<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 March 31, 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 May
4, 1998: 11,920,040 shares.
<PAGE>
DAVOX CORPORATION & SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
-------
<S> <C>
Consolidated Balance Sheets as of
March 31, 1998 (Unaudited) and December 31, 1997 3
Consolidated Statements of Income
for the three months ended March 31, 1998
and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998
and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------- --------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $21,417 $25,366
Marketable securities 34,101 23,802
Accounts receivable, net of reserves of
approximately $910 and $1,048
in 1998 and 1997, respectively 12,682 10,359
Interest receivable 543 ----
Deferred tax assets 9,319 9,319
Prepaid expenses and other current assets 1,172 969
------------- -----------
Total current assets 79,234 69,815
Property and equipment, net 4,440 4,585
Long-term deferred tax assets 669 669
Other assets 92 99
------------ -----------
$84,435 $75,168
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,172 $4,987
Accrued expenses 12,855 10,223
Customer deposits 784 2,018
Deferred revenue 6,483 3,783
------------- ------------
Total current liabilities 25,294 21,011
------------- ------------
Commitments and Contingencies
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 11,919,564 and 11,864,216
shares in 1998 and 1997, respectively 1,192 1,186
Capital in excess of par value 58,341 57,758
Cumulative translation adjustment (37) ----
Accumulated deficit (331) (4,763)
------------- ------------
59,165 54,181
Less - Treasury stock, 3,294 shares (24) (24)
------------- ------------
Total stockholders' equity 59,141 54,157
------------- -----------
$84,435 $75,168
============= ============
</TABLE>
<PAGE>
PART 1. 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
Ended March 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Product revenue $ 15,440 $ 11,792
Service revenue 7,720 5,477
---------- ----------
Total revenue 23,160 17,269
---------- ----------
Cost of product revenue 3,124 2,806
Cost of service revenue 4,444 3,503
---------- ----------
Total cost of revenue 7,568 6,309
---------- ----------
Gross profit 15,592 10,960
---------- ----------
Research, development and engineering expenses 2,486 1,882
Selling, general and administrative expenses 7,132 5,072
---------- ----------
Total operating expenses 9,618 6,954
---------- ----------
Income from operations 5,974 4,006
Interest income 758 410
Other expense 15 1
---------- ----------
Income before provisions for income taxes 6,717 4,415
Provision for income taxes 2,284 530
---------- ----------
Net income $ 4,433 $ 3,885
========== ==========
Earnings per share:
Basic $ 0.37 $ 0.35
========== ==========
Diluted $ 0.35 $ 0.31
========== ==========
Weighted average shares outstandings
Basic 11,891,443 11,224,517
========== ==========
Diluted 12,821,648 12,458,447
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income 4,433 3,885
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 696 1,007
Provision for losses on accounts receivable 24 15
Changes in current assets and liabilities -
Accounts receivable (2,347) (3,721)
Interest receivable (543) ----
Prepaid expenses and other current assets (202) 296
Accounts payable 185 117
Accrued expenses 2,595 644
Customer deposits (1,234) (1,397)
Deferred revenue 2,700 2,510
----------- -----------
Net cash provided by operating activities 6,307 3,356
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (550) (1,158)
Decrease (increase) in other assets 6 (33)
Purchases of marketable securities (22,640) (2,753)
Sales of marketable securities 12,340 5,993
----------- -----------
Net cash (used in) provided by investing activities (10,844) 2,049
----------- -----------
Cash Flows From Financing Activities:
Principal payments of long-term debt ---- (15)
Proceeds from exercise of stock options 383 550
Proceeds from employee stock purchase plan 205 84
----------- -----------
Net cash provided by financing activities 588 619
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,949) 6,024
Cash and cash equivalents, beginning of period 25,366 21,333
----------- -----------
Cash and cash equivalents, end of period $ 21,417 $ 27,357
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for income taxes $ 154 $ 3
=========== ===========
</TABLE>
<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 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 period ended March 31, 1998 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. 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
March 31, 1998 consist principally of Eurodollar bonds and commercial paper with
original maturities of less than one year, and they are recorded at amortized
cost.
The fair value of marketable securities at March 31, 1998 was approximately
equal to amortized cost. Gross unrealized holding losses at March 31, 1998 were
approximately $14,443.
4. 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 utilization of tax credits and benefits
derived from the Company's foreign sales corporation.
