality and to ensure that the Company's products are compatible with the increased variety of technologies and standards. 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. o The Company may not be able to retain its customer base and, in particular, its more significant customers, such as O2. 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. Sales to O2, which purchases both systems and managed services from the Company, accounted for approximately 11% of the Company's total sales during the quarters ended May 31, 2003 and 2002. Under the terms of its recently extended managed services contract with O2 and at current exchange rates, the Company will recognize revenues of approximately $1.0 million per month through July 2003, and $0.7 million per month from August 2003 through the end of the contract in July 2005. The amounts received under the agreement may vary based on future changes in the exchange rate between the dollar and the British pound. o 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 16 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. o 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. o 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 and AT&T Corp., 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. o 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. See Item 1 "Legal Proceedings" in Part II of this Quarterly Report on Form 10-Q and Item 3 "Legal Proceedings" in Part I of the Company's Annual Report on Form 10-K/A for the year ended February 28, 2003 for a discussion of certain pending and potential claims of infringement. o 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 37% and 42% in 17 fiscal quarters ended May 31, 2003 and 2002, respectively. International sales are subject to certain risks, including: o fluctuations in currency exchange rates; o the difficulty and expense of maintaining foreign offices and distribution channels; o tariffs and other barriers to trade; o greater difficulty in protecting and enforcing intellectual property rights; o general economic and political conditions in each country; o loss of revenue, property and equipment from expropriation; o import and export licensing requirements; and o 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. o 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. o 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. o 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. o 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. 18 o 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 first quarter of fiscal 2004 and 2003 were $38.4 million. The mix of sales varied between quarters, however, with system sales totaling $18.0 million for the first quarter of fiscal 2004 as compared to $21.6 million for the fiscal 2003 first quarter and services sales totaling $20.4 million in fiscal 2004 as compared to $16.8 million for the first quarter of fiscal 2003. Services sales during the first quarter of fiscal 2004 included $1.9 million relating to services performed in prior periods for an international managed services customer for which the Company recognizes revenue on a cash basis. 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 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 months ended May 31, 2003 and 2002 were as follows (in thousands):
MAY 31 ---------------------- 2003 2002 ------- ------- IVR/portal system sales (Enterprise system sales in fiscal 2003) $11,906 $12,310 Messaging system sales (included in Network system sales in fiscal 2003) 4,600 -- Payment system sales (included in Network system sales in fiscal 2003) 1,525 -- Network system sales -- 9,325 ------- ------- Total system sales 18,031 21,635 ------- ------- Maintenance and related services sales 13,586 12,025 Managed service (ASP) sales 6,785 4,756 ------- ------- Total services sales 20,371 16,781 ------- ------- Total Company sales $38,402 $38,416 ======= =======
As identified in the preceding chart, the decline in system sales from fiscal 2003 levels is primarily attributable to 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 is a combination of growth in the sale of maintenance and related services and the impact of the cash basis managed services recognized during the first quarter of fiscal 2004 as compared to the same time frame for fiscal 2003. One customer, O2, has purchased both systems and ASP managed services from the Company. Such combined purchases accounted for approximately 11% of the Company's total sales during the three-month periods ended May 31, 2003 and 2002. Under the terms of its managed services contract with O2 19 and at current exchange rates the Company will recognize revenues of $1.0 million per month through July 2003 and $0.7 million per month from August 2003 through July 2005. The amount received under the agreement may vary based on future changes in the exchange rate between the dollar and the British pound. There were no other customers accounting for 10% or more of the Company's sales during the three months ended May 31, 2003 and 2002. International sales comprised 37% of the Company's total sales during the first quarter of fiscal 2004, down from 42% during the first quarter of fiscal 2003. The decline is primarily attributable to slightly lower sales volumes in Latin American and the EMEA regions. 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 May 31, 2003, sales from service and support contracts, including contracts for ASP managed services, comprised approximately 53% of the Company's total sales, while sales from beginning systems backlog comprised approximately 40% of total sales and sales from the quarter's pipeline activity comprised approximately 7% of total sales. For the quarter ended May 31, 2002, sales from service and support contracts, sales from beginning systems backlog and sales from the quarter's pipeline activity comprised approximately 44%, 26% and 30% 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 May 31, 2003, February 28, 2003, November 30, 2002 and August 31, 2002, the Company's backlog of systems sales was approximately $29.5 million, $33.5 million, $29.5 million and $33.5 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 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. In June 2003, the Company announced that its chief financial officer will resign from the Company in July 2003 to pursue other opportunities. The Company expects to record cash and non-cash charges totaling approximately $0.5 million and $0.3 million, respectively, during the second quarter of fiscal 2004 under the terms of a separation agreement executed in connection with the resignation. 20 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 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 first quarter of fiscal 2004 was approximately $17.9 million or 46.7% of sales as compared to $22.8 million or 59.3% of sales for the first quarter of fiscal 2003. As described above, the Company incurred special charges to cost of goods sold totaling $0.6 million (1.6%) and $1.4 million (3.6%) in the first quarter of fiscal 2004 and 2003, respectively. Cost of goods sold on systems sales was $11.2 million, or 62.2% of system sales, versus $16.1 million, or 74.5% of system sales, for the first quarters of fiscal 2004 and 2003, respectively. This decrease results from the Company's cost cutting initiatives as well as from differences in the sales channel mix from quarter to quarter. Cost of goods sold on services sales was $6.7 million, or 33.0% of services sales, for the first quarter of fiscal 2004 versus $6.7 million, or 40.0% of services sales, for the same period of fiscal 2003. This improvement resulted from a combination of efficiency gains, as the Company served a larger customer base without increasing costs at the same rate as sales increased, and the effect on the calculation of the cash basis managed service revenues recognized in the quarter. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses during the first quarter of fiscal 2004 were approximately $3.9 million, or 10.0% of the Company's total sales. During the first quarter of the previous fiscal year, research and development expenses were $6.0 million, or 15.6% of the Company's total sales. The Company incurred R&D charges described above in "Special Charges" totaling $0.2 million (0.5%) and $0.5 million (1.3%) in the first quarter of fiscal 2004 and 2003, respectively. Expenses were down from fiscal 2003 as a result of the Company's cost reduction initiatives. 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 first quarter of fiscal 2004 were approximately $13.5 million, or 35.1% of the Company's total sales. SG&A expenses during the first quarter of fiscal 2003 were $17.7 million, or 46.1% of the Company's total sales. The Company incurred SG&A charges described above in "Special Charges" totaling $0.6 million (1.6%) and $0.7 million (1.8%) in the first quarter of fiscal 2004 and 2003, respectively. SG&A expenses have dropped in absolute dollars from the same period last year primarily as a result of cost control initiatives implemented by the Company during fiscal 2003. 21 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 for the first quarter of fiscal 2004, down from $1.8 million for the first quarter of 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 $2,270 Fiscal 2005 $1,654 Fiscal 2006 $1,168 Fiscal 2007 $1,099 Fiscal 2008 $1,099
