<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, 1998
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 30, 1998: 14,256,998 shares.
<PAGE>
DAVOX CORPORATION & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements: Page No.
-------
Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Statements of Income
for the Three Months and Nine Months ended
September 30, 1998 and 1997 4
Statements of Cash Flows
for the Nine Months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. CONSOLIDATED FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,744 $ 28,639
Marketable securities 33,883 23,802
Accounts receivable, net of reserves of
approximately $941 and $1,134
in 1998 and 1997, respectively 18,043 12,599
Interest receivable 1,232 -
Deferred tax assets 9,319 9,319
Prepaid expenses and other current assets 1,347 1,123
------------------- -------------------
Total current assets 86,568 75,482
------------------- -------------------
Property and equipment, net 5,714 5,248
Long-term deferred tax assets 669 669
Other assets 457 161
------------------- -------------------
$ 93,408 $ 81,560
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,294 $ 5,247
Accrued expenses 13,708 10,837
Customer deposits 1,536 2,018
Deferred revenue 5,148 4,355
Current portion of long-term obligations - 178
------------------- -------------------
Total current liabilities 25,686 22,635
------------------- -------------------
Deferred revenue - net of current portion 79 253
Long-term obligations - net of current portion - 297
------------------- -------------------
Total long term liabilities 79 550
------------------- -------------------
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 14,253,930 and 13,868,097
shares in 1998 and 1997, respectively 1,425 1,387
Capital in excess of par value 72,986 71,598
Cumulative translation adjustments (47) 7
Accumulated deficit (6,697) (14,593)
------------------- -------------------
67,667 58,399
Less - Treasury stock, 3,294 shares at cost (24) (24)
------------------- -------------------
Total stockholders' equity 67,643 58,375
------------------- -------------------
$ 93,408 $ 81,560
=================== ===================
</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
(In Thousands, Except Share and Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product revenue $ 11,759 $ 14,494 $ 43,186 $ 41,548
Service revenue 9,180 6,391 26,363 18,288
----------- ---------- ----------- -----------
Total revenue 20,939 20,885 69,549 59,836
----------- ---------- ----------- -----------
Cost of product revenue 2,346 2,969 8,297 8,961
Cost of service revenue 5,250 4,026 14,811 11,786
----------- ---------- ----------- -----------
Total cost of revenue 7,596 6,995 23,108 20,747
----------- ---------- ----------- -----------
Gross profit 13,343 13,890 46,441 39,089
----------- ---------- ----------- -----------
Operating expenses:
Research, development and engineering expenses 3,019 2,761 9,041 7,526
Selling, general and administrative expenses 8,198 7,833 26,336 20,988
Non-recurring merger transaction costs - - 1,329 -
Non-recurring merger-related integration costs - - 597 -
----------- ---------- ----------- -----------
Total operating expenses 11,217 10,594 37,303 28,514
----------- ---------- ----------- -----------
Income from operations 2,126 3,296 9,138 10,575
Other income, net 727 510 2,200 1,408
----------- ---------- ----------- -----------
Income before provision for income taxes 2,853 3,806 11,338 11,983
Provision for income taxes 970 675 3,855 1,761
----------- ---------- ----------- -----------
Net income $ 1,883 $ 3,131 $ 7,483 $ 10,222
=========== ========== =========== ===========
Earnings per share:
Basic $ 0.13 $ 0.24 $ 0.53 $ 0.80
=========== ========== =========== ===========
Diluted $ 0.13 $ 0.22 $ 0.50 $ 0.72
=========== ========== =========== ===========
Weighted average shares outstanding:
Basic 14,233,907 12,886,838 14,072,981 12,701,065
=========== ========== =========== ===========
Diluted 14,819,567 14,362,668 14,843,465 14,144,014
=========== ========== =========== ===========
</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
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 7,483 $ 10,222
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 2,450 2,778
Provision for losses on accounts receivable 116 116
Changes in current assets and liabilities -
Accounts receivable (5,560) (5,998)
Interest receivable (1,232) -
Prepaid expenses and other current assets (224) 826
Accounts payable 47 64
Accrued expenses 2,816 2,484
Customer deposits (482) (641)
Deferred revenue 619 996
---------- ----------
Net cash provided by operating activities 6,033 10,847
---------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment (2,916) (3,962)
(Increase) decrease in other assets (295) 113
Purchases of marketable securities (63,386) (21,405)
Sales of marketable securities 53,305 15,587
---------- ----------
Net cash used in investing activities (13,292) (9,667)
---------- ----------
Cash Flows From Financing Activities:
Principal (payments) borrowings of long-term obligations (475) 437
Payment of note receivable from officers 414 -
Proceeds from issuance of preferred stock - 5,075
Proceeds from exercise of stock options 971 1,107
Proceeds from employee stock purchase plan 454 245
---------- ----------
Net cash provided by financing activities 1,364 6,864
---------- ----------
Net (decrease) increase in cash and cash equivalents (5,895) 8,044
Cash and cash equivalents, beginning of period 28,639 24,275
---------- ----------
Cash and cash equivalents, end of period $ 22,744 $ 32,319
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 1,340 $ 181
========== ==========
</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 that was filed with the Securities and
Exchange Commission on March 6, 1998. In the opinion of management, the
accompanying unaudited consolidated financial statements include all 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, 1998 may not be indicative of the results that may be
expected for the full fiscal year.