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. 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 calculations of basic and diluted earnings per share are as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Net Income $ 4,433 $ 3,885
====== ======
Basic weighted average shares outstanding 11,891 11,225
Weighted average common equivalent shares 931 1,233
------ ------
Diluted weighted average shares outstanding 12,822 12,458
====== ======
Basic earnings per share $0.37 $0.35
Diluted earnings per share $0.35 $0.31
</TABLE>
As of March 31, 1998 and 1997, 184,828 and 210,349 weighted average common
equivalent shares were not included in the diluted weighted average shares
outstanding as they were antidilutive.
6. Stock Split
On April 24, 1997, the Company's Board of Directors authorized a three-for-
two stock split that was effected in the form of a 50% stock dividend paid on
May 28, 1997 to shareholders of record on May 13, 1997. The financial
statements included herein have been retroactively restated for the effect of
the stock split.
7. 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.
7
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. Other 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. The Company adopted SFAS
No. 130 in 1998. The changes in the components of other comprehensive (loss)
are reported as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended
March 31, 1998
--------------
<S> <C>
Foreign currency translation
adjustments $ (37)
------
Other comprehensive (loss) $ (37)
======
</TABLE>
9. 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.
10. Subsequent Event
In March, the Company announced that it had entered into an agreement
whereby the Company would acquire AnswerSoft, Inc., 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 are subject to outstanding Answersoft, Inc. stock options and
warrants. The acquisition will be accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16 and was approved by the shareholders
of both companies on May 6, 1998.
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 Ended March 31, 1998 and 1997
Total revenue for the first quarter of 1998 increased approximately $5.9
million, or 34.1% to $23.2 million compared to the same period in 1997.
Product revenue increased approximately $3.6 million, or 30.9% to $15.4
million in the first quarter of 1998 as compared to the same period in 1997.
This increase was caused by increased demand for the Unison(R) suite of call
center management systems, especially the telemarketing, collections, inbound,
and inbound/outbound call blending capabilities.
Cost of product revenue increased approximately $318,000, or 11.3% to $3.1
million for the first quarter of 1998, but as a percentage of product revenue
decreased 3.6% as compared to the first quarter of 1997. This decrease as a
percentage of product revenue was mainly attributable to the increased volume of
product shipments relative to fixed costs, and a higher margin product mix.
Service revenue increased approximately $2.2 million, or 41.0% to $7.7
million for the first quarter of 1998 as compared to the first quarter of 1997.
This increase was 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 shipments, and increased consulting
revenue in the first quarter of 1998, as compared to the first quarter of 1997.
Cost of service revenue increased approximately $941,000, or 26.9% to $4.4
million for the first quarter of 1998. This increase was attributable to
provisions for potential customer upgrades, and higher payroll and related
expenses in 1998 resulting from headcount increases. As a percentage of service
revenue, cost of service revenue decreased by 6.4% as compared to the first
quarter of 1997. This decrease was primarily attributable to the higher service
revenue relative to fixed costs.
Research, development and engineering expenses increased approximately
$604,000, or 32.1% to $2.5 million for the first quarter of 1998 as compared to
the same period in 1997. This increase was primarily attributable to higher
payroll and related expenses in 1998 resulting from headcount increases, and
higher consulting and depreciation expenses incurred in 1998. As a percentage
of total revenue, research, development and engineering expenses decreased 0.2%
from 10.9% for the first quarter of 1997 to 10.7% for the first quarter of 1998.
9
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Selling, general and administrative (SG&A) expenses increased by
approximately $2.1 million or 40.6% to $7.1 million for the first quarter of
1998 as compared to the same period in 1997. This increase was primarily
attributable to increased payroll and related expenses in 1998 resulting from
headcount increases and direct and indirect selling expenses related to the
increased product and service revenue.
Interest income in 1998 was derived primarily from money market
instruments and investments in bonds and commercial paper. Interest income
increased 84.9% for the first quarter of 1998, compared to the same period in
1997. This increase reflects 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 utilization of tax credits and benefits
derived from the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's principal sources of liquidity
were its cash and cash equivalent balances of approximately $21.4 million as
well as its marketable securities of approximately $34.1 million. As of the end
of fiscal year 1997, the Company's cash and cash equivalent balances were
approximately $25.4 million and its marketable securities were approximately
$23.8 million. The increase was due primarily to favorable operating results,
and proceeds from exercises of stock options. 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 March 31, 1998.
