<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-15578
DAVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware No. 02-0364368
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
6 Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices) (Zip Code)
Telephone: (978) 952-0200
(Registrant's telephone number, including area code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ___
--
Indicate the number of shares outstanding of each of the issuer's classes
of common stock: Common Stock, par value $.10 per share, outstanding as of
October 29, 1997: 11,773,313 shares.
<PAGE>
DAVOX CORPORATION & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page No.
--------
<S> <C>
Consolidated Balance Sheets as of
September 30, 1997 (Unaudited) and December 31, 1996 3
Consolidated Statements of Income
for the three months and nine months ended
September 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997
and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1997 December 31,
(Unaudited) 1996
-------------------- --------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,386,208 $ 21,333,300
Marketable securities 15,598,546 9,780,273
Accounts receivable, net of reserves of
approximately $685,000 and $699,000
in 1997 and 1996, respectively 8,976,026 3,184,814
Inventories 470,118 1,204,058
Prepaid expenses and other current assets 148,531 101,802
-------------------- --------------------
Total current assets 52,579,429 35,604,247
Property and equipment, net 4,866,876 4,050,850
Other assets 65,725 74,207
-------------------- --------------------
$ 57,512,030 $ 39,729,304
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,849,249 $ 4,811,190
Accrued expenses 8,515,358 6,174,935
Customer deposits 2,772,890 3,413,726
Deferred revenue 4,329,357 2,494,390
-------------------- --------------------
Total current liabilities 20,466,854 16,894,241
-------------------- --------------------
Commitments and Contingencies
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 11,633,067 and 11,080,749
shares in 1997 and 1996, respectively 1,163,307 1,108,075
Capital in excess of par value 46,135,891 44,894,273
Accumulated deficit (10,229,876) (23,143,139)
-------------------- --------------------
37,069,322 22,859,209
Less - Treasury Stock, 3,294 shares at cost (24,146) (24,146)
-------------------- --------------------
Total stockholders' equity 37,045,176 22,835,063
-------------------- --------------------
$ 57,512,030 $ 39,729,304
==================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
--------------------------------------- ---------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product revenue $13,711,932 $9,864,379 $38,040,263 $26,168,970
Service revenue 6,093,761 4,214,845 17,204,340 11,985,870
------------------- ----------------- ------------------- -----------------
Total revenue 19,805,693 14,079,224 55,244,603 38,154,840
------------------- ----------------- ------------------- -----------------
Cost of product revenue 2,939,391 2,894,865 8,829,778 7,662,944
Cost of service revenue 3,704,047 2,733,710 10,794,752 7,782,577
------------------- ----------------- ------------------- -----------------
Total cost of revenue 6,643,438 5,628,575 19,624,530 15,445,521
------------------- ----------------- ------------------- -----------------
Gross profit 13,162,255 8,450,649 35,620,073 22,709,319
------------------- ----------------- ------------------- -----------------
Research, development and
engineering expenses 2,242,101 1,549,027 6,137,139 4,232,593
Selling, general and administrative
expenses 5,774,327 4,511,770 16,160,933 12,239,362
------------------- ----------------- ------------------- -----------------
Total operating expenses 8,016,428 6,060,797 22,298,072 16,471,955
------------------- ----------------- ------------------- -----------------
Income from operations 5,145,827 2,389,852 13,322,001 6,237,364
Interest income, net 482,445 362,870 1,352,166 744,426
------------------- ----------------- ------------------- -----------------
Income before provision
for income taxes 5,628,272 2,752,722 14,674,167 6,981,790
Provision for income taxes 675,393 275,672 1,760,903 698,580
------------------- ----------------- ------------------- -----------------
Net income $ 4,952,879 $ 2,477,050 $ 12,913,264 $ 6,283,210
=================== ================= =================== =================
Net income per common and
common equivalent share $0.39 $0.20 $1.02 $0.51
=================== ================= =================== =================
Weighted average number of common and
common equivalent shares outstanding 12,784,279 12,374,201 12,601,076 12,226,989
=================== ================= =================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
--------------------------------------------
Cash flows from operating activities: 1997 1996
------------ ------------
<S> <C> <C>
Net income $ 12,913,264 $ 6,283,210
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 2,564,169 1,860,198
Provision for losses on accounts receivable 45,000 46,000
Changes in current assets and liabilities -
Accounts receivable (5,836,212) 844,903
Inventories 733,940 (451,244)
Prepaid expenses and other current assets (46,729) (25,499)
Accounts payable 38,059 1,026,911
Accrued expenses 2,340,423 1,014,155
Customer deposits (640,836) 4,137,805
Deferred revenue 1,834,967 1,446,705
------------ ------------
Net cash provided by operating activities 13,946,045 16,183,144
