INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN
Notes to Financial Statements
December 31, 2009
|
1.
|
DESCRIPTION OF THE PLAN
|
The following brief description of the Interactive Intelligence, Inc. 401(k) Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).
General
The Plan is a defined contribution plan established by Interactive Intelligence, Inc. (the “Company” and “Plan Administrator”) for qualifying employees effective January 1, 1996. The Plan is administered by an Investment Committee appointed by the Company. The trustee and record-keeper of the Plan is Merrill Lynch Trust Company, FSB (“Merrill Lynch” or the “Trustee”). The purpose of the Plan is to provide retirement income and other benefits to eligible employees of the Company.
Plan Termination
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 ERISA. Upon termination of the Plan, either full or partial, participants become fully vested in their entire account balances.
Eligibility
For purposes of making a pre-tax contribution or rollover contribution, an employee must have reached 21 years of age to be eligible for participation in the Plan. If an employee has met the age requirement, he or she is eligible to participate in the Plan as of his or her first day of service.
Employees are automatically enrolled into the Plan upon meeting the abo
ve criteria. If a participant wishes not to contribute to the Plan, they have 60 days to opt out or decline participation by changing their contribution percentage to zero through the Merrill Lynch website.
Contributions
Each year participants may contribute up to 50% of their pre-tax annual compensation, as defined in the Plan. Participant contributions are subject to the maximum limitations as defined in the Internal Revenue Code, as amended (the “Code”), plus “catch-up” adjustments as permitted by the Code. Participants may also contribute amounts representing qualified rollovers from other qualified benefit plans. Qualified matching and qualified non-elective Company contributions may be made as determined by the Company.
In
February 2009
, the Company announced to its employees that for the year ended December 31, 2009, and subject to the Company achieving specified annual financial performance targets, the Company would make a matching contribution to eligible participants. If the Company achieved a U.S. Generally Accepted Accounting Principles (“GAAP”) reported operating margin of at least 5%, the Company would match up to 25% of the first 4% of the participants’ pre-tax contributions to the Plan. If GAAP reported operating margin was greater than 9%, the Company would match up to 25% of the first 8% of the participants’ pre-tax contributions to the Plan.
Upon determination of the Company’s fiscal 2009 financial results, which were not finalized until early 2010, it was determined that the Company had met the second tier of the annual performance target during 2009, and each eligible participant received the applicable Company matching contribution during the first quarter of 2010.
The total amount of the Company’s matching contribution for the year ended December 31, 2009, which was reduced by forfeitures of $6,103, was $569,437.
In November 2009, the Company announced to its employees that for the year ended December 31, 2010, and subject to the Company achieving specified financial performance targets, the Company will make a matching contribution to eligible participants of up to 33% of the first 9% of their pre-tax compensation contributed to the Plan. If the Company achieves a GAAP reported operating margin of 4%, participants will earn one third of the full match. If the Company achieves a GAAP reported operating margin of 6%, participants will earn two thirds of the full match. If the Company achieves a GAAP reported operating margin of 8%, participants will earn the full match. The Company matching contribution will be credited to the participants’ accounts as soon as practicable after the Company’s annual financial results are determined and the Company achieves the financial performance target.
Rollover and Transfer Contributions
The Plan permits participants to have their account balance in other qualified plans rolled over to the Plan. Such transfers or rollovers to the Plan may only be made with the approval of the Plan Administrator and do not affect any other contributions made by or on behalf of a participant.
INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN
Notes to Financial Statements (continued)
Vesting
Participants are immediately vested in their contributions plus the actual earnings thereon. 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 will be 100% vested.
Participant Accounts
Each participant’s account is credited with the participant’s contributions, rollovers, Company contributions, if any, and an allocation of Plan earnings. Investment earnings are allocated proportionately among all participants’ accounts based on the ratio of their account balance to the total fund balance. The benefit to which a participant is entitled equals the participant’s vested account balance.
Party-in-Interest Transactions
Certain Plan investments are shares of mutual funds and a collective fund managed by Merrill Lynch, the trustee and record-keeper of the Plan, as defined by the Plan, and therefore, these transactions qualify as party-in-interest transactions.
In addition, the Plan’s investments include shares of the Company’s common stock. The Company is the Plan sponsor and, therefore, transactions involving the acquisition or disposition of the Company’s common stock also qualify as party-in-interest transactions. 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.
Investment Options
When participants are enrolled into the Plan upon meeting the eligibility criteria, their contributions are automatically invested in the Goal Manager – Moderate Model fund. However, participants may direct their pre-tax contributions to any of the investment options selected by the Plan Administrator.
Payment of Benefits
Upon termination of service or retirement, participants may elect to receive payments over a period provided in the Plan document or in a lump sum amount equal to the vested portion of their accounts as of the most recent valuation date before the distribution. Participants may also elect in-service withdrawals or may roll over their accounts from the Plan to another qualified retirement plan. Such benefit payments are subject to the provisions of the Plan.
