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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
May 31, 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
(State or other jurisdiction of
incorporation or organization)
    
    75-1927578
(I.R.S. Employer
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 Act). Yes þ No o The Registrant had 38,087,680 shares of common stock, no par value per share, outstanding as of
June 22, 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 6 ExhibitsSIGNATURESExtension of Health Care Coverage to Non-Employee DirectorsSalary Increase for Executive OfficersCertification of CEOCertification of CFOCertification of CEOCertification of CFO    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 Item 1 Financial Statements INTERVOICE, INC.
CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Data)May 31, 2005
    
    
    February 28, 2005(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    61,416
    
    
    $
    60,242Trade accounts receivable, net of allowance for
doubtful accounts of $1,008 in fiscal 2006 and
$799 in fiscal 2005
    
    
    30,781
    
    
    
    32,605Inventory
    
    
    8,290
    
    
    
    7,642Prepaid expenses and other current assets
    
    
    4,134
    
    
    
    4,339104,621
    
    
    
    104,828Property and EquipmentLand and buildings
    
    
    16,915
    
    
    
    16,932Computer equipment and software
    
    
    49,011
    
    
    
    46,514Furniture, fixtures and other
    
    
    3,226
    
    
    
    3,345Service equipment
    
    
    9,160
    
    
    
    9,26778,312
    
    
    
    76,058Less allowance for depreciation
    
    
    54,809
    
    
    
    54,30323,503
    
    
    
    21,755Other AssetsIntangible assets, net of accumulated amortization of $16,161
in fiscal 2006 and $15,840 in fiscal 2005
    
    
    4,686
    
    
    
    4,707Goodwill
    
    
    3,401
    
    
    
    3,401Other assets
    
    
    168
    
    
    
    168$
    136,379
    
    
    $
    134,859LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    9,777
    
    
    $
    11,485Accrued expenses
    
    
    8,689
    
    
    
    13,745Customer deposits
    
    
    7,461
    
    
    
    6,871Deferred income
    
    
    26,813
    
    
    
    24,448Current portion of long-term borrowings
    
    
    
    
    
    
    400Income taxes payable
    
    
    4,404
    
    
    
    4,12957,144
    
    
    
    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: 38,076,411 issued and
outstanding in fiscal 2006 and 37,196,216 issued
and outstanding in fiscal 2005
    
    
    19
    
    
    
    19Additional capital
    
    
    89,414
    
    
    
    85,421Accumulated deficit
    
    
    (9,012
    )
    
    
    (12,931
    )Accumulated other comprehensive loss
    
    
    (1,186
    )
    
    
    (61
    )Stockholders equity
    
    
    79,235
    
    
    
    72,448$
    136,379
    
    
    $
    134,859
 See notes to consolidated financial statements. 2




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INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In Thousands, Except Per Share Data)Three Months EndedMay 31, 2005
    
    
    May 31, 2004SalesSolutions
    
    $
    21,370
    
    
    $
    21,145Recurring services
    
    
    21,893
    
    
    
    20,77143,263
    
    
    
    41,916Cost of goods soldSolutions
    
    
    12,804
    
    
    
    11,980Recurring services
    
    
    6,112
    
    
    
    7,08118,916
    
    
    
    19,061Gross marginSolutions
    
    
    8,566
    
    
    
    9,165Recurring services
    
    
    15,781
    
    
    
    13,69024,347
    
    
    
    22,855Research and development expenses
    
    
    4,195
    
    
    
    3,743Selling, general and administrative expenses
    
    
    15,433
    
    
    
    14,152Amortization of acquisition related intangible assets
    
    
    252
    
    
    
    705Income from operations
    
    
    4,467
    
    
    
    4,255Other income (expense)
    
    
    623
    
    
    
    367Interest expense
    
    
    (25
    )
    
    
    (274
    )Income before taxes
    
    
    5,065
    
    
    
    4,348Income taxes
    
    
    1,146
    
    
    
    1,171Net income
    
    $
    3,919
    
    
    $
    3,177Net income per share  basic
    
    $
    0.10
    
    
    $
    0.09Shares used in basic per share computation
    
    
    37,530
    
    
    
    35,847Net income per share  diluted
    
    $
    0.10
    
    
    $
    0.08Shares used in diluted per share computation
    
    
    39,103
    
    
    
    38,484
 See notes to consolidated financial statements. 3




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INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In Thousands)Three Months EndedMay 31, 2005
    
    
    May 31, 2004Operating activitiesNet income
    
    $
    3,919
    
    
    $
    3,177Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,722
    
    
    
    2,284Other changes in operating activities
    
    
    (2,669
    )
    
    
    (836
    )Net cash provided by operating activities
    
    
    2,972
    
    
    
    4,625Investing activitiesPurchases of property and equipment
    
    
    (3,132
    )
    
    
    (933
    )Other
    
    
    (300
    )
    
    
    Net cash used in investing activities
    
    
    (3,432
    )
    
    
    (933
    )Financing activitiesPaydown of debt
    
    
    (1,733
    )
    
    
    (500
    )Premium on early extinguishment of debt
    
    
    
    
    
    
    (5
    )Exercise of stock options
    
    
    1,493
    
    
    
    1,583Exercise of warrants
    
    
    2,500
    
    
    
    Net cash provided by financing activities
    
    
    2,260
    
    
    
    1,078Effect of exchange rates on cash
    
    
    (626
    )
    
    
    (141
    )Increase in cash and cash equivalents
    
    
    1,174
    
    
    
    4,629Cash and cash equivalents, beginning of period
    
    
    60,242
    
    
    
    40,859Cash and cash equivalents, end of period
    
    $
    61,416
    
    
    $
    45,488
 See notes to consolidated financial statements. 4




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INTERVOICE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited) (In Thousands, Except Share Data) 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,919
    
    
    
    
    
    
    
    3,919Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,125
    )
    
    
    (1,125
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,794Exercise of stock options
    
    
    258,891
    
    
    
    
    
    
    
