##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED
November 30, 2005
 OR
 o
    
    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. Employerincorporation 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 þ No o
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
 The Registrant had 38,289,513 shares of common stock, no par value per share, outstanding as of
December 20, 2005.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1 Financial StatementsItem 2 Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4 Controls and ProceduresPART II. OTHER INFORMATIONItem 1 Legal ProceedingsItem 1A Risk FactorsItem 6 ExhibitsSIGNATURESIndex to ExhibitsStatement of Terms and Conditions of EmploymentCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1 Financial Statements
 
 (In Thousands, Except Share and Per Share Data)November 30, 2005
    
    
    February 28, 2005(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    70,258
    
    
    $
    60,242Trade accounts receivable, net of allowance for
doubtful accounts of $1,129 in fiscal 2006 and
$799 in fiscal 2005
    
    
    25,211
    
    
    
    32,605Inventory
    
    
    8,836
    
    
    
    7,642Prepaid expenses and other current assets
    
    
    4,620
    
    
    
    4,339108,925
    
    
    
    104,828Property and Equipment, net of accumulated depreciation of
$56,676 in fiscal 2006 and $54,303 in fiscal 2005
    
    
    27,151
    
    
    
    21,755Other AssetsIntangible assets, net of accumulated amortization of
$16,803 in fiscal 2006 and $15,840 in fiscal 2005
    
    
    4,044
    
    
    
    4,707Goodwill
    
    
    3,401
    
    
    
    3,401Other assets
    
    
    64
    
    
    
    168$
    143,585
    
    
    $
    134,859LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    9,499
    
    
    $
    11,485Accrued expenses
    
    
    9,479
    
    
    
    13,745Customer deposits
    
    
    6,815
    
    
    
    6,871Deferred income
    
    
    25,056
    
    
    
    24,448Current portion of long-term borrowings
    
    
    
    
    
    
    400Income taxes payable
    
    
    5,515
    
    
    
    4,12956,364
    
    
    
    61,078Long-Term Borrowings
    
    
    
    
    
    
    1,333Stockholders EquityPreferred stock, $100 par value2,000,000
shares authorized: none issuedCommon stock, no par value, at nominal
assigned value62,000,000 shares
authorized: 38,286,179 issued and
outstanding in fiscal 2006 and 37,196,216 issued
and outstanding in fiscal 2005
    
    
    19
    
    
    
    19Additional capital
    
    
    90,313
    
    
    
    85,421Accumulated deficit
    
    
    (786
    )
    
    
    (12,931
    )Accumulated other comprehensive loss
    
    
    (2,325
    )
    
    
    (61
    )Stockholders equity
    
    
    87,221
    
    
    
    72,448$
    143,585
    
    
    $
    134,859
 
 2




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##### Table of Contents



(In Thousands, Except Per Share Data)Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2005
    
    
    2004
    
    
    2005
    
    
    2004SalesSolutions
    
    $
    19,328
    
    
    $
    27,638
    
    
    $
    62,720
    
    
    $
    74,027Recurring services
    
    
    21,683
    
    
    
    20,723
    
    
    
    64,844
    
    
    
    60,51041,011
    
    
    
    48,361
    
    
    
    127,564
    
    
    
    134,537Cost of goods soldSolutions
    
    
    11,474
    
    
    
    13,741
    
    
    
    37,328
    
    
    
    38,997Recurring services
    
    
    6,409
    
    
    
    6,997
    
    
    
    18,794
    
    
    
    20,97317,883
    
    
    
    20,738
    
    
    
    56,122
    
    
    
    59,970Gross marginSolutions
    
    
    7,854
    
    
    
    13,897
    
    
    
    25,392
    
    
    
    35,030Recurring services
    
    
    15,274
    
    
    
    13,726
    
    
    
    46,050
    
    
    
    39,53723,128
    
    
    
    27,623
    
    
    
    71,442
    
    
    
    74,567Research and development expenses
    
    
    4,226
    
    
    
    4,119
    
    
    
    12,305
    
    
    
    11,282Selling, general and administrative expenses
    
    
    15,801
    
    
    
