UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-K
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(Mark
One)
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þ
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
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OR
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*
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ____________to____________
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Commission
File Number
000-27385
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INTERACTIVE
INTELLIGENCE, INC.
(Exact
name of registrant as specified in its charter)
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Indiana
(State
or Other Jurisdiction
of
I
ncorporation)
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35-1933097
(IRS
Employer
Identification
No.)
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7601 Interactive
Way
Indianapolis,
IN 46278
(Address
of principal executive offices, including zip code)
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(317)
872-3000
(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $0.01 par value per share
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The
NASDAQ Stock Market LLC
(The
NASDAQ Global Market)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
£
No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
£
No
þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
þ
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
£
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Accelerated
filer
þ
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Non-accelerated
filer
£
(Do
not check if a smaller reporting company)
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Smaller
reporting company
£
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
£
No
þ
Assuming
solely for the purposes of this calculation that all directors and executive
officers of the registrant are “affiliates”, the aggregate market value of the
registrant’s common stock held by non-affiliates of the registrant, based upon
the closing sale price per share of the registrant’s common stock on June 30,
2008 as reported on The NASDAQ Global Market on that date was
$161,877,771.
As
of February 2
8
,
2009, there were 16,953,058
shares outstanding of the
registrant’s common stock, $0.01 par value.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the information required by Part III of this Form 10-K are incorporated by
reference from portions of the registrant’s Proxy Statement for its 2009 Annual
Meeting of Shareholders to be held on May 28, 2009, which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31,
2008.
TABLE OF
CONTENTS
PART I.
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Page
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Item
1.
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Business.
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4
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Item
1A.
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Risk
Factors.
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18
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Item
1B.
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Unresolved
Staff Comments.
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25
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Item
2.
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Properties.
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25
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Item
3.
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Legal
Proceedings.
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26
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Item
4.
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Submission
of Matters to a Vote of Security Holders.
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26
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PART II.
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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26
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Item
6.
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Selected
Financial Data.
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28
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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29
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk.
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39
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Item
8.
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Financial
Statements and Supplementary Data.
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40
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
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58
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Item
9A.
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Controls
and Procedures.
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59
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Item
9B.
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Other
Information.
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59
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PART
III.
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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60
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Item
11.
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Executive
Compensation.
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60
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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60
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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61
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Item
14.
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Principal
Accountant Fees and Services.
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61
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PART IV.
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Item
15.
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Exhibits
and Financial Statement Schedules.
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61
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SIGNATURES
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65
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PART
I.
SPECIAL
NOTE ABOUT FORWARD-LOOKING INFORMATION
Certain
statements in this Annual Report on Form 10-K contain "forward-looking"
information (as defined in the Private Securities Litigation Reform Act of
1995,
Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended) that involves risks and uncertainties which
may cause actual results to differ materially from those predicted in the
forward-looking statements. Forward-looking statements can often be identified
by their use of such verbs as “believes”, “intend”, “plan”, “may”,
“should”, “will”, “would”, “will be”, “will continue”, or similar verbs or
conjugations of such verbs. If any of our assumptions on which the statements
are based prove incorrect or should unanticipated circumstances arise, our
actual results could materially differ from those anticipated by such
forward-looking statements. The differences could be caused by a number of
factors or combination of factors, including, but not limited to, those set
forth in the Item 1A “Risk Factors” section of this Annual Report on Form
10-K.
Company
Overview
Interactive
Intelligence, Inc. (“Interactive Intelligence,” “we,” “us” or “our”) was formed
in 1994 as an Indiana corporation and maintains its world headquarters and
executive offices at 7601 Interactive Way, Indianapolis, IN 46278. Our telephone
number is (317) 872-3000. We are located on the web at
http://www.inin.com
.
We file annual, quarterly and current reports, proxy statements and other
documents with the United States Securities and Exchange Commission (the “SEC”)
under the Securities Exchange Act of 1934, as amended. These periodic and
current reports and all amendments to those reports are available free of charge
on the investor relations page of our website at
http://investors.inin.com
.
Unified
Business Communications Solutions
We are a
leading provider of software application suites for Voice over Internet Protocol
(“VoIP”) business communications and are increasingly leveraging our leadership
position in the worldwide contact center market to offer our solutions to
enterprises. Businesses, as well as organizations that employ remote and mobile
workers, utilize our
solutions in industries
including, but not limited to, teleservices, financial services (banks, credit
unions), insurance, higher education (universities), healthcare, retail,
technology, government and business services. For enterprises that rely on
the Microsoft
®
Corporation (“Microsoft”) platform, we offer a pre-integrated all-software
Internet Protocol Private Branch Exchange (“IP PBX”) phone and communications
system that enables straightforward integration to Microsoft applications for
data management. In all, our innovative software products and services are
designed expressly for multichannel contact management, business communications
and messaging using the Session Initiation Protocol (“SIP”) global
communications standard that supports VoIP. To supplement our software
solutions, our product lineup includes a full-featured media server, media
gateways and SIP proxy for IP-based communications networks and infrastructures.
Our customers can deploy our solutions as an on-premise system at their site or
as a Communications as a Service (“CaaS”) model offered via our off-site CaaS
data center.
Our
application-based solutions are integrated on a single software platform.
Overall, our platform has been developed to deliver security, broaden
integration to business systems and end-user devices, enhance mobility for
today’s workforce, scale to thousands of users and more wholly satisfy diverse
business communications and interaction management needs in markets
for:
·
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Enterprise
IP Telephony
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By
implementing our all-in-one solutions, businesses are able to unify multichannel
communications media (phone, fax, e-mail and web chat); improve workforce
performance, effectiveness and productivity; and more readily adapt to changing
market and customer requirements. Organizations in the industries we serve are
further able to reduce equipment and maintenance costs over traditional
“multipoint” communications hardware and reduce the complexity of such
non-integrated systems, through our integrated solutions.
Innovation
and Value
We have
long been recognized for our innovative, bundled contact center application
solutions. Our single integrated platform and all-in-one application suites
allow contact centers and business enterprises to queue and manage multichannel
communications media. Contact centers can leverage this same software platform
for predictive outbound dialing, workforce management, quality monitoring,
post-call customer satisfaction surveys, call and screen recording and agent
scoring, interaction tracking, speech recognition, and other enhanced contact
management and compliance capabilities.
Our
principal competitors are vendors who follow traditional proprietary (“legacy”)
approaches and offer a combination of hardware-centric PBX phone systems,
automated call distributors (“ACD”), voice mail systems, interactive voice
response (“IVR”) systems and associated equipment. Contrasting such multipoint
hardware systems, our unified platform is architected on open standards software
developed to run on the Microsoft
®
Windows
®
("Microsoft Windows") operating system and our own industry standard servers.
This allows businesses to reduce both the number of devices and the cost of
expensive communications equipment from proprietary vendors. Our media server,
media gateways and SIP proxy
also replace
comparable, more expensive components from proprietary vendors.
The added
value of our open software approach is in the clear migration path it provides
to VoIP using the SIP standard for networked voice and data. In addition to
VoIP, this open approach enables broader integration to business systems and
end-user telephones, while reducing overall costs for network management, system
administration and functionality upgrades. Our application solutions also
pre-integrate to popular business applications for customer relationship
management (“CRM”), enterprise resource planning (“ERP”) and other processes,
enabling businesses to fully integrate and automate their specific business
rules with minimal interruption.
Continued
Global Success and Recognition
We began
licensing our software in 1997. We market our software solutions around the
globe, directly to customers and through a channel of approximately 300
value-added partners. Our software applications are available in 21 languages
and are installed in more than 80 countries.
Partners
and customers who license our products are certified through our professional
education curriculum and are supported by our global support network of trained
technology and implementation partners.
We have
been an ISO 9001:2000 Certified company since January 2005 and obtained our
re-certification in February 2009, marking our fourth consecutive year of
compliance. Being certified to ISO 9001:2000 gives assurance to our customers
and partners that we are able to satisfy ISO requirements by having in place the
means to continuously improve our business processes.
Other
recent company recognition includes the following:
·
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2008
Product of the Year,
Internet Telephony
®
Magazine
,
Enterprise Interaction Center®;
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·
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Leaders
Quadrant, Gartner, Inc’s “Magic Quadrant for Contact Center
Infrastructure, Worldwide,” 2008
report;
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·
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Number
One Unified Communications Vendor by North American Contact Centers,
Datamonitor "Business Trends: Contact Center Investments in Developed
Markets (Customer Focus)" 2008
report;
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·
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Number
196 in the Top 500 Global Software & Services Companies list,
Software
Magazine
;
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·
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2008
Top 50 Hot Growth companies,
BusinessWeek
magazine;
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·
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60
fastest growing software companies in the United States, CIOZone;
and
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·
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2008
Product of the Year,
Customer Interaction
Solutions
®
Magazine
, Interactive
Intelligence Customer Interaction
Center®.
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Industry
Overview and Current Developments
Process
automation, VoIP, high-speed Internet access, Internet-based commerce
(“eServices”), and the growing acceptance of data networks configured to
transmit voice traffic continue to cause a major shift in business
communications technologies. Organizations in many industries, and in increasing
numbers, are moving from one-dimensional, hardware-based PBX phone systems to
multichannel software platforms. Such platforms incorporate VoIP, IP telephony
and a unified communications approach to bring networks and voice and data
applications together, allowing businesses to reduce communications equipment
costs and administration, and to automate communications and business processes
to improve organizational effectiveness. We have followed an open standards
all-in-one software approach since 1994 to develop our industry-leading
solutions for these unique business communications technology
components.
The
Convergence of Voice and Data
In a
technology trend that continues to gain acceptance worldwide, the IP has
prompted many businesses to begin moving voice traffic from circuit-switched
networks and bulky hardware equipment to more agile “converged” voice and data
networks, applications servers, and lower cost end-user devices based on the
popular Transmission Control Protocol/ Internet Protocol (“TCP/IP”) for network
interconnections and VoIP. One result of this transition is that traditional PBX
phone system hardware is being replaced by software-based IP PBX solutions. We
provide these software-based solutions along with other vendors including Avaya
Inc. (“Avaya”), Cisco Systems, Inc. (“Cisco”), Nortel Networks Corporation
(“Nortel”), Genesys Telecommunications Laboratories, Inc. (“Genesys”), Aspect
Software, Inc. (formerly Aspect Communications Corporation) (“Aspect”) and
others.
Unified
Communications
According
to industry analysts at Gartner, Inc., unified communications are defined as the
“direct result of convergence in communication networks and applications.”
Microsoft also has defined unified communications as a solution that “bridges
the gap between telephony and computing to deliver real-time messaging, voice
and conferencing to the desktop environment.” The convergence of voice and data
communications on IP networks leveraging open standards software platforms is
continuing to generate a new paradigm for business communications and how
people, groups and organizations communicate. Unified communications products
based on software solutions and equipment such as servers, gateways and IP-based
phones and end-user devices are proving to reduce costs over their proprietary
counterparts, while at the same time enhancing organizational productivity by
facilitating the integration and use of presence management and multiple
enterprise communication methods. Most unified communications products,
including our own, are currently offered either as a stand-alone product
solution or from a portfolio of integrated applications and
platforms.
Internet-based
Interactions
In
addition to more traditional communications media such as the telephone, voice
mail, and the fax machine, the Internet has expanded communications media to
include e-mail, Internet chat sessions, web callback requests and VoIP calls. As
consumers have continued to leverage these web-based contact options, companies
have learned to utilize the Internet as a key channel for sales, distribution
and customer service. With customer service as an objective, many of these
companies are deploying web applications for e-mail management, web auto
response, web collaboration and other online services to satisfy consumer habits
and raise service levels. Though many online services are unified in an
applications approach, most companies still support online media channels using
separate e-mail platforms, web servers, chat servers and other disjointed
equipment that can lead to inconsistencies and inefficiencies across customer
touch points.
Moving
from Call Centers to Contact Centers
Until a
few years ago, a call center consisting of phone banks and agents handling
inbound and outbound calls was sufficient for businesses and their customers.
While relegated to a single communications channel, these “call-only” centers
nevertheless required multipoint systems consisting of a PBX, ACD and an
automated attendant to handle voice-based interactions, along with optional
systems such as an IVR system, a predictive outbound dialer and a call logger.
Most call centers also were forced to spend time and money to integrate their
disparate phone system devices. In a continuing movement away from conventional
call center operations, “contact centers” are incorporating multichannel
communications technologies that pair e-mail and web interaction options
alongside phone calls, allowing businesses to offer more contact options for
customers plus a wider range of service and support channels. As multichannel
platforms play a broader role in customer service, sales, and functions such as
CRM, organizations are beginning to realize the value of formal “full service”
contact centers. In turn, information technology leaders continue to adopt a
bundled application approach to multichannel contact management, primarily to
replace multiple hardware-centric systems and more easily migrate to
network-based IP telephony.
The
Need to Integrate Telecommunications and Information Systems
For many
businesses, telecommunications systems and information systems remain distinct
components in a communications infrastructure. Yet to interact internally and
externally, and do so more effectively, businesses must be able to access and
utilize these systems in a seamless manner. Many vendors therefore offer
computer telephony integration (“CTI”) middleware products and services to
integrate various types of telecommunications devices with information
technology, to “bring the two sides together.” For example in a contact center,
a CTI-based screen pop application can enable a data window to pop up on an
agent’s monitor and present information about a caller at the same time the
agent’s telephone or headset rings. For customer service in particular, screen
pops allow the agent to view the customer’s account information, which is
usually maintained in a CRM record or ERP application.
While
effective for customer service, we believe that using CTI middleware products to
integrate communications and information systems raises a number of fundamental
problems. In addition to being expensive and time-consuming to implement, the
total cost of ownership for any CTI integration over time is high due to
multiple points of configuration (and potential failure), administration and
maintenance. Managing and modifying an integrated CTI infrastructure is also
difficult in that each device may be independently configured by different
vendors. For instance, adding just one new agent in a contact center may require
configuring a new extension in the center’s PBX phone system, defining a new
mail box in its voice mail system, and creating a new agent entry in an ACD to
route calls to the new agent. This process can result in the new user’s
information being entered into each device inconsistently or incorrectly. With
an emphasis on web-based objectives in particular, we believe CTI used in this
traditional multi-device approach makes it more difficult for businesses to
interact over the Internet.
Broader
Integration to Business/Data Systems and End-user Devices
With the
increasing emphasis on business processes, automation is key to broadening
integration between a communications platform and business applications,
information systems, databases, knowledge bases and end-user devices such as
phone sets, hand-held devices, cell phones and laptop computers. Compared to
traditional communications hardware systems and CTI, by using industry-standard
servers and low-cost IP devices for users across an organization, IP-based
applications and open standards increase integration capability to a wider range
of business systems. Especially within dispersed multi-site organizations,
integration is easier to accomplish since different locations can leverage IP
networks to integrate business system servers, use SIP connections from the same
network to integrate IP phones and devices at the desktop, and use wireless
connections to equip mobile workers. Organizations that rely on separate PBX,
ACD and associated equipment for communications are not afforded the same
integration flexibility. Even though many proprietary vendors are now beginning
to take an applications approach to their solutions, they have yet to reach the
same levels of openness that more established applications vendors reached years
ago. Consequently, the customers of many proprietary vendors must still utilize
expensive CTI methods, third-party integration services, and higher-priced
proprietary devices to manage their business and communications
systems.
Enhanced
Security
As IP
telephony becomes more prevalent in business communications, the potential of
attacks to an IP communications system makes security a critical priority for
contact centers as well as for healthcare providers, financial institutions,
government agencies, public companies and other organizations that manage
confidential voice and data communications over an IP network. Open standards
including SIP provide a rigorous approach to user authentication and message
encryption in a VoIP environment, as do standards such as the Payment Card
Industry Data Security Standard, which allows businesses that utilize VoIP
technologies to safeguard confidential data stemming from credit card
transactions. While many standards focus on security, SIP is the most regulated
given the actions of the Internet Engineering Task Force (“IETF”), which
continuously introduces, amends and strictly monitors SIP security
specifications worldwide. Our solutions leverage the SIP security standard
specification. Our new breed of all-in-one IP communications application
suites improve security inherently, in that they pre-integrate applications on a
single platform for all voice and data functions, and allow organizations to
reduce the number systems and access points for potential attacks by
streamlining security down to a central underlying platform. Single
software-based platforms likewise extend security mechanisms to all critical
points between an IP network and the desktop, allowing organizations to deploy
virtual private networks (“VPN”), virtual local area networks (“VLAN”), access
lists, authentication, Transport Layer Security (“TLS”), Secure Real-time
Transport Protocol (“SRTP”) and encryption mechanisms from the network to their
IP communications system’s application server, gateway, data servers and phone
devices.
Migration
from Voice Mail to Unified Messaging and Enhanced Messaging
Unified
messaging efficiently combines voice mail, fax and e-mail messages in an
end-user’s “unified” inbox, with messages accessible via the desktop, a web
browser, a handheld device, or even the telephone using Text-to-Speech
technology. With certain of the current voice mail and fax systems now reaching
end-of-life status, and with e-mail now a commonly used communication medium,
more enterprises are upgrading to unified messaging solutions that integrate
with existing PBXs equipped for IP telephony and VoIP. Many of these IP PBXs
natively support e-mail and directory servers that are already components in
most technology and telecommunication infrastructures, allowing an organization
to protect much of its technology investment as they make the move to a unified
messaging solution. Also, as workers become more mobile, organizations are
studying the value of enhanced messaging, which supplements unified messaging
with features such as customizable personal call rules and greetings for users,
Follow-Me call routing, real-time presence management, speech- and browser-based
voice mail access, workgroup capabilities and more.
Communications
as a Service
CaaS is a communications specific way of implementing many of the benefits of
Software as a Service (“SaaS”) on a monthly subscription basis. The service
provider maintains the core communications system in its own data center.
The benefit of the CaaS model — commonly referred to as “hosted services” or
“on-demand services” — is that it requires little or no capital expenditure for
on-premise equipment at the customer’s location and limited up-front payment for
deployment. The CaaS model also requires less user overhead to maintain compared
to an on-premise information technology infrastructure since application servers
reside at the provider’s off-site data center location, with the provider
implementing the solution and monitoring security and disaster recovery
mechanisms.
There are significant differences between the SaaS and CaaS approaches. SaaS
provides software to manage information and data flows for applications such as
CRM, sales force automation and human resources. CaaS involves interaction with
customers and these offerings typically include contact center-type applications
for IP PBX-based call processing, ACD call routing, auto attendant, IVR, voice
mail, call recording, quality monitoring, conferencing, messaging, automated
outbound notifications and other communications services.
Business
Process Automation (“BPA”) and Communications-Based Process Automation
(“CBPA”)
We
believe process automation will improve a new or existing customer’s position in
the global marketplace and strengthen their foundation for growth. Our
applications have long taken an intelligence-based approach to automation,
beginning with the ability to unify and handle multichannel interactions in the
same manner, and followed thereafter with features such as multichannel queuing,
skills-based (agent) routing, and speech-enabled IVR and auto attendant
processes structured according to an organization’s business rules. More
recently Communications-based Process Automation (“CBPA”) combines these
established communications automation practices with the automation of formal
business processes, such as help desk personnel formulating and tracking
customer trouble tickets or human resource staff handling employee time-off
requests. We are leveraging our current technology to extend our solutions to
encompass this communications-based approach to automating business and
interaction processes with a full-featured process automation product solution
scheduled for release during 2009, as well as with our newly-released post-call
satisfaction survey product and the ongoing automation of interaction management
functionality now deployed in our solutions.
Target
Markets
We have
developed our solutions to meet the requirements of three distinct target
markets in which our all-in-one approach delivers value. These markets include a
strong and growing demand for the inherent standards-based IP telephony, VoIP
and unified communications functionality that our application solutions
offer.
The
Contact Center
We remain
an industry leader in helping contact centers move from traditional time
division multiplex (“TDM”) phone equipment, multipoint call center technology
and CTI to pre-integrated application solutions for multichannel contact
management, developed on open standards for VoIP. Our scalable all-in-one
contact center platform and application suite enables centers to intelligently
route, monitor, record, track, and report on phone calls as well as fax, e-mail
and web interactions, whether in a single location or across multi-site
operations. Contact centers can also easily license our pre-integrated add-on
applications for predictive dialing, workforce management, screen recording and
multichannel recording and agent scoring, automated post-call satisfaction
surveys and other enhanced functionality.
For
self-service automation in the contact center environment, including
speech-enabled IVR and e-mail auto response technologies, we offer a full range
of solutions that help organizations support their sales and service objectives
while standardizing customer service options and reducing operations costs.
Among the more popular self-service applications our customers have implemented
are Frequently Asked Questions (“FAQ”) auto response via e-mail and IVR-based
processes for order status inquiries.
Moreover
as on-demand CaaS offerings take hold in the contact center market, our contact
center platform and application suite is already positioned to deliver ACD, IVR,
multimedia queuing, recording, real-time supervisory monitoring and other
critical services via the CaaS model and VoIP, with local control for services
implementation and administration.
Enterprise
IP Telephony
Leveraging
our strength in the contact center sector has enabled us to offer IP telephony
to the “larger enterprise” market. In positioning our contact center solution
for enterprise requirements, organizations can implement a single solution for
IP PBX, ACD, IVR, multimedia queuing, messaging, mobile access and other
capabilities that meet the needs of enterprise business users and workgroups as
well as contact center agents. We also continue to strengthen our position in
the mid-sized enterprise market with our “all-software” IP PBX phone and
communications solution for companies consisting of 100 to 1,500 users, and
especially for enterprises that rely on the Microsoft platform. In addition to
mid-sized enterprises, this market sector includes distributed organizations
such as banks and credit unions, and organizations that maintain mobile and
remote workforces, such as sales and service-oriented companies.
Enterprise
Messaging
We have
defined enterprise messaging as being a comprehensive yet adaptable solution for
voice mail, unified messaging (voice mail, e-mail and fax in one inbox), and
enhanced messaging — which builds upon unified messaging with advanced features
such as Find-Me/Follow-Me, customizable call rules, real-time presence
management, and other features. With certain existing voice mail systems
continuing to near end-of-life status, with organizations evaluating their
messaging solutions and requirements, and with the increased popularity of
e-mail and mobile communications technology, we believe we are well-positioned
in the enterprise messaging space.
We offer
a single, highly-scalable, multichannel messaging platform that allows
organizations to route live communications to desk phones as well as mobile
phones and telephony-enabled handheld devices, and to help users manage their
inbox for e-mail, voice mail and fax messages. Our platform’s inherent IP
architecture also paves a straightforward migration path to VoIP for
organizations looking to make the move to IP telephony. By providing flexible
choose-by-function deployment and licensing options for voice mail, unified
messaging, enhanced messaging, or a combination of all three, organizations can
configure and centrally administer the precise messaging environment needed, by
department or enterprise-wide. Our single IP platform/adaptable applications
approach has been successfully deployed by universities and large
companies.
Our
All-in-One Platform, Single-System Approach, Products, Customer Support and
Services
All-in-One
Platform, Single-System Approach
We
provide a comprehensive solution of contact management and business
communications applications developed to run on our pre-
integrated
Interaction
Center Platform
®
multichannel event-processing platform and the Microsoft Windows
operating system. Our platform-based software solutions do not require
multipoint hardware or integrations to third-party products or CTI middleware,
and are capable of processing thousands of interactions per hour.
As a true
all-in-one solution for voice and data, the Interaction Center Platform does not
require separate servers or integration, allowing contact centers and
enterprises to process telephone calls, e-mails, faxes, voice mail messages,
Internet chat sessions, IP telephony calls, Short Message Service (“SMS”)
messages, and generic media such as trouble tickets seamlessly and consistently
across various media channels. Organizations can further apply business rules
across media types for uniform customer service processes and end-to-end
tracking and reporting that improves workforce performance and service
quality.
Our
platform provides a single point of system management to simplify administration
and maintenance, eliminates hardware “boxes” to reduce equipment costs and
complexity and is flexibly deployed as a PBX/IP PBX or with an organization’s
existing PBX/IP PBX.
These
differentiating characteristics of our integrated software solutions allow
businesses to more effectively communicate internally and externally, and do so
at a much lower total cost of ownership compared to legacy hardware systems and
computer telephony integration products. Strategic advantages of our all-in-one,
single-system approach to unified business communications are described in the
following sections.
Automating
Interaction Processes and Business Processes
From the
beginning, the Interaction Center Platform was designed to queue and distribute
a variety of communications objects via automated processes. Now with
the emergence of CBPA as a viable business technology, the Interaction Center
Platform provides a logical and proven foundation for automating the business
rules, information, and voice and data interaction components that drive most
business processes.
Standards-Based
All-Software Architecture and IP Capabilities
Our
software applications incorporate native IP capabilities based on the
international SIP communications standard developed by the IETF and adopted by a
number of industry leaders including Microsoft. Unlike proprietary PBX phone
systems and associated legacy hardware that other vendors often advertise as
“IP-enabled,” our core platform and application solutions are inherently
architected on SIP and open standards throughout, eliminating the costly SIP
extension “lock-ins” required when using proprietary communications hardware
systems to support VoIP. To further reduce costs, our software runs on standard
commodity servers with no need for expensive and unreliable voice board
hardware, allowing organizations to incrementally scale to more users and
distributed office locations. In all, the open standards capabilities of our
solutions allow businesses to make use of a wide variety of low-cost IP soft
phones and telephone devices, gateways and other components from a number of
different vendors.
Broader
Range of Functions, No Need to Integrate Disparate Technologies
With
traditional legacy communications systems, contact center and business
enterprise operations must typically implement separate multipoint products such
as a PBX for phone calls, a web server for chat, and other systems for other
voice and data functions. To work together, these systems often require
significant, and complex, integration hardware, middleware and services. Our
pre-integrated application suites instead offer a single software solution for
common communications features in the contact center and the enterprise: PBX/IP
PBX, telephony, e-mail processing, ACD, IVR, web interaction event processing,
inbound and outbound fax, conferencing, multichannel recording and screen
recording, quality monitoring and more. To protect existing system investments,
businesses can use our software applications to supplement their PBX with
web-based interaction management, unified messaging, IVR, departmental contact
center services, and other phone system functions. Our solutions also include
supervisory features to view communications statistics in real time,
supplemented by workforce management, coaching features, interaction tracking
and end-to-end reporting to improve operational performance.
Open
Architecture and Greater Compatibility with Leading Technologies
To
accommodate our standards-based approach to business communications, we
developed our Interaction Center
Platform on an open
architecture completely different from traditional telecommunications systems
that are based on a proprietary, closed architecture. Traditional systems limit
an organization’s ability to readily adapt to change or customize communications
processes. With proprietary systems, even simple changes such as adding a new
employee or changing an employee’s location can require costly vendor services.
Our solutions are built using industry-standard server, network and software
components such as Intel Corporation’s (“Intel”) microprocessors, the Microsoft
Windows operating system, and gateways from a select list of certified vendors
(including our own
Interaction Gateway
™
).
Our open platform architecture allows organizations to easily configure our
applications to meet precise communications requirements and to flexibly make
hardware or software modifications as necessary. Our products also easily
interact with popular technology products that include:
|
·
|
E-mail servers
such as
Microsoft Exchange Server, International Business Machines Corporation
(“IBM”) Lotus Notes and Novell
GroupWise;
|
|
·
|
Database systems
from
Microsoft, Oracle Corporation (“Oracle”) and
IBM;
|
|
·
|
Mainframe systems
,
including those that support 3270 and 5250 terminal
emulation;
|
|
·
|
Web servers
from Apache
Digital Corporation, IBM WebSphere and
Microsoft;
|
|
·
|
Network management
systems
, including Hewlett-Packard Company’s HP OpenView, IBM
Tivoli NetView and Computer Associates International, Inc.’s Unicenter
TNG;
|
|
·
|
CRM and ERP systems
such as those from Microsoft, Oracle, SAP Corporation and others;
and
|
|
·
|
Enterprise directories
,
including Microsoft Active Directory, Novell NDS e-Directory and
Sun/iPlanet Directory Server.
|
Greater
Ability to Utilize the Internet
With
online initiatives now playing a significant sales and marketing role in many
businesses, our solutions provide a number of web-based interaction options.