The Company's primary investing activities were purchases and sales of
marketable securities and purchases of property and equipment. Property and
equipment purchases were approximately $0.5 million during the first quarter of
1998, compared to approximately $1.2 million during the first quarter of 1997.
Purchases and sales of marketable securities generated a net cash outflow of
approximately $10.3 million during the first quarter of 1998, compared to a net
cash inflow of approximately $3.2 million during the first quarter of 1997.
Cash provided by financing activities is generated primarily from
proceeds from exercises of stock options, and proceeds from purchases of stock
through the Company's employee stock purchase plan. Proceeds from exercises of
stock options were approximately $0.4 million during the first quarter of 1998,
compared to approximately $0.5 million during the first quarter of 1997.
Proceeds from purchases of stock through the employee stock purchase plan were
approximately $0.2 million during the first quarter of 1998, compared to
approximately $0.1 million during the first quarter of 1997.
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)
At March 31, 1998, the working capital of the Company increased to
approximately $53.9 million from approximately $48.8 million as of December 31,
1997. The increase was primarily attributable to the net income of
approximately $4.4 million for the first three months of 1998, and the Company's
recognition of its short term deferred tax assets in 1997 of approximately $9.3
million.
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.
ACQUISITION OF ANSWERSOFT, INC.
In March, the Company announced that it had entered into an agreement
whereby the Company would acquire AnswerSoft, Inc., 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 are subject to outstanding AnswerSoft, Inc., stock options and
warrants. The acquisition will be accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16 and was approved by the shareholders
of both companies on May 6, 1998.
11
<PAGE>
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to historical information contained herein, this report
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended, and the statements 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 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 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 Form S-4.
Year 2000 Systems Modifications - We are continually in the process of
updating our products, information and network systems and, as part of that
process, we are evaluating the costs associated with modifying and testing our
systems for the Year 2000. We expect to make some of the necessary modifications
through our ongoing investment in systems upgrades. We are not yet able to
estimate the incremental cost of the Year 2000 conversion effort but such costs
will be expensed as incurred. The costs incurred to date have not been material.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Corporation's inability to implement such changes could have an adverse effect
on future results of operations.
Note: Davox and Unison are registered trademarks and LYRICall and ComposeIt are
trademarks of Davox Corporation. All other marks are the properties of their
respective holders.
12
<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, 1997.
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) A current report on Form 8-K was filed on March 17, 1998,
reporting, pursuant to Item 5, the Company's entering into an
Agreement and Plan of Merger among the Company, Duke Acquisition
Corporation ("DAC") and AnswerSoft, Inc. ("AnswerSoft") pursuant
to which DAC will be merged with and into AnswerSoft and
AnswerSoft will become a wholly-owned subsidiary of the Company.
Pro forma financial information of the Company and AnswerSoft was
filed as part of the Form 8-K.
13
<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: May 6, 1998 By: /s/ Alphonse M. Lucchese
------------------------
Alphonse M. Lucchese
Chief Executive Officer
and Chairman (Principal
Executive Officer)
Date: May 6, 1998 By: /s/ John J. Connolly
--------------------
John J. Connolly
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,417
<SECURITIES> 34,101
<RECEIVABLES> 13,592
<ALLOWANCES> 910
<INVENTORY> 940
<CURRENT-ASSETS> 79,234
<PP&E> 4,440
<DEPRECIATION> 0
<TOTAL-ASSETS> 84,435
<CURRENT-LIABILITIES> 25,294
<BONDS> 0
0
0
<COMMON> 1,192
<OTHER-SE> 57,973
<TOTAL-LIABILITY-AND-EQUITY> 84,435
<SALES> 15,440
<TOTAL-REVENUES> 23,160
<CGS> 3,124
<TOTAL-COSTS> 7,568
<OTHER-EXPENSES> 2,486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 758
<INCOME-PRETAX> 6,717
<INCOME-TAX> 2,284
<INCOME-CONTINUING> 4,433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,433
<EPS-PRIMARY> 0.37<F1>
<EPS-DILUTED> 0.35
<FN>
<F1>Information has been prepared in accordance with SFAS No. 128. Basic and
diluted EPS have been reported in place of primary and fully diluted.
</FN>
</TABLE>