    1,493
    
    
    
    
    
    
    
    
    
    
    
    1,493Exercise of warrants
    
    
    621,304
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500Balance at May 31, 2005
    
    
    38,076,411
    
    
    $
    19
    
    
    $
    89,414
    
    
    $
    (9,012
    )
    
    $
    (1,186
    )
    
    $
    79,235
 See notes to consolidated financial statements. 5




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 31, 2005 Note A  Basis of Presentation We have prepared the accompanying consolidated financial statements in accordance with
generally accepted accounting principles for interim financial information. The consolidated
balance sheet at February 28, 2005 has been derived from audited financial statements at that date.
We believe we have included all adjustments necessary for a fair presentation of the unaudited May
31, 2005 and 2004 consolidated financial statements. Such adjustments are of a normal recurring
nature. These financial statements should be read in conjunction with our audited financial
statements and related notes for the three years ended February 28, 2005 included in our Annual
Report on Form 10-K. Our Annual Report is available on our website at www.intervoice.com. Our
operating results for the three-month period ended May 31, 2005 are not necessarily indicative of
the results that may be expected for our fiscal year ending February 28, 2006, as our results 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 our sales, the sales channel
mix of products sold, and changes in general economic conditions, any of which could have an
adverse effect on our operations. Our consolidated financial statements include the accounts of Intervoice, Inc. and our
subsidiaries, all of which are directly or indirectly 100% owned by Intervoice, Inc. All
significant intercompany transactions and accounts have been eliminated in consolidation.
Financial statements of our foreign subsidiaries have been translated into U.S. dollars at current
and average exchange rates. Resulting translation adjustments are recorded in stockholders equity
as a part of accumulated other comprehensive loss. Any foreign currency transaction gains and
losses are included in the accompanying consolidated statements of operations. Our total
comprehensive income for the first quarter of fiscal 2006 and 2005 was $2.8 million and $2.9
million, respectively. Total comprehensive income is comprised of net income and foreign currency
translation adjustments. Note B  Inventory Our inventory consists of the following (in thousands): May 31, 2005
    
    
    February 28, 2005Purchased parts
    
    $
    3,778
    
    
    $
    3,815Work in progress
    
    
    4,512
    
    
    
    3,827$
    8,290
    
    
    $
    7,642
 Note C  Long-Term Borrowings At May 31, 2005 and February 28, 2005 our long-term debt was comprised of the following (in thousands): May 31, 2005
    
    
    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
    
    
    
    
    
    
    400Long-term debt, net of current portion
    
    $
    
    
    
    $
    1,333
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We have a $5.5 million revolving line of credit agreement with a bank. The credit agreement
contains terms, conditions and representations that are generally customary for asset-based credit
facilities including requirements that we comply with certain financial and operating covenants.
As of May 31, 2005, we were in compliance with all such covenants. Any borrowings under the credit
agreement would be secured by first liens on our accounts receivable, general intangibles,
equipment, inventory and the real property and fixtures comprising our Dallas headquarters. We may
borrow, partially or wholly repay our outstanding borrowings without penalty, and reborrow under
the agreement so long as the total outstanding borrowings do not exceed $5.5 million. We had no
amounts drawn under this line at May 31, 2005. The revolving line of credit agreement expires on
January 31, 2007. Note D  Income Taxes We provided income taxes for the three months ended May 31, 2005 and 2004 based on estimated
annual effective rates for fiscal 2006 and fiscal 2005 of 26% and 27%, respectively. These rates
differ from the 35% U.S. federal statutory rate primarily because of expected benefits to be
realized in the U.S. from the use of previously reserved deferred tax assets and from the effect of
non-U.S. tax rates. The tax provision for the quarter ended May 31, 2005 was also reduced by $0.2
million as a result of the favorable settlement of certain foreign tax issues. On October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The
AJCA provides for a deduction of 85% of certain foreign earnings that are repatriated, as defined
in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in fiscal
2006. We have begun an evaluation of the effects of the repatriation provision; however, we have
not reached a decision on whether or not the election will be beneficial to us. The range of
possible amounts we are considering for repatriation under the AJCA is from $0 to $13.0 million.
The related potential range of income tax expense associated with the repatriation is from $0 to
$0.7 million. We expect to complete our evaluation of the effects of the repatriation provision
during the third quarter of fiscal 2006. Note E  Earnings Per Share Three Months Ended May 31(in thousands, except per share data)
    
    2005
    
    
    2004Numerator:Net income
    
    $
    3,919
    
    
    $
    3,177Denominator:Denominator for basic earnings per share
    
    
    37,530
    
    
    
    35,847Dilutive potential common shares:Employee stock options
    
    
    1,344
    
    
    
    2,191Warrants
    
    
    229
    
    
    
    446Denominator for diluted earnings per share
    
    
    39,103
    
    
    
    38,484Net income per share:Basic
    
    $
    0.10
    
    
    $
    0.09Diluted
    
    $
    0.10
    
    
    $
    0.08
 7




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Options to purchase 1,194,667 and 753,000 shares of common stock at average exercise prices of
$13.95 and $14.90 per share were outstanding at May 31, 2005 and 2004, respectively, but were not
included in the computation of diluted earnings per share because the options exercises prices
were greater than the average market price of our common shares during the applicable period and,
therefore, the effect would have been anti-dilutive. We account for our stock-based employee compensation using the intrinsic value method as
defined in Accounting Principles Board Statement No. 25 (APB 25). Under this approach, we
recognize expense at the grant date of an option only to the extent that the fair value of the
related common stock at the grant date exceeds the exercise price of the option. In practice, we
typically grant options at an exercise price equal to the fair value of the stock on the grant
date, and, accordingly, we typically do not recognize any expense upon the granting of an option. Because we have elected this treatment, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123) and Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS No.
148) require disclosure of pro forma information which provides the effects on net income and net
income per share as if we had accounted for our employee stock awards under the fair value method
prescribed by SFAS No. 123. The Financial Accounting Standards Board has issued a revision to SFAS
No. 123 (SFAS No. 123R) that requires companies to include a compensation expense in their
statements of operations relating to the issuance of employee stock options and other equity awards
based on the grant date fair value of the equity instrument. This change in accounting for stock
options will become effective for our fiscal year beginning March 1, 2006. We are still assessing
the transition method we will use to implement SFAS No. 123R as well as the impact of the new
statement on our Consolidated Statements of Operations. The following table illustrates the effect on net income and net income per share amounts for
the three months ended May 31, 2005 and 2004 if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share
amounts): Three Months Ended May 312005
    