These options include e-mail, FAQ auto response, web chat and callback requests,
online forms, and VoIP calls. Such options are increasingly important for
effective e-commerce initiatives, eServices and online customer service as
consumers continue to use the Internet to conduct business
transactions.
Greater
Ability to Configure Communications to Meet Specific Needs
Our core
Interaction Center
Platform includes the
built-in
Interaction
Designer
®
graphical application generator that allows an organization to integrate
specific business rules and required interaction processes. In addition to
deploying applications quickly with minimal configuration, organizations can use
the pre-built tool sets in
Interaction Designer
to
configure specific routines for nearly any aspect of their communications
processing. This capability allows organizations to bypass expensive
customization and still tailor communications processes for their customers,
employees and other users using a single tool to structure dial plans, call
distribution rules, IVR menus
, web services, voice mail system menus, fax
applications and other communications applications.
Lower
Total Cost of Ownership
We
believe our pre-integrated applications-based solutions result in a lower total
cost of ownership compared to traditional multipoint communications systems with
similar functionality. Our all-in-one platform and application solutions are
developed specifically to replace costly hardware equipment, reduce energy
consumption, and simplify configuration and ongoing administration while
delivering enhanced multichannel communications features. The ability to deploy
a single application suite on a single server, or group of servers, and license
new features and users rather than procure additional hardware products,
provides additional cost control by eliminating excessive integration costs from
different vendors. Also, contributing to a lower total cost of ownership is that
our solutions reduce end-user training with their intuitive Windows-driven
environment and reduce the time and expense typically required to manage changes
in a multi-component business communications system.
Business
Strategy
We intend
to highlight our CBPA effort during 2009 to solidify our position in the contact
center market and expand our IP telephony solutions further into the enterprise
market. We also plan to emphasize our new packaged approach to professional
services, market these services and enhanced product functionality to existing
customers, and focus on growing our CaaS offering as a viable option that allows
an organization to pay for a communications solution on a
monthly subscription basis. Our strategy for achieving this overall mission
includes multiple objectives, described as follows.
Communications-based
Process Automation
Communications-“enabled” business process (“CEBP”) solutions are currently
offered by other vendors. These CEBP solutions initiate simple notifications via
e-mail or the telephone. For example, CEBP technologies are what banks use to
issue an alert e-mail or phone call whenever a customer’s database record
indicates an account balance less than a defined threshold. CEBP does not
automate the entire business process.
Our
Interaction Center
Platform
technology
with our
Interaction
Attendant
®
and
graphical call flow manager provides a unique foundation for business process
automation. Leveraging our established platform, during 2009 we intend to offer
our
Interaction Process
Automation
™
(“IPA”)
application as a CBPA solution that differs significantly from the current
vendor offerings. With our IPA solution, the communications system becomes the
process automation platform. As an example of CBPA, while our solution is able
to handle the outbound notifications of the current offerings, a bank could also
use our solution to queue up new mortgage applications submitted online and
route the application along with all work tasks and due dates to the next
available underwriter — much as a contact center would route an incoming call to
the first available agent or an agent skilled in a particular product or
language
.
Promote
Our Packaged Services Offerings
During
2009, we intend to launch and promote our professional services as packaged
offerings. As tightly-defined, fixed-cost services, these packages are intended
to help our customers control costs for implementation, system configuration,
technical support, managed support and administration, and ongoing education,
and are intended to eliminate the series of open-ended services engagements that
many legacy vendors require for their multipoint hardware systems. We
believe that these packaged services offerings will more effectively position us
against our competitors.
Market
More Effectively to Our Existing Customers
Our
existing customers have long represented a core revenue stream for new
application solutions, services and our business overall. Our customers also
provide input on our products, which assists in our development efforts.
Throughout 2009, we intend to market recently-released application solutions to
these established customers, such as the
Interaction
Feedback
™
solution for automated post-call satisfaction surveys, and the
Interaction
Monitor
™
client/server module for full-time off-site system monitoring and
administration. We further anticipate an interest from existing customers for
our IPA application solution and for the new fixed-cost packaged solutions from
our Worldwide Services organization. Intended marketing activities are to
include promotional campaigns and special offers for our existing customer base,
executed primarily via e-mail and call campaigns conducted by our Lead Team and
inside sales personnel.
Rapidly
Grow our Communications as a Service Customer Base
In
its December 2008 “Market Trends: Forecast for North American Hosted Contact
Center Market, 2007-2013” report, Gartner, Inc. notes that “the 2008 to
2009 economic slowdown should favor hosted contact center adoption.” The report
forecasts the North American hosted contact center market to increase from $104
million in 2007 to $361 million by 2013, yielding a 23% compound annual growth
rate (CAGR). Moving forward, our Interactive Intelligence Customer Interaction
Center® (“CIC”) all-in-one communications software suite positions us to
capitalize on opportunities in the growing hosted or CaaS market. In addition to
providing robust contact center features, CIC is inherently architected for
VoIP, a critical component of the CaaS model for the services
delivery, redundancy and highest reliability that CaaS-based offerings
require. More importantly, in providing contact center services with local
control, our CaaS offering enables us to offer an option that we believe no one
else in the industry provides.
Specifically,
our local control deployment VoIP model allows a contact center to use its own
telephone lines, choose the best-suited telephone signal carrier, and maintain
voice traffic on its own network. With control over call recordings on their
network and in file storage systems, a contact center will be able to encrypt
recordings for greater security. For data, local control allows contact centers
to manage information in their database server to distribute as they like. Most
of all, contact centers maintain their own dedicated virtual machine in our data
center, allowing them to run their selected applications with complete isolation
from all other CaaS customers, ensuring that no other customer can corrupt data
or disable another system, as is possible with shared tenant solutions offered
by our competitors.
Our
CaaS offerings currently include Interactive Contact Center Services ("ICCS")
along with Interactive Notification Services. ICCS provide IVR and ACD, plus
call recording, screen pop integration and multimedia routing for e-mail and
text chat. Agents and supervisors also get a desktop client for call control,
desktop faxing, unified messaging, and real-time presence and monitoring.
Interactive Notification Services allow organizations to automate outbound
messages such as appointment reminders and time-sensitive announcements that
typically require manual calling. We believe these comprehensive CaaS offerings
will differentiate us against our competitors.
Innovation
and Enhancing Our Core Product Offerings
Forward-thinking
has been the cornerstone of our company. We will continue to leverage our
knowledge of contact center, telecommunications, IP, and process automation
technologies to improve our solutions with enhanced functionality,
maintainability, security, mobility, scalability and broader integration. We
also will continue to improve and add to our global offerings for VoIP and
unified business communications with our own media server, gateways and SIP
proxy. By continuing to invest in research and development of new and existing
products for contact centers, enterprises and VoIP infrastructures, we intend to
improve our technology to address the requirements of large-scale organizations
with thousands of users.
New
applications, services and functionality scheduled to be released by us in 2009
include our previously described IPA application to automate business processes
leveraging our communications platform, our Interaction Monitor
™
client/server solution for remote system monitoring and administration, and our
CaaS offerings for contact center capabilities and outbound notifications based
on the CaaS model for “pay-as-you-go” monthly subscription
services.
Expand
in Our Markets
For all
markets we serve, our strategy is to appeal to a broad audience of customers and
partners by providing “whole solutions” for business communications worldwide.
We maintain offices and dedicated field marketing managers throughout the world,
and intend to focus our marketing efforts to execute our global corporate
marketing objectives.
On the
application solution front, we have leveraged the already strong position of our
CIC IP application suite to appeal to larger single- and multi-site contact
center operations with 50 to 5,000 ACD agents. The single-platform CIC solution
utilizes VoIP via the international SIP communications standard, and offers a
pre-integrated all-in-one application suite for multichannel interaction
management, CRM integration, screen pop, self-service automation, multi-lingual
support, and communications features for enterprise business users as well as
contact center agents, remote agents and supervisors.
We also
have continued to position our pre-
integrated
Enterprise Interaction
Center
®
(“EIC”) IP PBX offering for enterprises from 100 to 1,500 users. As a whole
product model for businesses using the Microsoft platform, EIC is delivered
complete with the EIC server and application solution, SIP proxy, gateways and
IP phones. We are positioning the EIC solution to a global audience of mid-sized
enterprises, and especially to those that employ growing mobile workforces, that
require increased contact center and workgroup capabilities, and that see the
need for a more unified communications infrastructure using VoIP.
We have
additionally
enhanced our
Messaging Interaction
Center
™
(“M
IC”) enterprise messaging solution by positioning it as a combined
application server/telephony user interface solution to deliver advanced voice
and IP capabilities alongside its messaging features. With these enhancements,
we believe MIC offers a clear path to VoIP messaging through a cost-effective,
easy to use system that is easy to install and administer.
Leverage
our Relationships with Multi-National Partners to Open New Selling
Opportunities
To reach
a broader geographic customer base and expand our markets, we intend to work
closely with our approximately 300 partner organizations worldwide. Our partners
include Affiliated Computer Services, Unisys Corporation, IBM, General Dynamics
Corporation and many other firms that are focused on contact center and/or
enterprise telephony. Along with the name and brand recognition of these
partners, we will leverage their marketing capabilities to bring attention to
our brand. We believe that working in conjunction with companies such as these
will provide us with opportunities worldwide.
Develop
Effective Relationships with Companies in Specific Vertical
Industries
In the
last several years, we have attracted an increasing number of customers in
higher education, healthcare, financial services (banks and credit unions),
insurance, teleservices, and other industry-specific markets. To further
penetrate these markets, our strategy is to leverage our existing business
relationships with customers and partners in these industries, and build new
relationships with other established companies in the vertical segments we
serve. To supplement our vertical market offerings, we will work alongside these
companies, as well as with our partners who specialize in specific industries,
to create custom applications and solutions, most notably in the financial
services sector, and will present such offerings throughout our entire partner
channel.
Increase
Awareness of our All-in-One Solution and Launch Aggressive Replacement
Programs
Our
Interaction Center Platform technology and pre-integrated application suite
solutions have offered a true all-in-one system for unified business
communications since being initially designed in 1994 and first implemented in
1997. It is this approach that many of our competitors have tried to replicate
often by acquiring products from other companies and/or attempting to develop a
similar platform and supported applications. We intend to market directly to our
competitors’ customers to make them aware of our all-in-one application
solutions as a viable replacement for their existing systems. With the economic
uncertainty that many of our competitors now face, we believe that our financial
position and our continuous introduction of new forward-thinking products
position us to attract these customers.
Our
Products
We have
developed a comprehensive product solution to serve the contact management and
business communications needs of organizations in our three target
markets:
·
|
Enterprise
IP Telephony
|
It is
important to note that our pre-integrated application solutions, as well as the
core Interaction Center Platform that supports them, are designed expressly to
work with one another as fully-integrated all-in-one solutions that require no
third party products or CTI. Because our products are not acquired from other
vendors, our customers avoid the complexities and costs of trying to integrate
disparate multipoint systems that were not originally designed to work
together.
Interactive
Intelligence Customer Interaction Center
®
(“CIC”)
Unified
Communications from a Single Integrated Platform for the Contact Center and
Enterprise IP Telephony for the Larger Enterprise
CIC gives
contact centers and enterprises a single platform and a pre-integrated
all-in-one application solution for IP telephony, highlighted by multimedia ACD
to uniformly manage phone calls, faxes, e-mails and web interactions. CIC’s
inherent PBX/IP PBX call processing, voice mail, fax server and unified
messaging further enhance performance and customer service for agents,
supervisors and business users. The SIP-architected CIC provides a
straightforward migration path for VoIP, and is well-suited for contact centers,
including remote agents. CIC also serves as a communication solution for
enterprises and multi-site organizations, including mobile workers. CIC can be
deployed as an on-premise product or provided through a CaaS deployment
model.
Enterprise
Interaction Center
®
(“EIC”)
Enterprise
IP Telephony for the Mid-sized Enterprise
EIC is a
complete all-software IP PBX phone and communications system built on the
Microsoft platform and architected for SIP-supported VoIP. The EIC solution is
targeted at mid-sized businesses from 100 to 1,500 users, whether in one
location, in distributed branch offices or in mobile workgroups. In one system,
EIC includes IP PBX call processing, ACD, automated attendant, voice mail,
operator console, Find-Me/Follow-Me, built-in fax server, and web chat and web
callback. The EIC software additionally offers features including real-time
presence management and remote access, with pre-integrated unified
messaging, IVR and
Interaction Client
®
integrations
for Microsoft applications optionally
available.
Messaging Interaction
Center
™
(“MIC”)
Voice
Mail, Unified Messaging, Enhanced Enterprise Messaging, SIP-supported
VoIP
MIC
personifies enterprise messaging with its “choose by function” capability on one
integrated platform. Users on the same system can have different capabilities
ranging from voice mail to unified messaging to enhanced messaging features that
include one-number Find-Me/Forward, universal web-based message access and
system administration, message notification options, personal settings options,
and calendar and contact management capabilities. MIC also offers call
screening, user-defined call handling rules, automatic callback, and desktop
faxing and fax “navigation.” MIC allows organizations of up to hundreds of
thousands of users to replace legacy voice mail, implement unified messaging,
take advantage of VoIP using the SIP standard, or leverage all of these
capabilities in one solution.
Functionality
included in CIC that can be managed by configuration settings and license keys
is identified in the following sections:
Interaction
Dialer
®
Interaction
Dialer leverages the CIC platform for outbound and blended predictive dialing,
and provides call scripting, multi-site campaign management, intelligent
campaign staging, compliance options and more. Version 2.4 of the Interaction
Dialer application also works with our Interaction Gateway for SIP-based
outbound dialing that scales to higher call levels per hour.
Interaction
Director
®
Interaction
Director pre-integrates to multiple CIC servers to route calls to the location
that can best handle those calls at that time. A single Interaction Director
server can process hundreds of thousands of calls per hour.
Interaction
EasyScripter
™
Interaction
EasyScripter integrates to Interaction Dialer for easy web-based scripting at
all user levels, including for “non-technical” users.
Interaction
Feedback
™
Interaction
Feedback integrates to CIC to automate post-call IVR-based customer satisfaction
surveys, including survey development and results scoring.
Interaction
Optimizer
®
Interaction
Optimizer supports workforce management forecasting, scheduling and real-time
adherence for contact centers.
Integration
to Microsoft
®
Office
Communications Server (“OCS”) 2007
OCS
leverages CIC’s Interaction Client
®
functionality to give users the ability to call other users and originate
conference calls between any OCS client, Interaction Client, or external party.
OCS and Interaction Client users can also transfer calls and record calls and
conference calls on demand via the Interaction Client. “Shared” users can
additionally leverage an integrated office communicator contacts list in the
Interaction Client to initiate chats and launch OCS instant messages and video
calls.
Pre-integrated
add-on modules for CIC and EIC are identified in the following
sections.
Interaction
Monitor
™
Interaction
Monitor is a client/server solution to remotely observe and administer the
servers, gateways and other associated devices in an Interaction Center (CIC,
EIC, and MIC) network configuration. For Interaction Center system
administrators, as well as for partners and sales engineers who maintain
Interaction Center servers for their customers, Interaction Monitor fully
automates the monitoring process in a single environment, 24 hours a day, seven
days a week.
Interaction
Supervisor
™
Interaction
Supervisor pre-integrates to CIC and to the EIC solution to provide a single
real-time interface for monitoring agent, user and workgroup activities, along
with interaction events and Interaction Center system and queue
statistics.
Interaction
Tracker
®
Interaction
Tracker is a full interaction/contact history management application that works
with CIC and EIC to track multimedia interactions and allows authorized users to
resolve new contacts and search for and view historical interaction-based
information. Interaction Tracker can function as a customer interaction tracking
system, but can also be integrated with packaged CRM solutions and/or special
purpose customer information management systems.
Interaction
Recorder
®
Interaction
Recorder offers complete quality assessment control in one environment for
recording and archiving phone calls, e-mails, faxes and web chats. In addition,
CIC users can capture interactions with Interaction Recorder’s screen recording
capability. Scoring features in the Interaction Recorder application simplify
quality processes and out-of-the-box reports facilitate measuring individual and
group scoring results for performance.
For
self-service automation:
e-FAQ
®
e-FAQ
provides users across enterprises and contact centers a seamless, integrated
gateway to vital up-to-date information that employees and customers alike can
query for as needed, using their choice of communication channels to ensure
rapid data delivery. The e-FAQ application uses linguistic analysis to clarify
incoming questions, search for matches, and instantly reply when an appropriate
match is found. e
-FAQ’s web-based
e-FAQ Knowledge
Manager
™
simplifies authoring and centralizes administration, reporting, and testing.
e-FAQ’s built-in editor interface and sample response templates further
streamline the authoring and implementation process.
For the
mobile workforce:
Interaction
Mobile Office
™
Interaction
Mobile Office integrates to the CIC, EIC and MIC application solutions to extend
each system to mobile users. By leveraging the Interaction Mobile Office
application’s speech-enabled telephone user interface, users can change presence
management settings and access Microsoft Exchange-based voice mails, e-mails,
faxes, corporate directories, and calendars from wherever they are
located.
For voice
mail and unified messaging enhancement:
Interaction Message
Indicator
™
(“IMI”)
IMI
monitors Microsoft Exchange Server 2007 Unified Messaging mailboxes for the
presence of voice mail messages. IMI initiates the message waiting indicator on
a user’s desktop phone and discontinues the message waiting indicator when new
voice mails have been reviewed. IMI is engineered to work with all third-party
phone systems, and with our EIC and CIC application solutions.
We also
have developed SIP and VoIP solutions that enhance our software offerings,
including the following:
Interaction
Gateway
®
Interaction
Gateway makes it possible to configure Interaction Dialer (version 2.4 and
higher) and CIC for SIP-supported outbound predictive dialing, increased call
volume capacity, and advanced call analysis for outbound dialing. By supporting
the high-volume outbound capacities of multiple Interaction Dialer servers, the
Interaction Gateway appliance is targeted to teleservices firms and businesses
that offer blended inbound/outbound dialing services to their
customers.
Interaction
Media Server
™
and Interaction SIP Proxy
™
The
Interaction Media Server and Interaction SIP Proxy for CIC and EIC is available
in version 2.4 and version 3.0 and increases Interaction Center system
performance by moving audio recording, processing and compression to this
appliance. Interaction Media Server features, which utilize our next-generation
Interaction Over Networks
®
technology,
also allow organizations to support supervisory monitoring, recording at remote
sites, and the playback of recorded music during ACD wait states. Interaction
SIP Proxy likewise allows organizations employing the SIP communications
standard for VoIP to support all SIP methods and status codes, comply with SIP
specifications, and more effectively balance and route SIP-based
messages.
Hardware
As part
of our EIC solution we sell servers, gateways and telephone handsets.
Some customers licensing our CIC software require that we deliver certain
hardware, such as servers and telephone handsets, and occasionally including
networking hardware, as part of the solution. In addition, we have developed our
Interaction Media Server, Interaction SIP Proxy and Interaction Gateway
appliances as a combination of hardware and our software.
Research
and Development
Leveraging
technology is part of our strategic position, and we continue to invest a
substantial percentage of our revenue in research and development. Our research
and development group is comprised of professionals with backgrounds in
telecommunications, software, and hardware. This combination of diverse
technical and communications expertise contributes to our competitive advantage
with a differentiated technology approach. A series of packaged customer
solutions are available from this group, such as integration to SAP Corporation,
Oracle's Siebel, Inc., and Microsoft Dynamics
®
CRM. These solutions allow partners to quickly install sophisticated
applications for customers.
We are
both a Microsoft Certified Developer as well as a Microsoft Certified Solutions
Provider. These designations provide us early access to Microsoft technology and
the opportunity to develop products quicker and which effectively interoperate
with Microsoft products.
Research
and development expenses were $21.5 million, $17.0 million and $13.6 million in
2008, 2007 and 2006, respectively. Our research and development group is
structured as technical teams, each of which follows formal processes for
enhancements, release management and technical reviews.
Research
and development expenses include a testing department that is increasingly
utilizing automated techniques to stress test significant portions of our core
software.
We continue to make
research and development a priority in our business in
order to remain on the
forefront of innovation
.
Customer
Support and Services
We
recognize the importance of offering quality service and support to our partners
and customers. Our partners provide valuable initial support and implementation
services to many of our customers. We provide a wide range of services and
support to both partners and customers via our Worldwide Services teams,
including Professional Services, Support Services, Managed Services, and
Education Services. These services teams are described in more detail in
the following sections.
Professional
Services
Our
Professional Services team takes an innovative approach to the delivery of
our services. This team handles strategic accounts and enhances partner
expertise on advanced offerings such as predictive dialing, speech recognition
and third-party CRM integrations. Our Professional Services team can also, among
other things, help integrate our products to applications such as
Salesforce.com, embed call control into in-house applications and speech-enable
IVR applications. The system configuration services and ad-hoc consulting
services from our Professional Services team ensure that the customer has the
solution that drives their business to success. The Professional Services team
works closely with new partners as they implement our products at their sites,
and is often involved with the early release of our products to assist in new
release implementations. We are continuing to invest in this team as we provide
more consultative services and implementation services for strategic customers
globally.
Support
Services
Our
Support Services team offers global technical support for our partners and
customers 24 hours a day, 7 days a week by phone, fax, e-mail, web chat and from
our website. We have support centers at our world headquarters in Indianapolis,
Indiana, and in the United Kingdom and Malaysia. Other secondary support
resources are available in California and Virginia in the United States, and in
the Netherlands, Australia, Japan and Korea. We utilize our CIC products,
leveraged with technologies such as knowledge base, CRM and the Internet, to
maximize the effectiveness of our support services.
Our
Support Services team is divided into regions that align with our worldwide
sales teams. Interactions are routed to the respective region based on the
customer location. This enables Support Services team members to better know
their customers and offer quality support services. The engineers on our Support
Services team are also specialists. They focus their efforts on very specific
areas of our offerings, allowing them to develop a deeper knowledge set. This
enables us to do skills-based routing that directs the customer to the best
engineer based on their domain, thus reducing the time to resolve the problem.
We use Interaction Director to route incidents globally in a “follow-the-sun”
manner.
Managed
Services
With our
growing base of strategic partners and end customers, we now offer a Managed
Care Program in which an assigned Managed Services team of knowledge experts
provides off-site support and day-to-day support on-site within our customers’
locations. We use Interaction Monitor to enable our engineers to have a constant
view of the health of the customer system. Our goal is to provide
proactive system management.
Education
Services
Our
Education Services team is also divided into regions that align with our
worldwide sales teams and provides technical certification and advanced
instruction through on-site courses, classroom presentations, and web-based
training. This team develops and maintains course curriculum for formal
certification programs such as sales, product installation, troubleshooting,
system administration and custom design. Web-based training courses offer
enhanced topics such as reporting, system administration, and computer-based
user training. All of our partners are required to maintain updated
certifications to license and support our products. Classes are also offered to
all of our end customers to encourage the most effective use of the
applications. We have moved our classroom sessions to a VoIP structure and
focused our Education Services resources on the IP-based Interaction Center.
This enables our partners and our end customers to build a deeper understanding
of the networking infrastructure and telephony technology of the
future.
Marketing
Our
marketing team is organized by five departments: Product Management, Solutions
Marketing, Market Communications, Lead Management, and the Marketing Services
Group.
Our
Product Management team is responsible for coordinating activities with our
development teams to define product requirements and to manage the process for
market requirements, product development approvals, pricing definitions, release
scheduling and beta test coordination. The Product Management team oversees the
product management process from product concept through the end of the beta test
cycle.
Members
of our Solutions Marketing team focus on the marketing and promotion of our
solutions to customers, prospective customers and partners as well as to
industry analysts. Their responsibilities include product promotional
activities, market positioning of new and updated products, Internet content and
other solutions-related events and actions.
Our
Market Communications team manages media and industry analyst relations,
primarily through regularly-scheduled briefings with magazine editors and
industry analysts and by participating in various media events such as
tradeshows and seminars.
Our Lead Management team drives all
lead-generation activities resulting from tradeshows, seminars, and web-based
marketing programs and utilizes purchased lists of prospective customers. This
team leverages joint marketing activities with strategic partners such as Intel,
Microsoft and Polycom, Inc. to generate qualified leads for partners as
well as our Territory Managers and Channel Sales Managers. This Lead Management
team additionally organizes our annual User Forum customer conference and
Partner Conference
.
Our
Marketing Services Group is responsible for all print collateral and associated
materials for tradeshows, marketing seminars, promotions, advertising, brand
awareness, customer and partner relations and other company functions. Field
Marketing Managers throughout Europe, the Middle East and Africa (“EMEA”) and
the Asia-Pacific (“APAC”) regions are aligned with our Marketing Services Group
and are responsible for similar brand awareness, marketing and advertising
functions in their respective areas.
Global
Distribution and Sales
We
distribute our products through partners and direct arrangements with end-user
customers. In 2008 product orders we received through partners were 67% of total
orders.
We assign
geographic or account responsibilities to Territory Managers/Channel Sales
Managers who manage partners and direct customer opportunities.
As of
December 31, 2008, we had 52 Territory Managers/Channel Sales Managers and
maintained a global channel network of approximately 300 partners with a
presence in over 70 countries.
For the
growing VoIP and IP telephony market, our distribution channel is anchored by
knowledgeable and experienced “converged” partners who understand voice and data
networking. We continue to expand this partner network to cover new geographic
and product markets worldwide.
In the
Americas, we license and distribute mainly through our partners. However, in the
United States and Canada, we also maintain certain direct customers, primarily
with major corporations or in areas lacking adequate partner relationships. In
such cases, we utilize our Territory Managers, supplemented by lead generation
and inside sales teams that generate potential opportunities. In EMEA and APAC,
we license and distribute our solutions principally through a joint strategy
between our Master Distributors and partners at the Elite and Premier Partner
levels. Our EMEA headquarters are located near London, England and our APAC
headquarters are located in Kuala Lumpur, Malaysia.
Our
partners are supported by Program Managers, regional Channel Enablement
Managers, Licensing Specialists and other roles related to sales, support
services and education/certification.
Within
our program framework, our principal partner level designations
include:
·
|
Master Distributors
are
partners with an existing channel that is staffed with the resources to
provide sales, implementation services, support and bundled solutions
(hardware and software) to our Elite and Premier level partners (as
described in the following sections) and their customers. Master
Distributors identify prospective Elite and Premier Partners and assist in
promoting our partner programs. Requirements of this partner level include
call center expertise and focus, expertise in voice/convergence, solution
selling, an enterprise and telephony experienced sales force with
Microsoft competencies and a large existing installed base of customers.
Master Distributors provide support services to Premier and Elite Partners
and have a strong regional presence with dedicated local and/or regional
sales and technical resources.
|
·
|
Elite Partners
provide
full-scale marketing, sales, services and support for one or more of our
products. By acquiring requisite sales, technical and support
certifications, Elite Partners earn the highest margins possible through
implementation, support and other services in addition to sales. We also
assign a Territory Manager/ Channel Sales Manager to each Elite Partner
for continuous oversight. Elite Partners also receive all marketing and
business development advantages of the Partner Enablement Program. Elite
Partner candidates can begin at the Elite level by obtaining all
appropriate sales and technical certifications, or can migrate from the
Premier Partner designation by satisfying Elite-level certification
requirements.
|
·
|
Premier Partners
focus
on marketing and sales and receive product training along with marketing
and business development support. Premier Partners are required to be
sales certified, which requires taking certain sales courses that we offer
and successfully passing a sales examination administered by us. We assign
a Territory Manager/ Channel Sales Manager to each Premier Partner to
provide ongoing assistance. The Premier Partner level permits partners to
grow their customer base while providing the framework to earn technical
certification, build a service and support practice for our products, and
ultimately move to the Elite Partner level where revenues and margin
potentials are much greater.
|
·
|
Referral Agents
generate leads and are compensated for each qualified lead that results in
an order. Partners at this level can earn referral fees for identifying
potential leads and are not required to earn technical certifications.
Referral Agents can transition to the Premier Partner designation by
completing sales training and investing in the Premier level’s required
demonstration/internal use Interaction Center communications
system.
|
We also
have a Channel Ready team that extends beyond the software aspects of our
solution to the hardware. Our Channel Ready team takes the final product and
produces an image that enables the partner to install solutions faster and
easier, provide back-up and recovery for normal maintenance, and reduce the cost
of ongoing support. Our Channel Ready team works with hardware providers
globally and has built relationships that enable us to provide a full solution
for our partners. This team also develops appliances that use our software, such
as the Interaction Media Server and Interaction Gateway.