INTEREST EXPENSE. Interest expense was $0.5 million during the first quarter of fiscal 2004, versus $1.5 million for the same period of fiscal 2003. The reduction relates to two factors. First, the Company's outstanding debt as of the beginning of the first quarter 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 $0.4 million for the write off of debt issuance costs associated with a term loan retired during the quarter as part of the Company's fiscal 2003 debt restructuring activities. There were no such expenses during the first quarter of fiscal 2004. INCOME TAXES (BENEFIT). During the three-month periods ended May 31, 2003 and 2002, the Company recognized current income tax expense on the pretax income of certain foreign subsidiaries. During the same periods, the Company incurred domestic pretax losses. The Company did not recognize current income tax benefits as a result of such losses, however, because the existence of recent domestic losses prevented it from concluding that it was more likely than not that such benefits would be realized. 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 22 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. INCOME (LOSS) FROM OPERATIONS AND NET INCOME (LOSS). The Company generated operating income of $2.4 million and net income of $0.9 million during the first quarter of fiscal 2004. During the first quarter of fiscal 2003, the Company generated an operating loss of $9.8 million, a loss before the cumulative effect of a change in accounting principle of $8.7 million and a net loss of $24.5 million. 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. LIQUIDITY AND CAPITAL RESOURCES. The Company had approximately $27.8 million in cash and cash equivalents at May 31, 2003, while borrowings under the Company's long-term debt facilities totaled $18.3 million. The Company's cash reserves increased $1.6 million during the three months ended May 31, 2003, with operating activities providing $3.6 million of cash, net investing activities using $1.3 million of cash and net financing activities using $0.8 million of cash. Operating cash flow for the quarter ended May 31, 2003 was favorably impacted by the Company's return to profitability in the quarter, including its collection of $1.9 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 reduced its inventory holdings by $1.1 million from fiscal 2003 ending levels, and held its days sales outstanding (DSOs) of accounts receivable to 62 days, virtually unchanged from February 28, 2003. 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 $4.5 million (17.0% of total net receivables) at May 31, 2003, down $0.4 million from February 28, 2003. The Company expects to bill and collect unbilled receivables as of May 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 $2.0 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 or third quarter 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. 23 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 second quarter of fiscal 2004. The Company used $1.3 million of cash to purchase additional equipment during the quarter ended May 31, 2003 and used $0.8 million of cash to make scheduled principal payments under its term loan. At May 31, 2003, the Company had $18.3 million in outstanding debt, including $10.5 million under a mortgage loan and $7.8 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 ($17.2 million maximum at May 31, 2003) or a defined borrowing base comprised primarily of eligible U.S. and U.K. accounts receivable ($0.4 million maximum at May 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% (7.0% as of May 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 virtually all of 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 is initially required to have EBITDA (as defined in the credit facilities) in minimum cumulative amounts on a monthly basis through August 31, 24 2003. While lower amounts are allowed within each fiscal quarter, the Company must generate cumulative EBITDA of $9.0 million for the twelve-month period ending August 31, 2003. Thereafter, the Company is required to have 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 beginning on or after March 1, 2003 except in certain circumstances and with the lender's prior approval. As of May 31, 2003, the Company was in compliance with all financial and operating covenants. 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 continue to increase its revenues and/or lower its expenses in future quarters as compared to the quarter completed on May 31, 2003. To comply with the minimum cumulative EBITDA covenant for the remainder of fiscal 2004, the Company may not incur a loss before interest, taxes, depreciation and amortization in excess of $4.3 million for the quarter ending August 31, 2003, and it must generate average EBITDA of at least $3.7 million per quarter for the two-quarter period ending November 30, 2003 and average EBITDA of at least $5.1 million per quarter for the three-quarter period ending February 29, 2004. The Company generated EBITDA of $4.6 million for the quarter ended May 31, 2003. A reconciliation of net income for the quarter to EBITDA follows:
($000s) ------- Net income $ 936 Add back EBITDA elements Interest 545 Taxes 744 Depreciation and amortization 2,382 ------ EBITDA 4,607 ======
If the Company is not able to achieve these 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. 25 At May 31, 2003, the Company's outstanding long-term debt was comprised of the following (in thousands):
May 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 $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% (7.0% at May 31, 2003) 7,777 ------- $18,277 =======
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 May 31, 2003.
Fiscal ---------------------------------------------- 2004 2005 2006 ---------- ---------- ---------- (Dollars in thousands) Long-term debt variable rate U.S. $ $ 2,500 $ 3,333 $ 12,444 Projected weighted average interest rate 9.2% 9.6% 10.0%