    
    2004Net income, as reported
    
    $
    3,919
    
    
    $
    3,177Less: Total stock-based employee
compensation expense determined under
fair value based methods for all
awards, net of tax
    
    
    (1,233
    )
    
    
    (914
    )Pro forma net income
    
    $
    2,686
    
    
    $
    2,263Net income per share:Basic  as reported
    
    $
    0.10
    
    
    $
    0.09Basic  pro forma
    
    $
    0.07
    
    
    $
    0.06Diluted  as reported
    
    $
    0.10
    
    
    $
    0.08Diluted  pro forma
    
    $
    0.07
    
    
    $
    0.06
 Note F  Operating Segment Information and Major Customers We operate as a single, integrated business unit. Our chief operating decision maker assesses
performance and allocates resources on an enterprise wide basis. Our product line includes voice
automation/IVR solutions, network portal solutions, messaging solutions, payment solutions,
maintenance and support services, and managed services provided for customers on an outsourced or
managed service 8




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provider basis. We believe that product line distinction provides the most meaningful
breakdown of quarterly and annual sales activity. Our net sales by product line for the three
months ended May 31, 2005 and 2004 were as follows (in thousands): Three Months Ended May 312005
    
    
    2004Voice automation/IVR solution sales
    
    $
    10,708
    
    
    $
    14,978Network portal solution sales
    
    
    3,484
    
    
    
    608Messaging solution sales
    
    
    4,848
    
    
    
    2,405Payment solution sales
    
    
    2,330
    
    
    
    3,154Total solution sales
    
    
    21,370
    
    
    
    21,145Maintenance and support services revenues
    
    
    15,435
    
    
    
    15,215Managed service revenues
    
    
    6,458
    
    
    
    5,556Total recurring services revenues
    
    
    21,893
    
    
    
    20,771Total sales
    
    $
    43,263
    
    
    $
    41,916
 Geographic Operations We assign revenues to geographic areas based on the locations of our customers. Our net sales
by geographic area for the three-month periods ended May 31, 2005 and 2004 were as follows (in
thousands): Three Months Ended May 312005
    
    
    2004North America
    
    $
    23,080
    
    
    $
    25,336Europe
    
    
    10,880
    
    
    
    8,647Middle East and Africa
    
    
    7,055
    
    
    
    5,990Central and South America
    
    
    1,351
    
    
    
    1,104Pacific Rim
    
    
    897
    
    
    
    839Total
    
    $
    43,263
    
    
    $
    41,916
 Concentration of Revenue One customer, O2, accounted for approximately 10% of our revenue for the quarter ended May 31,
2005. No customer accounted for 10% or more of our revenue for the quarter ended May 31, 2004. Note G  Contingencies Intellectual Property Matters We provide our customers a qualified indemnity against the infringement of third
party intellectual property rights. From time to time various owners of patents and copyrighted
works send us or our customers letters alleging that our products do or might infringe upon the
owners intellectual property rights, and/or suggesting that we or our customers should negotiate a
license or cross-license agreement with the owner. Our policy is to never knowingly infringe upon
any third partys intellectual property rights. Accordingly, we forward any such allegation or
licensing request to our outside legal counsel for their review and opinion. We generally attempt
to resolve any such matter by informing the owner of our position concerning non-infringement or
invalidity, and/or, if appropriate, negotiating a license or cross-license agreement. Even though
we attempt to resolve these matters without litigation, it is always possible that the owner of a
patent or copyrighted works will sue us. Although no such litigation is currently pending against
us, owners of patents and/or copyrighted works have previously sued us alleging infringement of
their intellectual property rights. We currently have a portfolio of 73 patents, and we have
applied for and will continue to apply for and receive a number of additional patents to reflect
our technological innovations. We believe our patent portfolio could allow us to assert
counterclaims for infringement against certain owners of intellectual property rights if those
owners were to sue us for infringement. From time to time Ronald A. Katz Technology Licensing L.P. (RAKTL) has sent letters to
certain of 9