In the event of an active or inactive participant’s death, the value of the vested participant’s account balance will become payable to the participant’s beneficiary.
Participant Loans
A participant of the Plan can borrow from his or her account. Amounts borrowed by the participant are transferred from one or more of the investment funds. The participant pays interest on the loan based on market rates at the date the loan is issued. This interest is credited to the participant’s account balance. Both the maximum amounts available and repayment terms for such borrowings are subject to the provisions of the Plan.
Forfeitures
Forfeitures are non-vested account balances of terminated employees, which may be applied at the discretion of the Company. Forfeitures will be used first to reduce Company contributions. Any remaining forfeitures will be used to offset Plan expenses with any remaining forfeitures then allocated to participants’ account balances. Forfeitures totaling $
6,103
and $24,806 were used to reduce 2009 and 2008 Company contributions, respectively.
There were no unallocated forfeitures as of December 31, 2009
and 2008.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Accounting
The financial statements of the Plan have been prepared under the accrual basis of accounting.
INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN
Notes to Financial Statements (continued)
As described in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 962,
Plan Accounting - Defined Contribution Pension Plans
, investment contracts held by a defined-contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the plan. As required by the guidance, the statement of net assets available for benefits presents the fair value of the investment contracts as well as the adjustment of the fully benefit-responsive investment contracts from fair value to contract value. The statement of changes in net assets available for benefits is prepared on a contract value basis.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Investment Valuation and Income Recognition
The Plan’s investments in common stock and mutual funds are stated at fair value. If available, quoted market prices are used to value investments. Shares of mutual funds are valued at the net asset value of shares held by the Plan at year end. Participant loans are carried at amortized cost plus accrued interest, which approximates fair value.
Net appreciation in fair value of investments is reflected in the statement of changes in net assets available for benefits and includes realized gains and losses on investments bought and sold and the change in appreciation from one period to the next. Purchases and sales are recorded on a trade-date basis. Interest income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date.
The Plan has $1,135,992 of investments in a collective investment trust fund which is reported at fair value and adjusted to a contract value
, equal to the principal balance plus accrued interest,
of $1,218,876 to determine the net assets available for benefits. The Plan has concluded that the net asset value reported by the underlying fund approximates the fair value of the investment. These investments are redeemable with the fund at contract value. Due to the nature of the investments held by the funds, changes in the market conditions and the economic environment may significantly impact the net asset value of the funds and, consequently, the fair value of the Plan’s interests in the funds.
Although a secondary market exists for these investments, it is not active and individual transactions are typically not observable. When transactions occur in this limited secondary market, they may occur at discounts to the reported net asset value. Therefore, if the redemption rights in the funds were restricted or eliminated and the Plan was to sell these investments in the secondary market, it is reasonably possible that a buyer in the secondary market may require a discount to the reported net asset value, and the discount could be significant.
Payments to Participants
Payments to participants, including in-service withdrawals, transfers and qualified distributions, are recorded when paid.
Administrative Expenses
Expenses related to the Plan may be paid by either the Plan, Plan participants or the Company; however, Plan participants have typically paid for these expenses as they relate to such items as loan fees.
|
3.
|
FAIR VALUE MEASUREMENTS
|
FASB ASC Topic 820,
Fair Value Measurements and Di
sclosures
(“FASB ASC 820”),
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 hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below:
|
·
|
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.
|
INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN
Notes to Financial Statements (continued)
The Plan’s investments that are measured at fair value on a recurring basis, such as money market funds, mutual funds and equity securities, are generally classified within Level 1 of the fair value hierarchy. The Plan also invests in a common collective trust whose funds are traded daily and does not adjust the quoted price for such investments.
The following table sets forth a summary of the Plan’s investments measured at fair value on a recurring basis as of December 31, 2009:
|
|
|
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)
|
|
|
Mutual funds
|
|
|
18,138,426
|
|
|
|
18,138,426
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Interactive Intelligence, Inc. common stock
|
|
|
1,279,766
|
|
|
|
1,279,766
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Common collective trust
|
|
|
1,135,992
|
|
|
|
N/A
|
|
|
|
1,135,992
|
|
|
|
N/A
|
|
|
Total
|
|
$
|
20,554,184
|
|
|
$
|
19,418,192
|
|
|
$
|
1,135,992
|
|
|
|
N/A
|
|
The following table sets forth a summary of the Plan’s investments measured at fair value on a recurring basis as of December 31, 2008:
|
|
|
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)
|
|
|
Mutual funds
|
|
|
11,538,449
|
|
|
|
11,538,449
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Interactive Intelligence, Inc. common stock
|
|
|
407,663
|
|
|
|
407,663
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Common collective trust
|
|
|
979,101
|
|
|
|
N/A
|
|
|
|
979,101
|
|
|
|
N/A
|
|
|
Total
|
|
$
|
12,925,213
|
|
|
$
|
11,946,112
|
|
|
$
|
979,101
|
|
|
|
N/A
|
|
INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN
Notes to Financial Statements (continued)
The market values of individual investments that represent 5% or more of the Plan’s net assets are as follows:
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
Mutual funds:
|
|
|
|
|
|
|
Davis NY Venture A
|
|
$
|
3,310,740
|
|
$
|
2,054,633
|
|
|
American Funds Growth Fund of America R3
|
|
|
2,880,271
|
|
|
1,795,699
|
|
|
PIMCO Total Return A
|
|
|
2,663,064
|
|
|
1,601,806
|
|
|
American Funds Capital World Growth & Income R3
|
|
|
2,370,241
|
|
|
1,539,125
|
|
|
Eaton Vance Small Cap
|
|
|
2,324,125
|
|
|
1,431,450
|
|
|
BlackRock S&P 500 Index I **
|
|
|
1,222,270
|
|
|
887,040
|
|
|
BlackRock Global Allocation A **
|
|
|
***
|
|
|
718,231
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Interactive Intelligence, Inc. *
|
|
|
1,279,766
|
|
|
407,663
|
|
|
|
|
|
|
|
|
|
|
|
Common collective trust:
|
|
|
|
|
|
|
|
|
Retirement Preservation Trust (1) *
|
|
|
1,135,992
|
(1)
|
|
979,101
|
(1)
|
_______________
* Indicates a party-in-interest to the Plan.