2. Acquisition of AnswerSoft, Inc.
In May 1998, the Company acquired AnswerSoft, Inc., (ASI), a Richardson,
Texas developer of inbound call center software solutions, in exchange for the
issuance of an aggregate of 2,384,452 shares of Davox common stock, including
shares which were subject to outstanding ASI stock options and warrants. In
connection with the merger with ASI, the Company incurred non-recurring merger
transaction costs, primarily professional fees, of $1.3 million. In addition,
the Company incurred non-recurring costs, primarily severance and lease
termination costs, of $597,000 related to the integration of the two businesses.
The acquisition was accounted for as a pooling of interests under Accounting
Principles Board Opinion No. 16. Accordingly, the historical information for
1998 and 1997 has been retroactively restated to reflect the merger. Revenue
and net income (loss) for the separate entities prior to the acquisition and
restated for the combined Company are as follows:
For the Nine Months
Ended September 30,
1997
----
Davox
-----
Total revenue $55,244
Net income $12,913
AnswerSoft
----------
Total revenue $ 4,592
Net loss $(2,691)
Combined
--------
Total revenue $59,836
Net Income $10,222
6
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. 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.
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, 1998 consist primarily of Eurodollar bonds and commercial paper
with original maturities of less than one year, and they are recorded at
amortized cost.
5. Derivative Financial Instruments and Fair Value of Financial Instruments
The Company does not have any derivative or other financial instruments
as defined by SFAS No. 119, Disclosures About Derivative Financial Instruments
and Fair Value of Financial Instruments.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
short-term investments, accounts receivable and accounts payable. The estimated
fair value of these financial instruments approximates their carrying value at
September 30, 1998 and December 31, 1997 due to the short-term nature of these
instruments.
6. Provision for Income Taxes
In accordance with generally accepted accounting principles, the
Company provides for income taxes on an interim basis using its estimated annual
effective income tax rate. The Company is providing for income taxes in 1998 at
an effective tax rate of 34%, which is lower than the combined federal and state
statutory tax rates due primarily to the utilization of tax credits and benefits
derived from the Company's foreign sales corporation.
7
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. Earnings Per Share
In March 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share. This statement established standards for
computing and presenting earnings per share and applies to entities with
publicly traded common stock or potential common stock. This statement is
effective for fiscal years ending after December 15, 1997. The prior years'
earnings per share have been retroactively restated in accordance with this
statement. Basic earnings per share was determined by dividing net income by
the weighted average shares of common stock outstanding during the year.
Diluted earnings per share reflects the dilution of the potentially dilutive
securities, primarily stock options based on the treasury stock method.
The calculation of basic and diluted shares outstanding is as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
------ ------ ------ -----
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 14,234 12,887 14,073 12,701
Weighted average common equivalent shares 586 1,476 770 1,443
------ ------ ------ ------
Diluted weighted average shares outstanding 14,820 14,363 14,843 14,144
====== ====== ====== ======
</TABLE>
For the three month period ended September 30, 1998, 1,777,602 weighted
average common equivalent shares were not included in the diluted weighted
average shares outstanding as they were antidilutive. For the three month
period ended September 30, 1997, there were no antidilutive shares. For the
nine month period ended September 30, 1998, 1,180,787 weighted average common
equivalent shares were not included in the diluted weighted average shares
outstanding as they were antidilutive. For the nine month period ended
September 30, 1997, there were no antidilutive shares.