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our customers suggesting that the customer should negotiate a license agreement to cover the
practice of certain patents owned by RAKTL. In the letters, RAKTL has alleged that certain of its
patents pertain to certain enhanced services offered by network providers, including prepaid card
and wireless services and postpaid card services. RAKTL has further alleged that certain of its
patents pertain to certain call processing applications, including applications for call centers
that route calls using a called partys DNIS identification number. As a result of the
correspondence, many of Intervoices customers have had discussions, or are in discussions, with
RAKTL. We offer certain products that can be programmed and configured to provide enhanced services
to network providers and call processing applications for call centers. Our contracts with
customers usually include a qualified obligation to indemnify and defend customers against claims
that products as delivered by Intervoice infringe a third partys patent. None of our customers
have notified us that RAKTL has claimed that any product provided by Intervoice infringes any
claims of any RAKTL patent. Accordingly, we have not been required to defend any customers against
a claim of infringement under a RAKTL patent. We have, however, received letters from customers
notifying us of the efforts by RAKTL to license its patent portfolio and reminding us of our
potential obligations under the indemnification provisions of our agreements in the event that a
claim is asserted. In response to correspondence from RAKTL, a few customers have attempted to
tender to us the defense of our products under contractual indemnity provisions. We have informed
these customers that while we fully intend to honor any contractual indemnity provisions, we do not
believe we currently have any obligation to provide such a defense because RAKTL does not appear to
have made a claim that an Intervoice product infringes a patent. Some of these customers have
disagreed with us and believe that the correspondence from RAKTL can be construed as claims against
Intervoice products. Some of our customers have licensed certain rights under the RAKTL patent portfolio. One such
customer who attempted to tender the defense of its products to us informed us that the customer
had entered into an agreement to license certain rights under the RAKTL patents and demanded we
indemnify the customer for unspecified amounts, including attorneys fees, paid in connection with
the license agreement. We notified the customer over a year ago that we believe we do not have any
indemnity obligation in connection with the license agreement. We have received no further
response from the customer. Even though no claims have been made that a specific product offered by Intervoice infringes
any claim under the RAKTL patent portfolio, we have received opinions from our outside patent
counsel that certain products and applications we offer do not infringe certain claims of the RAKTL
patents. We have also received opinions from our outside counsel that certain claims under the
RAKTL patent portfolio are invalid or unenforceable. Furthermore, based on the reviews by outside
counsel, we are not aware of any valid and enforceable claims under the RAKTL portfolio that are
infringed by our products. If we do become involved in litigation in connection with the RAKTL
patent portfolio, under a contractual indemnity or any other legal theory, we intend to vigorously
contest the claims and to assert appropriate defenses. We have received letters from Webley Systems (Webley), a division of Parus Holdings, Inc.
(Parus), and their counsel alleging that certain Webley patents cover one or more of our products
and services. In the letters, Parus offers a license to the Webley patents. As a result of the
correspondence, we conducted discussions with Parus. Based on reviews by outside counsel, we are
not aware of any valid and enforceable claims under the Webley patents that are infringed by our
products or services. Pending Litigation David Barrie, et al., on Behalf of Themselves and All Others Similarly Situated v.
InterVoice-Brite, Inc., et al.; No. 3-01CV1071-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 Intervoice during the period
from October 12, 1999 through June 6, 2000 (the Class Period). Plaintiffs have filed claims,
which were consolidated into one proceeding, under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 against us as well as
certain named current and former officers and directors of Intervoice on behalf of the alleged
class members. In the complaint, Plaintiffs claim that we and the named current and former
officers and directors issued false and misleading statements during the Class Period concerning
the financial condition of Intervoice, the results of the merger with Brite Voice Systems, Inc. and
the alleged future business projections of Intervoice. Plaintiffs have asserted that these alleged
statements resulted in artificially inflated stock prices. 10




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We responded to this complaint by filing a motion to dismiss the complaint in the consolidated
proceeding. We 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, we
requested that the United States District Court for the Northern District of Texas dismiss the
complaint in its entirety. Plaintiffs responded to our request for dismissal. On August 8, 2002,
the Court entered an order granting our 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 which the Court dismissed on September 15, 2003.
Plaintiffs appealed the District Court decision to the Fifth Circuit Court of Appeals. On January
12, 2005, the Fifth Circuit Court of Appeals issued an opinion in which it affirmed, in part, the
District Courts order of dismissal. The Court of Appeals opinion also reversed a limited number
of issues in the District Courts proceedings. On February 25, 2005, Intervoice filed a motion for
rehearing with the Fifth Circuit Court of Appeals requesting the Court to modify its opinion. On
May 12, 2005, the Fifth Circuit Court of Appeals denied our petition for rehearing but modified its
opinion to clarify the Courts decision. The case has been remanded to the District Court for
further proceedings consistent with the Fifth Circuits opinion. We believe that we and our
officers and directors complied with the securities laws and will continue to vigorously defend the
portions of the case that have been remanded to the District Court. Shareholder Demand Letter We
recently received a letter written on behalf of one of
our shareholders alleging that certain current and former officers and directors breached their fiduciary duties to Intervoice,
and demanding that we commence an action against such persons under Texas state law to recover damages and bonuses and equity
compensation paid to them. The alleged breaches of fiduciary duties purportedly occurred during the fiscal year ended February 29,
2000, and appear to be based on claims asserted in the class action lawsuit discussed above. The shareholder has threatened to commence
a shareholders derivative action on behalf of Intervoice if our Board of Directors does not commence an action based on the
shareholders allegations. We are evaluating alternative courses of action to take with respect to the allegations. Audit Committee Investigation In
December 2004, our Audit Committee completed an investigation it had begun in August 2004
of certain transactions occurring during our fiscal years 2000 through 2002. The Audit Committee
was assisted in its investigation by separate independent legal counsel and a national accounting
firm. The Audit Committee has reported the results of the investigation to, and we are cooperating
with, the SEC. We are currently providing documents to the SEC in response to a subpoena
requesting information about the transactions that were the subject of the investigation, and two
of our employees, who are not officers, have received subpoenas to produce documents and provide
testimony to the SEC. Our Audit Committee and its counsel are actively monitoring our response to
the SEC, and they have been conducting a review of certain documents and information provided to the SEC which we
located after the Committees original investigation. Intervoice is also honoring our
pre-existing obligation to indemnify two former officers of Intervoice who received subpoenas to
produce documents and provide testimony to the SEC in connection with the investigation. The Audit
Committee investigation found that we accounted for certain transactions incorrectly
during our fiscal years 2000 through 2002. The Audit Committee investigation concluded that a
$900,000 payment made by Intervoice to a publicly held supplier purportedly for certain prepaid
licenses was linked to an agreement to amend a 1997 warrant issued to us by the supplier to permit
our cashless exercise of the warrant. As a result, we believe that the $900,000 payment should
have been recorded as a reduction in the $21.4 million gain we recognized on the sale of the shares
underlying the warrant during the fourth quarter of fiscal 2001 and should not have been recorded
as prepaid license inventory. Our payment to the supplier may have rendered unavailable a
nonexclusive registration exemption for the sale of the shares underlying the warrant. The Audit
Committee investigation also found that Intervoice intentionally provided the same supplier false or
misleading documents for such supplier to use to support such suppliers improper recognition of
revenue in calendar 2001. The
Audit Committee investigation and review further found that six of the seven customer
sales transactions the Committee investigated were accounted for incorrectly and that there was
intentional misconduct in at least one of those sales transactions. These six transactions
occurred at the end of quarters in which we just met analysts expectations with respect to
earnings per share. The Audit Committee found that Intervoice improperly recognized revenue in a
quarter-end barter transaction involving approximately 0.4% of annual revenues for fiscal 2000, and
that we improperly accelerated the recognition of revenue in five quarter-end transactions totaling
approximately 0.4% and 0.3% of annual revenues in fiscal 2000 and fiscal 2002, respectively.
In addition, as a result of work performed in responding to the SEC subpoena, the Committee has concluded
that Intervoice improperly recognized approximately $5.4 million of revenue in two sales transactions
during the second and third quarters of fiscal 2002 because the transactions were subject to oral side
agreements that gave our customer expanded rights of return. We subsequently reversed the $5.4 million
of revenue during the fourth quarter of fiscal 2002 in connection with a return of the related systems.
Separately, the Audit Committee further determined that in September 2001 one of our current
executive officers improperly communicated Intervoice information to a shareholder. Intervoices
management concluded, with the concurrence of the Audit Committee and our
external auditors, that restatement of our prior annual financial statements to adjust for the
findings of the Audit Committee investigation and review is not necessary. In reaching this
conclusion, we considered the impact of the incorrect accounting on each of the periods affected,
the ages of the affected financial statements and the lack of any material changes in prior period
trends as a result of the incorrect accounting. In addition, we noted 11