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 May 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 May 31, 2003, the Company had an intercompany balance payable to its U.K. subsidiary totaling approximately $25.7 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. 26 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-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934) as of a date within ninety days before the filing date of this quarterly report. 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. While the Company recently implemented certain enhancements to its procedures and controls for determining and disclosing system backlog, the Company does not consider such enhancements to be significant changes to its disclosure procedures and controls. There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore no corrective actions were taken. 27 PART II. OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS INTELLECTUAL PROPERTY MATTERS In the matter of Aerotel, Ltd. et al, v. Sprint Corporation, et al, Cause No. 99-CIV-11091 (SAS), pending in the United States District Court, Southern District of New York, Aerotel, Ltd., has sued Sprint Corporation alleging that certain prepaid services offered by Sprint are infringing Aerotel's U.S. Patent No. 4,706,275 ("275 patent"). According to Sprint, the suit originally focused on land-line prepaid services not provided by the Company. As part of an unsuccessful mediation effort, Aerotel also sought compensation for certain prepaid wireless services provided to Sprint PCS by the Company. As a result of the mediation effort, Sprint requested that the Company provide a defense and indemnification to Aerotel's infringement claims, to the extent that they pertain to any wireless prepaid services offered by the Company. In response to this request, the Company provided certain assistance to Sprint's counsel in defending against such claims, to the extent they dealt with issues unique to the system and services provided by the Company. Furthermore, the Company and Sprint recently entered into an agreement to settle and release the Company from any obligations to Sprint in connection with the Aerotel litigation. Under the agreement, the Company will make certain payments, which are not significant to the Company's consolidated financial position, to Sprint. PENDING LITIGATION David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v. InterVoice-Brite, Inc., et al.; No. 3-01CV1071-D, pending in the United States District Court, Northern District of Texas, Dallas Division: Several related class action lawsuits were filed in the United States District Court for the Northern District of Texas on behalf of purchasers of common stock of the Company during the period from October 12, 1999 through June 6, 2000 (the "Class Period"). Plaintiffs have filed claims, which were consolidated into one proceeding, under Sections 10(b) and 20(a) of the 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 claim 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 have 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 intends to defend the lawsuit vigorously. The Company responded to this 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 complaint on September 23, 2002. The Company has filed a motion to dismiss the amended complaint, and plaintiffs have filed a response in opposition to the Company's motion to dismiss. At the direction of the Court, the parties attended a mediation with a neutral third-party mediator during June 2003. The mediation did not result in a settlement. All discovery and other proceedings not related to the dismissal have been stayed pending resolution of the Company's request to dismiss the amended complaint. 28 Telemac Arbitration On March 28, 2003 the Company announced a settlement of an arbitration proceeding in the Los Angeles, California, office of JAMS initiated by Telemac Corporation ("Telemac") against the Company, InterVoice Brite Ltd. and Brite Voice Systems, Inc., JAMS Case No. 1220026278. Telemac's allegations arose out of the negotiation of an Amended and Restated Prepaid Phone Processing Agreement between Telemac and Brite Voice Systems Group, Ltd., and certain amendments thereto, under which Telemac licensed prepaid wireless software for use in the United Kingdom under agreement with O2, formerly BT Cellnet, a provider of wireless telephony in the United Kingdom. The terms of the settlement included a cash payment to Telemac, which was not significant to the Company's consolidated financial condition. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
10.1 Separation Agreement with Rob-Roy J. Graham dated June 25, 2003(1) 99.1 Certification Pursuant to 18 U.S.C. Section 1350, signed by David W. Brandenburg(1) 99.2 Certification Pursuant to 18 U.S.C. Section 1350, signed by Rob-Roy J. Graham(1)
- ---------- (1) Filed herewith. (b) Reports on Form 8-K 1. A report on Form 8-K was filed March 12, 2003 to announce the Company's intention to review certain intangible assets for impairment and to announce preliminary sales and other financial data relating to its fiscal quarter ended February 28, 2003. 2. A report on Form 8-K was filed March 31, 2003 to announce a modification and extension of its license and managed services agreement with Telemac, the settlement of the Telemac arbitration and the extension of its existing contract with O2. 3. A report on Form 8-K was filed May 6, 2003 to announce the Company's financial results for the quarter ended February 28, 2003 and the Company's outlook for the future. 29 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: July 15, 2003 By: /s/ MARK C. FALKENBERG ---------------------- Mark C. Falkenberg Chief Accounting Officer 30 CERTIFICATIONS 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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrants' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 15, 2003 /s/ David W. Brandenburg ------------------------------------------ David W. Brandenburg Chief Executive Officer and Chairman 31 CERTIFICATIONS I, Rob-Roy J. Graham, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Intervoice, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the registrants' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 15, 2003 /s/ Rob-Roy J. Graham ------------------------------------------ Rob-Roy J. Graham Executive Vice President and Chief Financial Officer 32 INDEX TO EXHIBITS
EXHIBITS NO. DESCRIPTION -------- ----------- 10.1 Separation Agreement with Rob-Roy J. Graham dated June 25, 2003.(1) 99.1 Certification Pursuant to 18 U.S.C. Section 1350, signed by David W. Brandenburg(1) 99.2 Certification Pursuant to 18 U.S.C. Section 1350, signed by Rob-Roy J. Graham(1)
- ---------- (1) Filed herewith. 33 EX-10.1 3 d07359exv10w1.txt SEPARATION AGREEMENT WITH ROB-ROY J. GRAHAM [INTERVOICE COMPANY LETTERHEAD] June 25, 2003 Mr. Rob-Roy J. Graham 3517 Wentwood Dr. Dallas, TX 75225 Dear Rob: This letter confirms the discussions held with you regarding your separation from employment with Intervoice, Inc. ("Intervoice"). The terms set forth below constitute Intervoice's offer and, by your signature, your acceptance of this proposed Separation Agreement (the "Agreement"). On behalf of Intervoice, I want to express my appreciation for your past service and contributions, and wish you success in your future endeavors. 1. Resignation from Employment and All Offices. You have offered your resignation from Intervoice's employment to pursue other opportunities, and Intervoice hereby accepts your resignation on the terms set forth herein. On or before the Separation Date, as such term is defined in Paragraph 4 below, you will submit your resignation from all corporate offices, to be effective as of the Separation Date. 2. Salary and Benefits. In accordance with Intervoice's existing policies or at its discretion, you have received or will receive the following payments and benefits pursuant to your employment with Intervoice and your participation in Intervoice's benefit plans: (a) Payment of your regular base salary at the current rate through the Separation Date; (b) Payment of any accrued and unused vacation leave benefits on your current schedule of benefits as of the Separation Date; (c) Present or future payment or other entitlement, in accordance with the terms of the applicable plan or other benefit, of any benefits to which you have vested entitlement under the terms of employee benefit plans established by Intervoice; and (d) At your discretion, exercise of any stock options you may hold, to the extent such options are exercisable (see Paragraph 3(c) below for provisions relating to the amendment of your stock option agreements subject to your acceptance of this Agreement). The amounts paid in accordance with subparagraphs (a) and (b) of this paragraph are gross amounts, subject to lawful deductions, including any deductions you have previously authorized. Mr. Rob-Roy J. Graham June 25, 2003 Page 2 Unless you choose to accept the Special Separation Compensation described in Paragraph 3 below, your regular paid group health insurance benefits will continue only through the last day of the month in which you cease to be an Intervoice employee. By law, you are entitled at your option to continue your group health insurance coverage for a period of time thereafter at your own expense. Please complete a COBRA election form, which will be furnished to you, and return it to Carol Cannon in Intervoice's Human Resources Department at your earliest convenience, in accordance with the terms of the election form, if you wish to continue such insurance coverage. (See Paragraph 3 below for special provisions relating to continuation of your coverage.) Intervoice will settle all authorized reimbursable business expenses, if any, based on your submission of appropriate expense reports along with the required receipts and documenting information. Final expense reports for any remaining outstanding reimbursable expenses you have incurred must be submitted within 5 days after the Separation Date, except for any charges not billed to you by that time, in which case the expense must be promptly submitted upon your receipt of the billing. 