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment, net (3,380,195) (3,166,060)
Decrease (increase) in other assets 8,482 (6,775)
Purchases of marketable securities (21,404,853) (3,297,403)
Sales of marketable securities 15,586,580 --
------------ ------------
Net cash used in investing activities (9,189,986) (6,470,238)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,052,009 1,591,601
Proceeds from employee stock purchase plan 244,840 90,919
------------ ------------
Net cash provided by financing activities 1,296,849 1,682,520
------------ ------------
Net increase in cash and cash equivalents 6,052,908 11,395,426
Cash and cash equivalents at beginning of period 21,333,300 12,935,907
------------ ------------
Cash and cash equivalents at end of period $ 27,386,208 $ 24,331,333
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,517 $ 8,203
============ ============
Cash paid during the period for income taxes $ 181,307 $ 151,891
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PART 1. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Preparation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and note disclosures required by generally accepted
accounting principles. The statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K, Commission File No. 0-15578 which was filed with the Securities and
Exchange Commission on February 28, 1997. In the opinion of management, the
accompanying consolidated financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the Company's financial position and results of operations. The results of
operations for the three month and nine month periods ended September 30, 1997
may not be indicative of the results that may be expected for the full fiscal
year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
3. Cash and Cash Equivalents
Cash equivalents are highly liquid investments consisting mainly of
commercial paper with original maturities of less than three months at the date
of purchase.
4. Marketable Securities
The Company's investment portfolio of debt securities consists of
marketable securities classified as held-to-maturity under the provisions of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The marketable securities held at
September 30, 1997 consist principally of commercial paper and government
securities with original maturities of less than one year, and they are recorded
at amortized cost on the balance sheet.
The fair value of marketable securities at September 30, 1997 was
approximately equal to amortized cost. Gross unrealized holding losses at
September 30, 1997 were approximately $2,680.
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. Provision for Income Taxes
The Company provides for income taxes in interim periods based on its
estimated effective tax rate for the entire fiscal year. The Company is
providing for income tax in 1997 based on an estimated effective tax rate of
12%. Such rate is less than the combined federal statutory and state tax rates
due primarily to the utilization of net operating loss carryforwards and
recognition of previously unrecognized deferred tax assets. The Company
provided for certain state income taxes in those states which do not allow for
net operating loss carryforwards.
6. Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is computed based on
the weighted average number of common and common equivalent shares (stock
options and warrants) outstanding during the period. Fully diluted earnings per
share have not been presented as their amounts do not differ significantly from
primary earnings per share.
7. Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. SFAS
No. 128 establishes standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. This statement is effective for fiscal years ending after December 15,
1997 and early adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. The Company will adopt
this statement for its fiscal year ended December 31, 1997.
7
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. Recently Issued Accounting Standards (continued)
Pro forma calculations of basic and diluted earnings per share as
required by SFAS No. 128 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic EPS
Net Income $ 4,952,879 $ 2,477,050 $12,913,264 $ 6,283,210
---------- ---------- ----------- ----------
Weighted average common
shares outstanding 11,598,109 10,898,285 11,429,504 10,628,822
----------- ----------- ----------- -----------
Basic EPS: $ 0.43 $ 0.23 $ 1.13 $ 0.59
=========== =========== =========== ===========
Diluted EPS
Net Income $ 4,952,879 $ 2,477,050 $12,913,264 $ 6,283,210
----------- ----------- ----------- -----------
Weighted average common and
potential common equivalent
shares outstanding 12,784,279 12,374,201 12,601,076 12,226,989
----------- ----------- ----------- -----------
Diluted EPS: $ 0.39 $ 0.20 $ 1.02 $ 0.51
=========== =========== =========== ===========
</TABLE>
8. Stock Split
On April 24, 1997, the Company's Board of Directors approved an increase in
the authorized number of common shares of the Company's stock from 10,000,000 to
30,000,000 and authorized a three-for-two stock split of the Company's common
stock which was effected in the form of a 50% stock dividend paid on May 28,
1997 to shareholders of record on May 13, 1997. All share and per share amounts
have been retroactively restated for all periods presented to reflect the stock
split. Accordingly, approximately $ 385,000 was transferred from capital in
excess of par value to common stock.