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that since the date of the most recent transaction reviewed in the investigation, we have
restructured our business, made significant management changes, consolidated our physical
operations, significantly reduced our fixed operating costs and refinanced and repaid all of our
major debt obligations. We cannot predict whether we may have future losses relating to the
matters investigated by the Audit Committee as a result of future claims, if any, including any
claims by the government. Other Matters We are
a defendant from time to time in lawsuits incidental to our business. Based on
currently available information, we believe that resolution of the lawsuit and other matters
described above, is uncertain, and there can be no assurance that future costs related to such
matters would not be material to our financial position or results of operations. We are a party to many routine contracts in which we provide general indemnities and
warranties in the normal course of business to third parties for various risks. These indemnities
and warranties are discussed in the following paragraphs. Except in specific circumstances where we
have determined that the likelihood of loss is probable and the amount of the loss quantifiable, we
have not recorded a liability for any of these indemnities. In general, we are not able to
estimate the potential amount of any liability relating to these indemnities and warranties. 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. Our contracts with our customers generally contain qualified indemnifications against third
party claims relating to the infringement of intellectual property as described in Intellectual
Property Matters above. Our contracts with our customers also generally contain warranties and, in some cases, general
indemnifications against other unspecified third party and general liability claims. We have
liability insurance protecting us against certain obligations, primarily certain claims related to
property damage, that result from these indemnities. We are obligated under letters of credit totaling approximately $0.9 million issued by a bank
to guarantee our performance under a long-term international managed services contract and related
proposals. These letters of credit expire during fiscal 2006. We have employment agreements with two executive officers. One of these agreements requires
us to make termination payments to the officer of one and one-half 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 within a two year period following a change in ownership of Intervoice, as
defined in the agreement. If the officer with such agreement were terminated for one of the
preceding reasons during fiscal 2006, the cost to us would range from $0.6 million to $1.7 million.
The second employment agreement requires that in the event the officers services are terminated
without cause, we either must make termination payments to the officer of one times the officers
annual base compensation and accelerate vesting on 33,333 shares of our common stock covered by a
stock option or make termination payments to the officer of two times the officers annual base
compensation. If the officer covered by this agreement were terminated during fiscal 2006, we
would be required to make payments ranging from $0.3 million to $0.5 million. Under the terms of our Articles of Incorporation, we indemnify our directors, officers,
employees or agents or any other person serving at our request as a director, officer, employee or
agent of another corporation in connection with a derivative suit if he or she (1) is successful on
the merits or otherwise or (2) acted in good faith, and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the corporation. We will not provide
indemnification, however, for any claim as to which the person was adjudged liable for negligence
or misconduct unless the court determines that under the circumstances the person is fairly and
reasonably entitled to indemnification. We provide the same category of persons with
indemnification in a non-derivative suit only if such person (1) is successful on the merits or
otherwise or (2) acted in good faith, and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any criminal action or
proceeding, had no reason to believe his or her 12




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conduct was unlawful. Under the terms of our Bylaws, we also indemnify our current and former
officers and directors to the fullest extent permitted or required under Article 2.02-1 of the
Texas Business Corporation Act. In connection with certain lawsuits filed against us and certain of our present and former
officers and directors (see Pending Litigation above), we have agreed to pay in advance any
expenses, including attorneys fees, incurred by such present and former officers and directors in
defending such litigation, in accordance with Article 2.02-1 of the Texas Business Corporation Act
and the Companys Articles of Incorporation and Bylaws. Each of these parties has provided us with
a written undertaking to repay us the expenses advanced if the person is ultimately not entitled to
indemnification. We have a qualified obligation to indemnify two former officers in connection with activities
resulting from the Audit Committee investigation and related SEC inquiries described in Audit
Committee Investigation above. Texas corporations are authorized to obtain insurance to protect officers and directors from
certain liabilities, including liabilities against which the corporation cannot indemnify its
officers and directors. We have obtained liability insurance for our officers and directors as
permitted by Article 2.02-1 of the Texas Business Corporation Act. 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 and contain other customary
provisions to limit or exclude coverage for certain losses and expenses. 13




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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 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 in this report regarding our financial position, business strategy,
plans and objectives of management for future operations, future sales and industry conditions, are
forward-looking statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such expectations will
prove to be correct. In addition to important factors described elsewhere in this report, we
caution current and potential investors that the following important risk factors, among others,
sometimes have affected, and in the future could affect, our actual results and could cause such
results during fiscal 2006, and beyond, to differ materially from those expressed in any
forward-looking statements made by or on behalf of Intervoice:  
    
    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 Item 1
Financial Statements of Part I of this quarterly report on Form 10-Q. We believe the
pending lawsuit to which we are subject is without merit, and we intend to defend the
matter vigorously. There can be no assurances, however, that we will prevail in this
matter. Furthermore, we may become subject to claims, including claims by the government,
or other adverse consequences arising from the findings of an Audit Committee investigation
we completed in December 2004. We, two of our former officers and two current employees who
are 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.
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 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, Edify, Comverse
Technology, Huawei and Lucent Technologies. Many of our competitors have greater financial, 14




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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. 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.
    