8. Revenue Recognition
In October 1997, the American Institute of Certified Public Accountants
issued SOP 97-2, Software Revenue Recognition. The Company believes that its
revenue recognition practices are consistent with those required by SOP 97-2.
9. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources.
8
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. Comprehensive Income (continued)
The components of comprehensive income are as follows (in thousands):
For the Three Months For the Nine Months
Ended Sept. 30, 1998 Ended Sept. 30, 1998
--------------------- ---------------------
Net income $1,883 $7,483
Foreign currency translation
adjustments (5) (54)
------ ------
Comprehensive income $1,878 $7,429
====== ======
10. Recently Issued Accounting Standards
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997, and interim period reporting is not
required until interim periods beginning after December 15, 1998. Unless
impracticable, companies would be required to restate prior period information
upon adoption. Management does not expect the adoption of this standard to have
a material impact on the Company and its operations.
9
<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, 1998 and 1997
Total revenue for the third quarter of 1998 increased approximately $54,000,
or 0.3% to $20.9 million compared to the same period in 1997, while total
revenue for the first nine months of 1998 increased approximately $9.7 million,
or 16.2% to $69.5 million as compared to the same period in 1997.
Product revenue for the third quarter of 1998 decreased approximately $2.7
million, or 18.9% to $11.8 million compared to the third quarter of 1997. This
decrease was due to lower sales of Unison(R) systems with collections and
telemarketing applications, which was partially offset by higher sales of
Concerto(TM) inbound products. Product revenue for the first nine months of
1998 increased approximately $1.6 million, or 3.9% to $43.2 million compared to
the first nine months of 1997. This increase for the first nine months of 1998
was due primarily to the higher sales of Unison(R) systems with collections
applications, achieved during the first and second quarters of 1998.
Cost of product revenue for the third quarter of 1998 decreased approximately
$623,000, or 21.0% to $2.3 million compared to the same period in 1997. As a
percentage of product revenue, the cost of product revenue decreased by 0.5% in
the third quarter of 1998 compared to the same period in 1997. This decrease was
due primarily to the lower product volume in the quarter and to a continued
decrease in the hardware content of the Company's products. Cost of product
revenue for the first nine months of 1998 decreased approximately $664,000, or
7.4% to $8.3 million compared to the same period in 1997. As a percentage of
product revenue, the cost of product revenue for the first nine months of 1998
decreased 2.4% compared to the same period in 1997. The decrease in cost of
product revenue for the first nine months of 1998 was due primarily to the
continued decrease in the hardware content of the Company's products.
Service revenue for the third quarter of 1998 increased approximately $2.8
million, or 43.6% to $9.2 million compared to the same period in 1997. Service
revenue for the first nine months of 1998 increased approximately $8.1 million,
or 44.2% to $26.4 million compared to the same period in 1997. The increases in
service revenue for the third quarter of 1998 and for the first nine months of
1998 were due to increases in maintenance revenue, implementation revenue, and
professional services revenue in 1998 as compared to 1997, resulting from
increases in the number of the Company's customers.
Cost of service revenue for the third quarter of 1998 increased approximately
$1.2 million, or 30.4% to $5.2 million compared to the same period in 1997. Cost
of service revenue for the first nine months of 1998 increased approximately
$3.0 million, or 25.7% to $14.8 million compared to the same period in 1997.
These increases were attributable to higher payroll and payroll related expenses
in 1998 resulting from customer service headcount increases, higher recruiting
and consulting costs.
10
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
As a percentage of service revenue, cost of service revenue decreased by
5.8% in the third quarter of 1998 compared to the same period in 1997, and
decreased by 8.3% for the first nine months of 1998 compared to the same period
in 1997. These decreases as a percentage of service revenue were primarily
attributable to the higher service revenue relative to fixed costs.
Research, development and engineering expenses increased approximately
$258,000, or 9.3% to $3.0 million for the third quarter of 1998 as compared to
the same period in 1997. Research, development and engineering expenses
increased approximately $1.5 million, or 20.1% to $9.0 million for the first
nine months of 1998 compared to the same period in 1997. These increases were
primarily attributable to higher payroll and related expenses, higher
documentation and depreciation expenses incurred in 1998.
Selling, general and administrative (SG&A) expenses increased by
approximately $365,000, or 4.7% to $8.2 million for the third quarter of 1998
compared to the same period in 1997. This increase was due to higher payroll
and sales related expenses resulting from a larger headcount in the sales force
in the third quarter of 1998. SG&A expenses increased by approximately $5.3
million, or 25.5% to $26.3 million for the first nine months of 1998 compared to
the same period in 1997. This increase was attributable to higher payroll and
sales related expenses resulting from a larger headcount in the sales force in
1998.