    16,380
    
    
    
    46,601
    
    
    
    44,469Amortization of acquisition related intangible assets
    
    
    252
    
    
    
    252
    
    
    
    756
    
    
    
    1,209Income from operations
    
    
    2,849
    
    
    
    6,872
    
    
    
    11,780
    
    
    
    17,607Interest income
    
    
    685
    
    
    
    275
    
    
    
    1,781
    
    
    
    542Interest expense
    
    
    
    
    
    
    (129
    )
    
    
    (31
    )
    
    
    (513
    )Other income (expense)
    
    
    212
    
    
    
    (89
    )
    
    
    379
    
    
    
    109Income before taxes
    
    
    3,746
    
    
    
    6,929
    
    
    
    13,909
    
    
    
    17,745Income taxes (benefit)
    
    
    121
    
    
    
    (104
    )
    
    
    1,764
    
    
    
    2,453Net income
    
    $
    3,625
    
    
    $
    7,033
    
    
    $
    12,145
    
    
    $
    15,292Net income per share  basic
    
    $
    0.09
    
    
    $
    0.20
    
    
    $
    0.32
    
    
    $
    0.43Shares used in basic per share computation
    
    
    38,251
    
    
    
    36,060
    
    
    
    37,970
    
    
    
    35,965Net income per share  diluted
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.31
    
    
    $
    0.40Shares used in diluted per share computation
    
    
    39,080
    
    
    
    38,295
    
    
    
    39,046
    
    
    
    38,260
 
 3




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(In Thousands)Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Operating activitiesNet income
    
    $
    3,625
    
    
    $
    7,033
    
    
    $
    12,145
    
    
    $
    15,292Adjustments to reconcile net income
to net cash provided by operating activities-
depreciation and amortization
    
    
    2,324
    
    
    
    1,980
    
    
    
    5,916
    
    
    
    6,047Other changes in operating activities
    
    
    (1,616
    )
    
    
    (6,621
    )
    
    
    702
    
    
    
    (10,276
    )Net cash provided by operating activities
    
    
    4,333
    
    
    
    2,392
    
    
    
    18,763
    
    
    
    11,063Investing activitiesPurchases of property and equipment
    
    
    (3,055
    )
    
    
    (1,371
    )
    
    
    (10,099
    )
    
    
    (4,835
    )Other
    
    
    
    
    
    
    
    
    
    
    (300
    )
    
    
    Net cash used in investing activities
    
    
    (3,055
    )
    
    
    (1,371
    )
    
    
    (10,399
    )
    
    
    (4,835
    )Financing activitiesPaydown of debt
    
    
    
    
    
    
    (1,100
    )
    
    
    (1,733
    )
    
    
    (10,666
    )Borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000Premium on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )Release of restricted cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,750Exercise of stock options
    
    
    314
    
    
    
    915
    
    
    
    2,392
    
    
    
    2,618Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    Net cash provided by (used in) financing activities
    
    
    314
    
    
    
    (185
    )
    
    
    3,159
    
    
    
    2,697Effect of exchange rates on cash
    
    
    (726
    )
    
    
    804
    
    
    
    (1,507
    )
    
    
    811Increase in cash and cash equivalents
    
    
    866
    
    
    
    1,640
    
    
    
    10,016
    
    
    
    9,736Cash and cash equivalents, beginning of period
    
    
    69,392
    
    
    
    48,955
    
    
    
    60,242
    
    
    
    40,859Cash and cash equivalents, end of period
    
    $
    70,258
    
    
    $
    50,595
    
    
    $
    70,258
    
    
    $
    50,595
 
 4




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Accumulated OtherCommon Stock
    
    Additional
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Deficit
    
    Loss
    
    TotalBalance at February 28, 2005
    
    
    37,196,216
    
    
    $
    19
    
    
    $
    85,421
    
    
    $
    (12,931
    )
    
    $
    (61
    )
    
    $
    72,448Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,145
    
    
    
    
    
    
    
    12,145Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,264
    )
    
    
    (2,264
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,881Exercise of stock options
    