3. Special Separation Compensation. Contingent upon your acceptance of the terms of this Agreement and in consideration of your undertakings set forth herein, Intervoice offers you, in addition to the pay and benefits you will receive pursuant to Paragraph 2 and in lieu of benefits under any other Intervoice severance pay program or other agreement, the following Special Separation Compensation: (a) Payment of the sum of $511,544.00, equivalent to two times your current annualized base salary. This sum is a gross amount, subject to lawful deductions, and will be paid in lump sum on the first business day after the Ratification Effective Date of this Agreement as defined in Paragraph 23. (b) Payment for a period of 18 months following the month in which the Separation Date occurs for Intervoice's group health insurance coverage on you and any covered dependents as in effect on the Separation Date, to the same extent as if you had continued as an employee; provided, however, that Intervoice's obligation in this regard shall terminate at such earlier date as you and your family members who are then under Intervoice's coverage have become eligible and qualified for comparable coverage (including any preexisting-condition requirements) under another employer's plan. To receive this coverage, you must make the COBRA election referred to in Paragraph 2 above, and by your agreement hereto you authorize deduction from the payment described in subparagraph (a) of this paragraph for your share, if any, of the premiums. (c) Amendment of your stock options as follows: Effective upon the date of your initial execution of this Agreement as shown by the date of your signature hereto on page 13, all stock option agreements between you and Intervoice pursuant to which Intervoice has heretofore granted to you options for the purchase of the Common Stock, no par value, of Intervoice ("Stock Options") shall be deemed to be amended so that (i) all Stock Options that are not yet Mr. Rob-Roy J. Graham June 25, 2003 Page 3 exercisable (except for that portion of the Stock Options granted under the Intervoice 1999 Stock Option Plan with an exercise price of $1.015 which become exercisable on July 18, 2003) shall become immediately exercisable, and (ii) all Stock Options granted to you under Intervoice's 1998 Stock Option Plan and 1999 Stock Option Plan shall remain exercisable for 12 months from the Separation Date; provided, however, that this subparagraph 3(c) and the deemed amendments to the stock option agreements set forth above shall be null and void and of no effect whatsoever in the event you take, or fail to take, as the case may be, any of the following actions: (a) you revoke your acceptance of this Agreement prior to the Effective Date, (b) you fail to timely sign the Renewal and Ratification pursuant to Paragraph 23 hereof, or (c) you revoke your Renewal and Ratification of this Agreement prior to the Ratification Effective Date (any or all of such acts hereinafter the "Revocation or Failure Events"). Provided further, if any of the Revocation or Failure Events occurs and prior to the occurrence thereof you have exercised any Stock Options the exercisability of which had been accelerated by operation of this subparagraph 3(c), then with respect to such exercised Stock Options you shall forthwith pay to Intervoice in cash the difference between the exercise price of each such option and the closing price of shares of Intervoice common stock as quoted on NASDAQ on the day each such option was exercised. (d) Transfer to you, as of the Separation Date, of ownership of the following personal property: (i) Intervoice's laptop computer presently assigned to you; (ii) Intervoice's desktop computer presently in use at your home; Intervoice's printer also presently in use at your home; and Intervoice's cellular telephone (together with chargers and ancillary equipment), presently assigned to you and such right to the presently assigned telephone number as may exist under Intervoice's existing contract with the responsible carrier, subject to your assumption of financial responsibility for the cell phone account as of first day following the Separation Date. This Agreement shall suffice as a bill of sale with respect to all such items of personal property. (e) Provision of Executive Package of career transition services through a qualified service firm selected by Intervoice. These services are available at your option, and can be initiated by contacting Don Brown at 972-454-8070. In the event you do not wish to utilize these career transition services, you may, alternatively, elect within six months of the date of your initial execution of this Agreement to receive the equivalent value of the services, which is $7,500.00, in cash. A cash payment is subject to lawful deductions. Your election to receive a cash payment must be communicated in writing to Don Brown at the address shown on the letterhead. (f) Reimbursement of reasonable legal fees and expenses incurred by you in connection with the review and negotiation of this Agreement prior to its execution. 4. Temporary Continuation of Employment and Corporate Officer Responsibilities. Your last date of employment (the "Separation Date") shall be the date which is 30 days Mr. Rob-Roy J. Graham June 25, 2003 Page 4 after your initial execution of this Agreement. Until the close of business on the Separation Date, you will continue diligently and faithfully to perform your present duties as Chief Financial Officer and Secretary and to carry on all normal activities of such offices. 5. Employment Agreement Replaced by this Agreement; Preservation of Covenant Not to Compete and Confidentiality Provisions. Except as otherwise provided herein, that certain employment agreement effective September 1, 1998, as amended by its First Amendment effective July 1, 2000, and Second Amendment effective March 1, 2001 (together with any and all other amendments thereto, collectively the "Employment Agreement"), between you and Intervoice, is replaced in its entirety by this Agreement as of the Effective Date hereof; and the terms of this Agreement shall supersede all provisions of the Employment Agreement. Provided, however, that (i) Paragraph 6 (Covenant Not to Compete) (except for subparagraph 6(b), which is hereby amended and restated in its entirety as is set forth in Schedule 1 hereto), and (ii) Paragraph 27 (Assignment, Protection and Confidentiality of Proprietary Information) of the original employment agreement effective September 1, 1998, shall continue in full force and effect, and nothing herein except as provided in this Paragraph 5 shall act to cancel, change, or supersede your continuing obligations under such preserved provisions. You and Intervoice acknowledge your mutual intention that the terms of this Agreement alone, and not the Employment Agreement, shall define your compensation for the remainder of your employment and upon termination of your employment. 6. Continuation of Obligations Under Employee Agreement on Ideas, Inventions and Confidential Information. Nothing herein shall act to cancel, change, or supersede your continuing obligations as specified under any of the terms of the Employee Agreement on Ideas, Inventions and Confidential Information which you executed on August 26, 1992. The terms of such Employee Agreement on Ideas, Inventions and Confidential Information shall be deemed to be incorporated herein by reference. 