In connection with the merger with AnswerSoft, Inc., the Company incurred
non-recurring merger transaction costs, primarily professional fees, of $1.3
million. In addition, the Company incurred non-recurring costs, primarily
severance and lease termination costs, of $597,000 related to the integration of
the two businesses.
Other income in 1998 was derived primarily from investments in Eurodollar
bonds, commercial paper, and money market instruments, net of interest expense.
Other income increased 42.5% for the third quarter of 1998 compared to the same
period in 1997. Other income increased 56.3% for the first nine months of 1998
compared to the same period in 1997. These increases reflect the higher average
cash and marketable securities balances in 1998 compared to 1997.
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis using its estimated annual
effective income tax rate. The Company is providing for income taxes in 1998 at
an effective tax rate of 34%, which is lower than the combined federal and state
statutory tax rates due primarily to the utilization of tax credits and benefits
derived from the Company's foreign sales corporation. For the first nine months
of 1997, the Company had available significant net operating loss carryforwards
and provided for federal alternative minimum tax, as well as for state income
taxes in those states which do not allow for net operating loss carryforwards,
at an effective tax rate of 14.7%.
11
<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
As of September 30, 1998, the Company's principal sources of liquidity were
its cash and cash equivalent balances of approximately $22.7 million as well as
its marketable securities of approximately $33.9 million. As of December 31,
1997, the Company's cash and cash equivalent balances were approximately $28.6
million and its marketable securities were approximately $23.8 million. The
overall increase of approximately $4.2 million in the total cash and marketable
securities was due primarily to favorable operating results, increase in
interest income, and proceeds from exercises of stock options, offset by the
purchase of property and equipment. In addition, the Company has an agreement
for a working capital line of credit with a bank for 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, 1998.
The Company's primary investing activities were purchases of property and
equipment, and purchases and sales of marketable securities. Property and
equipment purchases totaled approximately $2.9 million during the first nine
months of 1998, compared to approximately $4.0 million during the first nine
months of 1997. Purchases and sales of marketable securities generated a net
cash outflow of approximately $10.1 million during the first nine months of
1998, compared to a net cash outflow of approximately $5.8 million during the
first nine months of 1997.
Cash provided by financing activities during the first nine months of 1998
totaled approximately $1.4 million, and was generated primarily from proceeds
from exercises of stock options, from purchases of stock through the Company's
employee stock purchase plan, and from repayment of a note receivable from an
AnswerSoft officer, offset by payment of long-term obligations. Cash provided
by financing activities during the first nine months of 1997 totaled
approximately $6.9 million, and was generated primarily from issuance of
preferred stock, from exercises of stock options, from purchases of stock
through the employee stock purchase plan, and from borrowings of long-term
obligations.
At September 30, 1998, the working capital of the Company increased to
approximately $60.9 million from approximately $52.8 million as of December 31,
1997. This increase was primarily attributable to the higher total cash and
marketable securities balance from favorable operating results in 1998, and
increases in interest and account receivables.
Management believes, based on its current operating plan, that the Company's
existing cash and 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.
12
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ACQUISITION OF ANSWERSOFT, INC.
In May 1998, the Company acquired AnswerSoft, Inc., (ASI), a Richardson,
Texas developer of inbound call center software solutions, in exchange for the
issuance of an aggregate of 2,384,452 shares of Davox common stock, including
shares which were subject to outstanding ASI stock options and warrants. In
connection with the merger with ASI, the Company incurred non-recurring merger
transaction costs, primarily professional fees, of $1.3 million. In addition,
the Company incurred non-recurring costs, primarily severance and lease
termination costs, of $597,000 related to the integration of the two businesses.
The acquisition was accounted for as a pooling of interests under Accounting
Principles Board Opinion No. 16. Accordingly, the historical information for
1998 and 1997 has been retroactively restated to reflect the merger.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 presents potential concerns and issues for the Company as
well as other companies in the information technology industry. In general, Year
2000 compliance issues typically arise in computer software and hardware systems
that use two digit date formats, instead of four digit dates, to represent a
particular year. Users must test their unique combination of hardware, system
software (including databases, transaction processors, and operating systems)
and application software in order to achieve Year 2000 readiness.