Our
Technical Sales team is responsible for demonstration facilities, systems and
services at our Indianapolis, Indiana headquarters and regional offices
throughout the U.S. and around the world. This team builds and maintains
demonstration scripts and provides training to our partners and internal sales
teams. All of our partners are granted access to our systems and services for
live customer demonstrations on a global basis, and are assisted by our
Technical Sales team as needed to perform demonstrations. Our Technical Sales
team further assists with marketing efforts and presentations at industry
tradeshows, regional seminars, and events including our annual partner
conference and global user forum.
Customers
and Geographic Areas of Operations
As of
December 31, 2008, we had licensed our products to more than 2,000 active
customers in the Americas, EMEA and APAC. No customer or partner accounted for
10% or more of our revenues or accounts receivable in 2008, 2007 or 2006.
As such, no material
part of our business is dependent upon a single customer or partner or a small
group of customers or partners. Therefore, the loss of any one customer or
partner would not have a material adverse effect on our operations.
See Note
12 of Notes to Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K for financial information about each of the
geographic areas in which we operate.
Competition
The
markets for our application-based solutions are highly competitive. Our
competition varies depending on the different market segments in which we
license our software applications: Contact Centers, Enterprise IP Telephony, and
Enterprise Messaging. Unlike those solutions from several of our competitors,
customers can choose to deploy many of our solutions on-premise or leverage them
in a CaaS model. In the contact center sector our main competitors are Aspect,
Avaya, Cisco and Nortel. Significant enterprise IP telephony competitors include
Alcatel-Lucent, Avaya, Cisco, Nortel, Siemens AG and ShoreTel, Inc. For
enterprise messaging we compete mainly with Avaya, Cisco, Intervoice, Inc.,
Nortel and Applied Voice & Speech Technologies, Inc. We compete, on a
smaller scale, with many other established and recent entrants in each
marketplace.
Intellectual
Property and Other Proprietary Rights
We own
numerous patents and patent applications that we consider valuable components of
our business. To protect our proprietary rights, we rely primarily on a
combination of:
|
·
|
copyright,
patent, trade secret and trademark
laws;
|
|
·
|
confidentiality
agreements with employees and third parties;
and
|
|
·
|
protective
contractual provisions such as those contained in licenses and other
agreements with consultants, suppliers, partners and
customers.
|
As of
December 31, 2008, we and our subsidiaries held 12 patents and have filed other
patent applications relating to technology embodied in our software products. In
addition, we and our subsidiaries hold 12 United States and 64 foreign trademark
registrations and have numerous other trademark applications pending worldwide,
as well as common law rights in other trademarks and service marks. We and our
subsidiaries also hold 18 registered copyrights and have numerous other
applications pending.
Environmental
Issues
Compliance
with federal, state and local provisions regulating the discharge of material
into the environment or otherwise relating to the protection of the environment
has not had a material effect upon our capital expenditures, earnings or
competitive position. We believe the nature of our operations have little, if
any, environmental impact. We therefore anticipate no material capital
expenditures for environmental control facilities for our current fiscal year or
for the foreseeable future.
Employees
As of
February 28, 2009,
we
had
594
employees
worldwide, including 175 in research and development, 166 in client
services, 160 in sales and marketing and 93 in administration. Our
future performance depends in significant part upon the continued service of our
key sales, marketing, technical and senior management personnel and our
continuing ability to attract and retain highly qualified personnel. Competition
for such personnel is intense and we may not be successful in attracting or
retaining these individuals in the future.
We
believe that we have a corporate culture that attracts highly qualified and
motivated employees. We emphasize teamwork, flexible work arrangements, local
decision-making and open communications. Certain key employees have been granted
stock options. We do not have any employees represented by a labor union. We
have not experienced any work stoppages. We consider our relations with our
current employees to be good.
The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Annual Report on
Form 10-K and presented elsewhere by management from time to time. Such factors,
among others, may have a material adverse effect on our business, financial
condition, and results of operations and you should carefully consider them. It
is not possible to predict or identify all such factors. Consequently, you
should not consider any such list to be a complete statement of all our
potential risks or uncertainties. Because of these and other factors, past
performance should not be considered an indication of future
performance.
The
Overall Weakened Economic Climate Could Result in Decreased Demand for Our
Products and Services
Our
products typically represent substantial capital commitments by customers and
involve a potentially long sales cycle. As a result, our operations and
performance depend significantly on worldwide economic conditions and their
impact on customer purchasing decisions. In this current economic
climate, current or prospective customers are reviewing the allocation of their
capital spending budgets to communication software, services and systems, which
has resulted, and may continue to result, in our current or prospective
customers delaying and/or reducing their capital spending related to information
systems. Some of the factors that could influence the levels of spending by our
current or prospective customers include availability of credit, labor and
healthcare costs, consumer confidence and other factors affecting spending
behavior. These and other economic factors could have a material adverse effect
on demand for our products and services and on our financial condition and
operating results.
We
May Not Sustain Profitability
We have
been profitable for the past five consecutive years. Prior to 2004, we
historically incurred losses and may do so again in the future. At December 31,
2008, we had accumulated net losses since inception of $26.1 million. We intend
to continue to make significant investments in our research and development,
sales and marketing, and services operations.
Our
Quarterly Operating Results Have Varied Significantly
Our
operating results may vary significantly from quarter to quarter depending
on a number of factors affecting us or our industry, including many that are
beyond our control. As a result, we believe that period-to-period comparisons of
our operating results should not be relied on as an indication of our future
performance. In addition, our operating results in a future quarter or quarters
may fall below expectations of securities analysts or investors and, as a
result, the price of our common stock may fluctuate.
Because
we do not know if or when our partners and current or potential customers will
place orders and finalize licenses, we cannot accurately forecast our licensing
activity, our revenues and our operating results for future quarters. We
recognize revenues from different licenses over different periods depending on
the satisfaction of the requirements of relevant accounting literature,
including American Institute of Certified Public Accountants (“AICPA”) Statement
of Position 97-2, AICPA Statement of Position 98-9, SEC Staff Accounting
Bulletin (“SAB”) No. 104, and all related AICPA Technical Practice Aids
(5100.38 - 5100.76). As a result, our quarterly revenues and operating
results depend on many factors, including the type of license, the size,
quantity and timing of orders received for our products during each quarter, the
delivery of the related software or hardware and our expectations regarding
collection. If a large number of orders or several large orders do not occur or
are deferred or delayed, our revenues in a quarter could be substantially
reduced. This risk is heightened by the significant investment and executive
level decision-making typically involved in our customers’ decisions to license
our products. Since a large portion of our operating expenses, including
salaries and rent, is fixed and difficult to reduce or modify in a short time
period, our business, financial condition or results of operations could be
materially adversely affected if revenues do not meet our
expectations.
Our
limited number of products, changes in pricing policies, the timing of
development completion, and announcement and sale of new or upgraded versions of
our products are some of the additional factors that could cause our revenues
and operating results to vary significantly from period to period.
We
Are Exposed to Fluctuations in the Market Value of Our Money Market Funds and
Investments. The Financial Pressure on Investment Institutions Managing Our
Investments or the Failure of Such Entities May Lead to Restrictions on Access
to Our Investments Which Could Negatively Impact Our Balance of Cash and Cash
Equivalents, thus Affecting Our Overall Financial Condition
We
maintain an investment portfolio of various holdings and maturities. These
securities are recorded on our consolidated balance sheets at fair value. This
portfolio includes money market funds, notes, bonds and commercial paper of
various issuers. If the debt of these issuers is downgraded, the carrying value
of these investments could be impaired. In addition, we could also face default
risk from some of these issuers, which could cause the carrying value to be
impaired. Financial institutions have been under significant pressure over the
past several quarters. Should one or more of the financial institutions
managing our invested funds experience increased financial pressure resulting in
bankruptcy, or the threat of bankruptcy, access to our funds may be restricted
for a period of time and may also result in losses on those funds.
Our cash and cash equivalents are highly liquid investments with original
maturities of three months or less at the time of purchase. We maintain the cash
and cash equivalents with reputable major financial institutions. Deposits with
these banks exceed the Federal Deposit Insurance Corporation insurance limits or
similar limits in foreign jurisdictions. While we monitor daily the cash
balances in the operating accounts and adjust the balances as appropriate, these
balances could be impacted if one or more of the financial institutions with
which we deposit fails or is subject to other adverse conditions in the
financial or credit markets.
To date we have
experienced
no loss
or lack of access to our invested cash or cash equivalents; however, we can
provide no assurance that access to our invested cash and cash equivalents will
not be impacted by adverse conditions in the financial and credit
markets.
We
Have a Lengthy Product Sales Cycle Which May Contribute to Variability of
Quarterly Operating Results
We have
generally experienced a lengthy initial sales cycle, which can last six to nine
months and sometimes longer. The lengthy sales cycle is one of the factors that
has caused, and may in the future continue to cause, our product revenues and
operating results to vary significantly from quarter to quarter which may in
turn affect the market price of our common stock. The lengthy sales cycle also
makes it difficult for us to forecast product license revenues. Because of the
unique characteristics of our products and our prospective customers’ internal
evaluation processes, decisions to license our products often require
significant time and executive-level decision making. We believe that many
companies currently are not aware of the benefits of interaction management
software of the type that we license or of our products and capabilities. For
this reason, we must provide a significant level of education to prospective
customers about the use and benefits of our products, which can cause potential
customers to take many months to make these decisions. As a result, sales cycles
for customer orders vary substantially from customer to customer. Excessive
delay in product sales could materially adversely affect our business, financial
condition or results of operations.
The
length of the sales cycle for customer orders depends on a number of other
factors over which we have little or no control, including:
·
|
a
customer’s budgetary constraints;
|
·
|
the
timing of a customer’s budget
cycle;
|
·
|
concerns
by customers about the introduction of new products by us or our
competitors; and
|
·
|
downturns
in general economic conditions, including reductions in demand for contact
center services.
|
Our
Inability to Successfully Manage Our Increasingly Complex Supplier and Other
Third Party Relationships Could Adversely Affect Us
As the
complexity of our product technology and our supplier and other third party
relationships have increased, the management of those relationships and the
negotiation of contractual terms sufficient to protect our rights and limit our
potential liabilities are complicated, and we expect this trend to continue in
the future. In addition, because we offer, through suppliers, a whole product
solution, this has added complexity to those third party relationships. As a
result, our inability to successfully manage these relationships or negotiate
sufficient contractual terms could have a material adverse effect on
us.
For
certain of our orders, we supply hardware to support the implementation of our
software. We are dependent on third parties for the supply of hardware
components to our customers. If these hardware distributors experience
financial, operational or quality assurance difficulties, or if there is any
other disruption in our relationships, we may be required to locate
alternative hardware sources. We are also subject to the following risks related
to our hardware distribution system:
·
|
cancellations
of orders due to unavailability of
hardware;
|
·
|
increased
hardware prices, which may reduce our gross profit or make our
products less price competitive;
and
|
·
|
additional
development expense to modify our products to work with new hardware
configurations.
|
We cannot
assure you that we would be able to locate alternative hardware sources in a
timely manner, on terms favorable to us, or at all. Even if we and/or our
distributors are successful in locating alternative sources of supply,
alternative suppliers could increase prices significantly. In addition,
alternative components may malfunction or interact with existing components
in unexpected ways. The use of new suppliers and the modification of our
products to function with new systems would require testing and may require
further modifications, which may result in additional expense, diversion of
management attention and other resources, inability to fulfill customer orders
or delay in fulfillment, reduction in quality and reliability, customer
dissatisfaction and other adverse effects on our reputation, business and
operating results.
We
May Not be Able to Grow Our Business If We Do Not Maintain Successful
Relationships With Our Reseller Partners and Continue to Recruit and Develop
Additional Successful Reseller Partners
Our
ability to achieve revenue growth in the future will depend in part on our
success in maintaining productive relationships with our existing and
future reseller partners and in recruiting and training additional reseller
partners. We rely primarily on these partners to market and support our products
and plan on continuing to rely heavily on such partners in the future. We
continue to expand our partner and distribution networks and may be unable to
attract additional partners with both voice and data expertise or appropriate
partners that will be able to market our products effectively and that will be
qualified to provide timely and cost-effective customer support and service. We
generally do not have long-term or exclusive agreements with our partners, and
the loss of specific larger partners or a significant number of partners could
materially adversely affect our business, financial condition or results of
operations. In addition, due to the current weakened economic conditions, the
risk of failure of a specific partner or a significant number of partners is
increased, which failure could also materially adversely affect our
business, financial condition or results of operations.
We
Face Competitive Pressures, Which May Have a Material Adverse Effect on
Us
The
market for our software applications is highly competitive and, because there
are relatively low barriers to entry in the software market, we expect
competitive pressures to continue to be a risk to our ongoing success in the
market. In addition, because our industry is evolving and characterized by rapid
technological change, it is difficult for us to predict whether, when and by
whom new competing technologies or new competitors may be introduced into our
markets. Currently, our competition comes from several different market
segments, including computer telephony platform developers, computer telephony
applications software developers and telecommunications equipment vendors.
Additionally, alternative deployment strategies such as software as a service,
are offered by certain companies. We cannot provide assurance that we will be
able to compete effectively against current and future competitors in these
segments, nor new segments with new types of competitors. In addition, increased
competition or other competitive pressures may result in price reductions,
reduced margins or loss of market share, any of which could have a material
adverse effect on our business, financial condition or results of
operations.
Many of
our current and potential competitors have longer operating histories,
significantly greater resources, greater name recognition and a larger installed
base of customers than we do. Competitors may be able to respond to new or
emerging technologies and changes in customer requirements more effectively than
we can, or devote greater resources to the development, promotion and sale of
products than we can. In addition, for a number of our larger competitors, the
product segment in which they currently compete with us is a small portion of
their overall offering. These competitors might be willing and able to
dramatically cut prices in our segment in order to protect or grow other
segments that are more important to their overall business. Current and
potential competitors have established, and may in the future establish,
cooperative relationships among themselves or with third parties, including
mergers or acquisitions, to increase the ability of their products to address
the needs of our current or prospective customers. If these competitors were to
acquire significantly increased market share, it could have a material adverse
effect on our business, financial condition or results of
operations.
Our
Future Business Prospects Depend in Part on Our Ability to Maintain and Improve
Our Current Products and Develop New Products
We
believe that our future business prospects depend in large part on our ability
to maintain and improve our current software applications and to develop new
software applications on a timely basis. Our software applications will have to
continue to achieve market acceptance, maintain technological competitiveness
and meet an expanding range of customer requirements. As a result of the
complexities inherent in our applications, major new applications and
application enhancements require long development and testing periods. We may
not be successful in developing and marketing, on a timely and cost effective
basis, application enhancements or new software applications that respond to
technological change, evolving industry standards or customer requirements. We
may also experience difficulties that could delay or prevent the successful
development, introduction or marketing of application enhancements, and our new
applications and application enhancements may not achieve market acceptance.
Significant delays in the general availability of new releases of our software
applications or significant problems in the installation or implementation of
new releases of our applications could have a material adverse effect on our
business, financial condition or results of operations.
If
We Are Unable to Maintain the Compatibility of Our Software With Certain Other
Products and Technologies, Our Future Business Would be Adversely
Affected
Our
software must integrate with software and hardware solutions provided by a
number of our existing and potential competitors. For example, our products must
integrate with phone switches made by the telephone switch vendors and computer
telephony software applications offered by other software providers. These
competitors or their business partners could alter their products so that our
software no longer integrates well with them, or they could delay or deny our
access to software releases that allow us to timely adapt our software to
integrate with their products. If we cannot adapt our software to changes in
necessary technology, it may significantly impair our ability to compete
effectively, particularly if our software must integrate with the software and
hardware solutions of our competitors.
A
Decline in Market Acceptance for Microsoft Technologies on Which Our Products
Rely Could Have a Material Adverse Effect on Us
Our
products currently run on Microsoft Windows operating systems. Our web client
interfaces are supported on certain browsers which run on Windows, Mac and
Linux. A decline in market acceptance for Microsoft technologies or the
increased acceptance of other server technologies could cause us to incur
significant development costs and could have a material adverse effect on our
ability to market our current products. Although we believe that Microsoft
technologies will continue to be widely used by businesses, we cannot assure you
that businesses will adopt these technologies as anticipated or will not in the
future migrate to other computing technologies that we do not currently support.
In addition, our products and technologies must continue to be compatible with
new developments in Microsoft technologies. We cannot assure you that we can
maintain that compatibility or that we will not incur significant expenses in
connection therewith.
Slow
Growth, or a Decline in Demand for Interaction Management Software of the Type
We License, Could Materially Adversely Affect Our Financial Results and Growth
Prospects
If the
demand for interaction management software of the type we license does not grow
within each of our three targeted markets, our financial results and ability to
grow our business could be materially adversely affected. All of our revenues
have been generated from licenses of our Interaction Center Platform software or
complementary products, and related support, educational and professional
services. We expect these products and services to account for the majority of
our revenues for the foreseeable future. Although we believe demand for the
functions performed by our products is high, the market for our products and
services is still emerging. Further, our growth plans require us to successfully
attract enterprise and service provider customers in significantly larger
numbers than we have historically achieved.
If
Our Customers Do Not Perceive Our Products or the Related Services Provided by
Us or Our Partners to Be Effective or of High Quality, Our Brand and Name
Recognition Will Suffer
We
believe that establishing and maintaining brand and name recognition is critical
for attracting, retaining and expanding customers in our target markets. We also
believe that the importance of reputation and name recognition will increase as
competition in our market increases. Promotion and enhancement of our name will
depend on the effectiveness of our marketing and advertising efforts and on our
success in providing high-quality products and related services, neither of
which can be assured. If our customers do not perceive our products or related
services to be effective or of high quality, our brand and name recognition
would suffer which could have a material adverse effect on our business,
financial condition or results of operations.
Our Products Require
Wide
Area N
etworks
, and We
May be Unable to Sell Our P
roducts
Where Netw
orks Do Not Perform
A
dequately
Our
products also depend on the reliable performance of the wide area networks of
enterprise customers. If enterprise customers experience inadequate performance
with their wide area networks, whether due to outages, component failures, or
otherwise, our product performance would be adversely affected. As a result,
when these types of problems occur with these networks, our enterprise customers
may not be able to immediately identify the source of the problem, and may
conclude that the problem is related to our products. This could harm our
relationships with our current enterprise customers and make it more difficult
to attract new enterprise customers, which could negatively affect our
business.
Our
Products Could Have Defects for Which We Are Potentially Liable and Which Could
Result in Loss of Revenue, Increased Costs, Loss of Our Credibility, Harm Our
Reputation or Delay in Acceptance of Our Products in the Market
Our
products, including components supplied by others, may contain errors or
defects, especially when first introduced or when new versions are released.
Despite internal product testing, we have in the past discovered software errors
in some of our products after their introduction. Errors in new products or
releases could be found after commencement of commercial shipments, and this
could result in additional development costs, diversion of technical and other
resources from our other development efforts, or the loss of credibility with
current or future customers. This could result in a loss of revenue or delay in
market acceptance of our products, which could have a material adverse effect on
our business, financial condition or results of operations.
Our
license agreements with our customers typically contain provisions designed to
limit our exposure to potential product liability and some contract claims.
However, not all of these agreements contain these types of provisions and,
where present, these provisions vary as to their terms and may not be effective
under the laws of some jurisdictions. A product liability, warranty, or other
claim brought against us could have a material adverse effect on our business,
financial condition or results of operations.
Our
software runs on a Windows 2000 or Windows 2003 server and for telephone call
processing uses voice processing boards or third party VoIP media processing
software such as Intel HMP software. Our server software also
operates in a complex network environment with database servers, email servers
and other third party systems. Because of this complexity, our software may be
more prone to performance interruptions for our customers than traditional
hardware-based products. Performance interruptions at our customer sites, many
of which currently do not have back-up systems, could affect demand for our
products or give rise to claims against us.
If
We Do Not Provide Installation Services or Training Courses Effectively and
Efficiently, Our Partners and End Customers May Not Use Our Installation
Services, May Not Attend Our Training Courses or May Stop Using Our
Software
Our
partners and end customers ordinarily purchase installation, training and
maintenance services together with our products. The functionality of our
products is not dependent on our installation and training services. We believe
that the speed and quality of installation services are competitive factors in
our industry. If our installation services are not satisfactory, our partners
and end customers may choose not to use our installation services, or
attend our training courses or may not license our software in the future.
As a result, we would lose product licensing and services revenue, and it could
harm our reputation. In addition, our revenues realized from the performance of
maintenance services are material to our operating results, and a failure
to provide adequate maintenance support to our partners and end customers would
result in reduced maintenance revenues and have an adverse effect on our
operating results.
We
May Not Be Able to Protect Our Proprietary Rights Adequately, Which Could Allow
Third Parties to Copy or Otherwise Obtain and Use Our Technology Without
Authorization
We regard
our software products as proprietary. In an effort to protect our proprietary
rights, we rely primarily on a combination of copyright, trademark and trade
secret laws, as well as patents, licensing and other agreements with
consultants, suppliers, partners and customers, and employee and third-party
non-disclosure agreements. These laws and agreements provide only limited
protection of our proprietary rights. It may be possible for a third party to
copy or otherwise obtain and use our technology without authorization. A third
party could also develop similar technology independently. In addition, the laws
of some countries in which we license our products do not protect our software
and intellectual property rights to the same extent as the laws of the United
States. Unauthorized copying, use or reverse engineering of our products could
materially adversely affect our business, results of operations or financial
condition.
Certain
Provisions in Agreements That We Have Entered Into May Expose Us to
Liability for Breach That Is Not Limited In Amount By the Terms of the
Contract
Certain
contract provisions, principally confidentiality and indemnification obligations
in certain of our license agreements, could expose us to risks of loss that, in
some cases, are not limited by contract to a specified maximum amount. If we
fail to perform to the standards required by these contracts, we could be
subject to additional liability and our business, financial condition and
results of operations could be materially and adversely affected.
Termination
of Certain Third Party Licenses for Technology Embedded in Our Products Could
Adversely Affect Us
We
license from third parties technology that is embedded in our products. Some of
these third parties that license technology to us are our competitors, or could
become competitive with us in the future. Certain license agreements permit
either party to terminate all or a portion of the license without cause at any
time. Further, some of the license agreements provide that upon acquisition of
us by certain other third parties, we would have to pay a significant fee to
continue the license. If one or more of these licenses terminates or cannot be
renewed on satisfactory terms, we would have to modify our affected products to
use alternative technology, which may not be available, or eliminate the
affected product function, either of which could have a material adverse effect
on us.
Infringement
Claims Could Adversely Affect Us
Third
parties have claimed and may in the future claim that our technology infringes
their proprietary rights. As the number of software products in our target
markets increases and the functionality of these products overlap, we believe
that software developers may face additional infringement claims.
Infringement
claims, even if without merit, can be time consuming and expensive to defend. A
third party asserting infringement claims against us or our customers with
respect to our current or future products may require us to enter into costly
royalty arrangements or litigation, or otherwise materially adversely affect
us.
Changes
in Corporate Taxes or Adverse Outcomes Resulting from Examination of Our Income
Tax Returns Could Adversely Affect Our Results
Our
provision for income taxes is subject to volatility and could be adversely
affected by changes in the valuation of our deferred tax assets and liabilities;
by earnings being lower than anticipated in countries that have lower tax rates
and higher than anticipated in countries that have higher tax rates; by
expiration of or lapses in the research and development tax credit
laws; by transfer pricing adjustments including the post-acquisition integration
of purchased intangible assets from certain acquisitions into our
intercompany research and development cost sharing arrangement; by tax
effects of nondeductible stock option expense; by tax costs related to
intercompany realignments; or by changes in tax laws, regulations and accounting
principles, including accounting for uncertain tax positions or
interpretations thereof. If amounts included in tax returns are reduced or
disallowed, it would reduce our carryforward losses and tax credits and the
amount of expected future non-cash income tax expense used by management and
investors. Significant judgment is required to determine the recognition and
measurement attribute prescribed in Financial Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109” (“FIN 48”). In addition, FIN 48 applies to all income tax
positions, including the potential recovery of previously paid taxes, which if
settled unfavorably could adversely impact our provision for income taxes or
additional paid-in capital. Further, as a result of certain of our ongoing
employment and capital investment actions and commitments, our income in certain
countries is subject to reduced tax rates and in some cases is wholly exempt
from tax. Our failure to meet these commitments could adversely impact our
provision for income taxes. In addition, we are subject to the examination of
our income tax returns by the Internal Revenue Service and other tax
authorities. We have also recorded state and local income tax incentives
as a reduction of certain operating expenses and if those incentives were to be
disallowed we may be required to record additional expense. We regularly assess
the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes. There can be no
assurance that the outcomes from these continuous examinations will not have an
adverse effect on our operating results and financial condition.
We
Depend on Key Personnel and Will Need to Retain and Recruit Skilled Personnel,
for Which Competition Is Intense, to Conduct and Grow Our Business
Effectively
Our
success depends in large part on the continued service of our key personnel,
particularly Dr. Donald E. Brown, our Chief Executive Officer
and largest stockholder. The loss of the services of Dr. Brown or
other key personnel could have a material adverse effect on our business,
financial condition or results of operations. Our future success also depends on
our ability to attract, train, assimilate and retain additional qualified
personnel. Competition for persons with skills in the software industry is
intense, particularly for those with relevant technical and/or sales experience.
We cannot assure you that we will be able to retain our key employees or that we
can attract, train, assimilate or retain other highly qualified personnel in the
future.
We
May Pursue Acquisitions That by Their Nature Present Risks and That May Not be
Successful
In the
future we may pursue acquisitions to diversify our product offerings and
customer base or for other strategic purposes. We have limited prior history of
making acquisitions and we cannot assure you that any future acquisitions will
be successful. The following are some of the risks associated with acquisitions
that could have a material adverse effect on our business, financial condition
or results of operations:
·
|
We
cannot assure that any acquired businesses will achieve anticipated
revenues, earnings or cash flow.
|
·
|
We
may be unable to integrate acquired businesses successfully and realize
anticipated economic, operational and other benefits in a timely manner,
particularly if we acquire a business in a market in which we have limited
or no current expertise, or with a corporate culture different from our
own. If we are unable to integrate acquired businesses successfully, we
could incur substantial costs and delays or other operational, technical
or financial problems.
|
·
|
Acquisitions
could disrupt our ongoing business, distract management, divert resources
and make it difficult to maintain our current business standards, controls
and procedures.
|
·
|
We
may finance future acquisitions by issuing common stock for some or all of
the purchase price. This could dilute the ownership interests of our
stockholders. We may also incur debt or be required to recognize expense
related to intangible assets recorded in future
acquisitions.
|
·
|
We
may be competing with other firms, many of which have greater financial
and other resources, to acquire attractive companies, making it more
difficult to acquire suitable companies on acceptable
terms.
|
Our
International Operations Involve Financial and Operational Risks Which May
Adversely Affect Our Business and Operating Results
Our
international operations require significant management attention and financial
resources to establish and operate, including hiring appropriate personnel and
recruiting effective international partners. Non-North American revenues
accounted for 27%, 25% and 25% of our total revenues for the years ended
December 31, 2008, 2007 and 2006, respectively. We intend to continue to
emphasize our international operations and we may enter additional international
markets. Revenues from international operations may be inadequate to cover the
expenses of those operations. Risks inherent in our international business
activities may include the following:
·
|
economic
and political instability;
|
·
|
unexpected
changes in foreign regulatory requirements and
laws;
|
·
|
tariffs
and other trade barriers;
|
·
|
timing,
cost and potential difficulty of adapting our software products to the
local language in those foreign countries that do not use the English
alphabet, such as Japan, Korea and
China;
|
·
|
lack
of acceptance of our products in foreign
countries;
|
·
|
longer
sales cycles and accounts receivable payment
cycles;
|
·
|
potentially
adverse tax consequences;
|
·
|
restrictions
on the repatriation of funds;
|
·
|
increased
government regulations related to increasing or reducing business activity
in various countries.
|
Our
international revenues are generally denominated in United States dollars with,
principally, the exception of some European partners and customers. Our
international expenses are generally denominated in local foreign currencies.