    
    468,659
    
    
    
    
    
    
    
    2,392
    
    
    
    
    
    
    
    
    
    
    
    2,392Exercise of warrants
    
    
    621,304
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500Balance at November 30, 2005
    
    
    38,286,179
    
    
    $
    19
    
    
    $
    90,313
    
    
    $
    (786
    )
    
    $
    (2,325
    )
    
    $
    87,221
 
 5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED NOVEMBER 30, 2005
 Note A  Basis of Presentation
   Note B  Inventory
  November 30, 2005
    
    
    February 28, 2005Purchased parts
    
    $
    3,067
    
    
    $
    3,815Work in progress
    
    
    5,769
    
    
    
    3,827$
    8,836
    
    
    $
    7,642
 Note C  Property and Equipment
  November 30, 2005
    
    
    February 28, 2005Land and buildings
    
    $
    16,901
    
    
    $
    16,932Computer equipment and software
    
    
    39,791
    
    
    
    34,004Furniture and fixtures
    
    
    2,744
    
    
    
    3,345Managed services equipment
    
    
    15,977
    
    
    
    12,510Maintenance services equipment
    
    
    8,414
    
    
    
    9,26783,827
    
    
    
    76,058Less allowance for accumulated depreciation
    
    
    (56,676
    )
    
    
    (54,303
    )Property and equipment, net
    
    $
    27,151
    
    
    $
    21,755
  6




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Note D
 Long-Term Borrowings
  February 28, 2005Term loan, bearing interest, payable monthly, accruing at a rate equal to the
prime rate plus 0.50% or the London Inter-Bank Offering Rate plus
2.25%, principal repaid in full during March 2005
    
    $
    1,733Less: current portion
    
    
    (400
    )Long-term debt, net of current portion
    
    $
    1,333
  Note E  Income Taxes
    7




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Note F  Earnings Per Share
 Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,(in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net income
    
    $
    3,625
    
    
    $
    7,033
    
    
    $
    12,145
    
    
    $
    15,292Denominator:Denominator for basic
earnings per share
    
    
    38,251
    
    
    
    36,060
    
    
    
    37,970
    
    
    
    35,965Dilutive potential common sharesEmployee stock options
    
    
    829
    
    
    
    1,835
    
    
    
    1,005
    
    
    
    1,883Outstanding warrants
    
    
    
    
    
    
    400
    
    
    
    71
    
    
    
    412Denominator for diluted
earnings per share
    
    
    39,080
    
    
    
    38,295
    
    
    
    39,046
    
    
    
    38,260Net income per share:Basic
    
    $
    0.09
    
    
    $
    0.20
    
    
    $
    0.32
    
    
    $
    0.43Diluted
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.31
    
    
    $
    0.40
    8




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Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    3,625
    
    
    $
    7,033
    
    
    $
    12,145
    
    
    $
    15,292Less: Total
stock-based employee
compensation expense
determined under fair
value based methods
for all awards, net of
tax
    
    
    (2,615
    )
    
    
    (1,598
    )
    
    
    (5,854
    )
    
    
    (3,996
    )Pro forma net income
    
    $
    1,010
    
    
    $
    5,435
    
    
    $
    6,291
    
    
    $
    11,296Net income per share:Basic  as reported
    
    $
    0.09
    
    
    $
    0.20
    
    
    $
    0.32
    
    
    $
    0.43Basic  pro forma
    
    $
    0.03
    
    
    $
    0.15
    
    
    $
    0.17
    
    
    $
    0.31Diluted  as reported
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.31
    
    
    $
    0.40Diluted  pro forma
    
    $
    0.03
    
    
    $
    0.14
    
    
    $
    0.16
    
    
    $
    0.30
 Note G  Operating Segment Information and Major Customers
  Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Voice automation/IVR solution sales
    
    $
    9,749
    
    
    $
    15,152
    
    
    $
    30,954
    
    
    $
    48,990Network portal solution sales
    
    
    689
    
    
    
    2,244
    
    
    
    7,417
    
    
    
    4,442Messaging solution sales
    
    
    5,877
    
    
    