7. Incorporation of Preserved Provisions by Reference. In the construction of this Agreement, to the extent necessary to allow a proper interpretation of and to give due regard to provisions preserved under the terms of Paragraphs 5 and 6 hereof, the applicable terms of Paragraphs 6 and 27 of the Employment Agreement and the entirety of the Employee Agreement on Ideas, Inventions and Confidential Information are incorporated herein by reference. 8. Validity of Covenant Not to Compete and Confidentiality Provisions. You acknowledge and agree that the restrictions contained in Paragraphs 6 and 27 of the Employment Agreement, and the confidentiality provisions of the Employee Agreement on Ideas, Inventions and Confidential Information, are ancillary to otherwise enforceable agreements; that Intervoice's promises and undertakings set forth in the Employment Agreement and the Employee Agreement on Ideas, Inventions and Confidential Information, your position and responsibilities with Intervoice, and Intervoice's granting to you ownership in Intervoice in the form of Intervoice stock, gave rise to Intervoice's interest in restricting your post-employment activities; that such restrictions were and are designed to enforce your promises and undertakings set forth in Paragraphs 6 and Mr. Rob-Roy J. Graham June 25, 2003 Page 5 27 of the Employment Agreement and the confidentiality provisions of the Employee Agreement on Ideas, Inventions and Confidential Information and your common-law obligations and duties owed to Intervoice; that the restrictions are reasonable and necessary, are valid and enforceable under Texas law, and do not impose a greater restraint than necessary to protect Intervoice's goodwill, confidential information, and other legitimate business interests; and that you will immediately notify Intervoice in writing, through its Executive Vice President and General Counsel, should you believe or be advised that the restrictions are not, or likely are not, valid or enforceable under Texas law (the "Enforceability Notification"). Intervoice agrees that your conduct in providing the Enforceability Notification under this Paragraph shall not constitute a waiver of any attorney-client privilege between you and your attorney(s). 9. Compelled Disclosure of Confidential Information. In the event you believe that you are compelled by law or valid legal process to disclose any confidential information within the purview of Paragraph 27 of the Employment Agreement or any provision of the Employee Agreement on Ideas, Inventions and Confidential Information, you will notify Intervoice in writing, through its Executive Vice President and General Counsel, sufficiently in advance of any such disclosure to allow Intervoice the opportunity to defend, limit, or otherwise protect its interests against such disclosure. 10. Return of Property. You are required, unless otherwise agreed to in writing, to return to Intervoice any and all items of its property, including without limitation all records and documentation regarding Intervoice's financial, accounting, and corporate transactions; keys and access cards or devices; any computers and their peripheral equipment and cell phones and their ancillary equipment (except for such items referred to in Paragraph 3(d) herein); calculators and other equipment; credit cards; forms; files, manuals, and correspondence; business records; personnel data, lists of employees, and salary and benefits information pertaining to other employees; customer lists and files; lists of suppliers and vendors; price lists, contracts, and contract information; marketing plans, brochures, and catalogs; training materials; product samples; software, computer tapes and diskettes or other portable media, computer-readable files and data stored on any hard drive or other installed device, and data processing reports; and any and all other documents or property which you have had possession of or control over during the course of your employment with Intervoice. By your signature below, you represent that you will comply with this requirement. 11. Mutual Releases. (a) GENERAL RELEASE OF INTERVOICE AND RELATED PARTIES. IN CONSIDERATION OF THE MUTUAL PROMISES AND UNDERTAKINGS HEREIN AND THE SPECIAL SEPARATION COMPENSATION AS DESCRIBED IN PARAGRAPH 3 ABOVE, YOU AND YOUR FAMILY MEMBERS, HEIRS, SUCCESSORS, AND ASSIGNS (COLLECTIVELY THE "GRAHAM RELEASING PARTIES") HEREBY RELEASE, ACQUIT, AND FOREVER WAIVE AND DISCHARGE ANY AND ALL CLAIMS AND DEMANDS OF WHATEVER KIND OR CHARACTER, WHETHER VICARIOUS, DERIVATIVE, OR DIRECT THAT YOU OR THEY, INDIVIDUALLY, COLLECTIVELY, OR OTHERWISE, MAY HAVE OR ASSERT AGAINST: (I) INTERVOICE; (II) ANY DIRECT OR INDIRECT SUBSIDIARY OR OTHER AFFILIATED ENTITY OF INTERVOICE; OR (III) Mr. Rob-Roy J. Graham June 25, 2003 Page 6 ANY OFFICER, DIRECTOR, FIDUCIARY, AGENT, EMPLOYEE, REPRESENTATIVE, INSURER, ATTORNEY, OR ANY SUCCESSORS AND ASSIGNS OF THE PERSONS OR ENTITIES JUST NAMED (COLLECTIVELY THE "INTERVOICE RELEASED PARTIES"). THIS GENERAL RELEASE INCLUDES BUT IS NOT LIMITED TO ANY CLAIM OR DEMAND BASED ON ANY FEDERAL, STATE, OR LOCAL STATUTORY OR COMMON LAW OR CONSTITUTIONAL PROVISION THAT APPLIES OR IS ASSERTED TO APPLY, DIRECTLY OR INDIRECTLY, TO THE FORMATION, CONTINUATION, OR TERMINATION OF YOUR EMPLOYMENT RELATIONSHIP WITH INTERVOICE. THUS, YOU AND THE OTHER GRAHAM RELEASING PARTIES AGREE TO WAIVE TO THE MAXIMUM EXTENT PERMITTED BY LAW ANY CLAIMS OR DEMANDS AGAINST INTERVOICE OR ANY OF THE OTHER INTERVOICE RELEASED PARTIES SUCH AS FOR WRONGFUL DISCHARGE; UNLAWFUL EMPLOYMENT DISCRIMINATION ON THE BASIS OF AGE OR ANY OTHER FORM OF UNLAWFUL EMPLOYMENT DISCRIMINATION; RETALIATION; BREACH OF CONTRACT (EXPRESS OR IMPLIED); BREACH OF ANY ALLEGED DUTY OF GOOD FAITH AND FAIR DEALING; VIOLATION OF THE PUBLIC POLICY OF THE UNITED STATES, THE STATE OF TEXAS, OR ANY OTHER STATE; INTENTIONAL OR NEGLIGENT INFLICTION OF EMOTIONAL DISTRESS; TORTIOUS INTERFERENCE WITH CONTRACT; PROMISSORY ESTOPPEL; DETRIMENTAL RELIANCE; DEFAMATION OF CHARACTER; DURESS; NEGLIGENT MISREPRESENTATION; INTENTIONAL MISREPRESENTATION OR FRAUD; INVASION OF PRIVACY; LOSS OF CONSORTIUM; ASSAULT; BATTERY; CONSPIRACY; BAD FAITH; NEGLIGENT HIRING, RETENTION, OR SUPERVISION; ANY INTENTIONAL OR NEGLIGENT ACT OF PERSONAL INJURY; ANY ALLEGED ACT OF HARASSMENT OR INTIMIDATION; OR ANY OTHER INTENTIONAL OR NEGLIGENT TORT; OR ANY ALLEGED VIOLATION OF THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967 (THE "ADEA"); TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, AS AMENDED ("TITLE VII"); THE AMERICANS WITH DISABILITIES ACT OF 1990 (THE "ADA"); THE FAMILY AND MEDICAL LEAVE ACT OF 1993 (THE "FMLA"); THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 ("ERISA"); THE FAIR LABOR STANDARDS ACT (THE "FLSA"); THE FAIR CREDIT REPORTING ACT (THE "FCRA"); THE TEXAS COMMISSION ON HUMAN RIGHTS ACT (THE "TCHRA"); AND THE TEXAS WAGE PAYMENT STATUTE (THE "TWPS"). THIS RELEASE INCLUDES ANY CLAIMS OR DEMANDS FOR DAMAGES (ACTUAL OR PUNITIVE), BACK WAGES, FUTURE WAGES OR FRONT PAY, COMMISSIONS, BONUSES, SEVERANCE BENEFITS, MEDICAL EXPENSES AND THE COSTS OF ANY COUNSELING, REINSTATEMENT OR PRIORITY PLACEMENT, PROMOTION, VACATION LEAVE BENEFITS, PAST AND FUTURE MEDICAL OR OTHER EMPLOYMENT BENEFITS (EXCEPT AS TO WHICH THERE IS, AS OF THE SEPARATION DATE, EXISTING CONTRACTUAL OR VESTED ENTITLEMENT) INCLUDING CONTRIBUTIONS TO ANY EMPLOYEE BENEFIT PLANS, RETIREMENT BENEFITS (EXCEPT AS TO WHICH THERE IS, AS OF THE SEPARATION DATE, VESTED ENTITLEMENT), RELOCATION EXPENSES, COMPENSATORY DAMAGES, INJUNCTIVE RELIEF, LIQUIDATED DAMAGES, PENALTIES, EQUITABLE RELIEF, ATTORNEY'S FEES, COSTS OF COURT, DISBURSEMENTS, INTEREST, AND ANY AND ALL OTHER LOSS, EXPENSE, OR DETRIMENT OF WHATEVER KIND OR CHARACTER RESULTING FROM, GROWING OUT OF, CONNECTED WITH, OR RELATED IN ANY WAY TO THE FORMATION, CONTINUATION, OR TERMINATION OF YOUR EMPLOYMENT RELATIONSHIP WITH INTERVOICE. Mr. Rob-Roy J. Graham June 25, 2003 Page 7 FURTHER, YOU FOREVER WAIVE ANY RIGHT TO MONETARY RECOVERY FROM THE INTERVOICE RELEASED PARTIES, WHETHER SOUGHT DIRECTLY BY YOU OR IN THE EVENT ANY ADMINISTRATIVE AGENCY OR OTHER PUBLIC AUTHORITY, INDIVIDUAL, OR GROUP OF INDIVIDUALS SHOULD