Although foreign currency translation gains and losses have been immaterial to
date, fluctuations in exchange rates between the United States dollar and other
currencies could have a material adverse effect on our business, financial
condition or results of operations, and particularly on our operating margins.
To date, we have not sought to actively hedge the risks associated with
fluctuations in exchange rates, but we may more actively undertake to do so in
the future. Any hedging techniques we implement in the future may not be
successful. Exchange rate fluctuations could also make our products more
expensive than competitive products not subject to these fluctuations, which
could adversely affect our revenues and profitability in international
markets.
We
May Not Be Able to Obtain Adequate Financing to Implement Our Strategy and Any
Equity Financing Would Dilute Our Existing Shareholders
Successful
implementation of our strategy may require continued access to capital. If we do
not generate sufficient cash from operations, our growth could be limited unless
we are able to obtain capital through additional debt or equity financings. We
cannot assure you that debt or equity financings will be available as required
for acquisitions or other needs. Even if financing is available, it may not be
on terms that are favorable to us or sufficient for our needs. If we are unable
to obtain sufficient financing, we may be unable to fully implement our growth
strategy. In addition, if we complete an equity financing, the issuance of
shares of our common stock would dilute your ownership interest in our
company.
Our
Stock Price Has Been and Could Continue to Be Highly Volatile
Our stock
price has been and could continue to be highly volatile due to a number of
factors, including:
·
|
actual
or anticipated fluctuations in our operating
results;
|
·
|
announcements
by us, our competitors or our
customers;
|
·
|
changes
in financial estimates of securities analysts or investors regarding us,
our industry or our competitors;
|
·
|
technological
innovations by others;
|
·
|
the
operating and stock price performance of other comparable companies or of
our competitors;
|
·
|
the
availability for future sale, or sales, of a substantial number of shares
of our common stock in the public market;
and
|
·
|
general
market or economic conditions.
|
This risk
may be heightened because our industry is continually evolving, characterized by
rapid technological change and susceptible to the introduction of new competing
technologies or competitors.
In
addition, the stock market has experienced significant price and volume
fluctuations in the past few months that have particularly affected the trading
prices of equity securities of many technology companies, including us. These
price and volume fluctuations often have been unrelated to the operating
performance of the affected companies. In the past, following periods of
volatility in the market price of a company’s securities, securities class
action litigation has sometimes been instituted against that company. This type
of litigation, regardless of the outcome, could result in substantial costs and
a diversion of management’s attention and resources, which could materially and
adversely affect our business, financial condition or results of
operations.
Our
Common Stock is Subject to Various Listing Requirements
The
various markets operated by The NASDAQ Stock Market, LLC (“NASDAQ”)
have quantitative maintenance criteria for continued listing of common stock. We
may be delisted from one or more NASDAQ markets if we fail to comply with the
criteria. While we believe that we currently meet criteria for listing on a
market operated by NASDAQ, we can offer no assurance that our common stock will
continue to meet the various criteria for continued listing on any market
operated by NASDAQ. Any delisting may result in a reduction in the liquidity of
our common stock, which may have a material adverse effect on the price of our
common stock.
Changes
Made to Generally Accepted Accounting Principles and Other Legislative Changes
May Impact Our Business
Revisions
to generally accepted accounting principles will require us to review our
accounting and financial reporting procedures in order to ensure continued
compliance with required policies. From time to time, such changes may have a
short-term impact on our reporting, and these changes may impact market
perception of our financial condition. In addition, legislative changes, and the
perception these changes create, can have a material adverse effect on our
business.
We
are Required to Recognize Stock-Based Compensation Expense Related to Employee
Stock Options, and There is No Assurance that the Expense that We are Required
to Recognize is Indicative of the Accurate Value of Our Share-Based Payment
Awards
The
application of
Statement
of Financial Accounting Standards
No. 123 (revised 2004),
Share-Based Payment
(“SFAS
123R”) requires the use of an option-pricing model to determine the fair value
of share-based payment awards on the day they are granted. As a result of
adopting SFAS 123R, beginning with 2006, our earnings were lower than they would
have been had we not been required to adopt SFAS 123R. This will continue to be
the case for future periods as long as we have either new grants or unvested
stock-based payment awards. We cannot predict the effect that this adverse
impact on our reported operating results will have on the trading price of our
common stock.
This
determination of fair value is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables. If
factors change and we use different assumptions for estimating stock-based
compensation expense in future periods, stock-based compensation expense may
differ materially in the future from that recorded in 2008. Although the fair
value of employee stock options is determined in accordance with SFAS 123R and
SAB No. 107,
Share-Based
Payment
, as amended by SAB No. 110,
Share-Based
Payment
, using an option-pricing model such as Black-Scholes, that
value may not be indicative of the fair value observed in a willing buyer and
willing seller market transaction.
Failure
to Maintain Effective Internal Controls in Accordance with Section 404 of
the Sarbanes-Oxley Act of 2002 Could Have a Material Adverse Effect on Our
Business, Operating Results and Stock Price
The
Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and
directors. We are also required to comply with the internal control over
financial reporting requirements of Section 404 of the Sarbanes-Oxley Act. Our
efforts to comply with the requirements of Section 404 have resulted in
increased general and administrative expense and a diversion of management time
and attention from revenue-generating activities to compliance activities, and
we expect these efforts to require the continued commitment of significant
resources.
If we
fail to maintain the adequacy of our internal controls, we may not be able
to ensure that we can conclude on an ongoing basis that we have effective
internal control over financial reporting. Failure to maintain effective
internal control over financial reporting could result in investigation by
regulatory authorities, and could have a material adverse effect on our business
and operating results, investor confidence in our reported financial
information, and the market price of our common stock.
Anti-Takeover
Provisions in Our Organizational Documents and Indiana Law Make Any Change in
Control of Us More Difficult, May Discourage Bids at a Premium over the Market
Price and May Adversely Affect the Market Price of Our Stock
Our
Restated Articles of Incorporation and By-Laws contain provisions that may have
the effect of delaying, deferring or preventing a change in control of us, may
discourage bids at a premium over the market price of our common stock and may
adversely affect the market price of our common stock, and the voting and other
rights of the holders of our common stock. These provisions
include:
|
·
|
the
division of our board of directors into three classes serving staggered
three-year terms;
|
|
·
|
removal
of directors only for cause and only upon a 66 2/3% shareholder
vote;
|
|
·
|
prohibiting
shareholders from calling a special meeting of
shareholders;
|
|
·
|
the
ability to issue additional shares of our common stock or preferred stock
without shareholders’ approval; and
|
|
·
|
advance
notice requirements for raising business or making nominations at
shareholders’ meetings.
|
The
Indiana corporation law contains business combination provisions that, in
general, prohibit for five years any business combination with a beneficial
owner of 10% or more of our common stock unless the holder’s acquisition of the
stock was approved in advance by our board of directors. The Indiana corporation
law also contains control share acquisition provisions that limit the ability of
certain shareholders to vote their shares unless their control share acquisition
is approved.
Man-Made
Problems and/or Catastrophic Events May Disrupt Our Operations and Harm Our
Operating Results
Despite
our implementation of network security measures, our servers are vulnerable to
computer viruses, break-ins, and similar disruptions from unauthorized tampering
with our computer systems. Any such event could have a material adverse effect
on our business, operating results, and financial condition. Efforts to limit
the ability of malicious third parties to disrupt the operations of the Internet
or undermine our own security efforts may meet with resistance. In addition, the
continued threat of terrorism and heightened security and military action in
response to this threat, or any future acts of terrorism, may cause further
disruptions to the economies of the United States and other countries and create
further uncertainties or otherwise materially harm our business, operating
results, and financial condition. Likewise, events such as widespread blackouts
could have similar negative impacts. To the extent that such disruptions or
uncertainties result in delays or cancellations of customer orders or the
manufacture or shipment of our products, our business, operating results and
financial condition could be materially and adversely affected.
A
disruption or failure of our systems or operations in the event of a major
earthquake, weather event, or other catastrophic event could cause delays in
completing sales, providing services or performing other mission-critical
functions. A catastrophic event that results in the destruction or disruption of
any of our critical business or information technology systems could harm our
ability to conduct normal business operations and our operating
results.
We
Cannot Predict Every Event and Circumstance That May Impact Our Business and,
Therefore, the Risks and Uncertainties Discussed Above May Not Be the Only Ones
You Should Consider
The risks
and uncertainties discussed above are in addition to those that apply to most
businesses generally. In addition, as we continue to grow our business, we may
encounter other risks of which we are not aware at this time. These additional
risks may cause serious damage to our business in the future, the impact of
which we cannot estimate at this time.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
None.
Our world
headquarters are located in a 200,000 square foot space in two office buildings
in Indianapolis, Indiana. We lease the space under an operating lease agreement
and amendments which expire on March 31, 2018. In addition to our world
headquarters, we occupy two regional offices in the United States,
one in Herndon, Virginia, and one in Irvine, California. We also
lease offices for each of our EMEA and APAC operations in Berkshire, United
Kingdom and Kuala Lumpur, Malaysia, respectively. We lease space for our various
sales, services and development offices located throughout the United States and
in other countries with varying terms and lengths of contract. All of
these leases are short-term operating leases.
We
believe that all of our facilities, including our world headquarters,
regional offices and international offices in EMEA and APAC, are
adequate and well suited to accommodate our business operations. We continuously
review space alternatives to ensure we have adequate room for growth in the
future.
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
The
information set forth in Note 13 of Notes to Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K is incorporated herein by
reference.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|
None.
PART
II.
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
|
Market
Information
Our
common stock is traded on The NASDAQ Global Market under the ticker symbol ININ.
The following table sets forth, for the quarterly periods indicated, the high
and low common stock prices per share as reported by The NASDAQ Global
Market:
|
|
|
|
|
|
|
Quarter Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
26.99
|
|
|
$
|
11.00
|
|
|
$
|
23.10
|
|
|
$
|
13.50
|
|
June
30
|
|
|
13.71
|
|
|
|
10.88
|
|
|
|
21.42
|
|
|
|
14.50
|
|
September
30
|
|
|
12.37
|
|
|
|
6.60
|
|
|
|
22.87
|
|
|
|
17.88
|
|
December
31
|
|
|
9.48
|
|
|
|
5.51
|
|
|
|
30.16
|
|
|
|
19.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
have never declared or paid cash dividends on our common stock and do not expect
to declare or pay any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and to expand
our business. Any future determination to declare or pay cash dividends will be
at the discretion of our Board of Directors and will depend upon our financial
condition, operating results, capital requirements and other factors that our
Board of Directors deem relevant.
As
of February 28, 2009, there were 127 registered holders of record of our common
stock.
Share
Repurchase Program
On July
28, 2008, our Board of Directors approved a share repurchase program to
facilitate the repurchase of our common stock over the course of one
year. Under this program, we could purchase shares of our common
stock up to a maximum aggregate purchase price of $10.0 million. Repurchases
could be made from time to time in the open market and in privately negotiated
transactions, based on business and market conditions under plans designed to
comply with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of
1934, as amended. The program could be amended, suspended or discontinued at any
time and did not commit us to repurchase shares of our common
stock. All shares acquired are available for stock-based compensation
awards and other corporate purposes.
As of
December 31, 2008, we repurchased 1,204,454 shares of our common stock at an
aggregate cost of $10.0 million. The share repurchase program was completed on
November 12, 2008. No additional shares have been repurchased. Below is a
summary of the shares repurchased in the fourth quarter of fiscal
2008:
|
|
Total
Number of Shares Purchased
|
|
|
Weighted
Average Price Paid per Share
|
|
|
Total Number
of Shares Purchased as Part of Publicly Announced
Program
|
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the
Program
|
|
Oct
1, 2008 – Oct 31, 2008
|
|
|
721,715
|
|
|
|
7.59
|
|
|
|
721,715
|
|
|
$
|
1,039,051
|
|
Nov
1, 2008 - Nov 30, 2008
|
|
|
129,488
|
|
|
|
7.98
|
|
|
|
129,488
|
|
|
|
-
|
|
Dec
1, 2008 - Dec 31, 2008
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
851,203
|
|
|
|
7.65
|
|
|
|
851,203
|
|
|
|
|
|
Performance
Graph
The
following graph compares the cumulative total return to shareholders of
our common stock from December 31, 2003 through December 31, 2008
with the cumulative total return over such period of (i) the Standard &
Poor’s 500 Stock Index (the S&P 500 Index) and (ii) the Research Data Group
Software Composite Index (the RDG Software Composite Index). The graph assumes
an investment of $100 on December 31, 2003 in each of our common stock, the
S&P 500 Index and the RDG Software Composite Index (and the reinvestment of
all dividends). The performance shown is not necessarily indicative of future
performance. The comparisons shown in the graph below are based on historical
data and we caution that the stock price performance shown is not indicative of,
and is not intended to forecast, the potential future performance of our common
stock. Information used in the graph was obtained from Research Data Group, a
source believed to be reliable, but we are not responsible for any errors or
omissions in such information.
Cumulative
Total Return
Years
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interactive
Intelligence, Inc.
|
|
$
|
100.00
|
|
|
$
|
86.54
|
|
|
$
|
98.08
|
|
|
$
|
431.15
|
|
|
$
|
506.73
|
|
|
$
|
123.27
|
|
S&P
500 Index
|
|
|
100.00
|
|
|
|
110.88
|
|
|
|
116.33
|
|
|
|
134.70
|
|
|
|
142.10
|
|
|
|
89.53
|
|
RDG
Software Composite Index
|
|
|
100.00
|
|
|
|
110.69
|
|
|
|
109.48
|
|
|
|
125.50
|
|
|
|
146.24
|
|
|
|
86.68
|
|
The
preceding Performance Graph and related information shall not be deemed
“soliciting material,” or to be “filed” with the SEC, nor shall such information
be incorporated by reference in any filing of Interactive Intelligence, Inc.
under the Securities Act of 1933 or the Securities Exchange Act of 1934
whether made before or after the date hereof and irrespective of any general
incorporation language in any such filing.
The
remaining information required by Item 5 concerning securities authorized for
issuance under our equity compensation plans is set forth in or incorporated by
reference to Part III, Item 12 of this Annual Report on Form 10-K.
ITEM
6. SELECTED
CONSOLIDATED FINANCIAL DATA.
The
following selected consolidated financial data (in thousands, except per share
amounts) is qualified in its entirety by, and should be read in conjunction
with, Management’s Discussion and Analysis of Financial Condition and Results of
Operations and our Consolidated Financial Statements and the Notes thereto
contained in Items 7 and 8, respectively, of this Annual Report on Form 10-K.
There were no cash dividends declared per common share.
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
121,406
|
|
|
$
|
109,901
|
|
|
$
|
83,044
|
|
|
$
|
62,937
|
|
|
$
|
55,119
|
|
Gross
profit
|
|
|
82,268
|
|
|
|
74,648
|
|
|
|
59,050
|
|
|
|
47,374
|
|
|
|
41,964
|
|
Operating
income
|
|
|
6,756
|
|
|
|
7,994
|
|
|
|
4,977
|
|
|
|
2,392
|
|
|
|
983
|
|
Net
income
|
|
|
4,338
|
|
|
|
17,456
|
|
|
|
10,248
|
|
|
|
2,108
|
|
|
|
1,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
1.00
|
|
|
$
|
0.62
|
|
|
$
|
0.13
|
|
|
$
|
0.07
|
|
Diluted
|
|
|
0.23
|
|
|
|
0.91
|
|
|
|
0.56
|
|
|
|
0.13
|
|
|
|
0.06
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and
short-term
investments
|
|
$
|
45,510
|
|
|
$
|
46,327
|
|
|
$
|
27,086
|
|
|
$
|
15,127
|
|
|
$
|
14,603
|
|
Net
working capital
|
|
|
35,504
|
|
|
|
37,073
|
|
|
|
14,449
|
|
|
|
3,177
|
|
|
|
347
|
|
Total
assets
|
|
|
105,183
|
|
|
|
103,438
|
|
|
|
66,775
|
|
|
|
38,398
|
|
|
|
32,498
|
|
Total
shareholders’ equity
|
|
|
47,247
|
|
|
|
48,619
|
|
|
|
24,278
|
|
|
|
7,793
|
|
|
|
5,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations is intended to provide investors with an understanding of
our past performance, our financial condition and our prospects and should be
read in conjunction with other sections of this Annual Report on Form 10-K,
including Part I, Item 1 “Business”; Part II, Item 6 “Selected Financial Data”;
and Part II, Item 8 “Financial Statements and Supplementary Data”. Investors
should carefully review the information contained in this report under Part I,
Item 1A “Risk Factors”. The following will be discussed and
analyzed:
·
|
Critical
Accounting Policies and Estimates
|
·
|
Historical
Results of Operations
|
·
|
Liquidity
and Capital Resources
|
Overview
Interactive
Intelligence, Inc. (“Interactive Intelligence”, “we”, “us” or “our”) was formed
in 1994 as an Indiana corporation and maintains its world headquarters and
executive offices at 7601 Interactive Way, Indianapolis, IN 46278. Our telephone
number is (317) 872-3000. We are located on the web at
http://www.inin.com
.
We file annual, quarterly and current reports, proxy statements and other
documents with the SEC under the Securities Exchange Act of 1934, as amended.
These periodic and current reports and all amendments to those reports are
available free of charge on the investor relations page of our website at
http://investors.inin.com
.
We are a
leading provider of software application suites for VoIP business
communications, and are increasingly leveraging our leadership position in the
worldwide contact center market to offer our solutions to enterprises. In
addition to the contact center sector, businesses utilize our
solutions in industries
including, but not limited to, teleservices, financial services (banks, credit
unions), insurance, higher education (universities), healthcare, retail,
technology, government and business services. Organizations that employ remote
and mobile workers incorporate our solutions as well. For enterprises that rely
on the Microsoft platform, we offer a pre-integrated all-software IP PBX phone
and communications system that enables straightforward integration to Microsoft
applications for data management. In all, our innovative software products and
services are designed expressly for multichannel contact management, business
communications and messaging using the SIP global communications standard that
supports VoIP. To supplement our software solutions, our product lineup includes
a full-featured media server, media gateways and SIP proxy for IP-based
communications networks and infrastructures. Our customers can deploy our
solutions as an on-premise system at their site or as CaaS offered via our
off-site data center.
Our
application-based solutions are integrated on a single software platform.
Overall, our platform has been developed to deliver security, broaden
integration to business systems and end-user devices, enhance mobility for
today’s workforce, scale to thousands of users, and more wholly satisfy diverse
business communications and interaction management needs in markets
for:
·
|
Enterprise
IP Telephony
|
By
implementing our all-in-one solutions, businesses are able to unify multichannel
communications media (phone, fax, e-mail and web chat); improve workforce
performance, effectiveness and productivity; and more readily adapt to changing
market and customer requirements. Organizations in the industries we serve are
further able to reduce equipment and maintenance costs over traditional
“multipoint” communications hardware, and additionally reduce the complexity of
such non-integrated systems.
Business
Strategy
In the
coming year, we intend to highlight our CBPA effort to solidify our position in
the contact center market and expand our IP telephony solutions further into the
enterprise market. We also will emphasize our new packaged approach to
professional services, market these services and enhanced product functionality
more aggressively to existing customers, and focus on growing our CaaS offering
as a viable option that allows an organization to pay for a communications
solution on a monthly subscription basis. Our strategy for achieving this
overall mission is:
1.
|
Launch
our Communications-Based Process
Automation;
|
2.
|
Promote
our Packaged Services Offerings;
|
3.
|
Market
More Effectively and Aggressively to our Existing
Customers;
|
4.
|
Rapidly
Grow our CaaS Customer Base;
|
5.
|
Innovation
and Enhancing our Core Product
Offerings;
|
6.
|
Expand
in our Markets;
|
7.
|
Leverage
our Relationships with Multi-National Partners to Open New Selling
Opportunities;
|
8.
|
Develop
Effective Relationships with Companies in Specific Vertical Industries;
and
|
9.
|
Increase
Awareness of our All-in-One Solution and Launch Aggressive Replacement
Programs.
|
Critical
Accounting Policies and Estimates
We
believe our accounting policies listed below are important to understanding our
historical and future performance, as these policies affect our reported amounts
of revenues and expenses and are applied to significant areas involving
management’s judgments and estimates. These policies, and our procedures related
to these policies, are described below. See also Note 2 of Notes to Consolidated
Financial Statements included in Item 8 of this Annual Report on Form
10-K for a further summary of our significant accounting policies and
methods used in the preparation of our consolidated financial
statements.
The
accounting policies described below are significantly affected by critical
accounting estimates. Such accounting policies require significant judgments,
assumptions and estimates used in the preparation of our consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K, and actual
results could differ materially from the amounts reported based on these
policies.
Sources
of Revenues and Revenue Recognition Policy
We
generate product revenues from licensing the right to use our software
applications and in certain instances providing hardware as a component of our
solution, and we generate services revenues primarily from annual support fees,
annual renewal fees, professional services and educational
services.
Product
revenues
Our
license agreements are either perpetual or annually renewable. For
any revenues to be recognized from a license agreement, the following criteria
must be met:
·
|
Persuasive
evidence of an arrangement exists;
|
·
|
The
fee is fixed or determinable;
|
·
|
Collection
is probable; and
|
For a
perpetual license agreement, upon meeting the revenue recognition criteria
above, we immediately recognize as product revenues the amount of initial
license fees if sufficient vendor specific objective evidence of fair value
(“VSOE”) exists to support allocating a portion of the total fee to the
undelivered elements of the arrangement. If sufficient VSOE of the undelivered
elements does not exist, we recognize the initial license fee as product
revenues ratably over the initial term of the support agreement once support is
the only undelivered element. The support period is generally 12 months but may
be up to 18 months for initial orders because support begins when the licenses
are downloaded, when support commences, or no more than six months following the
contract date. We determine VSOE of support in perpetual agreements based on
substantive renewal rates the customer must pay to renew the support. The VSOE
of other services is based on amounts charged when the services are sold in
stand-alone sales.
For an
annually renewable license agreement, upon meeting the revenue recognition
criteria above, we recognize a majority of the initial license fees under these
agreements as product revenues ratably over the initial license period, which is
generally 12 months, and the remainder of the initial license fees are
recognized as services revenues over the same time period.
We
recognize revenues related to any hardware sales when the hardware is delivered
and all other revenue recognition criteria are met.
Services
revenues
Services
revenues are primarily recognized for renewal fees and support related to
annually renewable license agreements and support fees for perpetual license
agreements. For annually renewable agreements, the allocation of the order
between product revenues and services revenues is based on an average renewal
rate for our time based contracts. We apply the allocation of product revenues
and services revenues consistently to all annually renewable agreements. Under
annually renewable license agreements, after the initial license period, our
customers may renew their license agreement for an additional period, typically
12 months, by paying a renewal fee. The revenue from annual renewal fees is
classified under services revenue and the revenue is recognized ratably over the
contract period. Under perpetual license agreements, we recognize annual support
fees as services revenues ratably over the post-contract support period, which
is typically 12 months, however customers have the option to prepay support up
to three years.
We also
generate revenues from other services that we provide to our customers
and partners. These additional revenues include fees for professional services,
educational services and CaaS. Revenues from professional services, which
include implementing our products for a customer or partner, educational
services, which consist of training courses for customers and partners, and
CaaS, which allows customers to deploy our solutions via our off-site data
center, are recognized as the related services are performed.
Stock-Based
Compensation Expense
We
account for our employee and director stock options in accordance with SFAS
123R and the guidance of SAB No. 107,
Share-Based Payment
(“SAB
107”), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors, based on
fair values. On December 21, 2007, the SEC released SAB No. 110,
Share-Based Payment
,
which extended the permissibility of the simplified method, in certain
circumstances, under SAB 107, for options granted after December 31,
2007.
As
permitted by SFAS 123R, we continue to use the Black-Scholes option-pricing
model as our method of valuation for share-based payment awards. Our
determination of fair value of share-based payment awards on the date of grant
using the Black-Scholes option-pricing model is affected by our stock price as
well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to, our expected stock
price volatility over the term of the awards and an expected risk-free rate of
return. If factors change and we use different assumptions for estimating
stock-based compensation expense in future periods, stock-based compensation
expense related to new awards may differ materially in the future from that
recorded in the current period related to outstanding awards.
For
additional information, refer to Note 6 of Notes to Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K. Stock-based
compensation expense for employee and director stock options recognized under
SFAS 123R for the years ended December 31, 2008, 2007 and 2006 was $3.0
million, $3.1 million and $2.1 million, respectively.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
SFAS No.
109,
Accounting for Income
Taxes
(“SFAS 109”), establishes financial accounting and reporting
standards for the effect of income taxes. We are subject to income taxes in both
the United States and numerous foreign jurisdictions. Significant judgment is
required in evaluating our tax positions and determining our provision for
income taxes. The objectives of accounting for income taxes are to recognize the
amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in an entity’s financial statements or tax returns. Variations in the
actual outcome of these future tax consequences could materially impact our
financial position, results of operations, or cash flows.
In
assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon generation of future taxable income during the periods in which
temporary differences such as loss carryforwards and tax credits become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment and ensuring that the deferred tax
asset valuation allowance is adjusted as appropriate.
At
December 31, 2008, we had $26.8 million of tax net operating loss carryforwards
and $4.7 million in tax credit carryforwards. During 2008 and 2007 our total
deferred tax asset decreased by $2.2 million and increased by $8.4 million,
respectively. We have no valuation allowance recorded at December 31, 2008. We
will continue to evaluate the valuation of recorded deferred tax assets in
accordance with the requirements of SFAS 109.
Allowance
for Doubtful Accounts Receivable
The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable.
We
evaluate bad debt expense based on a percentage of revenue reported each period.
We then review the allowance for doubtful accounts each reporting period based
on a detailed analysis of our accounts receivable. In the analysis, we primarily
consider the following attributes of the partner or customer: the age of the
receivable; their creditworthiness; the economic conditions of their industry;
and general economic conditions. If any of these factors change, we may also
change our original estimates, which could impact the level of our future
allowance for doubtful accounts.
We have
considered the impact of the current economic conditions as part of our overall
determination of allowance for doubtful accounts.
If
payment is not made timely, we will contact the customer or partner to try to
obtain payment. If this is not successful, we will institute other collection
practices such as generating collection letters, involving our sales personnel
and ultimately terminating the customer’s or partner’s access to future
upgrades, licenses and technical support. Once all collection efforts are
exhausted, the receivable is written off against the allowance for doubtful
accounts.
Research
and Development
All
research and development expenditures have been expensed as incurred. Based on
our product development process and technological feasibility, the date at which
capitalization of development costs may begin is established upon completion of
a working model. Costs incurred between completion of the working model and the
point at which the product is ready for general release have been
insignificant.
Legal
Proceedings
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines, and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment and/or remediation can be
reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred.
Financial
Highlights
For the
year ended December 31, 2008 we achieved 10% annual revenue growth compared to
2007 and generated over $14.6 million of operating cash flow. Our operating
income decreased 15% year-over-year. Factors that affect revenues in any
particular year include the overall economy’s growth or uncertainty, an
end-customer’s budget constraints, personnel resources to implement our
solutions, historical product order patterns and willingness to implement a
critical telecommunications system. Revenues in any particular period can
greatly fluctuate from other periods.
The
amount of orders we receive, while impacting product revenues, does not have an
exact correlation to recognized revenues because the terms in the contracts, a
customer’s or partner’s collection history, and any other contractual conditions
affect whether we can recognize the order during the period the order is
received or in subsequent periods. Consequently, product revenues for
any particular period are impacted not only by orders received in the current
period but also by orders received in previous periods that are being recognized
in the current period.
The following table sets forth
information about our total revenues (in millions) and the annual growth
percentage over the previous year for the past five years (including the impact
of the reclassifications and adjustments discussed in Note 2 of Notes to
Consolidated Financial Statements).