8
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESUlTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1997 and 1996
Total revenue for the third quarter of 1997 increased approximately $5.7
million, or 40.7% compared to the same period in 1996, while total revenue for
the first nine months of 1997 increased approximately $17.1 million, or 44.8%
compared to the same period in 1996.
Product revenue increased approximately $3.8 million, or 39.0% to $13.7
million in the third quarter of 1997 as compared to the third quarter of 1996.
Product revenue for the first nine months of 1997 increased approximately $11.9
million, or 45.4% to $38.0 million as compared to the same period in 1996.
These increases are caused by continued increasing demand for the Unison call
center management system, especially the telemarketing, collections, and
inbound/outbound call blending capabilities.
Cost of product revenue increased 1.5% to $2.9 million for the third
quarter of 1997, but as a percentage of product revenue decreased 7.9% as
compared to the third quarter of 1996. Cost of product revenue for the first
nine months of 1997 increased $1.2 million, or 15.2% to $8.8 million, but as a
percentage of product revenue decreased 6.1% as compared to the same period in
1996. The decreases as a percentage of product revenue are mainly attributable
to the increased volume of product shipments relative to fixed costs, and a
higher margin product mix.
Service revenue increased approximately $1.9 million, or 44.6% to $6.1
million for the third quarter of 1997 as compared to the third quarter of 1996.
Service revenue for the first nine months of 1997 increased $5.2 million, or
43.5% to $17.2 million as compared to the same period in 1996. These increases
are due to an increase in maintenance revenue related to the growth in the
number of the Company's customers, increased installation revenue related to the
increased volume of product sales, and professional services revenue.
Cost of service revenue increased approximately $1.0 million, or 35.5% to
$3.7 million for the third quarter of 1997. Cost of service revenue for the
first nine months of 1997 increased approximately $3.0 million, or 38.7% to
$10.8 million. These increases are attributable to higher payroll and related
expenses in 1997 resulting from headcount increases, increased third party
maintenance and installation charges in 1997, and accelerated depreciation on
certain service assets. As a percentage of service revenue, cost of service
revenue decreased by 4.1% and 2.2% for the third quarter and first nine months
respectively, as compared to the same periods in 1996. These decreases are
primarily attributable to the higher service revenue relative to fixed costs.
9
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANAlYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Research, development and engineering expenses increased approximately
$.7 million, or 44.7% to $2.2 million for the third quarter of 1997 as compared
to the third quarter of 1996. Research, development and engineering expenses
increased approximately $1.9 million, or 45.0% to $6.1 million for the first
nine months of 1997 as compared to the same period in 1996. These increases are
primarily attributable to higher payroll and related expenses in 1997 resulting
from headcount increases and higher outside consulting fees in 1997. As a
percentage of total revenue, research, development and engineering expenses
increased from 11.0% for the third quarter of 1996 to 11.3% for the third
quarter of 1997.
Selling, general and administrative (SG&A) expenses increased approximately
$1.3 million or 28.0% to $5.8 million for the third quarter of 1997 as compared
to the third quarter of 1996. SG&A expenses for the first nine months of 1997
increased approximately $3.9 million, or 32.0% to $16.2 million as compared to
the same period in 1996. These increases are primarily attributable to
increased payroll and related expenses in 1997 resulting from headcount
increases and indirect and direct selling expenses related to the increased
revenue. As a percentage of total revenue, SG&A expenses decreased from 32.0%
for the third quarter of 1996 to 29.2% for the third quarter of 1997 and from
32.1% for the first nine months of 1996 to 29.3% for the first nine months of
1997. These decreases are due primarily to the increases in revenue.
Interest income in 1997 was derived primarily from money market
instruments and investments in commercial paper and government securities.