PURSUE ANY CLAIM ON YOUR BEHALF; AND YOU WILL NOT REQUEST OR ACCEPT FROM THE INTERVOICE RELEASED PARTIES, AS COMPENSATION OR DAMAGES RELATED TO YOUR EMPLOYMENT OR THE TERMINATION OF YOUR EMPLOYMENT BY INTERVOICE, ANYTHING OF VALUE THAT IS NOT PROVIDED FOR IN THIS AGREEMENT. THIS GENERAL RELEASE DOES NOT APPLY TO ANY RIGHTS OR CLAIMS THAT MAY ARISE AFTER THE DATE THIS AGREEMENT IS EXECUTED. AS PROVIDED BY LAW, AFTER YOU HAVE SIGNED THIS AGREEMENT, AND SIMILARLY AFTER YOU HAVE SIGNED THE RENEWAL AND RATIFICATION, YOU WILL STILL HAVE AN ADDITIONAL SEVEN DAYS IN WHICH TO RECONSIDER AND REVOKE YOUR ACCEPTANCE, IF YOU WISH. (b) INTERVOICE'S GENERAL RELEASE OF YOU. IN CONSIDERATION OF THE MUTUAL PROMISES AND UNDERTAKINGS HEREIN, INTERVOICE, ON BEHALF OF ITSELF AND ITS DIRECT AND INDIRECT SUBSIDIARIES AND ANY OTHER AFFILIATED ENTITIES (COLLECTIVELY THE "INTERVOICE RELEASING PARTIES"), HEREBY RELEASES, ACQUITS, AND FOREVER WAIVES AND DISCHARGES ANY AND ALL CLAIMS AND DEMANDS OF WHATEVER KIND OR CHARACTER, WHETHER VICARIOUS, DERIVATIVE, OR DIRECT, THAT IT MAY HAVE OR ASSERT AGAINST YOU, YOUR FAMILY MEMBERS, HEIRS, SUCCESSORS, ASSIGNS, OR ANY AGENT OR REPRESENTATIVE (COLLECTIVELY THE "GRAHAM RELEASED PARTIES"). THIS GENERAL RELEASE INCLUDES BUT IS NOT LIMITED TO ANY CLAIM OR DEMAND FOR DAMAGES, LOSS, OR OTHER EXPENSE RESULTING FROM, GROWING OUT OF, CONNECTED WITH, OR RELATED IN ANY WAY TO THE FORMATION, CONTINUATION, OR TERMINATION OF YOUR EMPLOYMENT RELATIONSHIP WITH INTERVOICE. THIS GENERAL RELEASE DOES NOT APPLY TO ANY RIGHTS OR CLAIMS THAT MAY ARISE AFTER THE DATE THIS AGREEMENT IS EXECUTED. 12. Confidentiality, Cooperation, Nonprosecution, and Other Commitments. (a) Disclosure of Terms. You acknowledge and consent that the terms of this Agreement shall be attached to the Form 1OQ for the quarter ended May 31, 2003, that Intervoice will file with the Securities and Exchange Commission, and that it will be discussed in a Form 8K Current Report and in the proxy statement for Intervoice's 2003 Annual Meeting. (b) Cooperation. You will cooperate fully and completely with Intervoice or any of the other Intervoice Released Parties, at their reasonable request, in all pending and future litigation, investigations, arbitrations, and/or other fact-finding or adjudicative proceedings, public or private, involving Intervoice or any of the other Intervoice Released Parties. This obligation includes your promptly meeting with counsel for Intervoice or the other Intervoice Released Parties at reasonable times upon their request, and providing testimony in court, before an arbitrator or other convening authority, or upon deposition that is truthful, accurate, and complete, according to information known to you. If you (i) appear Mr. Rob-Roy J. Graham June 25, 2003 Page 8 as a witness in any pending or future litigation, arbitration, or other fact-finding or adjudicative proceeding at the request of Intervoice or any of the other Intervoice Released Parties; or (ii) for any other reason incur out-of-pocket expenses in connection with fulfillment of your duties under this subparagraph 12(b) at the request of Intervoice or any of the other Intervoice Released Parties, Intervoice agrees to reimburse you, upon submission of substantiating documentation, for necessary and reasonable travel, lodging, and food expenses incurred by you as a result thereof. (c) Nonprosecution. Except as requested by Intervoice, as permitted by valid law or regulation that supersedes the terms of this Agreement, or as compelled by law or judicial process, you will not assist, cooperate with, or supply information of any kind to any individual or private-party litigant or their agents or attorneys (i) in any proceeding, investigation, or inquiry raising issues under the ADEA, Title VII, the ADA, the FMLA, ERISA, the FLSA, the FCRA, the TCHRA, the TWPS, or any other federal, state, or local law involving the formation, continuation, or termination of your employment relationship, or the employment of other persons, by Intervoice or any of the other Intervoice Released Parties, or (ii) in any other litigation against Intervoice or any of the other Intervoice Released Parties. (d) No Other Actions. Except as permitted by valid law that supersedes the terms of this Agreement, you will not initiate any investigation, inquiry, or any other action of any kind with respect to Intervoice's facilities, employment practices, or sales or business operations, relating to the termination of your employment as provided for in this Agreement, or to the employment of any other person. (e) Nondisparagement; Handling of Inquiries. You will not make to any other parties any statement, oral or written, which directly or indirectly impugns the quality or integrity of Intervoice's or any of the other Intervoice Released Parties' business, accounting, or employment practices, or any other disparaging or derogatory remarks about Intervoice or any of the other Intervoice Released Parties, their officers, directors, stockholders, managerial personnel, or other employees; and Intervoice shall instruct its officers not to make any disparaging or derogatory remarks about you. Nothing herein, however, is intended to or shall act in any manner to prevent you or Intervoice's officers from presenting testimony under oath, in any legal proceeding, that is truthful and accurate. Except as further provided hereinbelow, any direct inquiries to Intervoice from potential employers will receive Intervoice's normal response, pursuant to its current established policy, which provides for release solely of the following information: verification of (i) name, (ii) last job title held, and (iii) dates of service. If you have authorized Intervoice to provide other information in specific instances, Intervoice shall use in those instances the form of response, containing such factual information as has been jointly determined and agreed upon by you and Intervoice. Mr. Rob-Roy J. Graham June 25, 2003 Page 9 13. Agreement Not to Seek Reemployment. To prevent any future dispute regarding further employment with Intervoice, you hereby agree that: (i) you will not ever apply for or otherwise seek employment by Intervoice or any subsidiary or other Affiliate of Intervoice at any time in the future, at any location, office, or place of business, and (ii) your forbearance to seek future employment as just stated is purely contractual and is in no way involuntary, discriminatory, or retaliatory. 14. Agreement Regarding Solicitation of Employees, Customers, and Suppliers. For a period of one year following the Separation Date, and thereafter to the extent provided by law, you will not directly or indirectly, for your own account or for the benefit of any other person or party: (a) Solicit, induce, entice, or attempt to entice any employee, contractor, or subcontractor of Intervoice to terminate his or her employment or contract with Intervoice; or (b) Solicit, induce, entice, or attempt to entice any customer or supplier of Intervoice, including any firms that have been customers or suppliers of Intervoice within one year preceding the Separation Date, to terminate its business relationship with Intervoice. Should you breach this obligation, Intervoice will be entitled to enforce the provisions of this paragraph by seeking injunctive relief in addition to recovering any monetary damages Intervoice may sustain as a result of such breach, and if so determined by judgment or decree, you may be required to repay the Special Separation Compensation provided to you by this Agreement. 15. Officer's Indemnification. Intervoice hereby reaffirms its obligations to you pursuant to the provisions of its Bylaws at Paragraph 8.7, Indemnification, as currently in effect, to indemnify you in accordance therewith, both before and after the Separation Date. Intervoice acknowledges and agrees that you have provided to Intervoice the undertaking required by Paragraph 8.7(H) of its Bylaws and that you are entitled to advancement of any expenses, including attorneys' fees, in connection with the pending lawsuit in the United States District Court for the Northern District of Texas, Dallas Division, entitled David Barrie and Jill C. Richling, et al. v. Intervoice-Brite, Inc., et al., Cause No. C83-01CV1071-D. In any existing or future director and officer insurance policies, Intervoice shall cause you to be provided insurance coverage equal in scope to any other executive officer of Intervoice. 