Year:
|
|
|
|
|
|
|
2008
|
|
$
|
121.4
|
|
|
|
10
|
%
|
2007
|
|
|
109.9
|
|
|
|
32
|
|
2006
|
|
|
83.0
|
|
|
|
32
|
|
2005
|
|
|
62.9
|
|
|
|
14
|
|
2004
|
|
|
55.1
|
|
|
|
7
|
|
The 10%
increase in revenues for 2008 compared to 2007 can be attributed to an increase
in both product and services revenues. Overall the dollar amount of our
customer orders increased for the year ended 2008 by 5% compared to 2007. We saw
an overall increase in the dollar amount of initial orders of 24% in 2008
compared to 2007. The majority of these orders were for our contact center,
enterprise messaging and IP PBX solutions. This increase was offset by a
decrease in the dollar amount of follow-on orders in 2008 compared to 2007
of 6%, which was the result of many existing customers limiting expansions of
our systems in response to economic conditions. Product revenues may fluctuate
from quarter to quarter depending on the mix of orders between perpetual
licenses and annually renewable licenses.
Service
revenues increased by 17% during 2008, compared to 2007, as a result of our
growing installed base of customers and their related annual license renewal
fees and support fees for perpetual licenses, both in number and dollar amount
of licenses. This increase was also due to an increase in revenues from
education and CaaS, as more partners and customers participated in our global
training sessions and more customers opted to purchase our hosted
solution.
Cost of
revenues increased $3.9 million during 2008, compared to 2007, primarily due to
increased hardware costs for products as well as increased compensation expense.
Hardware costs for products increased primarily due to the dollar amount of our
EIC solution orders, which includes a hardware component, increasing in 2008
compared to 2007, as well as sales of the Interaction Gateway and media servers.
Compensation expense for our services personnel increased as a result of an
increase in staffing during the year.
Operating
expenses increased $8.9 million during 2008, compared to 2007, primarily due to
increases in compensation expense, marketing costs and general corporate
allocable cost such as rent and depreciation. Compensation expense
increased by $7.6 million in 2008 compared to 2007, primarily as a result of a
global staffing increase of 14% in the first three quarters of 2008, compared to
2007. During 2008, marketing costs also increased compared to 2007. The
$2.9 million year-over-year increase in marketing costs resulted from an
increase in advertising, public relations and marketing related events from
efforts to continue to increase our brand awareness and distribution. Allocated
rent and depreciation costs increased during 2008, by $1.1 million and $1.0
million, respectively, compared to 2007. The increase in these costs was
primarily due to additional offices opening in 2008, expansions of current
offices and an increase in our furniture and equipment during
2008.
During
the fourth quarter of 2008, we reached a settlement with the French Taxing
Authority related to a value added tax (“VAT”) claim. The settlement included
Interactive Intelligence France SARL paying $5.3 million for VAT, corporation
and withholding taxes and late penalties and interest. In return, Interactive
Intelligence, Inc. was granted a refund of VAT paid (including the current
amount and past payments) of $5.6 million. Interactive Intelligence, Inc.
assigned $5.3 million of this refund to pay off the VAT and other taxes and
penalties owed. The remaining $300,000 was refunded to Interactive Intelligence,
Inc.
We had
previously accrued for corporation taxes owed; therefore, the net U.S. dollar
effect to our financial position was a reduction in operating expenses of
$577,000, as that is where the original expense for the VAT was
allocated. VAT charges were incurred on various items including rent,
hotels, supplies, etc. The breakdown of how the refund was applied is as
follows:
VAT
Allocation (in thousands)
|
|
Costs
of services
|
|
$
|
191
|
|
Sales
and marketing
|
|
|
151
|
|
Research
and development
|
|
|
88
|
|
General
and administrative
|
|
|
147
|
|
Total
|
|
$
|
577
|
|
On July
28, 2008, our Board of Directors approved a $10.0 million share repurchase
program. As of December 31, 2008, we had repurchased approximately 1.2
million shares of our common stock under the share repurchase program at an
aggregate cost of $10.0 million and a weighted average price of $8.26 per
share. We did not repurchase any of our common stock during 2007.
Given the
current economic conditions, we do not believe that we can accurately predict
2009 results. During 2009, we will continue to focus on maintaining
profitability while positioning the company for future growth.
Historical
Results of Operations
The
following table sets forth, for the periods indicated, our consolidated
financial information expressed as a percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
50
|
%
|
|
|
52
|
%
|
|
|
52
|
%
|
Services
|
|
|
50
|
|
|
|
48
|
|
|
|
48
|
|
Total
revenues
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
13
|
|
|
|
13
|
|
|
|
11
|
|
Services
|
|
|
19
|
|
|
|
19
|
|
|
|
18
|
|
Total
cost of revenues
|
|
|
32
|
|
|
|
32
|
|
|
|
29
|
|
Gross
profit
|
|
|
68
|
|
|
|
68
|
|
|
|
71
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
32
|
|
|
|
33
|
|
|
|
36
|
|
Research
and development
|
|
|
18
|
|
|
|
16
|
|
|
|
16
|
|
General
and administrative
|
|
|
12
|
|
|
|
12
|
|
|
|
13
|
|
Total
operating expenses
|
|
|
62
|
|
|
|
61
|
|
|
|
65
|
|
Operating
income
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
Other
expense
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Total
other income
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
Income
before income taxes
|
|
|
7
|
|
|
|
9
|
|
|
|
7
|
|
Income
tax benefit (expense)
|
|
|
(3
|
)
|
|
|
7
|
|
|
|
5
|
|
Net
income
|
|
|
4
|
%
|
|
|
16
|
%
|
|
|
12
|
%
|
Comparison
of Years Ended December 31, 2008, 2007 and 2006
Revenues
Primary
Sources of Revenues
We
generate revenues from (i) product revenues which include licensing the right to
use our software applications and, in certain instances, providing hardware as a
component of our solution and (ii) services revenues which include annual
support fees, annual renewal fees, professional services fees and educational
services fees. Services revenues are primarily recognized for renewal fees
and support related to annually renewable license agreements and support fees
for perpetual license agreements.
Product
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Product
revenues
|
|
$
|
60,256
|
|
|
$
|
57,673
|
|
|
$
|
43,021
|
|
Change
from prior year period
|
|
|
4
|
%
|
|
|
34
|
%
|
|
|
29
|
%
|
Percentage
of total revenues
|
|
|
50
|
%
|
|
|
52
|
%
|
|
|
52
|
%
|
The
amount of product orders we receive, which include software and hardware and
first year support, impacts product revenues but does not have an exact
correlation to revenues because the terms in the contracts, collection history
with the customer or partner, and any other contractual conditions affect
whether we can recognize the order during the period or in a subsequent period.
Consequently, product revenues for any particular period are impacted not only
by orders received in the current period but also by orders received in previous
periods that are being recognized in the current period. In addition, product
orders include first year support which is deferred and recognized over the
support period.
For 2008,
the dollar amount of product orders increased by 5% compared to 2007. The dollar
amount of orders from our 366 new customers increased 24% in 2008 compared
to 2007. As a result of the weakening economy, the dollar amount of orders from
current customers in 2008 decreased by 6% compared to 2007. We also
experienced an increase of 50% in the dollar amount of orders for our media
server and gateway appliances along with other hardware we deliver as part of
our solutions in 2008 compared to 2007, which contributed to an increase in
product costs.
For 2007,
the dollar amount of product orders increased by 26% compared to 2006, with the
dollar amount of new customer orders increasing by 4% and the
dollar amount of current customer orders increasing by 44%. The dollar
amount of orders of our media servers and gateway appliances
increased to $6.6 million in 2007 from $3.0 million in 2006, or
116%.
Product
revenues can fluctuate from period to period depending on the mix of contracts
sold between perpetual licenses and annually renewable licenses. The majority of
our product licenses are perpetual but we do also have certain customers with
renewable term licenses. Annually renewable licenses represented 20%, 19%
and 23%, respectively, of total product order in 2008, 2007 and 2006,
respectively. Perpetual orders are recognized when received, if other
recognition criteria are satisfied, while renewable term licenses are deferred
and generally recognized over one year. The impact of the mix of contracts
on our product revenues occurs only in the year of a product order; subsequent
renewal fees received for annually renewable licenses and renewal support fees
for perpetual contracts are all allocated entirely to services
revenues.
Our
geographic mix of licenses has been relatively constant over 2008, 2007 and
2006, with the Americas contributing 68% to 73%, EMEA contributing 20% to 23%,
and APAC contribution 7% to 9% of the total contracts in any one
year.
Services
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Services
revenues
|
|
$
|
61,150
|
|
|
$
|
52,228
|
|
|
$
|
40,023
|
|
Change
from prior year period
|
|
|
17
|
%
|
|
|
30
|
%
|
|
|
35
|
%
|
Percentage
of total revenues
|
|
|
50
|
%
|
|
|
48
|
%
|
|
|
48
|
%
|
Services
revenues include the portion of the license arrangement allocated from
annually renewable and perpetual contracts, license renewals of annually
renewable contracts, and support fees for perpetual contracts, as well as
professional services, education, CaaS and other miscellaneous revenues.
Revenues related to our renewal and support fees represented approximately 77%,
76% and 81% of our total services revenues for 2008, 2007 and 2006,
respectively.
The
increase in services revenues in 2008 compared to 2007 was due to increases in
our growing installed base of customers and increases in related payments of
annually renewable license fees and support fees for perpetual licenses. License
renewal and support revenues increased $7.4 million in 2008 compared to 2007. As
we sign contracts and install our solutions with new end-customers and expand
product usage at existing customers, we expect that our services revenues will
continue to increase as customers renew licenses and pay for support on our
software applications. The actual percentage fee charged for renewal of annually
renewable licenses and perpetual support agreements as compared to the initial
annually renewable license fee and perpetual license, respectively, is
comparable on a relative percentage basis, and therefore, the mix of these types
of contracts in the future is not expected to impact our future services
revenues. Education and CaaS increased during 2008 compared to the prior year by
$404,000 and $900,000, respectively. The increase in education was due to
revenue from a larger number of partners and customers attending our
global training sessions. CaaS increased because more customers opted to
purchase a hosted solution.
License
renewal and support revenue increased in 2007, compared to 2006 by $7.3 million
primarily due to an increase in license renewal and support fees for our
software applications. In April 2007, we acquired the professional services
division of Alliance Systems Ltd. ("Alliance), which also contributed to the
increase in 2007 compared to 2006. The acquisition added 13 engineers to our
professional services team and increased our resources to serve our
customers and partners which resulted in a professional services revenue
increase of $4.3 million, or 117%, during 2007 compared to the prior
year.
Support
and license renewal rates were approximately 90% during each of the last
three years.
Services revenues have and will fluctuate based on dollar amount of orders and
license renewals, the number of attendees at our educational classes, the amount
of assistance our customers and partners need for implementation and
installation and CaaS adoption. We anticipate these services revenues will
continue to increase in the future if the number of our customers continues to
increase.
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
15,446
|
|
|
$
|
14,159
|
|
|
$
|
9,318
|
|
Services
|
|
|
23,692
|
|
|
|
21,094
|
|
|
|
14,676
|
|
Total
cost of revenues
|
|
$
|
39,138
|
|
|
$
|
35,253
|
|
|
$
|
23,994
|
|
Change
from prior year period
|
|
|
11
|
%
|
|
|
47
|
%
|
|
|
54
|
%
|
Product
costs as a % of product revenues
|
|
|
26
|
%
|
|
|
25
|
%
|
|
|
22
|
%
|
Services
costs as a % of services revenues
|
|
|
39
|
%
|
|
|
40
|
%
|
|
|
37
|
%
|
Costs of
product consist of hardware costs, primarily for media server and
Interaction Gateway appliances that we developed; servers, telephone
handsets and gateways that we purchase and resell; royalties for third
party software and other technologies included in our solutions; personnel
costs; and, to a lesser extent, software packaging costs, which include product
media, duplication and documentation. Costs of product can fluctuate depending
on which software applications are licensed to our customers and partners, the
third party software that is licensed by the end user from us as part of our
software applications and the dollar amount of orders for hardware.
The
increase in costs of product of $1.3 million from 2007 to 2008 resulted
primarily from an increase in hardware cost of goods sold due to
higher dollar amounts of our EIC solution orders, which include a hardware
component. Sales of our Interaction Gateway and media servers increased in
2008 compared to 2007, as well.
Costs of
product for 2007 increased $4.8 million compared to 2006. Hardware costs
increased $2.5 million as we continued to sell servers, gateways and telephone
handsets with our CIC and EIC solutions. Royalties paid to third parties
increased $1.8 million during 2007 compared to 2006 as we continued our use of
technologies licensed from third parties. Staffing increased in the distribution
center which resulted in a $388,000 increase in total compensation
costs.
Costs of
services consist primarily of compensation expenses for technical support,
educational and professional services personnel and other costs associated with
supporting our customers and partners. These expenses increased in 2008 compared
to 2007 primarily due to a $1.9 million increase in compensation expense for our
services personnel as a result of an increase in staffing. The increase was
partially offset by the VAT refund of $191,000 allocated to costs of
services.
The
increase in 2007 costs of services, as compared to 2006, was primarily due to a
$5.0 million increase in compensation expense for our services personnel. This
increase resulted from a 28% increase in staffing during this period principally
as a result of our April 2007 acquisition of the professional services division
of Alliance. We incurred $360,000 of additional travel-related expenses during
2007 principally due to an increase in the demand for our professional services
personnel to install our applications at the customers’ sites.
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Gross
profit
|
|
$
|
82,268
|
|
|
$
|
74,648
|
|
|
$
|
59,050
|
|
Change
from prior year period
|
|
|
10
|
%
|
|
|
26
|
%
|
|
|
25
|
%
|
Percentage
of total revenues
|
|
|
68
|
%
|
|
|
68
|
%
|
|
|
71
|
%
|
Gross
profit as a percentage of total revenues remained consistent during 2008,
compared to 2007. The overall increase in gross profit was the result of an
increase in our services margin in 2008, compared to 2007, due to an increase in
license renewal and support revenues. In addition, $191,000 of the increase was
related to the VAT refund allocated to costs of services.
Gross
profit as a percentage of total revenues decreased in 2007, compared to 2006,
primarily due to additional costs of product and services. Our services margin
decreased during 2007, compared to 2006, principally due to the increase in
compensation costs as a result of additional services personnel.
Gross
margin in any particular period is dependent upon revenues recognized versus
costs of product and costs of services incurred and is expected to
vary.
Operating
Expenses
Sales
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Sales
and marketing expenses
|
|
$
|
39,295
|
|
|
$
|
36,368
|
|
|
$
|
29,503
|
|
Change
from prior year period
|
|
|
8
|
%
|
|
|
23
|
%
|
|
|
22
|
%
|
Percentage
of total revenues
|
|
|
32
|
%
|
|
|
33
|
%
|
|
|
36
|
%
|
Percentage
of net product revenues
|
|
|
88
|
%
|
|
|
84
|
%
|
|
|
88
|
%
|
Sales and
marketing expenses are comprised primarily of compensation expenses, travel and
entertainment expenses and promotional costs related to our sales, marketing and
channel management operations. Sales and marketing compensation expense
increased $1.6 million during 2008, compared to 2007, due to an increase
in staffing. Corporate marketing expenses increased $443,000 during 2008,
compared to 2007, due to an increase in advertising, public relations and
marketing related events from efforts to continue to increase our brand
awareness and distribution. Allocated rent expense and depreciation also
increased during the year by $203,000 and $236,000, respectively, due to staff
additions in the sales and marketing department. The increases listed above were
partially offset by the VAT refund allocated to sales and marketing of
$151,000.
Sales and
marketing expenses increased in 2007 from 2006 primarily due to a $4.0 million
increase in compensation expense for our sales and marketing personnel, which
resulted from a 14% increase in staffing during the period. We also increased
our corporate marketing efforts during 2007, which included increased
advertising and brand promotions, seminars, web seminars, tradeshows and special
events such as our global user forum and partner conferences resulting in an
increase of $1.4 million in 2007 compared to 2006. Travel-related expenses also
increased by $352,000 in 2007 compared to 2006.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Research
and development expenses
|
|
$
|
21,539
|
|
|
$
|
17,040
|
|
|
$
|
13,578
|
|
Change
from prior year period
|
|
|
26
|
%
|
|
|
25
|
%
|
|
|
10
|
%
|
Percentage
of total revenues
|
|
|
18
|
%
|
|
|
16
|
%
|
|
|
16
|
%
|
Research
and development expenses are comprised primarily of compensation and
depreciation expenses. During 2008, compensation expense increased
$3.5 million, compared to 2007, due to an increase in staffing. Allocated
rent and depreciation expense also increased during the year by $524,000 and
$330,000, respectively, due to staff additions in the research and development
department. These increases were partially offset by the VAT refund of $88,000
allocated to research and development. Research and development expenses
increased during 2007, compared to 2006, primarily due to an increase of $3.0
million in compensation expense, which resulted from a 15% increase in
staffing.
We
believe that investment in research and development is critical to our future
growth and competitive position in the marketplace and is directly related to
timely development of new and enhanced solutions that are central to our
business. As a result, we expect research and development expenses will continue
to increase in future periods.
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
General
and administrative expenses
|
|
$
|
14,678
|
|
|
$
|
13,246
|
|
|
$
|
10,992
|
|
Change
from prior year period
|
|
|
11
|
%
|
|
|
21
|
%
|
|
|
32
|
%
|
Percentage
of total revenues
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
General
and administrative expenses are comprised of compensation expense and general
corporate expenses that are not allocable to other departments, such as
legal and other professional fees and bad debt expense. General and
administrative compensation related expense increased $595,000 in 2008 compared
to 2007, due to an increase in staffing. In addition, in 2008 compared to 2007
office expense and supplies, including non-allocable office operating
expenses
,
increased
by $241,000 and professional services related to accounting, legal and tax
fees increased by $169,000. We also recognized an increase in foreign
exchange translation losses of $110,000 in 2008 compared to 2007. The increases
listed above were partially offset by the VAT refund of $147,000 allocated to
general and administration.
General
and administrative expenses increased in 2007 compared to 2006 principally due
to a $1.2 million increase in compensation expense, which resulted from an 18%
increase in staffing. Bad debt expense increased $225,000 during 2007, compared
to 2006, due to one of our large partners filing for
bankruptcy. Professional consulting and outsourced services expenses
increased $214,000 during 2007, principally due to increased accounting, legal
and tax fees.
Other
Income (Expense)
Interest
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Cash,
cash equivalents and short-term investments (average)
|
|
$
|
45,919
|
|
|
$
|
36,707
|
|
|
$
|
21,107
|
|
Interest
income, gross
|
|
|
1,288
|
|
|
|
1,729
|
|
|
|
744
|
|
Return
on investments
|
|
|
3.0
|
%
|
|
|
5.0
|
%
|
|
|
4.0
|
%
|
Interest
income, net primarily consists of interest earned from investments and
interest-bearing cash accounts. Interest expense and fees, which are not
material for any years reported, are also included in interest income, net.
Interest
earned on investments during 2008 compared to 2007 decreased due to lower
interest rates as a result of decreases in interest yields on investments. In
response to the financial crisis in 2008, we transferred the majority of our
liquid investments into money market funds that are secured by low risk
government securities. We continue to monitor investment options with the
goal of maximizing our return on investment while minimizing the risk of default
on the principal balance. We do not have any investments in subprime
assets.
Interest
earned on investments during 2007 and 2006 improved principally due to
increasing average cash and investment balances and increasing interest
rates.
Other
Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Other
income (expense), net
|
|
$
|
(242
|
)
|
|
$
|
(96
|
)
|
|
$
|
(94
|
)
|
Other income (expense), net includes foreign currency transaction gains and
losses and, prior to 2008, foreign withholding taxes. During 2008, we conducted
a study of our foreign tax withholding and we determined that we had
sufficient and appropriate foreign source income to record our foreign
withholdings as a credit for tax purposes instead of as a deduction to net
income.
Foreign currency transaction gains and losses can fluctuate based on the amount
of revenue that is generated in certain international currencies, particularly
the Euro, and the exchange gain or loss that results from foreign currency
disbursements and receipts. The expense for 2007 consisted of $233,000 of
foreign tax withholdings, offset by $138,000 of gains related to realized
foreign currency transactions. The expense for 2006 consisted of $160,000 of
foreign tax withholdings, offset by $66,000 of gains related to foreign currency
transactions.
Income
Tax Benefit (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
$
|
(3,464
|
)
|
|
$
|
7,837
|
|
|
$
|
4,671
|
|
We had
over $3.0 million of tax net operating loss carryforwards and $4.7 million in
tax credit carryforwards included in deferred tax assets at December 31, 2008.
In addition we have tax deductible compensation of $23.9 million related to
stock option deductions which has not been recorded as an asset but will be
recognized when realized as a reduction of taxes payable. The tax benefit of
these deductions will be primarily recorded as a credit to additional paid-in
capital. During 2008 and 2007, our tax asset decreased by $2.2 million and
increased by $8.4 million, respectively. There was no valuation
allowance at December 31, 2008 or 2007. We recorded income tax expense of $3.5
million in 2008. However, due to the tax net operating loss carryforwards, the
tax credit carryforwards and stock option compensation deductions, we do not
expect to have a significant cash payment of income taxes until
2010.
Liquidity
and Capital Resources
We
generate cash from the collections we receive related to licensing our products
and from annual license renewals, maintenance and support and other services
revenues. During 2008, we also received $879,000 in cash from
employees exercising stock options. We use cash primarily for paying our
employees (including salaries, commissions and benefits), leasing office space,
paying travel expenses and marketing activities, paying vendors for hardware,
other services and supplies and purchasing property and equipment and, during
the third and fourth quarters of 2008, repurchasing $10.0 million of our common
stock. We continue to be debt free.
We
determine liquidity by combining cash and cash equivalents and short-term
investments as shown in the table below. Based on our recent performance and
current expectations, we believe that our current liquidity position, when
combined with our anticipated cash flows from operations, will be sufficient to
satisfy our working capital needs and current or expected obligations associated
with our operations over the next 12 months. Our future requirements will depend
on many factors, including cash flows from operations, territory expansion and
product development decisions and potential acquisitions. If our liquidity is
not sufficient to cover our needs, we may be forced to raise additional
capital, either through the capital markets or debt financings, and may not be
able to do so on favorable terms or at all.
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Cash
and cash equivalents
|
|
$
|
34,705
|
|
|
$
|
29,270
|
|
Short-term
investments
|
|
|
10,805
|
|
|
|
17,057
|
|
Total
liquidity
|
|
$
|
45,510
|
|
|
$
|
46,327
|
|
On
October 17, 2007, October 23, 2007, and October 26, 2007, we filed separately
with the SEC the first, second and third amendments, respectively, to the
registration statement on Form S-3 utilizing the “shelf” registration process,
which was originally filed on October 19, 2006. This registration statement, as
amended, was declared effective by the SEC on October 31, 2007 and will allow us
to offer and sell up to 3,000,000 shares of our common stock from time to time
in one or more transactions. In addition, under this shelf registration
statement, as amended, Dr. Donald E. Brown, our Chairman of the Board, President
and CEO, registered 1,000,000 shares of our common stock that he owns for sale
from time to time. Although the shelf registration statement, as amended, will
permit us to offer and sell up to 3,000,000 shares of our common stock, doing so
remains at the discretion of our Board of Directors, and there is no assurance
that we would be able to complete any such offering of our common
stock.
The
following table shows cash flows from operating activities, investing activities
and financing activities for the stated periods:
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($
in thousands)
|
|
Beginning
cash and cash equivalents
|
|
$
|
29,359
|
|
|
$
|
13,531
|
|
|
$
|
11,551
|
|
Cash
provided by operating activities
|
|
|
14,586
|
|
|
|
20,154
|
|
|
|
10,583
|
|
Cash
used in investing activities
|
|
|
(568
|
)
|
|
|
(8,085
|
)
|
|
|
(13,159
|
)
|
Cash
provided by (used in) financing activities
|
|
|
(8,672
|
)
|
|
|
3,759
|
|
|
|
4,556
|
|
Ending
cash and cash equivalents
|
|
$
|
34,705
|
|
|
$
|
29,359
|
|
|
$
|
13,531
|
|
Our
operating activities resulted in net cash provided of $14.6 million, $20.2
million and $10.6 million in 2008, 2007 and 2006, respectively. The net inflows
of cash were the result of net earnings, our increase in deferred services
revenues, which reflects support renewals, and deferred income taxes, offset in
part by deferred product revenues.
Depreciation was $3.7
million, $2.7 million and $1.8 million in 2008, 2007 and 2006, respectively.
Stock-based compensation expense related to stock options was $3.0 million, $3.1
million and $2.1 million in 2008, 2007 and 2006, respectively. Total deferred
revenues increased in 2008, 2007 and 2006 primarily due to an increase in
deferred services revenues, principally related to support renewals, as our
customer base continues to expand.
Our
investing activities resulted in net cash used of $568,000, $8.1 million and
$13.2 million in 2008, 2007 and 2006, respectively. The amount that we report as
cash and cash equivalents or as short-term investments fluctuates depending on
investing decisions in each period. Purchases of short-term investments are
reported as a use of cash and the related receipt of proceeds upon maturity of
the investment is reported as a source of cash. Our net purchases of
available-for-sale investments in 2008, 2007 and 2006 were $6.3 million, $3.1
million and $10.1 million, respectively. We purchased property and equipment
totaling $6.8 million, $4.1 million and $3.3 million in 2008, 2007 and 2006,
respectively. These purchases related mainly to a major expansion of our world
headquarters during 2008 as well as expansions of other offices domestically and
internationally. The purchases also included computer hardware and leasehold
improvements for our world headquarters and new regional headquarters offices.
We anticipate that our purchases of property and equipment will be significantly
less in 2009.
Net cash
used in financing activities was $8.7 million in 2008 and net cash provided by
financing activities was $3.8 million and $4.6 million in 2007 and 2006,
respectively. The decrease in cash provided by financing activities in 2008 was
due to the repurchases of our common stock totaling $10.0 million and a decrease
in proceeds from stock options exercised during the year. The increase in cash
provided in 2007 and 2006 was mainly due to proceeds of $3.5 million and $4.4
million from stock options that were exercised during the respective
periods.
As set
forth in the following Contractual Obligations table, we have operating lease
obligations and purchase obligations that are not recorded in our consolidated
financial statements. The operating lease obligations represent future payments
on leases classified as operating leases and disclosed pursuant to SFAS No. 13,
Accounting for Leases
.
These obligations include the amended operating lease of our world headquarters
and the leases of several other buildings for our offices in the United States
as well as eight other countries. See Note 8 of Notes to Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K for further
discussion on our lease commitments.
In
addition, we have signed obligations for activities after December 31,
2008, such as the global user forum and partner conferences, which are
included in our purchase obligations. Finally, other obligations include amounts
regarding our tax liabilities and uncertain tax positions related to FIN 48. See
Note 11 of Notes to Consolidated Financial Statements in Item 8 of this Annual
Report on Form 10-K for further discussion on our uncertain tax positions. The
amounts set forth in the following table are as of December 31, 2008 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
$
|
42,408
|
|
|
$
|
5,131
|
|
|
$
|
9,814
|
|
|
$
|
8,636
|
|
|
$
|
18,827
|
|
Purchase
obligations
|
|
|
6,107
|
|
|
|
2,247
|
|
|
|
3,860
|
|
|
|
--
|
|
|
|
--
|
|
Other
obligations reflected on the consolidated balance sheet
under GAAP
|
|
|
328
|
|
|
|
25
|
|
|
|
--
|
|
|
|
303
|
|
|
|
--
|
|
Total
|
|
$
|
48,843
|
|
|
$
|
7,403
|
|
|
$
|
13,674
|
|
|
$
|
8,939
|
|
|
$
|
18,827
|
|
In
addition to the amounts set forth in the table above, we have contractual
obligations with certain third party technology companies to pay royalties to
them based upon future licensing of their products and patented
technologies. We also have a purchase obligation with a third party
in which the known payments due are currently classified above in the one to
three year category. However, after three years the payments due will be based
on a percentage of our revenues, and are therefore unknown. We cannot estimate
what these future amounts will be; however, we expect them to increase as our
revenues continue to grow.
Off-Balance
Sheet Arrangements
Except as
set forth above in the Contractual Obligations table, we have no off-balance
sheet arrangements that have or are reasonably likely to have a current or
future impact on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources as of December 31, 2008.
We
provide indemnifications of varying scope and amount to certain customers
against claims of intellectual property infringement made by third parties
arising from the use of our products.
Our
direct software license agreements, in accordance with FASB Interpretation No.