Year 2000 Committee
- -------------------
The Company has established a Year 2000 steering committee under the
auspices of the Company's senior technical executive to evaluate, plan and
implement policies and practices, including contingency planning, and to address
the impact of the Year 2000 on the Company and its products. The Company's Year
2000 readiness preparations fall into three categories: (1) product readiness,
addressing product functionality; (2) internal readiness, addressing the Year
2000 operability of internal information technology ("IT") systems and mission
critical non-IT systems; and (3) third party readiness, addressing the
preparedness of relevant third parties and the Year 2000 operability of products
furnished for internal use and resale. After reviewing these areas, the
committee will report to the Board of Directors specific areas of concern and a
plan for resolving and further testing of any remaining Year 2000 issues. The
committee will also formulate a contingency plan in the event that the committee
reasonably determines that certain Year 2000 issues may not be resolved by the
end of 1999 or if unforeseen problems arise.
13
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Status of Investigation--Product Readiness
- -------------------------------------------
The Company has established Year 2000 date operability standards against
which the most current versions of its software products are being tested. The
Company has completed testing of its current line of Unison software products
and believes the most current versions conform to these standards and are Year
2000 ready. In connection with the acquisition of AnswerSoft, Inc. in May 1998,
the Company acquired the Concerto line of software tool products. The Company
has completed testing of the core Concerto software products and the Company
expects to complete testing of the remaining Concerto products by the end of the
first quarter of 1999. Based on its preliminary test results, the Company
believes that the core Concerto software products conform to its test standards
and are Year 2000 ready. Despite the Company's preliminary testing, there can
be no assurance that the Company's products do not contain undetected errors or
defects related to Year 2000 operability that may result in material costs to
the Company or that the Company's products contain all features and
functionality considered necessary by customers, end users and distributors to
be Year 2000 ready.
In early 1994, the Company discontinued its Computerized Automated Dialing
System ("CAS") and Communications Resource Server ("CRS") product lines and
introduced the Unison brand line of software products. Support of the CAS and
CRS products will be discontinued as of December 31, 1999. The Company has not
tested the CAS and CRS product lines and believes they do not conform to its
test standards and are not Year 2000 ready. The Company has actively been
notifying known users of these products that support is being discontinued and
that users may experience Year 2000 related operability issues. Users of these
discontinued or "legacy" products are being encouraged to migrate to the Unison
product line. The Company's exposure arising from its legacy products is not
known. The Company does expect to incur additional costs associated with
migrating users of legacy products, but does not believe these costs will be
material.
While the Company believes that most of its products are Year 2000 ready,
other factors may result in an application created using the Company's products
not being Year 2000 ready. Some of these factors include improper programming
techniques used by third parties in creating the application, customization, or
non-compliance of hardware, software or firmware not provided by the Company
with which the products operate. The Company does not believe that it would be
liable in such an event. However, due to the unprecedented nature of the
potential litigation related to Year 2000 readiness as discussed in the industry
and popular press, the most likely worst case scenario is that the Company would
be subject to litigation. It is uncertain whether or to what extent the Company
may be affected by such litigation.
14
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Status of Investigation--Product Readiness (continued)
- ------------------------------------------------------
The Company plans to test only the current versions of its products, and
does not plan to test earlier versions of products. The Company believes a
substantial number of the Company's customers are running product versions
which have not been tested and may experience Year 2000 date related operability
issues. The Company is in the process of identifying these customers and
encouraging them to migrate to current versions of the products. Further, the
Company cautions users of such products to conduct their own Year 2000
operability testing to determine if continued use of the products allows them to
meet their own Year 2000 readiness objectives. While many Customers will be
upgraded to Year 2000 ready versions of products under maintenance coverage, if
eligible, in the normal course the Company expects to incur some increased
expenses associated with the furnishing of upgrades and modifications. In
addition, the ability of the Company to implement upgrades in time to meet
customer's Year 2000 readiness requirements requires the continued availability
of qualified technical personnel and the Company may incur additional costs to
attract and retain such personnel as the Year 2000 draws closer. The Company
does not believe that the cost of potential upgrades or modifications will have
a material effect on the Company's business, financial condition and operating
results.