16. Nonadmission of Liability or Wrongdoing. This Agreement does not in any manner constitute an admission of liability or wrongdoing on the part of Intervoice or any of the other Intervoice Released Parties, but Intervoice and the other Intervoice Released Parties expressly deny any such liability or wrongdoing; and, except to the extent necessary to enforce this Agreement, neither this Agreement nor any part of it may be construed, used, or admitted into evidence in any judicial, administrative, or arbitral proceedings as an admission of any kind by Intervoice or any of the other Intervoice Released Parties. Mr. Rob-Roy J. Graham June 25, 2003 Page 10 17. Authority to Execute, and Indemnification for Claims. (a) Intervoice represents and warrants that it has the authority to execute this Agreement on behalf of all of the Intervoice Releasing Parties. Intervoice further agrees to indemnify fully and hold harmless you and any of the other Graham Released Parties from any and all claims brought by the Intervoice Releasing Parties on behalf of Intervoice, including the amount of any such claims you or any of the Graham Released Parties are compelled to pay, and the costs and attorney's fees incurred in defending against all such claims. (b) You represent and warrant that you have the authority to execute this Agreement on behalf of all the Graham Releasing Parties. You further agree to indemnify fully and hold harmless Intervoice and any of the other Intervoice Released Parties from any and all claims brought by the Graham Releasing Parties or derivative of your own, including the amount of any such claims Intervoice or any of the other Intervoice Released Parties are compelled to pay, and the costs and attorney's fees incurred in defending against all such claims. 18. Governing Law and Interpretation. This Agreement and the rights and duties of the parties under it shall be governed by and construed in accordance with the laws of the State of Texas, without regard for any conflicts of laws provisions. If any provision of this Agreement is held to be unenforceable, such provision shall be considered separate, distinct, and severable from the other remaining provisions of this Agreement, and shall not affect the validity or enforceability of such other remaining provisions; and in all other respects, this Agreement shall remain in full force and effect. If any provision of this Agreement is held to be unenforceable as written but may be made to be enforceable by limitation thereof then such provision shall be enforceable to the maximum extent permitted by applicable law. The language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties. 19. Breach of Agreement. (a) Should you fail to comply with any of your obligations as set forth in this Agreement, Intervoice will have no obligation to pay any unpaid portion of the Special Separation Compensation described above, and you may be required to repay any amounts and return and property comprising the Special Separation Compensation provided to you by this Agreement; but all other provisions of this Agreement shall remain in full force and effect. (b) If, notwithstanding your waiver of claims as described in Paragraph 11 above, you or any other of the Graham Releasing Parties (or any other party asserting any claim derivative of your own) should nonetheless proceed to make any such claims against the Intervoice Released Parties by bringing an action in a federal, state, or municipal court, or before any administrative body that has the power to make a monetary or equitable award, then in addition to any other legal or equitable remedies available to Mr. Rob-Roy J. Graham June 25, 2003 Page 11 Intervoice for your breach of this Agreement, Intervoice may seek, and the court or other body hearing the claims may hold you liable for, Intervoice's damages and costs, including attorney's fees, incurred in defending against your claims. The foregoing provision does not apply with respect to an action brought under the ADEA in which the General Release provisions of this Agreement are challenged. With respect to any such action, the first sentence of this subparagraph is modified to state: "If notwithstanding your waiver of claims as described in Paragraph 11 above, you should nonetheless proceed to make any such claims by bringing an action in a federal, state, or municipal court, or before any administrative body that has the power to make a monetary or equitable award, the court or other body hearing your claims may allow the employer to recover attorney's fees and/or costs specifically authorized by federal law or as may otherwise lawfully be determined by the court or other body hearing the claims." (c) If you engage in any of the restricted activities described in Paragraph 6(b) of the Employment Agreement during the period of restriction (as amended in Paragraph 5 herein), or engage in any conduct that violates Paragraph 27 of the Employment Agreement or any of the confidentiality terms of the Employee Agreement on Ideas, Inventions and Confidential Information at any time while any of the Stock Options remain outstanding and unexercised, then the amendments to the stock option agreement described in Paragraph 3(c) shall become null and void and of no effect whatsoever as of the date the restricted activities or the violation of Paragraph 27 or the confidentiality provisions of the Employee Agreement on Ideas, Inventions and Confidential Information commenced, and provided further that Intervoice may, as of the date of commencement of such engagement in restricted activities or violation of confidentiality duties, cease its performance under Paragraph 3 and proceed to pursue any and all remedies available pursuant to the terms of this Agreement or at law or in equity. 20. EXPIRATION OF OFFER. INTERVOICE'S OFFER OF THE PROPOSED SPECIAL SEPARATION COMPENSATION, IF NOT EARLIER WITHDRAWN, WILL EXPIRE AT 4:00 P.M. ON JULY 17, 2003, A PERIOD OF MORE THAN 21 DAYS AFTER YOU WERE ORIGINALLY PROVIDED WITH THE TERMS OF THIS OFFER FOR YOUR CONSIDERATION. IN THIS REGARD, YOU AGREE THAT ANY CHANGES MADE TO THE ORIGINAL OFFER, WHETHER THE SAME MAY BE CONSIDERED MATERIAL OR IMMATERIAL, DO NOT RESTART THE RUNNING OF THE MINIMUM 21-DAY PERIOD REFERRED TO HEREIN AND AS OTHERWISE REQUIRED BY LAW. YOU MAY ACCEPT THIS OFFER AT ANY TIME BEFORE EXPIRATION BY SIGNING THIS LETTER IN THE SPACE PROVIDED BELOW, AND RETURNING IT CONFIDENTIALLY TO DON BROWN, INTERVOICE'S EXECUTIVE VICE PRESIDENT HUMAN RESOURCES, OR DEAN HOWELL, INTERVOICE'S EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL. 21. Consultation With an Attorney. You have the right and are encouraged by Intervoice to consult with an attorney of your choosing before executing this Agreement. 22. Effective Date. This Agreement will become effective and enforceable upon the expiration of seven days after your execution and return of this document ("Effective Date"). At any time before the Effective Date of this Agreement, you may revoke your acceptance. Mr. Rob-Roy J. Graham June 25, 2003 Page 12 23. Renewal and Ratification of General Release. On the Separation Date (or within three business days thereafter), you agree to re-execute this Agreement in renewal and ratification of your General Release as set forth in Paragraph 11 above together with all other obligations undertaken by you herein, by again signing this letter in the appropriate space provided below. Your renewal and ratification will not become effective and enforceable until the expiration of seven days after your execution of it (the "Ratification Effective Date"). At any time before the Ratification Effective Date, you may revoke your renewal and ratification; but if you revoke, your employment will still have been terminated, and you will not receive the Special Separation Compensation. 24. Voluntary Agreement. You acknowledge that execution of this Agreement is knowing and voluntary on your part, and that you have had a reasonable time to deliberate regarding its terms. 