45,
Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others - an interpretation of FASB Statement No. 5, No. 57 and
No. 107
, include certain provisions for indemnifying customers, in
material compliance with their license agreement, against liabilities if our
software products infringe upon a third party's intellectual property rights,
over the life of the agreement. There is no maximum potential amount of future
payments set under the guarantee. However, we may at any time and at our option
and expense: (i) procure the right of the customer to continue to use our
software that may infringe a third party’s rights; (ii) modify our software so
as to avoid infringement; or (iii) require the customer to return our software
and refund the customer the fee actually paid by the customer for our software
less depreciation based on a five-year straight-line depreciation
schedule. The customer’s failure to provide timely notice or reasonable
assistance will relieve us of our obligations under this indemnification to the
extent that we have been actually and materially prejudiced by such failure. To
date, we have not incurred, nor do we expect to incur, any material related
costs and therefore, have not reserved for such liabilities.
Our
direct software license agreements also include a warranty that our software
products will substantially conform to our software user documentation for a
period of one year, provided the customer is in material compliance with the
software license agreement. To date, we have not incurred any material costs
associated with these product warranties, and as such, we have not reserved for
any such warranty liabilities in our operating results.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
We
develop software application products in the United States and license our
products worldwide. As a result, our financial results could be affected by
market risks, including changes in foreign currency exchange rates, interest
rates or weak economic conditions in certain markets. Market risk is the
potential of loss arising from unfavorable changes in market rates and
prices.
Foreign
Currency Exchange Rates
We
transact business in certain foreign currencies including the British pound and
the Euro. However, as a majority of the orders we receive are denominated in
United States dollars, a strengthening of the dollar could make our products
more expensive and less competitive in foreign markets. We have not historically
used foreign currency options or forward contracts to hedge our currency
exposures because of variability in the timing of cash flows associated with our
larger contracts. We did not have any such hedge instruments in place at
December 31, 2008. Rather, we attempt to mitigate our foreign currency risk by
generally transacting business and paying salaries in the functional currency of
each of the major countries in which we do business, thus creating natural
hedges. Additionally, as our business matures in foreign markets, we may offer
our products and services in certain other local currencies. If this were to
occur, foreign currency fluctuations would have a greater impact on us and may
have an adverse effect on our results of operations. Historically, our gains or
losses on foreign currency exchange translations have been immaterial to our
consolidated financial statements. For the year ended December 31, 2008,
approximately 10% of our revenues and 14% of our expenses were denominated in a
foreign currency, resulting in a loss of $193,000 from foreign currency exchange
translations.
Interest
Rate Risk
We invest
cash balances in excess of operating requirements in securities that have
maturities of one year or less. The carrying value of these securities
approximates market value, and there is no long-term interest rate risk
associated with these investments.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Interactive
Intelligence, Inc.:
We have
audited the accompanying consolidated balance sheets of Interactive
Intelligence, Inc. (the Company) and subsidiaries as of December 31, 2008
and 2007, and the related consolidated statements of income, stockholders’
equity, and cash flows for each of the years in the three-year period ended
December 31, 2008. In connection with our audits of the consolidated
financial statements, we have also audited the consolidated financial statement
Schedule II – Valuation and Qualifying Accounts. We also have audited
the Company’s internal control over financial reporting as of December 31,
2008, based on criteria established in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedule and an opinion on
the Company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Interactive Intelligence,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related consolidated financial
statement Schedule II – Valuation and Qualifying Accounts, when considered in
relation to the consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein. Also in our
opinion, Interactive Intelligence, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2008, based on criteria established in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
As
discussed in Note 11 to the consolidated financial statements, effective January
1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
,
an
interpretation of FASB Statement No. 109.
/s/ KPMG
LLP
Indianapolis,
Indiana
March 9,
2009
Interactive
Intelligence, Inc.
Consolidated
Balance Sheets
As
of December 31, 2008 and 2007
(in
thousands, except share and per share amounts)
|
|
December
31,
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
34,705
|
|
|
$
|
29,359
|
|
Short-term
investments
|
|
|
10,805
|
|
|
|
16,968
|
|
Accounts
receivable, net of allowance for doubtful accounts of $1,004 in 2008 and
$1,076 in 2007
|
|
|
27,533
|
|
|
|
27,527
|
|
Deferred
tax assets, net
|
|
|
6,017
|
|
|
|
5,833
|
|
Prepaid
expenses
|
|
|
5,507
|
|
|
|
5,501
|
|
Other
current assets
|
|
|
1,995
|
|
|
|
1,414
|
|
Total
current assets
|
|
|
86,562
|
|
|
|
86,602
|
|
Property
and equipment, net
|
|
|
10,762
|
|
|
|
6,932
|
|
Deferred
tax assets, net
|
|
|
5,136
|
|
|
|
7,520
|
|
Other
assets, net
|
|
|
2,723
|
|
|
|
2,384
|
|
Total
assets
|
|
$
|
105,183
|
|
|
$
|
103,438
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
11,361
|
|
|
$
|
9,594
|
|
Accrued
compensation and related expenses
|
|
|
3,486
|
|
|
|
4,381
|
|
Deferred
product revenues
|
|
|
4,754
|
|
|
|
6,843
|
|
Deferred
services revenues
|
|
|
31,457
|
|
|
|
28,711
|
|
Total
current liabilities
|
|
|
51,058
|
|
|
|
49,529
|
|
Noncurrent
deferred services revenue
|
|
$
|
6,878
|
|
|
$
|
5,290
|
|
Total
liabilities
|
|
|
57,936
|
|
|
|
54,819
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value: 10,000,000 shares authorized; no shares issued and
outstanding
|
|
|
--
|
|
|
|
--
|
|
Common
stock, $0.01 par value; 100,000,000 shares authorized; 16,928,089 issued
and outstanding at December 31, 2008, 17,901,084 issued and outstanding at
December 31, 2007
|
|
|
169
|
|
|
|
179
|
|
Treasury
stock, at cost: 1,164,776 shares as of December 31, 2008, 0
shares as of December 31, 2007
|
|
|
(9,714
|
)
|
|
|
--
|
|
Additional
paid-in capital
|
|
|
83,604
|
|
|
|
79,405
|
|
Accumulated
deficit
|
|
|
(26,812
|
)
|
|
|
(30,965
|
)
|
Total
shareholders’ equity
|
|
|
47,247
|
|
|
|
48,619
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
105,183
|
|
|
$
|
103,438
|
|
See
Accompanying Notes to Consolidated Financial Statements
Interactive
Intelligence, Inc.
Consolidated
Statements of Income
For
the Years Ended December 31, 2008, 2007 and 2006
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
60,256
|
|
|
$
|
57,673
|
|
|
$
|
43,021
|
|
Services
|
|
|
61,150
|
|
|
|
52,228
|
|
|
|
40,023
|
|
Total
revenues
|
|
|
121,406
|
|
|
|
109,901
|
|
|
|
83,044
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
15,446
|
|
|
|
14,159
|
|
|
|
9,318
|
|
Services
|
|
|
23,692
|
|
|
|
21,094
|
|
|
|
14,676
|
|
Total
cost of revenues
|
|
|
39,138
|
|
|
|
35,253
|
|
|
|
23,994
|
|
Gross
profit
|
|
|
82,268
|
|
|
|
74,648
|
|
|
|
59,050
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
39,295
|
|
|
|
36,368
|
|
|
|
29,503
|
|
Research
and development
|
|
|
21,539
|
|
|
|
17,040
|
|
|
|
13,578
|
|
General
and administrative
|
|
|
14,678
|
|
|
|
13,246
|
|
|
|
10,992
|
|
Total
operating expenses
|
|
|
75,512
|
|
|
|
66,654
|
|
|
|
54,073
|
|
Operating
income
|
|
|
6,756
|
|
|
|
7,994
|
|
|
|
4,977
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
1,288
|
|
|
|
1,721
|
|
|
|
694
|
|
Other
expense, net
|
|
|
(242
|
)
|
|
|
(96
|
)
|
|
|
(94
|
)
|
Total
other income, net
|
|
|
1,046
|
|
|
|
1,625
|
|
|
|
600
|
|
Income
before income taxes
|
|
|
7,802
|
|
|
|
9,619
|
|
|
|
5,577
|
|
Income
tax benefit (expense)
|
|
|
(3,464
|
)
|
|
|
7,837
|
|
|
|
4,671
|
|
Net
income
|
|
$
|
4,338
|
|
|
$
|
17,456
|
|
|
$
|
10,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
1.00
|
|
|
$
|
0.62
|
|
Diluted
|
|
|
0.23
|
|
|
|
0.91
|
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used to compute net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,746
|
|
|
|
17,481
|
|
|
|
16,553
|
|
Diluted
|
|
|
18,740
|
|
|
|
19,251
|
|
|
|
18,383
|
|
See
Accompanying Notes to Consolidated Financial Statements
Interactive
Intelligence, Inc.
Consolidated
Statements of Shareholders’ Equity
For
the Years Ended December 31, 2008, 2007 and 2006
(in
thousands)
|
|
|
|
|
Additional
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
January 1, 2006
|
|
|
16,121
|
|
|
$
|
161
|
|
|
$
|
65,826
|
|
|
$
|
--
|
|
|
$
|
(58,669
|
)
|
|
$
|
7,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
of common stock
|
|
|
24
|
|
|
|
--
|
|
|
|
177
|
|
|
|
--
|
|
|
|
--
|
|
|
|
177
|
|
Exercise
of stock options
|
|
|
994
|
|
|
|
10
|
|
|
|
4,369
|
|
|
|
--
|
|
|
|
--
|
|
|
|
4,379
|
|
Stock-based
compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
2,156
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
10,248
|
|
|
|
10,248
|
|
Total
comprehensive income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
10,248
|
|
|
|
10,248
|
|
Balances,
December 31, 2006
|
|
|
17,139
|
|
|
|
171
|
|
|
|
72,528
|
|
|
|
--
|
|
|
|
(48,421
|
)
|
|
|
24,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
of common stock
|
|
|
12
|
|
|
|
--
|
|
|
|
215
|
|
|
|
--
|
|
|
|
--
|
|
|
|
215
|
|
Exercise
of stock options
|
|
|
750
|
|
|
|
8
|
|
|
|
3,536
|
|
|
|
--
|
|
|
|
--
|
|
|
|
3,544
|
|
Stock-based
compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
3,126
|
|
|
|
--
|
|
|
|
--
|
|
|
|
3,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
17,456
|
|
|
|
17,456
|
|
Total
comprehensive income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
17.456
|
|
|
|
17,456
|
|
Balances,
December 31, 2007
|
|
|
17,901
|
|
|
|
179
|
|
|
|
79,405
|
|
|
|
--
|
|
|
|
(30,965
|
)
|
|
|
48,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances
of common stock
|
|
|
24
|
|
|
|
--
|
|
|
|
284
|
|
|
|
--
|
|
|
|
--
|
|
|
|
284
|
|
Exercise
of stock options
|
|
|
207
|
|
|
|
2
|
|
|
|
776
|
|
|
|
286
|
|
|
|
(185
|
)
|
|
|
879
|
|
Stock-based
compensation
|
|
|
--
|
|
|
|
--
|
|
|
|
2,966
|
|
|
|
--
|
|
|
|
--
|
|
|
|
2,966
|
|
Stock
option income tax benefits
|
|
|
--
|
|
|
|
--
|
|
|
|
177
|
|
|
|
--
|
|
|
|
--
|
|
|
|
177
|
|
Purchase
of treasury stock
|
|
|
(1,204
|
)
|
|
|
(12
|
)
|
|
|
--
|
|
|
|
(10,000
|
)
|
|
|
--
|
|
|
|
(10,012
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
4,338
|
|
|
|
4,338
|
|
Net
unrealized investment loss
|
|
|
--
|
|
|
|
--
|
|
|
|
(4
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
(4
|
)
|
Total
comprehensive income
|
|
|
--
|
|
|
|
--
|
|
|
|
(4
|
)
|
|
|
--
|
|
|
|
4,338
|
|
|
|
4,334
|
|
Balances,
December 31, 2008
|
|
|
16,928
|
|
|
$
|
169
|
|
|
$
|
83,604
|
|
|
$
|
(9,714
|
)
|
|
$
|
(26,812
|
)
|
|
$
|
47,247
|
|
See
Accompanying Notes to Consolidated Financial Statements
Interactive
Intelligence, Inc.
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2008, 2007 and 2006
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,338
|
|
|
$
|
17,456
|
|
|
$
|
10,248
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,659
|
|
|
|
2,659
|
|
|
|
1,839
|
|
Stock-based
compensation expense
|
|
|
2,966
|
|
|
|
3,126
|
|
|
|
2,156
|
|
Deferred
income tax
|
|
|
2,200
|
|
|
|
(8,353
|
)
|
|
|
(5,000
|
)
|
Accretion
of investment income
|
|
|
(109
|
)
|
|
|
(447
|
)
|
|
|
(119
|
)
|
Excess
tax benefits from stock-based payment arrangements
|
|
|
(177
|
)
|
|
|
--
|
|
|
|
--
|
|
Loss
on disposal of property and equipment
|
|
|
--
|
|
|
|
--
|
|
|
|
4
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(6
|
)
|
|
|
(6,157
|
)
|
|
|
(6,443
|
)
|
Prepaid
expenses
|
|
|
(6
|
)
|
|
|
(725
|
)
|
|
|
(2,298
|
)
|
Other
current assets
|
|
|
(581
|
)
|
|
|
404
|
|
|
|
(1,029
|
)
|
Other
assets
|
|
|
(339
|
)
|
|
|
(82
|
)
|
|
|
(71
|
)
|
Accounts
payable and accrued liabilities
|
|
|
1,291
|
|
|
|
1,709
|
|
|
|
1,209
|
|
Accrued
compensation and related expenses
|
|
|
(895
|
)
|
|
|
556
|
|
|
|
1,323
|
|
Deferred
product revenues
|
|
|
(1,788
|
)
|
|
|
933
|
|
|
|
715
|
|
Deferred
services revenues
|
|
|
4,033
|
|
|
|
9,075
|
|
|
|
8,049
|
|
Net
cash provided by operating activities
|
|
|
14,586
|
|
|
|
20,154
|
|
|
|
10,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of available-for-sale investments
|
|
|
24,150
|
|
|
|
21,615
|
|
|
|
6,989
|
|
Purchases
of available-for-sale investments
|
|
|
(17,890
|
)
|
|
|
(24,670
|
)
|
|
|
(16,849
|
)
|
Purchases
of property and equipment
|
|
|
(6,836
|
)
|
|
|
(4,086
|
)
|
|
|
(3,299
|
)
|
Acquisition
of professional services division
|
|
|
--
|
|
|
|
(1,033
|
)
|
|
|
--
|
|
Unrealized
gain on investment
|
|
|
8
|
|
|
|
89
|
|
|
|
--
|
|
Net
cash used in investing activities
|
|
|
(568
|
)
|
|
|
(8,085
|
)
|
|
|
(13,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from stock options exercised
|
|
|
879
|
|
|
|
3,544
|
|
|
|
4,379
|
|
Proceeds
from issuance of common stock
|
|
|
284
|
|
|
|
215
|
|
|
|
177
|
|
Excess
tax benefits from stock-based payment arrangements
|
|
|
177
|
|
|
|
--
|
|
|
|
--
|
|
Repurchase
of treasury stock
|
|
|
(10,012
|
)
|
|
|
--
|
|
|
|
--
|
|
Net
cash provided by (used in) financing activities
|
|
|
(8,672
|
)
|
|
|
3,759
|
|
|
|
4,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
5,346
|
|
|
|
15,828
|
|
|
|
1,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
29,359
|
|
|
|
13,531
|
|
|
|
11,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
34,705
|
|
|
$
|
29,359
|
|
|
$
|
13,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
--
|
|
|
$
|
8
|
|
|
$
|
49
|
|
Income
taxes
|
|
|
431
|
|
|
|
154
|
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
non-cash item:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment payable at end of year
|
|
$
|
653
|
|
|
$
|
--
|
|
|
$
|
--
|
|
See
Accompanying Notes to Consolidated Financial Statements
Interactive
Intelligence, Inc.
Notes
to Consolidated Financial Statements
December
31, 2008, 2007 and 2006
Interactive
Intelligence, Inc. (the “Company”)
is a provider of software
application suites for Voice over Internet Protocol (“VoIP”) business
communications and is increasingly leveraging its position in the worldwide
contact center market to offer its solutions to enterprises. In addition to the
contact center sector, businesses, as well as organizations that employ remote
and mobile workers, utilize the
solutions from the
Company in industries including, but not limited to, teleservices, financial
services (banks, credit unions), insurance, higher education (universities),
healthcare, retail, technology, government and business services. For
enterprises that rely on the Microsoft
®
Corporation (“Microsoft”) platform, the Company offers a pre-integrated
all-software Internet Protocol Private Branch Exchange (“IP PBX”) phone and
communications system that enables straightforward integration to Microsoft
applications for data management. In all, the Company’s innovative software
products and services are designed expressly for multichannel contact
management, business communications and messaging using the Session Initiation
Protocol (“SIP”) global communications standard that supports VoIP. To
supplement the Company’s software solutions, its product lineup includes a
full-featured media server, media gateways and SIP proxy for IP-based
communications networks and infrastructures. The Company’s customers can deploy
its solutions as an on-premise system at the Company’s site or as a
Communications as a Service (“CaaS”) model offered via an off-site
Interactive Intelligence CaaS data center.
The
Company’s application-based solutions are integrated on a single software
platform. Overall, the Company’s platform has been developed to deliver
security, broaden integration to business systems and end-user devices, enhance
mobility for today’s workforce, scale to thousands of users, and more wholly
satisfy diverse business communications and interaction management needs in
markets for:
|
·
|
Enterprise
IP Telephony
|
The
Company commenced principal operations in 1994 and revenues were first
recognized in 1997. Since then, the Company has established wholly-owned
subsidiaries in Australia, France, the Netherlands, Germany, United Kingdom, the
United Arab Emirates, Canada and Korea. The Company’s world headquarters are
located in Indianapolis, Indiana with regional offices throughout the United
States and eight other countries. The Company markets its software applications
in the Americas, Europe, the Middle East and Africa (“EMEA”), and Asia/Pacific
(“APAC”).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries after elimination of all significant
intercompany accounts and transactions.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Despite management’s best effort to
establish good faith estimates and assumptions, actual results could differ from
these estimates.
Revenue
Recognition
The
Company generates product revenues from licensing the right to use its software
applications and in certain instances providing hardware as a component of its
solution, and generates services revenues primarily from annual support fees,
annual renewal fees, professional services and educational
services.
Product
Revenues
The
Company’s license agreements are either perpetual or annually
renewable. For any revenues to be recognized from a license
agreement, the following criteria must be met:
|
·
|
Persuasive
evidence of an arrangement exists;
|
|
·
|
The
fee is fixed or determinable;
|
|
·
|
Collection
is probable; and
|
For a
perpetual license agreement, upon meeting the revenue recognition criteria
above, the Company immediately recognizes as product revenues the amount of
initial license fees if sufficient vendor specific objective evidence of fair
value (“VSOE”) exists to support allocating a portion of the total fee to the
undelivered elements of the arrangement. If sufficient VSOE of the undelivered
elements does not exist, the Company recognizes the initial license fee as
product revenues ratably over the initial term of the support agreement once
support is the only undelivered element. The support period is generally 12
months but may be up to 18 months for initial orders because support begins when
the licenses are downloaded, when support commences, or no more than six months
following the contract date. The Company determines VSOE of support in perpetual
agreements based on substantive renewal rates the customer must pay to renew the
support. The VSOE of other services is based on amounts charged when the
services are sold in stand-alone sales.
For an
annually renewable license agreement, upon meeting the revenue recognition
criteria above, the Company recognizes a majority of the license fees under
these agreements as product revenues ratably over the initial license period,
which is generally 12 months, and the remainder of the license fees are
recognized as services revenues over the same time period.
The
Company recognizes revenues related to any hardware sales when the hardware is
delivered and all other revenue recognition criteria are met.
Services
Revenues
Services
revenues are primarily recognized for renewal fees and support related to
annually renewable license agreements and support fees for perpetual license
agreements. For annually renewable agreements, the allocation of the order
between product revenues and services revenues is based on an average renewal
rate for the Company’s time based contracts. The Company applies the allocation
of product revenues and services revenues consistently to all annually renewable
agreements. Under annually renewable license agreements, after the initial
license period, the Company’s customers may renew their license agreement for an
additional period, typically 12 months, by paying a renewal fee. The revenue
from annual renewal fees is classified under services revenue and the revenue is
recognized ratably over the contract period. Under perpetual license agreements,
the Company recognizes annual support fees as services revenues ratably over the
post-contract support period, which is typically 12 months, but may extend up to
three years if prepaid.
The
Company also generates revenues from other services that it provides to its
customers and partners. These additional revenues include fees for professional
services, educational services and CaaS. Revenues from professional services,
which include implementing the Company’s products for a customer or partner,
educational services, which consist of training courses for customers and
partners, and CaaS, which allows customers to deploy our solutions via our
off-site data center, are recognized as the related services are
performed.
Accounts
Receivable and Allowance for Doubtful Accounts Receivable
Trade
accounts receivable are recorded at the invoiced amount. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable. The Company
evaluates bad debt expense based on a percentage of revenue reported each
period. The Company then reviews the allowance for doubtful accounts
each reporting period based on a detailed analysis of its accounts receivable.
In the analysis, the Company primarily considers the age of the customer’s or
partner’s receivable and also considers the creditworthiness of the customer or
partner, the economic conditions of the customer’s or partner’s industry, and
general economic conditions, among other factors. If any of these factors
change, the Company may also change its original estimates, which could impact
the level of its future allowance for doubtful accounts.
If
payment is not made timely, the Company will contact the customer or partner to
try to obtain the payment. If this is not successful, the Company will institute
other collection practices such as generating collection letters, involving
sales personnel and ultimately terminating the customer’s or partner’s access to
future upgrades, licenses and technical support. Once all collection efforts are
exhausted, the receivable is written off against the allowance for doubtful
accounts.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months
or less from date of purchase to be cash equivalents. Cash and cash equivalents
consist primarily of cash on deposit with financial institutions and high
quality money market instruments.
Investments
The
Company’s investments, which consist primarily of taxable corporate and
government debt securities, are classified as available-for-sale. Such
investments are recorded at fair value and unrealized gains and losses are
excluded from earnings and recorded as a separate component of equity until
realized. Premiums or discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Realized gains and losses from the sale of available-for-sale securities are
determined on a specific identification basis. A decline in the market value of
securities below cost judged to be other than temporary results in a reduction
in the carrying amount to fair value. The impairment is charged to earnings and
a new cost basis for the security is established. Interest and dividends on all
securities are included in interest income when earned.
Financial
Instruments
The fair
value of financial instruments, including cash and cash equivalents, short-term
investments and accounts receivable, approximate their carrying
values.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the lesser of the
term of the related lease or the estimated useful life. The Company leases its
office space under operating lease agreements. In accordance with the Financial
Accounting Standards Board (the “FASB”) Statement of Financial Accounting
Standards (“SFAS”) No. 13 ("SFAS 13"),
Accounting for Leases,
for
operating leases with escalating rent payments, the Company records these rent
payments on a straight-line basis over the life of the lease.
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets,
certain of the Company’s assets, such as
property and equipment and intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized for the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
Goodwill
and Other Intangible Assets
As a
result of the Company’s April 2007 acquisition (discussed in further detail in
Note 15) and in accordance with the provisions of SFAS No. 142,
Goodwill and Other Intangible
Assets
(“SFAS 142”), the Company reviews its goodwill and intangible
assets with indefinite lives for impairment at least annually. Identifiable
intangible assets such as intellectual property trademarks and patents are
amortized over a 10 to 15 year period using the straight-line method. SFAS 142
requires the Company to perform the goodwill impairment test annually or when a
change in facts and circumstances indicates that the fair value of an asset may
be below its carrying amount. The Company performed a goodwill impairment test
as of year-end and determined no indication of impairment existed.
Advertising
The
Company expenses all advertising costs as incurred. Advertising expense for
2008, 2007 and 2006 was $1,258,000, $733,000 and $387,000,
respectively.
Research
and Development
Research
and development expenditures are generally expensed as incurred. SFAS No. 86,
Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed
, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company’s product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant. Through December 31, 2008, all research and development costs
have been expensed.
Stock-Based
Compensation
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment
(“SFAS
123R”), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors under the
Company’s stock option plans, based on fair values. The Company adopted SFAS
123R on January 1, 2006. In addition, in December 2007, the SEC released Staff
Accounting Bulletin ("SAB") No. 110,
Share-Based Payment
(“SAB
110”), an amendment of SAB No. 107 (“SAB 107”), relating to SFAS 123R. The
Company has utilized SAB 110 in its application of SFAS 123R.
With the
adoption of SFAS 123R, the Company continues to use the Black-Scholes
option-pricing model as its method of valuation for share-based payment awards.
The Company’s determination of fair value of share-based payment awards on the
date of grant using the Black-Scholes option-pricing model is affected by the
Company’s stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to, the Company’s expected stock price volatility over the term of the awards
and an expected risk-free rate of return. If factors change and the Company uses
different assumptions for estimating stock-based compensation expense associated
with awards granted in future periods, stock-based compensation expense may
differ materially in the future from that recorded in the current
period.
Stock-based
compensation expense for employee and director stock options recognized under
SFAS 123R for the years ended December 31, 2008, 2007 and 2006 was $3.0 million,
$3.1 million and $2.1 million, respectively. See Note 6 for further information
on the Company’s stock-based compensation.
Fair
Value Measurements
SFAS No.
157,
Fair Value Measurements
(“SFAS 157”) defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. SFAS 157 also
explains that when relevant and observable market information is not available
to determine the measurement of an asset’s fair value, management must use their
judgment about the assumptions a market participant would use in pricing the
asset in a current sale transaction.
Appropriate
risk judgments that a market participant would use must also be taken into
account when determining the fair value. SFAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard
describes the following three levels of inputs that may be used to measure fair
value:
·
|
Level
1 - Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
|
·
|
Level
2 - Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
|
·
|
Level
3 - Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
|
The
Company’s assets that are measured at fair value on a recurring basis are
classified within Level 1 or Level 2 of the fair value hierarchy. The
types of instruments valued based on quoted market prices in active markets
include most money market securities and equity investments. Such
instruments are generally classified within Level 1 of the fair value
hierarchy. The Company invests in money market funds that are traded
daily and does not adjust the quoted price for such instruments. The
types of instruments valued based on quoted prices in less active markets,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency include the Company’s corporate notes, commercial
paper, asset-backed securities and certificates of deposits. Such
instruments are generally classified within Level 2 of the fair value
hierarchy. The Company uses consensus pricing, which is based on
multiple pricing sources, to value its fixed income investments.
The
following table sets forth a summary of the Company’s financial assets,
classified as cash and cash equivalents and short-term investments on its
condensed consolidated balance sheet, measured at fair value on a recurring
basis as of December 31, 2008 (in thousands):
|
|
Fair
Value Measurements at
|
|
|
|
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Cash
& cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
Market Funds
|
|
$
|
18,321
|
|
|
$
|
18,321
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Notes
|
|
$
|
5,707
|
|
|
$
|
--
|
|
|
$
|
5,707
|
|
|
$
|
--
|
|
Commercial
Paper
|
|
|
3,094
|
|
|
|
--
|
|
|
|
3,094
|
|
|
|
--
|
|
Certificates
of Deposits
|
|
|
2,004
|
|
|
|
--
|
|
|
|
2,004
|
|
|
|
--
|
|
Total
|
|
$
|
10,805
|
|
|
$
|
--
|
|
|
$
|
10,805
|
|
|
$
|
--
|
|
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
SFAS No.
109,
Accounting for Income
Taxes
(“SFAS 109”), establishes financial accounting and reporting
standards for the effect of income taxes. The Company is subject to income taxes
in both the United States and numerous foreign jurisdictions. Significant
judgment is required in evaluating the Company’s tax positions and determining
its provision for income taxes. The objectives of accounting for income taxes
are to recognize the amount of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in an entity’s financial statements or tax
returns. Variations in the actual outcome of these future tax consequences could
materially impact the Company’s financial position, results of operations, or
cash flows.
In
assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon generation of future taxable income during the periods in which
temporary differences such as loss carryforwards and tax credits become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment and ensuring that the deferred tax
asset valuation allowance is adjusted as appropriate.