    2,321
    
    
    
    16,743
    
    
    
    6,951Payment solution sales
    
    
    3,013
    
    
    
    7,921
    
    
    
    7,606
    
    
    
    13,644Total solution sales
    
    
    19,328
    
    
    
    27,638
    
    
    
    62,720
    
    
    
    74,027Maintenance and support
services revenues
    
    
    15,589
    
    
    
    15,298
    
    
    
    45,964
    
    
    
    44,293Managed services revenues
    
    
    6,094
    
    
    
    5,425
    
    
    
    18,880
    
    
    
    16,217Total recurring services revenues
    
    
    21,683
    
    
    
    20,723
    
    
    
    64,844
    
    
    
    60,510Total sales
    
    $
    41,011
    
    
    $
    48,361
    
    
    $
    127,564
    
    
    $
    134,537
 9




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Geographic Operations
  Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2005
    
    
    2004
    
    
    2005
    
    
    2004North America
    
    $
    22,105
    
    
    $
    27,071
    
    
    $
    67,508
    
    
    $
    80,441Europe
    
    
    7,233
    
    
    
    11,166
    
    
    
    28,938
    
    
    
    30,000Middle East and Africa
    
    
    5,201
    
    
    
    6,055
    
    
    
    17,146
    
    
    
    15,562Central and South America
    
    
    4,831
    
    
    
    2,520
    
    
    
    10,207
    
    
    
    4,883Pacific Rim
    
    
    1,641
    
    
    
    1,549
    
    
    
    3,765
    
    
    
    3,651Total
    
    $
    41,011
    
    
    $
    48,361
    
    
    $
    127,564
    
    
    $
    134,537
 Concentration of Revenue
  Note H
 Contingencies
 Intellectual Property Matters
    10




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Ronald A.
Katz Technology Licensing, L.P. v. Citibank, et al.; No. 505CV 142
   Pending Litigation
 David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.
  11




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Daniel Wardiman, derivatively on behalf of Nominal Defendant, Intervoice-Brite, Inc. v. Daniel
D. Hammond et. al.,
 Barrie
 Audit Committee Investigation
    12




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Other Matters
        13




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Note
I  Acquisition of Edify Corporation
  14




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Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Disclosures To Qualify Forward Looking Statements
  
    
    We may not be successful in integrating the operations and products, and retaining the
customers, of Edify, and this could negatively impact our business.We believe we will be
able to achieve certain cost savings and other synergies as a result of combining
Intervoice and Edify, but there can be no assurance that such synergies will be realized.
Our future success will depend in part upon our ability to integrate and operate Edify
successfully with our business. Any inability to integrate the products of Intervoice and
Edify while maintaining or increasing the market share that such products had prior to the
merger could decrease the revenues historically generated from these products. Customers
of Intervoice and Edify may delay their purchase of products or services from one or both
companies to consider any potential implications the acquisition may have for products and
services offered by either company. In addition, the integration process will require the
dedication of management resources, which may temporarily distract attention from our
day-to-day business. Our future success will also depend in part on our ability to retain
and assimilate certain key employees of Edify. There can be no assurance that we will be
able to efficiently integrate and operate Edify and its products with our business,
maintain business relationships with Edifys customers and retain and assimilate key
employees of Edify. Failure to do so could have a material adverse effect on our results
of operations or our financial condition. Edify provides products and services which are
similar to our products and services and, accordingly, our Edify operations are generally
subject to most of the other risk factors discussed in this Item 2.
    
    We are prone to quarterly sales fluctuations.The sales value of an
individual order for our solutions and services can range from a few thousand dollars to
several million dollars depending on the complexity of our customers business need and the
size of its operations. The quantity and size of large sales (sales valued at
approximately $2.0 million or more) during any quarter can cause wide variations in our
quarterly sales and earnings, as such sales are often unevenly distributed throughout the
fiscal year. In addition, some of our sales transactions are completed in the same fiscal
quarter as ordered. Our accuracy in estimating future sales is largely dependent on our
ability to successfully qualify, estimate and close solution sales from our 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. The accuracy of our estimate
of future sales is also dependent on our ability to accurately estimate the amount of
revenue to be contributed from beginning backlog and revenue from cash basis customers
during any fiscal quarter. This estimate can be affected by factors outside our control,
including changes in project timing requested by our customers. Accordingly, our actual
sales for any fiscal reporting period may be significantly different than any estimate of
sales we make for such period. See the discussion entitled Sales in this Item 2 for a
discussion of our system for estimating sales and trends in our business.
    