    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. 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 15




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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 47% and 40% of total sales for the fiscal quarters
ending May 31, 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 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.Our total sales for the
first quarter of fiscal 2006 were $43.3 million, up 3.2% from
$41.9 million in the first quarter of fiscal 2005. Solutions sales of $21.4 million and recurring
services revenues of $21.9 million for the first quarter of fiscal 2006 reflected increases of 1.1%
and 5.4%, respectively, over corresponding amounts for the first quarter of fiscal 2005. We operate as a single,
integrated business unit. Our chief operating decision maker assesses
performance and allocates resources on an enterprise wide basis. Our product line includes voice
automation/IVR solutions, network portal solutions, messaging solutions, payment solutions,
maintenance and support services, and managed services provided for customers on an outsourced or
managed service 16




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provider basis. We believe that product line distinction provides the most meaningful breakdown of
quarterly and annual sales activity. Our net sales by product line for the three months ended May
31, 2005 and 2004 were as follows (in thousands): Three Months Ended May 312005
    
    
    2004Voice automation/IVR solution sales
    
    $
    10,708
    
    
    $
    14,978Network portal solution sales
    
    
    3,484
    
    
    
    608Messaging solution sales
    
    
    4,848
    
    
    
    2,405Payment solution sales
    
    
    2,330
    
    
    
    3,154Total solution sales
    
    
    21,370
    
    
    
    21,145Maintenance and support services revenues
    
    
    15,435
    
    
    
    15,215Managed service revenues
    
    
    6,458
    
    
    
    5,556Total recurring services revenues
    
    
    21,893
    
    
    
    20,771Total sales
    
    $
    43,263
    
    
    $
    41,916
 As identified in the preceding chart, the increase in solution sales from fiscal 2005 levels
includes increases in network portal and messaging solutions with offsetting decreases in voice
automation/IVR and payment solutions. The increases in network portal and messaging solution sales
and the decrease in payment solution sales resulted from international sales while the decrease in
voice automation/IVR is composed of a $2.9 million reduction in North America sales and a $1.4
million reduction in international sales. The 5.4% increase in recurring services revenues is comprised of slight growth in the sale of
maintenance and support services, up $0.2 million or 1.4% from the fiscal 2005 first quarter, and
growth in managed services revenues of $0.9 million or 16.2% for the first fiscal quarter of 2006,
when compared to the first fiscal quarter of 2005. Managed services revenues include revenues from
an international managed services customer for which we recognize revenue on a cash basis. Such
revenues totaled $0.7 million in the first quarter of fiscal 2006 as compared to $0.4 million for
the first quarter of fiscal 2005. The remainder of the increase in managed services revenue is
primarily the result of increased revenues from existing customers. One customer, O2, accounted for approximately 10% of our revenue during the quarter ended May
31, 2005. No customer accounted for 10% or more of our revenue for the quarter ended May 31, 2004.
Sales under one long term managed services contract with O2 totaled approximately $2.5 million in
the first quarters of fiscal 2006 and 2005. During fiscal 2005, we announced that this contract,
which otherwise would have ended in July 2005, had been extended through July 2006. At current
exchange rates, the contract is expected to yield managed services revenue of approximately $0.8
million per month through July 2005 and approximately $0.6 million per month from August 2005 to
July 2006. We assign revenues to geographic areas based on the locations of our customers. Our net sales
by geographic area for the three-month periods ended May 31, 2005 and 2004 were as follows (in
thousands): Three Months Ended May 312005
    
    
    2004North America
    
    $
    23,080
    
    
    $
    25,336Europe
    
    
    10,880
    
    
    
    8,647Middle East and Africa
    
    
    7,055
    
    
    
    5,990Central and South America
    
    
    1,351
    
    
    
    1,104Pacific Rim
    
    
    897
    
    
    
    839Total
    
    $
    43,263
    
    
    $
    41,916
 International sales comprised 47% of our total sales during the first quarter of fiscal 2006,
up from 40% during the first quarter of fiscal 2005. 17




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We use a system combining estimated sales from our recurring services contracts, our backlog
of committed solutions orders and our pipeline of solutions sales opportunities to estimate sales
and trends in our business. For the quarters ended May 31, 2005 and 2004, sales were sourced as
follows: Three Months Ended May 312005
    
    
    2004Sales from recurring services and support
contracts, including contracts for
managed services
    
    
    51
    %
    
    
    50
    %Sales from beginning solutions backlog
    
    
    31
    %
    
    
    35
    %Sales from the quarters pipeline
    
    
    18
    %
    
    
    15
    %100
    %
    
    
    100
    %
 Our 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, we do not consider our book of services
contracts to be reportable backlog, as a portion of the potential revenue reflected in the contract
values may never be realized. Nevertheless, it is easier for us to estimate service and support
revenues than to estimate solutions sales for the next quarter because the service and support
contracts generally span multiple quarters and revenues recognized under each contract are
generally similar from one quarter to the next. Our backlog is made up of customer orders for solutions for which we have received complete
purchase orders and which we expect to ship within twelve months. Backlog as of the end of our
last five fiscal quarters was as follows (in thousands): Quarter Ended
    