25. Consideration. Whether expressly stated herein or not, all obligations that you assume and undertakings that you make by executing this Agreement are understood to be in consideration of the mutual promises and undertakings herein and the Special Separation Compensation offered to you as described in Paragraph 3 above. Further, by executing this Agreement, you acknowledge and agree that neither Intervoice nor any of the other Intervoice Released Parties has any legal obligation to provide the Special Separation Compensation to you, except pursuant to the terms of this Agreement. 26. Notices. Any notices required or permitted to be given under the terms of this Agreement or Schedule 1 hereto shall be given in writing, delivered to the attention of the persons or offices specified below. Any such notices shall be considered effective only upon actual delivery to the appropriate address, marked to the attention of the party or officer for whom the notice is intended. If to Intervoice: If to you: Intervoice, Inc. Mr. Rob-Roy J. Graham Attn: Executive Vice President and General Counsel 3517 Wentwood Dr. and Dallas, TX 75225 Executive Vice President Human Resources 17811 Waterview Parkway Dallas, TX 75252 27. Entire Agreement. Except with respect to certain preexisting obligations expressly referred to and incorporated by reference herein, this Agreement contains and constitutes the entire understanding and agreement between you and Intervoice as to its subject matter, and may be modified only by a writing of contemporaneous or subsequent date executed by both you and an authorized official of Intervoice. This Agreement does not supersede the rights and obligations of you and Intervoice under any nonqualified stock option agreements except as any such agreements are amended in Paragraph 3(c) herein. Mr. Rob-Roy J. Graham June 25, 2003 Page 13 ---------- If you are in agreement with the foregoing provisions, please execute both copies of this letter in the space provided below. You should return one executed original to the undersigned, and maintain the other executed original in your files. Upon the expiration of seven days after the date of your execution of this Agreement, unless revoked by you within that period, it shall then constitute a valid and binding agreement by and between Intervoice and you. Sincerely, INTERVOICE, INC. By: /s/ DAVID W. BRANDENBURG ------------------------ David W. Brandenburg Chairman of the Board and Chief Executive Officer ACCEPTED AND AGREED TO: /s/ ROB-ROY J. GRAHAM - --------------------- Rob-Roy J. Graham Date Signed: 6/25/03 ------- Mr. Rob-Roy J. Graham June 25, 2003 Page 14 RENEWAL AND RATIFICATION OF GENERAL RELEASE AND OTHER OBLIGATIONS IF YOU HAVE ACCEPTED THIS AGREEMENT, THE FOLLOWING IS TO BE COMPLETED ONLY ON THE SEPARATION DATE (or within three business days thereafter): In consideration of the mutual undertakings herein and the Special Separation Compensation specified in Paragraph 3 above, I hereby renew and ratify my General Release as set forth in Paragraph 11 of this Agreement together with all my other obligations under this Agreement. - ---------------------- ROB-ROY J. GRAHAM Date Signed:____________________ (only the date of the Separation Date or later may be entered) SCHEDULE I Subparagraph 6(b) of the Employment Agreement is hereby amended and restated in its entirety as follows: "6(b) For a period of twelve (12) months from the Separation Date (as defined in that certain letter agreement between Intervoice and you dated June 25, 2003, relating to your resignation from Intervoice) you 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 whose primary source of business relates to (i) touchtone-enabled or speech-enabled interactive voice response and/or (ii) messaging systems (including both voice mail and unified messaging) directly or indirectly targeted to telecommunication companies (said business activities described in (i) and (ii) above being hereafter referred to as "Restricted Activities"). Provided, during said twelve (12) month period referred to in the preceding sentence, you may be employed by, or otherwise connected with, an entity that is engaged in Restricted Activities but whose primary source of business is not related to Restricted Activities as long as your employment responsibilities and duties are segregated entirely from operations of Restricted Activities. For purposes of this subparagraph 6(b) the phrase "primary source of business" shall mean that fifty percent (50%) of the revenues of an entity are derived from the sales of systems or services of Restricted Activities. Any reference in this subparagraph 6(b) to an "entity" or "entities" shall include any affiliate of such entity or entities. The term "affiliate" shall have the same meaning as such term is defined in Rule 405 of the General Rules and Regulations of the Securities Act of 1933 (17 CFR 230.405). The parties hereto hereby agree that the entities listed under (x) below derive fifty percent (50%) or more of their revenues from sales of systems or services of Restricted Activities and are entities with which you shall be absolutely prohibited from being employed or otherwise connected with during the twelve (12) month period referred to in the first sentence of the first paragraph of this Section 6(b) and that the entities listed under (y) below derive less than fifty percent (50%) of their revenues from sales of systems or services of Restricted Activities: (x) Comverse Technologies Glenayre Nuance Speech Works Interactive Intelligence Bevocal Tellme Voice Genie Net Bytel Telerius ScanSoft (only if SpeechWorks is acquired by, or otherwise becomes similarly affiliated with, ScanSoft) (y) Nortel Siemens Ericsson Alcatel Fujitsu Lucent IBM Security First/Edify Avaya Enghouse Unisys Cisco Technomen Logica/CM G SSB Aspect Both parties recognize and agree that the names of the entities listed in (x) and (y) above may not be the official legal name of the entity but that each party recognizes and can readily identify such entities in the industry. If you intend to become associated with any entity listed under (y) above in any manner during the twelve (12) month period referred to in the first sentence of the first paragraph above, you agree to give Intervoice at least ten (10) business days' prior written notice of such intention and describe in reasonable detail the activities, duties and/or responsibilities in which you intend to be engaged with such entity. Intervoice shall retain the right to provide to you reasonable written evidence that any entity with which you intend to become associated is an entity that should be properly listed under (x) above. In the event Intervoice furnishes such evidence to you, you shall have the right to furnish reasonable written evidence to the contrary to Intervoice. Failure of Intervoice to respond within ten (10) business days after receipt of your notice of intention to associate with any entity listed under (y) above shall constitute a waiver of any objection Intervoice might have to such association. Notwithstanding the foregoing, you may own up to one percent (1%) of the shares of any publicly-owned corporation, provided that none of your other relationships with such corporation violates this covenant not to compete. Both parties recognize and agree that the lists of entities under (x) and (y) above are not exclusive, and there may be additional entities that would properly fall into either category and be subject to the terms of this subparagraph 6(b). EX-99.1 4 d07359exv99w1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 99.1 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 May 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: July 15, 2003 /s/ David W. Brandenburg --------------------------------------- David W. Brandenburg Chief Executive Officer and Chairman EX-99.2 5 d07359exv99w2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 99.2 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 May 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rob-Roy J. Graham, 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: July 15, 2003 /s/ Rob-Roy J. Graham --------------------------------------- Rob-Roy J. Graham Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----