    We are subject to potential and pending lawsuits and other claims.We are
subject to certain potential and pending lawsuits and other claims discussed in Note H of
Item 1 Financial Statements of Part I of this quarterly report on Form 10-Q. We believe
the pending lawsuits to which we are subject are without merit, and we intend to defend the
matters vigorously. There can be no assurances, however, that we will prevail in these
matters. Furthermore, we may become subject to claims, including claims by the government,
or other adverse consequences arising from the findings of the Audit Committee
investigation discussed in Note H. We, two of our former officers and two current employees
who are
 15




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not officers are currently responding to SEC subpoenas to produce documents and provide
testimony about the transactions that were the subject of the investigation. Any adverse
judgment, penalty or settlement related to any lawsuit or other such claim could have
consequences that would be material to our financial position or results of operations. We
may be required to indemnify certain of our current and former directors and officers under
existing arrangements in connection with the shareholders derivative suit in addition to
the indemnification we are currently providing to certain individuals in connection with the
class action lawsuit and the SEC investigation. Our insurance policies provide coverage for
losses and expenses incurred by us and our current and former directors and officers in
connection with claims made under the federal securities laws. These policies, however,
exclude losses and expenses related to the Barrie class action lawsuit discussed in Item 1
or to other litigation based on claims that are substantially the same as the claims in the
Barrie class action and contain other customary provisions to limit or exclude coverage for
certain losses and expenses.
    
    We face intense competition based on product capabilities, and we experience ever
increasing demands from our actual and prospective customers for our products to be
compatible with a variety of rapidly proliferating computing, telephony and computer
networking technologies and standards.Our success is dependent, to a large
degree, on our effectiveness in allocating resources to developing and improving products
compatible with those technologies, standards and functionalities that ultimately become
widely accepted by our current and prospective customers. Our success is also dependent, to
a large degree, on our ability to implement arrangements with vendors of complementary
product offerings so that we can provide our current and prospective customers greater
functionality. Our principal competitors include Genesys, Avaya, Nortel, Comverse
Technology, Huawei and Lucent Technologies. Many of our competitors have greater financial,
technological and marketing resources than we have. Although we have committed substantial
resources to enhance our existing products and to develop and market new products, there is
no assurance we will be successful.
    
    We may not be successful in transitioning our products and services to an open,
standards-based business model.Intervoice has historically provided complete,
bundled hardware and software solutions using internally developed components to address
our customers total business needs. Increasingly, the markets for our products are
requiring a shift to the development of products and services based on an open,
standards-based architecture such as the J2EE and Microsoftsâ.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, we believe we may sell less hardware and fewer bundled systems and may become
increasingly dependent on our development and sale of software application packages,
customized software and consulting and integration services. This shift will place new
challenges on us to transition our products and to hire and retain the mix of personnel
necessary to respond to this business environment, to adapt to the changing expense
structure that the new environment may tend to foster, and to increase sales of services,
customized software and application packages to offset reduced sales of hardware and
bundled solutions. The shift to open standards will also challenge us to accurately
estimate the level of R&D expenditures that will be necessary in future periods to comply
with existing standards and, potentially, to migrate to new open standards. If we are
unsuccessful in resolving one or more of these challenges, our revenues and profitability
could decline.
    
    We may not be able to retain our customer base, and, in particular, our more significant
customers.Our success is heavily dependent on our ability to retain our
significant customers, including those of Edify. The loss of one of our significant
customers could negatively impact our operating results. Our installed base of customers
generally is not contractually obligated to place further solutions orders with us or to
extend their services contracts with us at the expiration of their current contracts.
    