    BacklogMay 31, 2005
    
    $
    28,473February 28, 2005
    
    $
    35,446November 30, 2004
    
    $
    35,166August 31, 2004
    
    $
    40,214May 31, 2004
    
    $
    43,174
 The 20% decrease in solutions backlog from February 28, 2005 to May 31, 2005 reflects delays
experienced in the receipt of several significant orders. The accuracy of any estimate of future
sales is dependent, in part, on our ability to project the amount of revenue to be contributed from
beginning solutions backlog during any fiscal quarter. Our ability to estimate the amount of
backlog that will be converted to revenue in any fiscal quarter can be affected by factors outside
our control, including changes in project timing requested by our customers. Our pipeline of opportunities for solutions sales is the aggregation of our sales
opportunities for which we have not received a purchase order, with each opportunity evaluated for
the date the potential customer will make a purchase decision, competitive risks, and the potential
amount of any resulting sale. No matter how promising a pipeline opportunity may appear, there is
no assurance it will ever result in a sale. While this pipeline may provide us some sales guidance
in our business planning and budgeting, pipeline estimates are necessarily speculative and may not
consistently correlate to solutions sales in a particular quarter or over a longer period of time.
While we know the amount of solutions backlog available at the beginning of a quarter, we must
speculate on our pipeline of solutions opportunities for the quarter. Our accuracy in estimating
total solutions sales for the next fiscal quarter is, therefore, highly dependent upon our ability
to successfully estimate which pipeline opportunities will close during the quarter. Cost of Goods Sold.Cost of goods sold for the first quarter of fiscal 2006 was approximately
$18.9 million or 43.7% of sales as compared to $19.1 million or 45.5% of sales for the first
quarter of fiscal 2005. Cost of goods sold on solution sales was $12.8 million, or 59.9% of
solution sales in the first quarter of fiscal 2006, as compared to $12.0 million, or 56.7% of
solution sales, for the first quarter of fiscal 2005. The increase in cost of goods sold on
solution sales as a percentage of sales for the quarter ended May 31, 2005 as compared to the
quarter ended May 31, 2004 reflects the fact that a significant portion of our solution costs of
goods sold is comprised of labor costs that are fixed over the near term as opposed to direct
material and license/royalty costs that vary directly with sales volume. 18




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Cost of goods sold on recurring services sales was $6.1 million, or 27.9% of such sales,
for the first quarter of fiscal 2006 versus $7.1 million, or 34.1% of services sales, for the same
period of fiscal 2005. This decrease in cost of goods sold on recurring services in absolute
dollars results from cost reductions in several expense categories such as contract labor, warranty
and telecommunication costs. The decrease as a percent of sales reflects these cost reductions,
the effect of greater cash basis managed service revenues recognized in fiscal 2006 and the
improved leverage associated with the increase in managed service sales volumes to other existing
managed service customers. Research and Development Expenses.Research and development expenses during the first quarter
of fiscal 2006 were approximately $4.2 million, or 9.7% of our total sales as compared to $3.7
million, or 8.9%, of our total sales for the first quarter of fiscal 2005. Most of this increase
relates to the continued investment in various research and development initiatives involving
packaged applications and voice over IP (VoIP) as well as network product offerings. In addition,
fewer research and development resources were assigned to the completion of customer projects
during the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005. Recurring
research and development expenses include the design of new products and the enhancement of
existing products. Our research and development spending is focused in four key areas. First, we are developing
software tools to aid in the development and deployment of customer applications incorporating
speech recognition, text-to-speech, and other rich media technologies for enterprise, wireless, and
fixed line providers. Next, we are developing server-based application software platforms for
operations and management of contact center, speech and call completion applications. These
applications are branded under the product name Omvia Voice Framework and are scheduled for release
in fiscal 2006. We will use these software platforms for deployment and management of enterprise,
wireless and wireline network operator applications, which are designed to operate in both J2EE and
Microsoftsâ.NET enterprise computing environments. Third, we are developing media servers,
voice browsers, and call processing infrastructure based on open standards such as SALT, VoiceXML
and CCXML. These media servers are VoIP enabled, allowing operation in soft-switch and hybrid PSTN
and VoIP networks. Finally, we are developing packaged, speech enabled applications for the
network operator and enterprise markets. These include a range of vertical and horizontal
applications that are designed to greatly enhance customer return on investment by providing many
commonly used, configurable functions that can be deployed more quickly than can custom
applications. Certain of these applications are currently available under the product name Omvia
Voice Express. Additionally, we are developing modular productivity and communications
applications for wireless and fixed-line applications including speech driven voice mail, voice
activated dialing, and enhanced personal information management. The network products are branded
under the product name Omvia Media Exchange and are scheduled for release in fiscal 2006. We expect to maintain a strong commitment to research and development so that we can remain at
the forefront of technology development in our markets. Selling, General and Administrative Expenses.Selling, general and administrative expenses
during the first quarter of fiscal 2006 were approximately $15.4 million, or 35.7% of our total
sales. SG&A expenses during the first quarter of fiscal 2005 were $14.2 million, or 33.8% of our
total sales. We incurred SG&A charges in connection with the Audit Committee investigation
described in Item 1 of this Form 10-Q of approximately $0.6 million or 1.3% of sales in the first
quarter of fiscal 2006. We expect to continue to incur costs related to the Audit Committee
investigation during at least the second and third quarters of fiscal 2006, but at a reduced level. Interest Expense.Interest expense was less than $0.1 million during the first quarter of
fiscal 2006, versus $0.3 million for the same period of fiscal 2005. The reduction in interest
expense relates directly to reductions in the level of our outstanding debt, which totaled $1.7
million as of the beginning of the first quarter of fiscal 2006 as compared to $13.1 million at the
beginning of fiscal 2005. We repaid all remaining debt balances during the first quarter of fiscal
2006, and we currently do not anticipate incurring interest expense during the balance of fiscal
2006. Income Taxes.We provided income taxes for the three months ended May 31, 2005 and 2004
based on estimated annual effective rates for fiscal 2006 and fiscal 2005 of 26% and 27%,
respectively. These rates differ from the 35% U.S. federal statutory rate primarily because of
expected benefits to be realized in the U.S. from the use of previously reserved deferred tax
assets and from the effect of non-U.S. tax rates. The tax provision for the quarter ended May 31,
2005 was also reduced by $0.2 million as a result of the favorable settlement of certain foreign
tax issues. 19