** These funds are managed by Merrill Lynch, the Plan trustee and record-keeper and represent a party-in-interest to the Plan.
*** Investment did not represent 5% or more of the Plan’s net assets.
|
(1)
|
The amounts as of December 31, 2009 and 2008 represent the fair value. The contract value of these amounts was $1,218,876 and $1,137,167 as of
December 31, 2009 and 2008, respectively, which is the amount available for Plan benefits.
|
During 2009, the Plan’s investments (including gains and losses on investments purchased and sold, as well as held during the year) appreciated in fair value as determined by quoted market prices as follows:
|
|
|
Net Realized and Unrealized Appreciation in Fair
Value of Investments
|
|
|
Mutual funds
|
|
$
|
3,895,884
|
|
|
Interactive Intelligence, Inc. common stock
|
|
|
|
|
|
|
|
$
|
4,788,398
|
|
INTERACTIVE INTELLIGENCE, INC. 401(k) SAVINGS PLAN
Notes to Financial Statements (continued)
The Retirement Preservation Trust (“Trust”) is a collective investment trust fund that invests mainly in insurance companies, synthetic guaranteed investment contracts (“GICS”) and money market instruments, with the majority of the investments being held in GICS. The underlying investments of the GICS are primarily in pools of investment contracts that are issued by insurance companies and commercial banks, as well as a wrapper contract issued by a financially responsible third-party. The investments of the Trust are reported at fair value and adjusted to a contract value. The contract value represents the amount participants in the Trust would receive if they were to initiate permitted transactions under the term of the underlying Plan.
The Plan is a prototype plan administered by Merrill Lynch. The Internal Revenue Service (“IRS”) has determined and informed the Plan Administrator by a letter dated March 31, 2008 that its amended and restated prototype plan as of January 1, 2007 is designed in accordance with Section 401(a) of the Code and, therefore, the related trust is exempt from taxation. The Plan was subsequently amended and restated on November 2, 2009. The Plan is required to operate in conformity with the Code to maintain its qualification. Although it was amended since receiving the opinion letter from the IRS, the Plan Administrator believes the Plan is designed, and is currently being operated, in compliance with the applicable requirements of the Code and, therefore, believes that the Plan is qualified and the related trust is tax-exempt.
|
7.
|
RISKS AND UNCERTAINTIES
|
The Plan invests in various types of investment securities. Investment securities, in general, are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible to expect that changes in the values of investment securities will occur in the near term and that such changes could materially affect the participants’ account balances and the amounts reported in the statements of net assets available for benefits.
Recent market conditions have resulted in an unusually high degree of volatility and increased the risk and short-term liquidity associated with certain investments held by the Plan, which could impact the value of investments after the date of these financial statements.
|
8.
|
RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
|
The following is a reconciliation of net assets available for benefits according to the financial statements at December 31, 2009 as compared to the Form 5500:
|
|
|
|
|
|
Net assets available for benefits according to the financial statements
|
|
$
|
21,499,082
|
|
|
Less: Adjustment from fair value to contract value for fully benefit-responsive investment contracts
|
|
|
(82,884
|
)
|
|
Net assets available for benefits according to the Form 5500
|
|
$
|
21,416,198
|
|
The following is a reconciliation of the investment income according to the financial statements at December 31, 2009 as compared to the Form 5500:
|
|
|
|
|
|
Total investment income per the financial statements
|
|
$
|
5,114,151
|
|
|
Plus: Adjustment from fair value to contract value for fully benefit-responsive investment contracts
|
|
|
75,182
|
|
|
Total investment income per the Plan’s Form 5500
|
|
$
|
5,189,333
|
|
The Company has evaluated subsequent events as of the reporting date and noted no items to be disclosed.