    We will be harmed if we lose key business and technical personnel.We rely
upon the services of a relatively small number of key technical, project management and
senior management personnel, most of whom do not have employment contracts. If we were to
lose any of our key personnel, replacing them could be difficult and costly. If we were
unable to successfully and promptly replace such personnel, our business could be
materially harmed.
 16




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
    
    Our reliance on significant vendor relationships could result in significant expense or
an inability to serve our customers if we lose these relationships.Although we
generally use standard parts and components in our products, some of our components,
including semi-conductors and, in particular, digital signal processors manufactured by
Texas Instruments, are available only from a small number of vendors. Likewise, we license
speech recognition technology from a small number of vendors. Two of these vendors,
ScanSoft, Inc. and Nuance Communications, Inc., recently completed a merger of their
organizations. As we continue to migrate to open, standards-based systems, we will become
increasingly dependent on our component suppliers and software vendors. To date, we have
been able to obtain adequate supplies of needed components and licenses in a timely manner,
and we expect to continue to be able to do so. Nevertheless, if our significant vendors are
unable to supply components or licenses at current levels, we may not be able to obtain
these items from another source or at historical prices. In such instances, we would be
unable to provide products and services to our customers or generate historical operating
margins, and our business and operating results would suffer.
    
    If third parties assert claims that our products or services infringe on their
technology and related intellectual property rights, whether the claims are made directly
against us or against our customers, we could incur substantial costs to defend these
claims.We believe software and technology companies, including Intervoice and
others in our industry, increasingly may become subject to infringement claims. Such claims
may require us to enter into costly license agreements or result in even more costly
litigation. To the extent a licensing arrangement is required, the arrangement may not be
available at all, or, if available, may be very expensive or even prohibitively expensive.
As with any legal proceeding, there is no guarantee we will prevail in any litigation
instituted against us asserting infringement of intellectual property rights. To the extent
we suffer an adverse judgment, we might have to pay substantial damages, discontinue the
use and sale of infringing products, repurchase infringing products from our customers in
accordance with indemnity obligations, expend significant resources to acquire
non-infringing alternatives, and/or obtain licenses to the intellectual property that has
been infringed upon. As with licensing arrangements, non-infringing substitute technologies
may not be available and, if available, may be very expensive, or even prohibitively
expensive, to implement. Accordingly, for all of the foregoing reasons, a claim of
infringement could ultimately have a material adverse effect on our business, financial
condition and results of operations.
    
    We are exposed to risks related to our international operations that could increase our
costs and hurt our business.Our products are currently sold in more than 75
countries. Our international sales were 46% and 44% of total sales for the fiscal quarters
ending November 30, 2005 and 2004, respectively. International sales, personnel and
property are subject to certain risks, including:
 §
    
    terrorism;§
    
    fluctuations in currency exchange rates;
    
    the difficulty and expense of maintaining foreign offices and distribution channels;§
    
    tariffs and other barriers to trade;§
    
    greater difficulty in protecting and enforcing intellectual property rights;§
    
    general economic and political conditions in each country;§
    
    loss of revenue, property and equipment from expropriation;§
    
    import and export licensing requirements; and§
    
    additional expenses and risks inherent in conducting operations in
geographically distant locations, including risks arising from differences in
language and cultural approaches to the conduct of business.
 
    
    Our inability to meet contracted performance targets could subject us to significant
penalties.Many of our 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 our failure to
achieve certain minimum service levels. We have had to pay liquidated damages in the past
and may have to pay additional liquidated damages in the future. Any such future liquidated
damages could be significant.
    
    Increasing consolidation in the telecommunications and financial industries could
adversely affect our revenues and profitability.The majority of our largest
customers are in the telecommunications and financial industries. These industries are
undergoing significant consolidation as a result of merger and acquisition activity. This
activity could result in a decrease in the number of customers purchasing our products
and/or in delayed purchases of our products by customers that are reviewing their
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strategic alternatives in light of a pending merger or acquisition. If these results occur,
our revenues and profitability could decline.
    