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On October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The
AJCA provides for a deduction of 85% of certain foreign earnings that are repatriated, as defined
in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in fiscal
2006. We have begun an evaluation of the effects of the repatriation provision; however, we have
not reached a decision on whether or not the election will be beneficial to us. The range of
possible amounts we are considering for repatriation under the AJCA is from $0 to $13.0 million.
The related potential range of income tax expense associated with the repatriation is from $0 to
$0.7 million. We expect to complete our evaluation of the effects of the repatriation provision
during the third quarter of fiscal 2006. Income from Operations and Net Income.We generated operating income of $4.5 million and net
income of $3.9 million during the first quarter of fiscal 2006. During the first quarter of fiscal
2005, we generated operating income of $4.3 million and net income of $3.2 million. The
improvement resulted primarily from the benefit of lower interest costs and a lower effective tax
rate. Liquidity and Capital Resources.We had approximately $61.4 million in cash and cash
equivalents at May 31, 2005, with no borrowings under our long-term debt facilities. Our cash
reserves increased $1.2 million during the three months ended May 31, 2005, with operating
activities providing $3.0 million of cash, net investing activities using $3.4 million of cash and
net financing activities providing $2.3 million of cash. Operating cash flow for the quarter ended May 31, 2005 results from our profitability for the
quarter and our continuing focus on balance sheet management. We held our days sales outstanding
of accounts receivable to 64 days, up slightly from 60 days at February 28, 2005. For sales of certain of our more complex, customized systems (generally ones with a sales
price of $500,000 or more), we recognize revenue based on a percentage of completion methodology.
Unbilled receivables accrued under this methodology totaled $8.9 million (28.9% of total net
receivables) at May 31, 2005, up $1.5 million from February 28, 2005. We expect to bill and
collect unbilled receivables as of May 31, 2005 within the next twelve months. While we continue to focus on the level of our investment in accounts receivable, we generate
a significant percentage of our 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, we may offer selected customers such
payment terms. In all cases, however, we only recognize revenue at such time as our 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 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. We used $3.4 million of cash on investing activities during the first quarter of fiscal 2006,
primarily for the purchase of property and equipment. Approximately $1.5 million of this amount
related to increases in our managed services infrastructure to support new contracts signed last
fiscal year. The remainder was primarily related to our overall computing environment. During the quarter ended May 31, 2005, our financing activities provided $2.3 million in net
cash flow. Our option holders exercised options for 0.3 million shares of common stock and, in so
doing, provided us with $1.5 million in cash. The exercise of warrants for 0.6 million shares of
common stock provided us with $2.5 million in cash. We repaid the $1.7 million balance under our
term loan in March 2005. As of May 31, 2005, we were in compliance with all financial and
operating covenants under our $5.5 million revolving line of credit agreement. Adequacy of Cash Reserves We believe our cash reserves and internally generated cash flow along with any cash
availability under our line of credit will be sufficient to meet our cash requirements for at least
the next twelve months. 20




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Impact of Inflation We do not expect any significant short-term impact of inflation on our financial condition.
We presently are not bound by long-term fixed price sales contracts. The absence of such contracts
reduces our exposure to inflationary effects. 
 Item 4 Controls and Procedures Evaluation of disclosure controls and procedures.Our disclosure controls and procedures are
designed to provide reasonable, but not absolute, assurance that the objectives of our disclosure
control system are met. A control system, no matter how well conceived and operated, is subject to
inherent limitations. These limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more
persons or by management override of the control. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected. Based on the evaluation by our management (with the participation of our chief executive
officer and chief financial officer), as of the end of the period covered by this report, our chief
executive officer and chief financial officer have concluded that our disclosure controls and
procedures(as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to
provide reasonable assurance that material information required to be disclosed by us in reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission rules and
forms. Such officers also have concluded that our disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports we file or submit under the
Exchange Act is accumulated and communicated to our management, including our principal executive
and principal financial officers, to allow timely decisions regarding required disclosure. Changes in internal control.There has been no change in our internal control over financial
reporting identified in connection with the evaluation that occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 21




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PART II. OTHER INFORMATION 
 Item 1 Legal Proceedings See
Pending Litigation, Audit Committee
Investigation and Shareholder Demand Letter in Note G in Item 1 of Part I of
this quarterly report on Form 10-Q. 
 Item 6 Exhibits (a) Exhibits 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
    
    Form of Warrant, dated as of May 20, 2002, between the Registrant and
each of the Buyers under the Securities Purchase Agreement. (5)4.4
    
    Registration Rights Agreement, dated as of May 29, 2002, between the
Registrant and each of the Buyers under the Securities Purchase
Agreement. (5)4.5
    
    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
    
    Intervoice, Inc. Fiscal Year 2006 Annual Incentive Compensation Plan
Plan Summary. (7)10.2
    
    Intervoice, Inc. 2005 Stock Incentive Plan. (8)10.3
    
    Extension of Health Care Coverage
to Non-Employee Directors. (9)10.4
    
    Salary Increases for Executive Officers. (9)31.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (9)31.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a). (9)32.1
    
    Certification of Chief Executive Officer of Periodic Report Pursuant
to Rule 13a-14(b) and 18 U.S.C. Section 1350. (9)*32.2
    
    Certification of Chief Financial Officer of Periodic Report Pursuant
to Rule 13a-14(b) and 18 U.S.C. Section 1350. (9)*
 
 (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 April 28, 2005.(8)
    
    Incorporated by reference to exhibits to the Companys Current Report on Form 8-K, filed with
the SEC on June 3, 2005.(9)
    
    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. 22




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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 8, 2005
    
    By:
    
    /s/ MARK C. FALKENBERGMark C. FalkenbergChief Accounting Officer
 23