As of
December 31, 2008, the Company had $3.0 million of tax net operating loss
carryforwards and $4.7 million in tax credit carryforwards recorded as deferred
tax assets. During the years ended December 31, 2008 and 2007, the Company
recorded a tax expense of $3.5 million and a tax benefit of $7.8 million. There
was no valuation allowance at December 31, 2008. Management will continue to
evaluate the valuation of deferred tax assets in accordance with the
requirements of SFAS 109. See Note 11 for further information on the Company’s
income taxes.
Sales tax
amounts collected from customers is recorded on a net basis.
Net
Income per Share
Basic net
income per share is calculated based on the weighted-average number of common
shares outstanding in accordance with SFAS No. 128,
Earnings per Share
. Diluted
net income per share is calculated based on the weighted-average number of
common shares outstanding plus the effect of dilutive potential common shares.
The calculation of diluted net income per share excludes shares underlying stock
options outstanding that would be anti-dilutive.
Potential
common shares are composed of shares of common stock issuable upon the exercise
of stock options. The following table sets forth the calculation of basic and
diluted net income per share (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, as reported (A)
|
|
$
|
4,338
|
|
|
$
|
17,456
|
|
|
$
|
10,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
outstanding shares of common stock (B)
|
|
|
17,746
|
|
|
|
17,481
|
|
|
|
16,553
|
|
Dilutive
effect of stock options
|
|
|
994
|
|
|
|
1,770
|
|
|
|
1,830
|
|
Common
stock and common stock equivalents (C)
|
|
|
18,740
|
|
|
|
19,251
|
|
|
|
18,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(A/B)
|
|
$
|
0.24
|
|
|
$
|
1.00
|
|
|
$
|
0.62
|
|
Diluted
(A/C)
|
|
|
0.23
|
|
|
|
0.91
|
|
|
|
0.56
|
|
Anti-dilutive
shares not included in the diluted per share calculation for 2008, 2007 and 2006
were 1.3 million, 616,000 and 301,000, respectively.
Comprehensive
Income
Comprehensive
income is comprised of net income and other comprehensive income (loss). The
only item of other comprehensive income (loss) that the Company currently
reports is unrealized gains (losses) on marketable securities.
Legal
Proceedings
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines, and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment and/or remediation can be
reasonably estimated. Legal costs incurred in connection with loss contingencies
are expensed as incurred.
Reclassifications
and Adjustments
Certain
reclassifications have been made to prior year amounts to conform to the current
period presentation.
During
the second quarter of 2008, the Company identified an error in the
classification of the unearned premium/discount between cash and cash
equivalents and short-term investments. In the December 31, 2007
balance sheet, $89,000 has been reclassified from cash and cash equivalents to
short-term investments. This reclassification did not have any impact on results
previously reported.
Effective
March 31, 2008, in order to properly classify deferred revenues between
current and noncurrent, the Company reclassified $5.3 million of noncurrent
deferred revenues to a separate line item on the accompanying condensed
consolidated balance sheets. In addition, $582,000 of related prepaid
commissions associated with the Company’s noncurrent deferred revenues have also
been reclassified from the current portion of prepaid expenses and included in
noncurrent other assets, net. This reclassification did not have any impact
on results previously reported.
The
Company’s short-term investments all mature in less than one year and are
considered available for sale. In 2008 and 2007, the Company purchased
short-term investments for $17.9 million and $24.7 million, respectively. As of
December 31, 2008 and 2007, $10.8 million and $17.0 million in short-term
investments were outstanding, respectively, which were recorded at their fair
values. The Company does not invest in subprime assets.
Gross
realized gains and gross realized losses included in interest income, net
totaled less than $10,000 in each of 2008, 2007 and 2006.
Interest
income was $1.3 million, $1.7 million and $744,000 in 2008, 2007 and 2006,
respectively.
4.
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment are summarized as follows as of December 31, 2008 and 2007 (in
thousands):
|
|
|
|
|
|
|
Computer
equipment
|
|
$
|
13,313
|
|
|
$
|
13,747
|
|
Leasehold
improvements
|
|
|
8,173
|
|
|
|
4,529
|
|
Furniture
and fixtures
|
|
|
4,000
|
|
|
|
3,080
|
|
Software
|
|
|
1,404
|
|
|
|
1,327
|
|
Office
equipment
|
|
|
740
|
|
|
|
644
|
|
Trade
show equipment and other
|
|
|
451
|
|
|
|
464
|
|
Total
property and equipment
|
|
|
28,081
|
|
|
|
23,791
|
|
Less
accumulated depreciation
|
|
|
(17,319
|
)
|
|
|
(16,859
|
)
|
Net
property and equipment
|
|
$
|
10,762
|
|
|
$
|
6,932
|
|
Property
and equipment is depreciated over useful lives of 3 to 5 years, except for
leasehold improvements, which are depreciated over the lesser of the term of the
related lease or the estimated useful life, and vary from 3 to 15 years. During
the year ended December 31, 2008, the Company reduced assets and accumulated
depreciation by $3.2 million for fully depreciated computer and software
equipment that was seven years old or older and was no longer in
use.
During
2007 and 2006, the Company had a line of credit, secured by cash and cash
equivalents, with a bank that provided a maximum amount of $3.0 million with
interest to be charged at the bank’s prime rate. Principal on the note was due
on demand and interest was to be remitted monthly. The Company did not make any
borrowings under this line of credit during 2007 and 2006, and there were no
amounts outstanding on the line of credit as of December 31, 2006. This line of
credit expired on October 31, 2007 and was not renewed by the
Company.
6.
STOCK-BASED COMPENSATION
Stock
Option Plans
The
Company’s Stock Option Plans, adopted in 1995, 1999 and 2006, authorize the
Board of Directors or the Compensation Committee, as applicable, to grant
incentive and nonqualified stock options, and, in the case of the 2006 Equity
Incentive Plan, as amended (the “2006 Plan”), stock appreciation rights,
restricted stock, restricted stock units, performance shares, performance units
and other stock-based awards. After adoption of the 2006 Plan by the Company’s
shareholders in May 2006, the Company may no longer make any grants under
previous plans, but any shares subject to awards under the 1999 Stock Option and
Incentive Plan and the Outside Directors Stock Option Plan (collectively, the
“1999 Plans”) that are cancelled are added to shares available under the 2006
Plan. A maximum of 5,850,933 shares are available for delivery under the 2006
Plan, which consists of (i) 2,150,000 shares, plus (ii) 320,000 shares available
for issuance under the 1999 Plans, but not underlying any outstanding stock
options or other awards under the 1999 Plans, plus (iii) up to 3,380,933 shares
subject to outstanding stock options or other awards under the 1999 Plans that
expire, are forfeited or otherwise terminate unexercised on or after May 18,
2006. The number of shares available under the 2006 Plan is subject to
adjustment for certain changes in the Company’s capital structure. The exercise
price of options granted under the 2006 Plan is equal to the closing price of
the Company’s common stock, as reported by The NASDAQ Global Market, on the
business day immediately preceding the date of grant.
Beginning
in 2007, stock options granted by the Company are now categorized into two
types. The first type is performance-based stock options that are
granted in the first quarter of the applicable year and are subject to
cancellation if the specified performance targets, as approved by the Company's
Compensation Committee, are not met. If the applicable performance
targets have been achieved, the options will vest in four equal annual
installments beginning one year after the performance-related year has
ended. The fair value of these stock option grants is determined on
the date of grant and the related compensation expense is recognized over the
requisite service period, including the initial period for which the specified
performance targets must be met.
The
second type of stock options granted by the company is non-performance-based
options that are subject only to time-based vesting. These stock
options vest in four equal annual installments beginning one year after the
grant date. The fair value of these option grants is determined on
the date of grant and the related compensation expense is recognized for the
entire award on a straight-line basis over the vesting period.
Valuation
Assumptions
The
Company estimated the fair value of stock options using the Black-Scholes
valuation model. The fair value of each option grant is estimated on the date of
grant and is amortized on a straight-line basis over the vesting period. The
weighted-average estimated per option value of non-performance-based and
performance-based options under the stock option plans during the year ended
December 31, 2008, 2007 and 2006 was $7.29, $9.56 and $4.31, respectively, using
the following assumptions:
|
|
|
|
Valuation
assumptions for non-performance-based options:
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
--
|
%
|
|
|
--
|
%
|
|
|
--
|
%
|
Expected
volatility
|
|
|
63.21-66.87
|
%
|
|
|
61.18-63.82
|
%
|
|
|
66.40-66.81
|
%
|
Risk-free
interest rate
|
|
|
1.36-3.34
|
%
|
|
|
3.37-5.02
|
%
|
|
|
4.55-5.08
|
%
|
Expected
life of option (in years)
|
|
4.25
years
|
|
|
4.25
years
|
|
|
4.25
years
|
|
|
|
|
|
Valuation
assumptions for performance-based options:
|
|
|
|
|
|
|
|
|
|
Dividend
yield
|
|
|
--
|
%
|
|
|
--
|
%
|
|
|
N/A
|
|
Expected
volatility
|
|
|
63.66
|
%
|
|
|
67.27
|
%
|
|
|
N/A
|
|
Risk-free
interest rate
|
|
|
2.39
|
%
|
|
|
4.48
|
%
|
|
|
N/A
|
|
Expected
life of option (in years)
|
|
4.75
years
|
|
|
4.75
years
|
|
|
|
N/A
|
|
Expected Dividend:
The
Black-Scholes valuation model calls for a single expected dividend yield as an
input. The Company has never declared or paid cash dividends on its common stock
and does not expect to declare or pay any cash dividends in the foreseeable
future.
Expected Volatility:
The
Company’s volatility factor was based exclusively on its historical stock prices
over the most recent period commensurate with the estimated expected life of the
stock options.
Risk-Free Rate:
The Company
bases the risk-free interest rate on the implied yield currently available on
U.S. Treasury zero-coupon issues with an equivalent remaining term commensurate
with the estimated expected life of the stock options.
Expected Term:
The Company’s
expected term represents the period that the Company’s stock options are
expected to be outstanding and was determined using the simplified method
described in SAB 107. SAB 107 permitted the use of the simplified method for
options granted through December 31, 2007. In December 2007, the SEC released
SAB 110, an amendment of SAB 107, which extended the permissibility of the
simplified method for options granted after December 31, 2007. The
Company evaluated SAB 110 and determined that the simplified method is still
appropriate.
Estimated Pre-vesting
Forfeitures:
Beginning January 1, 2006, the Company included an estimate
for forfeitures in calculating stock option expense. When estimating
forfeitures, the Company considers historical termination behavior as well as
any future trends it expects.
For most
options granted through December 31, 2004, the term of each option is ten years
from the date of grant. In 2005, the Company began issuing options with a term
of six years from the date of grant.
If an
incentive stock option is granted to an employee who, at the time the option is
granted, owns stock representing more than 10% percent of the voting power of
all classes of stock of the Company, the exercise price of the option may not be
less than 110% of the market value per share on the date the option is granted
and the term of the option shall be not more than five years from the date of
grant.
The plans
may be terminated by the Company’s Board of Directors at any time.
Expense
Information under SFAS 123R
The
following table summarizes the allocation of stock-based compensation expense
related to stock options under SFAS 123R for the years ended December 31, 2008
and 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense by category:
|
|
|
|
|
|
|
|
|
|
Costs
of services
|
|
$
|
203
|
|
|
$
|
247
|
|
|
$
|
157
|
|
Sales
and marketing
|
|
|
1,094
|
|
|
|
1,305
|
|
|
|
1,023
|
|
Research
and development
|
|
|
833
|
|
|
|
565
|
|
|
|
263
|
|
General
and administrative
|
|
|
836
|
|
|
|
1,009
|
|
|
|
704
|
|
Total
stock-based compensation expense
|
|
$
|
2,966
|
|
|
$
|
3,126
|
|
|
$
|
2,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of stock-based compensation expense on net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.17
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.13
|
)
|
Diluted
|
|
|
(0.16
|
)
|
|
|
(0.16
|
)
|
|
|
(0.12
|
)
|
During
the third quarter of 2008, the Company determined that it was improbable that
the performance targets for certain performance-based awards granted at the
beginning of 2008 would be met. Therefore, during the third quarter of 2008, the
Company stopped accruing stock option expense and reversed stock option expense
recorded in previous periods totaling $432,000. During the fourth quarter of
2008, $64,000 of FAS 123R expense recorded for additional performance-based
options was reversed.
During
the year ended December 31, 2008, the Company granted stock options
for 599,315 shares of common stock, with an estimated total grant-date fair
value of approximately $2.5 million, compared to 665,550 shares of common stock
granted during 2007 with an estimated total grant-date fair value of
approximately $6.4 million. As required by SFAS 123R, management has made an
estimate of expected forfeitures and is recognizing compensation costs only for
those stock awards expected to vest. The Company estimated that the total
stock-based compensation for the awards not expected to vest was $302,000, with
such amounts deducted to arrive at the fair value of $2.2 million for the year
ended December 31, 2008.
Stock
Option Activity
The
following table sets forth a summary of option activity for the years ended
December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
beginning of year
|
|
|
3,232,483
|
|
|
$
|
8.71
|
|
|
|
3,422,741
|
|
|
$
|
6.12
|
|
|
|
3,853,688
|
|
|
$
|
5.44
|
|
Options
granted
|
|
|
599,315
|
|
|
|
14.12
|
|
|
|
665,550
|
|
|
|
17.64
|
|
|
|
638,263
|
|
|
|
7.57
|
|
Options
exercised
|
|
|
(206,958
|
)
|
|
|
4.23
|
|
|
|
(748,856
|
)
|
|
|
4.72
|
|
|
|
(994,978
|
)
|
|
|
4.40
|
|
Options
cancelled
|
|
|
(324,275
|
)
|
|
|
13.12
|
|
|
|
(106,952
|
)
|
|
|
6.47
|
|
|
|
(74,232
|
)
|
|
|
5.94
|
|
Options
outstanding, end of year
|
|
|
3,300,565
|
|
|
|
9.46
|
|
|
|
3,232,483
|
|
|
|
8.71
|
|
|
|
3,422,741
|
|
|
|
6.12
|
|
Option
price range at end of year
|
|
$
|
2.51
- $50.50
|
|
|
|
|
|
|
$
|
2.51
- $50.50
|
|
|
|
|
|
|
$
|
0.13
- $50.50
|
|
|
|
|
|
Weighted-average
fair value of options granted during the year
|
|
$
|
7.30
|
|
|
|
|
|
|
$
|
9.56
|
|
|
|
|
|
|
$
|
4.31
|
|
|
|
|
|
Options
exercisable at end of year
|
|
|
2,086,610
|
|
|
$
|
7.30
|
|
|
|
1,774,957
|
|
|
$
|
6.63
|
|
|
|
1,998,427
|
|
|
$
|
6.26
|
|
Options
available for grant at end of year
|
|
|
1,388,969
|
|
|
|
|
|
|
|
771,409
|
|
|
|
|
|
|
|
1,330,007
|
|
|
|
|
|
The
change in options available for grant at the end of year from 2007 to 2008 is
related to the Company’s shareholders approving an amendment to the 2006 Plan in
May 2008, which increased the number of shares available for grant by 900,000
shares.
The
following table sets forth information regarding the Company’s stock options
outstanding and exercisable at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
Weighted-
Average
Exercise
Price
|
|
$
|
2.51
– $ 4.35
|
|
|
|
495,568
|
|
4.28
years
|
|
$
|
3.45
|
|
|
|
477,706
|
|
|
$
|
3.43
|
|
$
|
4.36
– $ 5.17
|
|
|
|
587,891
|
|
2.86 years
|
|
|
4.92
|
|
|
|
355,818
|
|
|
|
4.86
|
|
$
|
5.19
– $ 5.84
|
|
|
|
482,962
|
|
5.17
years
|
|
|
5.68
|
|
|
|
476,254
|
|
|
|
5.69
|
|
$
|
5.85
– $ 9.26
|
|
|
|
553,421
|
|
3.22
years
|
|
|
7.35
|
|
|
|
445,046
|
|
|
|
7.01
|
|
$
|
9.33
– $14.79
|
|
|
|
589,950
|
|
4.13
years
|
|
|
13.74
|
|
|
|
157,269
|
|
|
|
12.59
|
|
$
|
14.86
– $20.50
|
|
|
|
503,517
|
|
4.52
years
|
|
|
18.45
|
|
|
|
93,259
|
|
|
|
18.97
|
|
$
|
21.00
– $50.50
|
|
|
|
87,256
|
|
1.92
years
|
|
|
27.82
|
|
|
|
81,258
|
|
|
|
28.21
|
|
Total
shares/average price
|
|
|
|
3,300,565
|
|
|
|
|
9.46
|
|
|
|
2,086,610
|
|
|
|
7.30
|
|
The total
intrinsic value of options exercised during the year ended December 31, 2008 was
$1.4 million at the date exercised. The aggregate intrinsic value of options
outstanding as of December 31, 2008 was $2.8 million and the aggregate intrinsic
value of options currently exercisable as of December 31, 2008 was $2.4 million.
The aggregate intrinsic value represents the total intrinsic value, based on the
Company’s closing stock price per share of $6.41 as of December 31, 2008, which
would have been realized by the option holders had all option holders exercised
their options as of that date. The total number of in-the-money options
exercisable as of December 31, 2008 was 1.6 million with a weighted average
exercise price of $4.88.
As of
December 31, 2008, there was $7.6 million of total unrecognized compensation
cost related to non-vested stock options. These costs are expected to be
recognized over the weighted average remaining vesting period of 2.0
years.
2000
Employee Stock Purchase Plan
In May
2000, the Company adopted the 2000 Employee Stock Purchase Plan (the “2000
Purchase Plan”). A total of 500,000 shares of common stock were reserved for
issuance under the 2000 Purchase Plan. On May 19, 2005, the shareholders of the
Company approved an amendment to the 2000 Purchase Plan that increased the
number of shares of common stock available for purchase and issuance to
750,000. The 2000 Purchase Plan permits eligible employees to acquire
shares of the Company’s common stock through periodic payroll deductions of up
to 20% of their total compensation up to a maximum of $1,000 per pay period. The
price at which the Company’s common stock may be purchased is 95% of the fair
market value of the Company’s closing common stock price, as reported on The
NASDAQ Global Market, on the last business day of the quarter. The actual
purchase date is generally on the first business day of the next calendar
quarter. An employee may set aside up to $25,000 to purchase shares annually.
The initial offering period commenced on April 1, 2000. A total of
24,501 shares, 12,027 shares and 24,283 shares were purchased and issued during
2008, 2007 and 2006, respectively, under the 2000 Purchase Plan at an average
price of $12.90, $18.33 and $12.40, respectively. As of December 31, 2008, there
were 197,677 shares available for purchase and issuance under the 2000 Purchase
Plan.
The 2000
Purchase Plan was modified, as of January 1, 2006, to ensure that it was
considered non-compensatory under SFAS 123R. As a result, the Company has not
recognized any stock-based compensation expense related to its 2000 Purchase
Plan.
7.
SHARE
REPURCHASE PROGRAM
On July
28, 2008, the Company’s Board of Directors approved a share repurchase program
to facilitate the repurchase of its common stock over the course of one
year. Under this program, the Company was authorized to purchase
shares of its common stock up to a maximum aggregate purchase price of $10.0
million. Repurchases could be made from time to time in the open market and in
privately negotiated transactions, based on business and market conditions under
plans designed to comply with Rule 10b5-1 and Rule 10b-18 under the Securities
Exchange Act of 1934, as amended. The program could be amended, suspended or
discontinued at any time and does not commit the Company to repurchase shares of
its common stock. Any shares acquired will be available for stock-based
compensation awards and other corporate purposes.
During
2008, the Company repurchased 1.2 million shares of its common stock at an
aggregate cost of $10.0 million. The share repurchase program was completed on
November 12, 2008.
The
Company’s world headquarters are located in a 200,000 square foot space in two
office buildings in Indianapolis, Indiana. The Company leases the space
under an operating lease agreement and amendments which expire on March 31,
2018. In addition to the Company’s world headquarters, it occupies two
regional offices in the United States, one in Herndon, Virginia
that it opened in October 2006, and one in Irvine, California that it
opened in September 2006. The Company also leases offices for each of its
EMEA and APAC operations in Berkshire, United Kingdom and Kuala Lumpur,
Malaysia, respectively.
The
Company believes that all of its facilities, including its world headquarters,
regional offices and international offices in EMEA and APAC, are
adequate and well suited to accommodate its business operations. The Company
continuously reviews space alternatives to ensure it has adequate room for
growth in the future.
The
Company also has several office leases throughout the United States and in eight
other countries. The Company rents office space for sales, services, development
and international offices under month-to-month leases. In accordance with
SFAS 13, rental expense is recognized ratably over the lease period,
including those leases containing escalation clauses. Rent expense,
net was $4.9 million, $3.8 million and $3.1 million for the years ended December
31, 2008, 2007 and 2006, respectively. Minimum future lease payments
under the Company’s operating leases as of December 31, 2008 are summarized as
follows (in thousands):
2009
|
|
$
|
5,132
|
|
2010
|
|
|
4,863
|
|
2011
|
|
|
4,950
|
|
2012
|
|
|
4,713
|
|
2013
|
|
|
3,923
|
|
Thereafter
|
|
|
18,827
|
|
Total
minimum lease payments
|
|
$
|
42,408
|
|
Prior to
and during part of 2008, the Company had sublet a portion of its
world headquarters office space. The sublease agreement expired
without renewal on February 29, 2008. The Company received sublease
payments of $33,000, $198,000 and $184,000 during 2008, 2007 and 2006,
respectively.
9.
|
CONCENTRATION
OF CREDIT RISK
|
No
customer or partner accounted for 10% or more of the Company’s revenues or
accounts receivable in 2008, 2007 and 2006.
The Company’s top five
partners collectively represented 20% and 25% of the Company’s accounts
receivable balance at December 31, 2008 and 2007, respectively. The Company
evaluates the creditworthiness of its customers and partners on a periodic
basis. The Company generally does not require collateral. The Company manages
its operations as a single segment for purposes of assessing performance and
making operating decisions.
10.
|
RETIREMENT
SAVINGS PLAN
|
The
Company maintains a 401(k) retirement savings plan (the “Plan”) to provide
retirement benefits for substantially all of its North American employees.
Participants in the Plan may elect to contribute up to 50% of their pre-tax
annual compensation to the Plan, limited to the maximum amount allowed by the
Internal Revenue Code, as amended. The Company, at its discretion, may also make
annual contributions to the Plan.
Effective
January 1, 2007, the Plan Administrator approved a restated Plan Document, which
included amendments to the Plan since January 1, 2003, including new benefits
added to the Plan such as a Company matching contribution potential and a Roth
401(k) option.
Subject
to meeting specified operating targets, the Company will match up to 25% of the
first 8% of a participant’s pre-tax compensation contributed to the Plan.
The Company’s performance resulted in a match of less than the full amount in
2008. The total amount of the Company’s matching contribution for the year ended
December 31, 2008 was $348,000.
During
2007, the Company met the annual performance target and made a match of up to
25% of the first 4% of a participant’s pre-tax compensation contributed to
the Plan. The total amount of the Company’s matching contribution for the year
ended December 31, 2007 was $312,000.
For an
eligible participant who has worked for the Company for less than four years at
the time of the Company matching contribution, the contribution will vest in
equal installments over four years based on the anniversary date of the
participant’s employment. For an eligible participant who has worked for the
Company for four or more years at the time of contribution, the contribution is
100% vested.
The 2009
matching contribution will be structured the same as in 2008.
Although
the Company has not expressed any intent to terminate the Plan, it has the
option to do so at any time subject to the provisions of the Employee Retirement
Income Security Act of 1974. Upon termination of the Plan, either full or
partial, participants become fully vested in their entire account
balances.
The
following table sets forth information regarding the United States and foreign
components of income tax benefit (expense) (in thousands) for 2008, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
United
States Federal
|
|
$
|
(829
|
)
|
|
$
|
(2,081
|
)
|
|
$
|
(2,910
|
)
|
State
and local
|
|
|
(173
|
)
|
|
|
(118
|
)
|
|
|
(291
|
)
|
Foreign
jurisdiction
|
|
|
(263
|
)
|
|
|
--
|
|
|
|
(263
|
)
|
Total
|
|
$
|
(1,265
|
)
|
|
$
|
(2,199
|
)
|
|
$
|
(3,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States Federal
|
|
$
|
(206
|
)
|
|
$
|
7,212
|
|
|
$
|
7,006
|
|
State
and local
|
|
|
(13
|
)
|
|
|
1,141
|
|
|
|
1,128
|
|
Foreign
jurisdiction
|
|
|
(297
|
)
|
|
|
--
|
|
|
|
(297
|
)
|
Total
|
|
$
|
(516
|
)
|
|
$
|
8,353
|
|
|
$
|
7,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States Federal
|
|
$
|
(72
|
)
|
|
$
|
5,000
|
|
|
$
|
4,928
|
|
State
and local
|
|
|
(50
|
)
|
|
|
--
|
|
|
|
(50
|
)
|
Foreign
jurisdiction
|
|
|
(207
|
)
|
|
|
--
|
|
|
|
(207
|
)
|
Total
|
|
$
|
(329
|
)
|
|
$
|
5,000
|
|
|
$
|
4,671
|
|
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets at December 31, 2008 and 2007 are presented below (in
thousands):
|
|
|
|
|
|
|
Accounts
receivable due to
allowance
for doubtful accounts
|
|
$
|
402
|
|
|
$
|
431
|
|
Accrued
expenses
|
|
|
890
|
|
|
|
730
|
|
Deferred
revenues
|
|
|
2,224
|
|
|
|
897
|
|
Stock-based
compensation expense
|
|
|
1,021
|
|
|
|
508
|
|
Depreciation
and amortization expense
|
|
|
451
|
|
|
|
282
|
|
Tax
net operating loss carryforwards
|
|
|
1,436
|
|
|
|
8,954
|
|
Foreign
tax credit carryforwards
|
|
|
2,277
|
|
|
|
--
|
|
Research
tax carryforwards
|
|
|
2,452
|
|
|
|
1,551
|
|
Net
deferred tax assets
|
|
$
|
11,153
|
|
|
$
|
13,353
|
|
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences such as loss carryforwards and tax credits
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, if any (including the impact of available carryback and
carryforward periods), projected future taxable income, and tax-planning
strategies in making this assessment. The Company will need to generate future
taxable income of approximately $28 million to realize the deferred tax assets
prior to the expiration of the net operating loss carryforwards in 2028. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences at December 31, 2008. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
For
federal and state net operating loss carryforwards purposes, there is an
additional $23.9 million of tax deductible compensation deductions that were
generated as a result of stock option exercises. These have not been
recognized for financial reporting purposes because they have not yet reduced
taxes payable. The tax benefit of these deductions will be recorded
as a credit to additional paid-in capital when realized.
The
following table sets forth the items accounting for the difference between
expected income tax benefit (expense) compared to actual income tax benefit
(expense) recorded in the Company’s consolidated financial statements (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
income tax expense at 35% tax rate
|
|
$
|
(2,731
|
)
|
|
$
|
(3,367
|
)
|
|
$
|
(1,952
|
)
|
State
taxes, net of federal benefit
|
|
|
(189
|
)
|
|
|
(552
|
)
|
|
|
33
|
|
Stock-based
compensation expense related to non-deductible stock option
expense
|
|
|
(685
|
)
|
|
|
(798
|
)
|
|
|
(585
|
)
|
Change
in deferred tax asset valuation allowance
|
|
|
--
|
|
|
|
12,727
|
|
|
|
7,152
|
|
Research tax
credit
|
|
|
278
|
|
|
|
87
|
|
|
|
--
|
|
Other
|
|
|
(137)
|
|
|
|
(260
|
)
|
|
|
23
|
|
Income
tax benefit (expense)
|
|
$
|
(3,464
|
)
|
|
$
|
7,837
|
|
|
$
|
4,671
|
|
At
December 31, 2008, the Company had net operating loss carryforwards for federal
income tax purposes, including Company compensation deductions for tax purposes
related to stock option exercises of $26.8 million which are available to
offset future federal taxable income, if any, through 2028. At December 31,
2008, the Company had net operating loss carryforwards for state income tax
purposes of $31.6 million, which are available to offset future state taxable
income through 2028. In addition, the Company had alternative minimum tax,
federal and state research tax credit carryforwards and foreign tax credit of
approximately $4.7 million at December 31, 2008, which are available to reduce
future federal, state and foreign-sourced income taxes.