    The occurrence of force majeure events could impact our results from operations.The
occurrence of one or more of the following events could potentially cause us to incur
significant losses: acts of God, war, riot, embargoes, acts of civil or military
authorities, acts of terrorism or sabotage, the spread of disease, fire, flood, explosion,
earthquake, accident, strikes, radiation, inability to secure transportation, failure of
communications, failure of utilities or similar events.
 Sales.
  Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Voice automation/IVR solution sales
    
    $
    9,749
    
    
    $
    15,152
    
    
    $
    30,954
    
    
    $
    48,990Network portal solution sales
    
    
    689
    
    
    
    2,244
    
    
    
    7,417
    
    
    
    4,442Messaging solution sales
    
    
    5,877
    
    
    
    2,321
    
    
    
    16,743
    
    
    
    6,951Payment solution sales
    
    
    3,013
    
    
    
    7,921
    
    
    
    7,606
    
    
    
    13,644Total solution sales
    
    
    19,328
    
    
    
    27,638
    
    
    
    62,720
    
    
    
    74,027Maintenance and support
services revenues
    
    
    15,589
    
    
    
    15,298
    
    
    
    45,964
    
    
    
    44,293Managed services revenues
    
    
    6,094
    
    
    
    5,425
    
    
    
    18,880
    
    
    
    16,217Total recurring services revenues
    
    
    21,683
    
    
    
    20,723
    
    
    
    64,844
    
    
    
    60,510Total sales
    
    $
    41,011
    
    
    $
    48,361
    
    
    $
    127,564
    
    
    $
    134,537
  Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,
    
    
    November 30,
    
    
    November 30,2005
    
    
    2004
    
    
    2005
    
    
    2004North America
    
    $
    22,105
    
    
    $
    27,071
    
    
    $
    67,508
    
    
    $
    80,441Europe
    
    
    7,233
    
    
    
    11,166
    
    
    
    28,938
    
    
    
    30,000Middle East and Africa
    
    
    5,201
    
    
    
    6,055
    
    
    
    17,146
    
    
    
    15,562Central and South America
    
    
    4,831
    
    
    
    2,520
    
    
    
    10,207
    
    
    
    4,883Pacific Rim
    
    
    1,641
    
    
    
    1,549
    
    
    
    3,765
    
    
    
    3,651Total
    
    $
    41,011
    
    
    $
    48,361
    
    
    $
    127,564
    
    
    $
    134,537
  18




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##### Table of Contents



Three Months Ended November 302005
    
    2004Sales from recurring services and
support contracts, including
contracts for managed services
    
    
    53
    %
    
    
    43
    %Sales from beginning solutions backlog
    
    
    29
    %
    
    
    45
    %Sales from the quarters pipeline
    
    
    18
    %
    
    
    12
    %100
    %
    
    
    100
    %
  19




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##### Table of Contents



Quarter Ended
    
    BacklogNovember 30, 2005
    
    $
    29,915August 31, 2005
    
    $
    30,265May 31, 2005
    
    $
    28,473February 28, 2005
    
    $
    35,446November 30, 2004
    
    $
    35,166
    Cost of Goods Sold.
  Research and Development Expenses.
  20




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##### Table of Contents



â
  Selling, General and Administrative Expenses.
 Income Taxes.
   Income from Operations and Net Income.
 21




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##### Table of Contents



Liquidity and Capital Resources.
       Adequacy of Cash Reserves.
 Impact of Inflation.
 22




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Item 4 Controls and Procedures
 Evaluation of disclosure controls and procedures.
  Changes in internal control.
 23




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1 Legal Proceedings
  
 Item 1A Risk Factors
  
 Item 6 Exhibits
  2.1
    
    
    Agreement and Plan of Merger dated November 18, 2005 by and among S1
Corporation, Edify corporation, Edify Holding Company, Inc., Intervoice,
Inc. and Arrowhead I, Inc. (7)3.1
    
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    
    Third Restated Bylaws of Registrant. (6)4.1
    
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001
between the Registrant and Computershare Investor Services, LLC, as
Rights Agent. (4)4.2
    