Interest income increased 32.3% and 79.9% for the third quarter and first nine
months of 1997 respectively, compared to the same periods in 1996. These
increases reflect the higher average cash and cash equivalents and marketable
securities balances in 1997 compared to 1996, as well as the higher investment
returns received as a result of the Company's new investment strategy of
investing in commercial paper and government securities.
The Company provided for income taxes at its anticipated effective
annual rate, which is 12%. This rate differs from the federal statutory rate
due to utilization of net operating loss carryforwards and recognition of
deferred tax assets and tax credits.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's principal sources of liquidity
were its cash and cash equivalent balances of approximately $27.4 million, its
marketable securities of approximately $15.6 million, and its accounts
receivable of approximately $9.0 million. As of the end of fiscal year 1996,
the Company's cash and cash equivalent balances were approximately $21.3
million, its marketable securities were approximately $9.8 million, and its
10
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
accounts receivable were approximately $3.2 million. The overall increase in
cash and cash equivalents and marketable securities was due primarily to the
favorable operating results, collection of deferred annual maintenance
contracts, and proceeds from exercises of stock options. The increase in
accounts receivable over year end was primarily due to an unusually large number
of product sales in the fourth quarter of 1996 being paid in full before year
end. In addition, the Company has an agreement for a working capital line of
credit with a bank for maximum borrowings up to $2.0 million based on eligible
receivables, as defined. There were no outstanding balances under the line of
credit as of September 30, 1997.
At September 30, 1997, the working capital of the Company increased to
approximately $32.1 million from approximately $18.7 million as of December 31,
1996. The increase was primarily attributable to increases in cash and cash
equivalents, marketable securities, and accounts receivable due to the favorable
operating results for the first nine months of 1997.
Management believes, based on its current operating plan, that the
Company's existing cash and cash equivalents, marketable securities, cash
generated from operations, and amounts available under its working capital line
of credit will be sufficient to meet the Company's cash requirements for the
next twelve months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements
made by its employees or information included in its filings with the Securities
exchange Commission (including this Form 10-Q), may, in addition to historical
information, contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1993, as amended and Section 21E of the Securities
and Exchange Act of 1934, as amended, and are subject to the safe harbors
created thereby. The company's future actual results could differ materially
from the forward-looking statements discussed or implied herein because of risks
or uncertainties including, but not limited to, risks associated with
competition and competitive pricing pressures, technological change, new product
introduction and market acceptance, the ability of Davox to attract and retain
key personnel, general economic conditions in the United States or worldwide
markets served by Davox, and those other factors discussed from time to time in
Davox's public reports filed with the Securities and Exchange Commission, such
as those discussed under "Factors Which May Affect Future Operating Results" in
Davox's report on Form 10-K.
11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material changes since the Company's Annual Report on
Form 10-K for the period ended December 31, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit
Number Description of Exhibit
------- -----------------------
27 Article 5 - Summary Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAVOX CORPORATION
Date: October 31, 1997 By: /s/ Alphonse M. Lucchese
------------------------
Alphonse M. Lucchese
President, Chief
Executive Officer and
Chairman (Principal
Executive Officer)
Date: October 31, 1997 By: /s/ John J. Connolly
--------------------
John J. Connolly
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,386,208
<SECURITIES> 15,598,546
<RECEIVABLES> 9,661,026
<ALLOWANCES> 685,000
<INVENTORY> 470,118
<CURRENT-ASSETS> 52,579,429
<PP&E> 4,866,876
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,512,030
<CURRENT-LIABILITIES> 20,466,854
<BONDS> 0
0
0
<COMMON> 1,163,307
<OTHER-SE> 35,906,015
<TOTAL-LIABILITY-AND-EQUITY> 57,512,030
<SALES> 38,040,263
<TOTAL-REVENUES> 55,244,603
<CGS> 8,829,778
<TOTAL-COSTS> 19,624,530
<OTHER-EXPENSES> 6,137,139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,352,166
<INCOME-PRETAX> 14,674,167
<INCOME-TAX> 1,760,903
<INCOME-CONTINUING> 12,913,264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,913,264
<EPS-PRIMARY> $1.02
<EPS-DILUTED> $1.02
</TABLE>