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109
(“FIN
48”). FIN 48 prescribes a recognition threshold and measurement
attributes for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Company
has identified an uncertain tax position related to certain tax credits that the
Company currently believes meets the “more likely than not” recognition
threshold to be sustained upon examination. Prior to the fourth quarter of 2007,
this uncertain tax position had not been recognized because the Company had a
full valuation allowance established. The balance of the reserve was
approximately $750,000 at December 31, 2008.
The
Company and its subsidiaries file federal income tax returns and income tax
returns in various states and foreign jurisdictions. Tax years 2005
and forward remain open for examination for federal tax purposes and tax years
2004 and forward remain open for examination for the Company’s more significant
state tax jurisdictions. To the extent utilized in future years’ tax
returns, net operating loss and capital loss carryforwards at December 31, 2008
will remain subject to examination until the respective tax year is
closed.
In
accordance with SFAS No. 131,
Disclosures about
Segments of an Enterprise and Related Information
, the Company views its
operations and manages its business as principally one segment which is
interaction management software applications licensing and associated services.
As a result, the financial information disclosed herein represents all of the
material financial information related to the Company’s principal operating
segment.
Revenues
derived from non-North American customers accounted for approximately 27%, 25%
and 25% in 2008, 2007 and 2006, respectively, of the Company’s total revenues.
The Company attributes its revenues to countries based on the country in which
the customer or partner is located. The sales and licensing revenues in each
individual non-North American country accounted for less than 10% of total
revenues in 2008, 2007 and 2006. As of December 31, 2008, approximately 11% of
the Company’s net property and equipment, which included computer and office
equipment, furniture and fixtures and leasehold improvements, were located in
foreign countries, of which two countries represented a concentration of more
than 2%.
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Legal
Proceedings
From time
to time, the Company has received notification from competitors and other
technology providers claiming that the Company’s technology infringes their
proprietary rights. The Company cannot assure you that these matters can be
resolved amicably without litigation, or that the Company will be able to enter
into licensing arrangements on terms and conditions that would not have a
material adverse effect on its business, financial condition or results of
operations.
In
November 2002, the Company received a notification from the French Taxing
Authority (“FTA”) as a result of a tax audit that had been conducted
encompassing the years 1998 through 2001. In December 2005, the Company received
an additional notification from the FTA as a result of an updated tax audit that
they conducted, which included the years 2002 through
2004. Both of these assessments claimed amounts owed related to
Value Added Tax (“VAT”) and corporation taxes in addition to what has previously
been paid. The FTA claimed the total amount owed was $5.9 million.
During the fourth quarter of 2008, the Company reached a settlement
with the FTA related to the VAT claim. The settlement included Interactive
Intelligence France SARL paying $5.3 million for VAT, corporation and
withholding taxes and late penalties and interest. In return, Interactive
Intelligence, Inc. was granted a refund of VAT paid (including the current
amount and past payments) of $5.6 million. Interactive Intelligence, Inc.
assigned $5.3 million of this refund to pay off the VAT and other taxes and
penalties owed. The remaining $300,000 was refunded to Interactive Intelligence,
Inc. The Company had previously accrued for corporation taxes owed;
therefore, the net U.S. dollar effect to the Company's financial
position was a reduction in operating expenses of $577,000, as that is where the
original expense for the VAT was allocated. VAT charges were incurred on
various items including rent, hotels, supplies, etc.
Subsequent
to the settlement, the Company received a letter from another division within
the FTA that claimed the Interactive Intelligence France SARL owes penalties and
interest in the amount of $650,000 as of December 31, 2008. The Company has
submitted an appeal for this amount as it believes penalties and interest were
agreed to and paid in the previous settlement. The Company does not believe it
will have to pay any money related to this claim, therefore no amount has been
accrued as of December 31, 2008. Although the Company is appealing this claim,
it cannot assure you that these matters will be resolved without further
litigation or that we will not have to pay some or all of the
assessments.
From time
to time, the Company is also involved in certain legal proceedings in the
ordinary course of conducting its business. While the ultimate liability
pursuant to these actions cannot currently be determined, the Company believes
these legal proceedings will not have a material adverse effect on its financial
position or results of operations. Litigation in general, and intellectual
property litigation in particular, can be expensive and disruptive to normal
business operations. Moreover, the results of complex legal proceedings are
difficult to predict.
Lease
Commitments and Other Contingencies
See Note
8 for further information on the Company’s lease commitments.
The
Company has received and may continue to receive certain payroll tax credits and
real estate tax abatements that were granted to the Company based upon certain
growth projections. If the Company’s actual results are less than those
projections, the Company may be subject to repayment of some or all of
the tax credits or payment of additional real estate taxes in the case
of the abatements. The Company does not believe that it will be subject to
payment of any money related to these taxes; however, the Company cannot provide
assurance as to the outcome.
14. RESTRUCTURING
AND OTHER CHARGES
During
2008, 2007 and 2006, the Company did not incur any restructuring
charges.
In
February 2003, the Company announced its plan to downsize and reorganize
resources in EMEA. The French office was significantly affected, with most
positions moved or eliminated. The Company determined that the severance
payments qualified as restructuring costs in accordance with SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
. These costs, along with related legal fees,
were classified as restructuring expenses. The Company paid the settlement
amount in the third quarter of 2006. Pursuant to the settlement agreements, the
Company has no future obligations regarding this matter and there are no
remaining claims with former employees in France.
A summary
of the accrued restructuring charges, expensed amount, cash payments and the
ending accrued restructuring charges for the years ended December 31, 2008, 2007
and 2006 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
491
|
|
|
$
|
--
|
|
|
$
|
(491
|
)
|
|
$
|
--
|
|
15.
ACQUISITION
On April
17, 2007, the Company entered into an asset purchase agreement, dated as of the
same date, with Alliance Systems Ltd. (“Alliance”), a master distributor of the
Company that provides computer infrastructure such as server and storage
solutions that supports wireless, VoIP, contact center, security, and video
enterprise communications solutions. Pursuant to the asset purchase agreement,
the Company acquired the professional services division of Alliance which was
focused on licensing, implementing and supporting the Company’s contact center
automation and enterprise IP telephony software solutions, for an aggregate
purchase price of $1.1 million, less adjustment for certain costs and pro-rated
customer receipts. A total of 13 professional services engineers and one sales
representative joined the Company in connection with the acquisition. The
Company funded the purchase price with cash available from
operations.
The
purchase price allocations for the Company’s acquisition of the professional
services division of Alliance were based on estimated fair values in accordance
with the provisions of SFAS No. 141,
Business Combinations
. The
following table summarizes the fair value of the intangible and other assets
acquired and liabilities assumed at the date of acquisition (in
thousands):
Goodwill
|
|
$
|
996
|
|
Customer
relationships
|
|
|
50
|
|
Property
and equipment
|
|
|
36
|
|
Total
assets acquired
|
|
|
1,082
|
|
Deferred
services revenue
|
|
|
(49
|
)
|
Net
assets acquired
|
|
$
|
1,033
|
|
The
premium paid over the fair value of the net assets acquired in the purchase, or
goodwill, was primarily attributed to expected synergies from the Company’s
acquisition of a professional services team having prior experience with the
Company’s solutions and their implementation.
Goodwill
and Other Intangible Assets
The
Company performs a goodwill impairment test at least annually or as
needed when a change in facts and circumstances indicate that the fair value of
a reporting unit may be below its carrying amount. The Company performed a
goodwill impairment test as of December 31, 2008 in accordance with SFAS 142 and
has concluded that no impairment existed as of December 31, 2008. The goodwill
impairment evaluation is a two-step test. For purposes of performing the
impairment test, the Company has one reporting unit consistent with its one
operating segment and all goodwill has been allocated to the one reporting unit.
Under the first step, the fair value of the reporting unit is compared with its
carrying value (including goodwill). If the fair value of the reporting unit is
less than its carrying value, an indication of goodwill impairment exists for
the reporting unit and the Company must perform step two of the impairment test
(measurement). Under step two, an impairment charge is recognized for any excess
of the carrying amount of the reporting unit’s goodwill over the fair value of
that goodwill.
16.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS 157, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
This Statement applies to previous accounting pronouncements that require or
permit fair value measurements. Accordingly, SFAS 157 does not require any new
fair value measurements. SFAS 157 became effective for the year beginning
January 1, 2008. There was no material impact on the Company’s consolidated
financial statements upon adoption of SFAS 157.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of SFAS No.
115
,
Accounting for
Certain Investments in Debt and Equity Securities
(“SFAS 159”). SFAS 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS 159 became
effective for the year beginning January 1, 2008. There was no
material impact on the Company’s consolidated financial statements upon adoption
of SFAS 159.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(“SFAS
141R”) and SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements – an amendment to ARB No. 51
(“SFAS
160”). SFAS 141R and SFAS 160 require most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at “full fair value” and require noncontrolling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with noncontrolling interest
holders. Both SFAS 141R and SFAS 160 became effective for periods beginning on
or after December 15, 2008, and earlier adoption was prohibited. SFAS 141R will
be applied to business combinations occurring after the effective date. SFAS 160
will be applied prospectively to all noncontrolling interests, including any
that arose before the effective date. There was no material impact on the
Company’s consolidated financial statements during 2008 as the Company did not
participate in any business combinations.
In
February 2008, the FASB issued FASB Staff Position ("FSP") No. 157-2,
Effective Date of FASB
Statement No. 157
(“FSP 157-2”), which delays the effective date of SFAS
157 for one year for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The Company elected a partial deferral of SFAS
157 under the provisions of FSP 157-2 related to the measurement of fair value
used when evaluating goodwill, other intangible assets and other long-lived
assets for impairment. See Note 2 for further information and related
disclosures regarding the Company’s fair value measurements. Upon adoption of
FSP 157-2, there was no material impact on the Company’s consolidated financial
statements.
In May
2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with United States Generally Accepted Accounting
Principles. SFAS 162 was effective beginning November 15, 2008. The Company is
continuing to evaluate the potential impact, if any, of the adoption of SFAS 162
on its consolidated financial statements.
In
October 2008, the FASB issued FSP No. 157-3,
Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active
(“FSP
157-3”), which clarifies the application of SFAS 157 in an inactive market. FSP
157-3 explains that when relevant and observable market information is not
available to determine the measurement of an asset’s fair value, management must
use their judgment about the assumptions a market participant would use in
pricing the asset in a current sale transaction. Appropriate risk
adjustments that a market participant would use must also be taken into account
when determining the fair value. Application of this guidance should be
accounted for as a change in estimate and FSP 157-3 was effective upon issuance.
Upon adoption of FSP 157-3, there was no material impact on the Company’s
consolidated financial statements.
17.
UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The
following selected quarterly data should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”. This information has been derived from unaudited consolidated
financial statements of the Company that, in management’s opinion, reflect all
recurring adjustments necessary to fairly present the Company’s financial
information when read in conjunction with its consolidated financial statements
and notes thereto. The results of operations for any quarter are not necessarily
indicative of the results to be expected for any future period. As discussed in
Note 2, certain reclassifications have been made to the prior year amounts to
conform to the current period presentation (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
29,483
|
|
|
$
|
30,610
|
|
|
$
|
30,056
|
|
|
$
|
31,257
|
|
Gross
profit
|
|
|
20,456
|
|
|
|
20,613
|
|
|
|
20,295
|
|
|
|
20,904
|
|
Operating
income
|
|
|
1,486
|
|
|
|
1,253
|
|
|
|
1,365
|
|
|
|
2,652
|
|
Net
income
|
|
|
1,117
|
|
|
|
845
|
|
|
|
924
|
|
|
|
1,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
Diluted
|
|
|
0.06
|
|
|
|
0.04
|
|
|
|
0.05
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used to compute net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,940
|
|
|
|
17,972
|
|
|
|
17,976
|
|
|
|
17,082
|
|
Diluted
|
|
|
19,216
|
|
|
|
19,077
|
|
|
|
18,855
|
|
|
|
17,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
24,288
|
|
|
$
|
27,135
|
|
|
$
|
29,202
|
|
|
$
|
29,276
|
|
Gross
profit
|
|
|
17,050
|
|
|
|
18,490
|
|
|
|
19,437
|
|
|
|
19,671
|
|
Operating
income
|
|
|
1,434
|
|
|
|
2,156
|
|
|
|
2,493
|
|
|
|
1,911
|
|
Net
income
|
|
|
1,753
|
|
|
|
2,395
|
|
|
|
2,971
|
|
|
|
10,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
$
|
0.58
|
|
Diluted
|
|
|
0.09
|
|
|
|
0.12
|
|
|
|
0.15
|
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used to compute net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,247
|
|
|
|
17,401
|
|
|
|
17,461
|
|
|
|
17,757
|
|
Diluted
|
|
|
19,236
|
|
|
|
19,291
|
|
|
|
19,407
|
|
|
|
19,524
|
|
Interactive
Intelligence, Inc.
Schedule
II – Valuation and Qualifying Accounts
For
the Years Ended December 31, 2008, 2007 and 2006
|
|
Balance
at
Beginning
of Period
|
|
|
Charged
(Credited) to Costs and Expenses, net
|
|
|
Charged
to Other Accounts
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts Receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,076,000
|
|
|
$
|
475,000
|
|
|
$
|
--
|
|
|
$
|
547,000
|
|
|
$
|
1,004,000
|
|
2007
|
|
|
596,000
|
|
|
|
480,000
|
|
|
|
--
|
|
|
|
--
|
|
|
|
1,076,000
|
|
2006
|
|
|
652,000
|
|
|
|
186,000
|
|
|
|
--
|
|
|
|
242,000
|
|
|
|
596,000
|
|
(1)
|
Uncollectible
accounts written off, net of
recoveries.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
Not
applicable.
ITEM
9A.
|
CONTROLS
AND PROCEDURES.
|
(a)
|
Disclosure
Controls and Procedures
|
We
maintain a set of disclosure controls and procedures that are designed to ensure
that information required to be disclosed by us in the reports filed by us under
the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. We carried out an evaluation, under the supervision and
with the participation of our management, including our President and Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of December
31, 2008, pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation,
our President and Chief Executive Officer and our Chief Financial Officer
concluded that our disclosure controls and procedures were
effective.
(b)
Management’s Report on Internal Control over Financial Reporting
The
management of Interactive Intelligence, Inc. (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. Internal control over financial reporting is defined in Rule
13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934,
as amended, as a process designed by, or under the supervision of, the Company’s
principal executive and principal financial officers and effected by the
Company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external reporting purposes
in accordance with accounting principles generally accepted in the United States
of America and includes those policies and procedures that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the Company’s
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that the Company’s receipts and
expenditures are being made only in accordance with authorizations of
its management and directors;
and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the consolidated financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s management (with the participation and under the
supervision of the Company’s principal executive and principal financial
officers) conducted an evaluation of the effectiveness of the Company’s internal
control over financial reporting based on the framework in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on this evaluation and the criteria in
Internal Control—Integrated
Framework
issued by COSO, management concluded that the Company’s
internal control over financial reporting was effective as of December 31, 2008.
The Company’s independent registered public accounting firm, KPMG LLP, has
audited the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, as stated in their report
dated
March 9, 2009
,
which is included in Item 8 of Part II of this Annual Report on Form
10-K.
(c)
Changes in Internal Control over Financial Reporting
There have been no changes in our
internal control over financial reporting that occurred during the quarter ended
December 31, 2008 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
(d) Attestation
Report of Independent Registered Public Accounting Firm
See
Independent Registered Public Accounting Firm report in Item 8 of Part II
of this Annual Report on Form 10-K.
ITEM
9B.
|
OTHER
INFORMATION.
|
None.
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
|
The
information required by this Item concerning our audit committee members and
financial expert, code of ethics, disclosure of delinquent Section 16 filers and
shareholder director nomination procedures is incorporated herein by reference
from our Proxy Statement for the Annual Meeting of Shareholders to be held on
May 28, 2009, which will be filed with the SEC no later than 120 days after
December 31, 2008.
The
following is the current biographical information with respect to our directors,
our nominees for director and our executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
Donald
E. Brown, M.D.
|
|
|
Donald E. Brown,
M.D.
|
|
|
Chairman
of the Board, President
|
|
|
Chairman
of the Board, President
|
|
|
and
Chief Executive Officer
|
|
|
and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
Edward
L. Hamburg *
|
|
|
|
|
|
Venture
Partner, Morgan Stanley Private Equity; Former Executive Vice
President
|
|
|
Executive
Vice President of
Worldwide
Sales
|
|
|
of
Corporate Operations and Chief Financial Officer,
SPSS
Inc.
|
|
|
|
|
|
(provider of
predictive analytics software technology and services)
|
|
|
William J. Gildea
III
|
|
|
|
|
|
Vice
President of Business
Development
|
|
|
|
|
|
|
|
|
Vice
President, Information Technology and
|
|
|
|
|
|
Chief
Information Officer, Eli Lilly and
Company
|
|
|
Chief
Financial Officer, Vice
President
of Finance and
|
|
|
|
|
|
Administration,
Secretary and Treasurer
|
|
|
|
|
|
|
|
|
Managing
Partner, Collina Ventures, LLC (private investment
company)
|
|
|
|
|
|
|
Vice
President of Worldwide
Support
and Professional Services
|
|
|
Samuel
F. Hulbert, Ph.D. +^
|
|
|
|
Former
President, Rose-Hulman
Institute
of
Technology
|
Pamela J.
Hynes
|
|
|
|
Vice
President of Customer Services
|
|
|
|
|
|
|
President,
Business Strategy
Advisors
LLC (business strategy consultancy)
|
|
|
|
|
Senior
Vice President of Worldwide
Marketing
|
|
|
*
Member of Audit
Committee
+
Member of Compensation and Stock
Option Committee
|
^
Member of Nominating and Corporate Governance
Committee
|
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
The
information required by this Item concerning remuneration of our executive
officers and directors, material transactions involving such executive officers
and directors and Compensation Committee interlocks, as well as the Compensation
Committee Report and the Compensation Discussion and Analysis, are incorporated
herein by reference from our Proxy Statement for the Annual Meeting of
Shareholders to be held on May 28, 2009, which will be filed with the SEC no
later than 120 days after December 31, 2008.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
|
The
information required by this Item concerning the stock ownership of management,
five percent beneficial owners and securities authorized for issuance under
equity compensation plans is incorporated herein by reference from our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 28, 2009,
which will be filed with the SEC no later than 120 days after December 31,
2008.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
The
information required by this Item concerning certain relationships and related
person transactions, and director independence is incorporated herein by
reference from our Proxy Statement for the Annual Meeting of Shareholders to be
held on May 28, 2009, which will be filed with the SEC no later than 120 days
after December 31, 2008.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
The
information required by this Item concerning the fees and services of our
independent registered public accounting firm and our Audit Committee actions
with respect thereto is incorporated herein by reference from our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 28, 2009,
which will be filed with the SEC no later than 120 days after December 31,
2008.
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
|
The
Consolidated Financial Statements are set forth under Item 8 of Part II of this
Annual Report on Form 10-K.
2.
|
Financial
Statement Schedule
|
Schedule II - Valuation and Qualifying
Accounts is set forth under Item 8 of Part II of this Annual Report on Form
10-K.
All other schedules are omitted because
they are either not required, not applicable, or the required information is
otherwise shown in the Consolidated Financial Statements, the Notes thereto or
Schedule II - Valuation and Quantifying Accounts.
The
following documents are filed as Exhibits to this Annual Report on Form 10-K or
incorporated by reference herein and, pursuant to Rule 12b-32 of the General
Rules and Regulations promulgated by the SEC under the Securities Exchange Act
of 1934, as amended, reference is made to such documents as previously filed as
exhibits with the SEC.
I
NDEX TO
EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
by Reference
|
|
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
3.1
|
|
Restated
Articles of Incorporation of the Company, as currently in
effect
|
S-1
(Registration
No. 333-79509)
|
|
3.1
|
|
5/28/1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Amended
By-Laws of the Company, as currently in effect
|
|
8-K
|
|
3.2
|
|
8/21/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
*Restated
1995 Incentive Stock Option Plan, as currently in effect
|
|
S-1/A
(Registration
No. 333-79509)
|
|
10.1
|
|
7/23/1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
*1995
Nonstatutory Stock Option Incentive Plan
|
|
|
S-1
(Registration
No. 333-79509)
|
|
10.2
|
|
5/28/1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
*Amended
1999 Stock Option and Incentive Plan, as currently in
effect
|
8-K
|
|
10.3
|
|
3/17/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4
|
|
*Amended
Outside Directors Stock Option Plan, as currently in
effect
|
DEF
14A
|
|
Appendix
A
|
|
4/8/2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
*Form
of Change of Control and Retention Agreement by and between the Company
and each of Stephen R. Head, Joseph A. Staples, Pamela J. Hynes and Gary
R. Blough
|
8-K
|
|
10.5
|
|
3/17/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Asset
Purchase Agreement dated as of April 17, 2007 between the Company and
Alliance Systems Ltd.
|
8-K
|
|
10.6
|
|
4/23/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
Patent
License Agreement, dated December 31, 2004, between the Company and
AudioFAX IP LLC (confidential treatment has been granted for certain
portions of this exhibit, and accordingly, those portions have been
omitted from this exhibit and filed separately with the Securities and
Exchange Commission)
|
10-K
|
|
10.8
|
|
3/28/2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
*Employment
Agreement, Non-Disclosure and Non-Competition between the Company and Gary
R. Blough, dated May 26, 2006
|
8-K
|
|
10.6
|
|
5/31/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
*Employment
Agreement between the Company and Stephen R. Head, dated November 3,
2003
|
10-K
|
|
10.11
|
|
3/25/2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
*(i)
Employment Agreement between the Company and Pamela J. Hynes dated
November 4, 1996 and the First Amendment to Employment Agreement between
the Company and Pamela J. Hynes dated February 23, 2000
|
10-Q
|
|
10.13
|
|
5/12/2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*(ii)
Letter of Assignment between the Company and Pamela J. Hynes, dated as of
January 2, 2007
|
10-K
|
|
10.20
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
*Stock
Option Agreement between the Company and Donald E. Brown, M.D., dated
September 22, 1998
|
S-1
(Registration
No. 333-79509)
|
|
10.14
|
|
5/28/1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
by Reference
|
|
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
10.16
|
|
(i)
Office Lease, dated April 1, 2001, between the Company and Duke-Weeks
Realty Limited Partnership (Exhibits thereto will be furnished
supplementally to the Securities and Exchange Commission upon
request)
|
10-K
|
|
10.16(i)
|
|
3/17/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ii)
Lease Modification Agreement, dated September 19, 2001, between the
Company and Duke-Weeks Realty Limited Partnership (Exhibits thereto will
be furnished supplementally to the Securities and Exchange Commission upon
request)
|
10-K
|
|
10.16(ii)
|
|
3/17/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(iii)
Third Lease Amendment, dated June 19, 2007, between the Company and Duke
Realty Limited Partnership (formerly Duke-Weeks Realty Limited
Partnership)
|
8-K
|
|
10
|
|
6/25/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(iv)
Sublease Agreement, dated December 29, 2004, between the Company and ANGEL
Learning, Inc. (formerly CyberLearning Labs, Inc.) (Exhibits thereto will
be furnished supplementally to the Securities and Exchange Commission upon
request)
|
10-K
|
|
10.16
(III)
|
|
3/28/2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(v)
Amendment No. 1 to Sublease, dated January 30, 2006, between the Company
and ANGEL Learning, Inc. (formerly CyberLearning Labs, Inc.) (Exhibits
thereto will be furnished supplementally to the Securities and Exchange
Commission upon request)
|
10-K
|
|
10.16
(IV)
|
|
3/29/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(vi)
Fourth Lease Amendment, dated March 14, 2008, between the Company and Duke
Realty Limited Partnership (formerly Duke-Weeks Realty Limited
Partnership)
|
10-Q
|
|
10.16
|
|
5/12/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
Consolidated
Subordinated Promissory Note made by the Company in favor of Donald
E. Brown, M.D.,
dated May 1, 1999
|
S-1
(Registration
No. 333-79509)
|
|
10.18
|
|
5/28/1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
*Form
of Agreement for Incentive Stock Options under 1999 Stock Option and
Incentive Plan
|
10-K
|
|
10.21
|
|
3/17/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
*Form
of Agreement for Nonqualified Stock Options under 1999 Stock Option and
Incentive Plan
|
10-K
|
|
10.21
|
|
3/17/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Form
of Indemnity Agreement between the Company and each of its directors and
executive officers
|
S-1/A
(Registration
No. 333-79509)
|
|
10.23
|
|
7/14/1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
*Form
of Agreement for Outside Directors Stock Option under Outside Directors
Stock Option Plan
|
10-Q
|
|
10.24
|
|
11/15/2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
*Employment
Agreement dated January 3, 2005 between the Company and Joseph A.
Staples
|
8-K
|
|
10.25
|
|
1/6/2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
|
*Summary
of Certain Director and Executive Officer Compensation
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.28
|
|
*Amended
Interactive Intelligence, Inc. Employee Stock Purchase Plan, as currently
in effect
|
8-K
|
|
10.28
|
|
1/5/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.29
|
|
*Interactive
Intelligence, Inc. 401(k) Savings Plan
|
|
|
S-8
(Registration
No. 333-33772)
|
|
4.3
|
|
3/31/2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.33
|
|
*Interactive
Intelligence, Inc. 2006 Equity Incentive Plan, As Amended May 30,
2008
|
8-K
|
10.33
|
6/4/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INDEX
TO EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated
by Reference
|
|
|
|
Exhibit
Number
|
|
Exhibit
Description
|
|
Form
|
Exhibit
|
|
Filing
Date
|
|
Filed
Herewith
|
|
10.35
|
|
*Form
of Incentive Stock Option Agreement under 2006 Equity Incentive
Plan
|
8-K
|
|
10.35
|
|
2/22/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.36
|
|
*Form
of Nonqualified Stock Option Agreement under 2006 Equity Incentive
Plan
|
8-K
|
|
10.36
|
|
2/22/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.37
|
|
*Form
of Non-Employee Director Stock Option Agreement under 2006 Equity
Incentive Plan
|
10-Q
|
|
10.37
|
|
8/9/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.38
|
|
*Form
of Non-Employee Director Change of Control Agreement
|
10-Q
|
|
10.38
|
|
8/9/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.40
|
|
*Employment
Agreement dated March 31, 2008 between the Company and William J. Gildea,
III
|
8-K
|
|
10.40
|
|
3/31/08
|
|
|
|
|
|
|
|
21
|
|
Subsidiaries
of the Company as of December 31, 2008
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Consent
of KPMG LLP, Independent Registered Public Accounting Firm
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer, pursuant to 18 U. S. C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The
indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation
S-K.
|
|
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
Interactive
Intelligence, Inc.
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
Date:
March 9, 2009
|
By:
|
|
|
|
Stephen
R. Head
|
|
|
Chief
Financial Officer, Vice President of Finance and Administration, Secretary
and Treasurer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
|
/s/ Donald E. Brown, M.D.
|
|
Chairman
of the Board of Directors,
|
March
9, 2009
|
Donald
E. Brown, M.D.
|
|
President,
Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
/s/ Stephen R. Head
|
|
Chief
Financial Officer,
|
|
Stephen
R. Head
|
|
Vice
President of Finance and Administration, Secretary and
Treasurer
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
/s/ Edward L. Hamburg, Ph.
D.
|
|
Director
|
|
Edward
L. Hamburg, Ph. D.
|
|
|
|
|
|
|
|
/s/ Mark E. Hill
|
|
Director
|
|
Mark
E. Hill
|
|
|
|
|
|
|
|
/s/ Samuel F. Hulbert,
Ph.D.
|
|
Director
|
|
Samuel
F. Hulbert, Ph.D.
|
|
|
|
|
|
|
|
/s/ Michael C. Heim
|
|
Director
|
|
Michael
C. Heim
|
|
|
|
|
|
|
|
/s/ Richard A. Reck
|
|
Director
|
|
Richard
A. Reck
|
|
|
|
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