Status of Investigation--Internal Readiness
- -------------------------------------------
The Company is also engaged in conducting a Year 2000 readiness audit of
its internal IT systems (including telecommunication, facilities management,
safety and security systems). Although the Company is not presently aware of
any material operational issues or costs associated with preparing its internal
IT and non-IT systems for the Year 2000, the Company is continuing its
investigation and there can be no assurance that the Company will not experience
unanticipated negative consequences or material costs caused by undetected
errors or defects in the technology used in its internal systems, which includes
third party hardware, firmware, and software. The Company will continue its
testing of internal systems through the first quarter of 2000.
Status of Investigation--Third Party Readiness
- ----------------------------------------------
The Company has not assessed fully the Year 2000 readiness of material
third parties, such as public utilities and key clients or suppliers, who
provide external services to the Company. The Company expects to substantially
complete these assessments and testing by the middle of 1999. The Company has
certain key relationships with suppliers which furnish components and software
used by the Company in its products. If these suppliers fail to adequately
address the Year 2000 issue for the products they supply the Company, this could
have a material adverse effect on the Company's operations, reputation, and
financial results. Certain of the Company's products contain third party
components and software that is integral to its operation for which the cost and
time to integrate alternative components or software into these products would
be material.
15
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Contingency Plans and Worst Case Scenario
- -----------------------------------------
At the present time, the Company does not have a contingency plan to operate
in the event that its products, systems, or business partners are not Year 2000
ready. If the Company's investigations suggest that there is a significant risk
that certain products, systems, or business partners might not be Year 2000
ready, the Company will develop a contingency plan. The Company is not in a
position to determine what would be its most reasonably likely worst case Year
2000 scenario or any plan for handling such scenario.
Costs, Source of Funds and Accounting Treatment
- -----------------------------------------------
The Company's policy is to expense all costs related to its Year 2000
compliance program unless the useful life of the technological asset is extended
or increased. The expenses incurred to date have not had a material impact on
the Company's results of operations or financial condition. At this time, the
Company intends to fund Year 2000 expenses through cash flows from operations.
The impact of the Year 2000 is difficult to discern, but is a risk to be
considered when evaluating future growth and performance of the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to historical information contained herein, this report contains
forward-looking statements concerning future expected financial and operating
results and the Company's expectations regarding Year 2000 compliance. The
Company's future actual results could differ materially from the forward-looking
statements discussed or implied in this report because of risks or uncertainties
including, but not limited to, risks associated with the acquisition of
AnswerSoft, Inc., competition and competitive pricing pressures, technological
change, new product introduction and market acceptance, the inability of the
Company to complete its Year 2000 investigation and successfully implement its
Year 2000 compliance program, the ability of Davox to attract and retain key
personnel, general economic conditions in the United States and 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 "Certain Factors That May Affect Future Results" in
Davox's quarterly reports on Form 10-Q and annual report on Form 10-K, and the
section entitled "Risk Factors" in the Company's recently filed Registration
Statement on Form S-4, file no. 333-49479.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A customer of Davox has been sued for patent infringement by
Manufacturing Administration and Management Systems, Inc. ("MAMS")
alleging that the customer's use of a computer driven automated dialer
infringes MAMS's patent. Under Davox's contract with this customer,
Davox is obligated to defend and indemnify such customer against any such
claims. In the third quarter of 1998, Davox sued MAMS in federal court
in the Eastern District of New York in an action entitled "Davox
Corporation v. Manufacturing Administration and Management Systems, Inc."
In the lawsuit, Davox is seeking a declaratory judgment that its products
do not infringe the MAMS patent or, in the alternative, that the MAMS
patent is invalid. Davox believes that MAMS's assertions of patent
infringement are without merit, and Davox will vigorously pursue this
action against MAMS.
Item 5. Other Information
Proposals of stockholders intended for inclusion in the proxy statement
to be furnished to all stockholders entitled to vote at the next annual
meeting of stockholders of the Company must be received at the Company's
principal executive offices not later than December 7, 1998. The
deadline for providing timely notice to the Company of matters that
stockholders otherwise desire to introduce at the next annual meeting of
stockholders of the Company is February 20, 1999. In order to curtail
any controversy as to the date on which a proposal was received by the
Company, it is suggested that proponents submit their proposals by
Certified Mail, Return Receipt Requested.
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,
1998.
17
<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: November 12, 1998 By: /s/ Alphonse M. Lucchese
------------------------
Alphonse M. Lucchese
Chief Executive Officer
and Chairman (Principal
Executive Officer)
Date: November 12, 1998 By: /s/ John J. Connolly
--------------------
John J. Connolly
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
18
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