    
    Securities Purchase Agreement, dated as of May 20, 2002, between the
Registrant and the Buyers named therein (the Securities Purchase
Agreement). (5)4.3
    
    
    Registration Rights Agreement, dated as of May 29, 2002, between the
Registrant and each of the Buyers under the Securities Purchase
Agreement. (5)4.4
    
    
    First Amendment to Third Amended and Restated Rights Agreement dated as
of May 29, 2002, between Registrant and Computershare Investor Services,
LLC, as Rights Agent. (5)10.1
    
    
    Statement of Terms and Conditions of Employment for Francis Sherlock. (8)31.1
    
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to
Rule 13a-14(a) or Rule 15d-14(a). (8)31.2
    
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to
Rule 13a-14(a) or Rule 15d-14(a). (8)32.1
    
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to
Rule 13a-14(b) and 18 U.S.C. Section 1350. (8)*32.2
    
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to
Rule 13a-14(b) and 18 U.S.C. Section 1350. (8)*
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(5)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(6)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(7)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on January 3, 2006.(8)
    
    Filed herewith.*
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 24




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##### Table of Contents



SIGNATURES
  INTERVOICE, INC.Date:  January 9, 2006
    By:
    /s/ MARK C. FALKENBERGMark C. FalkenbergChief Accounting Officer 25




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Description2.1
    
    
    Agreement and Plan of Merger dated November 18, 2005 by and among S1
Corporation, Edify Corporation, Edify Holding Company, Inc., Intervoice,
Inc. and Arrowhead I, Inc. (7)3.1
    
    
    Articles of Incorporation, as amended, of Registrant. (1)3.2
    
    
    Amendment to Articles of Incorporation of Registrant. (2)3.3
    
    
    Amendment to Articles of Incorporation of Registrant. (3)3.4
    
    
    Third Restated Bylaws of Registrant. (6)4.1
    
    
    Third Amended and Restated Rights Agreement dated as of May 1, 2001
between the Registrant and Computershare Investor Services, LLC, as
Rights Agent. (4)4.2
    
    
    Securities Purchase Agreement, dated as of May 20, 2002, between the
Registrant and the Buyers named therein (the Securities Purchase
Agreement). (5)4.3
    
    
    Registration Rights Agreement, dated as of May 29, 2002, between the
Registrant and each of the Buyers under the Securities Purchase
Agreement. (5)4.4
    
    
    First Amendment to Third Amended and Restated Rights Agreement dated as
of May 29, 2002, between Registrant and Computershare Investor Services,
LLC, as Rights Agent. (5)10.1
    
    
    Statement of Terms and Conditions of Employment for Francis Sherlock. (8)31.1
    
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to
Rule 13a-14(a) or Rule 15d-14(a). (8)31.2
    
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to
Rule 13a-14(a) or Rule 15d-14(a). (8)32.1
    
    
    Certification of Chief Executive Officer of Periodic Report Pursuant to
Rule 13a-14(b) and 18 U.S.C. Section 1350. (8)*32.2
    
    
    Certification of Chief Financial Officer of Periodic Report Pursuant to
Rule 13a-14(b) and 18 U.S.C. Section 1350. (8)*
 
 (1)
    
    Incorporated by reference to exhibits to the Companys 1995 Annual Report on Form 10-K for
the fiscal year ended February 28, 1995, filed with the SEC on May 30, 1995.(2)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1999, filed with the SEC on October 14, 1999.(3)
    
    Incorporated by reference to exhibits to the Companys Quarterly Report on Form 10-Q for the
quarter ended August 31, 2002, filed with the SEC on October 15, 2002.(4)
    
    Incorporated by reference to exhibits to Form 8-A/A (Amendment 3) filed with the SEC on May
9, 2001.(5)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on May 30, 2002.(6)
    
    Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004, filed with the SEC on October 12, 2004.(7)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on January 3, 2006.(8)
    
    Filed herewith.*
    
    The certifications attached as Exhibit 32.1 and 32.2 accompany the Quarterly Report on Form 10-Q
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 26