<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, 1999
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 27, 1999: 13,206,687 shares.
<PAGE>
DAVOX CORPORATION & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
-------
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risks 16 - 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,326 $31,759
Marketable securities 33,308 27,711
Accounts receivable, net of reserves of $1,373 and
$1,175 in 1999 and 1998, respectively 20,147 15,959
Interest receivable 691 739
Deferred tax assets 4,887 4,887
Prepaid expenses and other current assets 1,225 1,776
-------- -------
Total current assets 84,584 82,831
Property and equipment, net 5,239 5,298
Other assets 1,063 1,294
-------- -------
$ 90,886 $89,423
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,933 $ 4,965
Accrued expenses 9,832 9,461
Customer deposits 2,128 1,892
Deferred revenue 5,681 3,778
-------- -------
Total current liabilities 23,574 20,096
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000 shares
Issued - 14,536 and 14,349 shares in 1999
and 1998, respectively 1,454 1,435
Additional paid-in capital 74,136 73,555
Accumulated foreign currency translation adjustments 32 11
Retained earnings (deficit) 1,931 (5,650)
-------- -------
77,553 69,351
Treasury stock, 1,330 and 3 shares, at cost,
in 1999 and 1998, respectively (10,241) (24)
-------- -------
Total stockholders' equity 67,312 69,327
-------- -------
$ 90,886 $89,423
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM I. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Product revenue $14,035 $11,759 $37,856 $43,186
Service revenue 10,011 9,180 28,447 26,363
------- ------- ------- -------
Total revenue 24,046 20,939 66,303 69,549
Cost of product revenue 2,670 2,346 7,075 8,297
Cost of service revenue 5,171 5,250 15,745 14,811
------- ------- ------- -------
Total cost of revenue 7,841 7,596 22,820 23,108
Gross profit 16,205 13,343 43,483 46,441
Operating expenses:
Research, development and engineering 3,356 3,019 9,615 9,041
Selling, general and administrative 9,507 8,198 26,959 26,336
Non-recurring merger transaction costs -- -- -- 1,329
Non-recurring merger-related integration costs -- -- -- 597
------- ------- ------- -------
Total operating expenses 12,863 11,217 36,574 37,303
Income from operations 3,342 2,126 6,909 9,138
Other income (primarily interest income) 748 727 2,012 2,200
------- ------- ------- -------
Income before provision for income taxes 4,090 2,853 8,921 11,338
Provision for income taxes 614 970 1,338 3,855
------- ------- ------- -------
Net income $ 3,476 $ 1,883 $ 7,583 $ 7,483
======= ======= ======= =======
Earnings per share:
Basic $ 0.26 $ 0.13 $ 0.56 $ 0.53
======= ======= ======= =======
Diluted $ 0.25 $ 0.13 $ 0.53 $ 0.50
======= ======= ======= =======
Weighted average shares outstanding:
Basic 13,126 14,234 13,636 14,073
======= ======= ======= =======
Diluted 13,841 14,820 14,207 14,843
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM I. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 7,583 $ 7,483
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 2,615 2,450
Changes in current assets and liabilities -
Accounts receivable (4,188) (5,444)
Interest receivable 48 (1,232)
Prepaid expenses and other current assets 551 (224)
Accounts payable 969 47
Accrued expenses 371 2,870
Customer deposits 236 (482)
Deferred revenue 1,902 619
-------- --------
Net cash provided by operating activities 10,087 6,087
Cash Flows From Investing Activities:
Purchases of property and equipment (2,557) (2,916)
Decrease (increase) in other assets 231 (295)
Purchases of marketable securities (70,452) (63,386)
Maturities of marketable securities 64,855 53,305
-------- --------
Net cash used in investing activities (7,923) (13,292)
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 321 971
Proceeds from employee stock purchase plan 278 454
Purchases of treasury stock (10,217) --
Principal payments of long-term obligations -- (475)
Payment of note receivable from officer -- 414
-------- --------
Net cash (used in) provided by financing activities (9,618) 1,364
Effect of exchange rate differences on cash 21 (54)
-------- --------
Net decrease in cash and cash equivalents (7,433) (5,895)
Cash and cash equivalents, beginning of period 31,759 28,639
-------- --------
Cash and cash equivalents, end of period $ 24,326 $ 22,744
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 826 $ 1,340
======== ========
</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 8, 1999. 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, 1999
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. 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 1999 at
an effective tax rate of 15%, which is lower than the combined federal and state
statutory tax rates due primarily to net operating loss carryforwards,
utilization of tax credits and benefits derived from the Company's foreign sales
corporation.
4. Earnings Per Share
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the basis
of the weighted average number of common shares outstanding and the effect of
dilutive stock options using the treasury stock method. A reconciliation of
basic and diluted weighted average shares outstanding is as follows (in
thousands):
6
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Earnings Per Share (continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 13,126 14,234 13,636 14,073
Effect of dilutive stock options 715 586 571 770
------ ------ ------ ------
Diluted weighted average shares outstanding 13,841 14,820 14,207 14,843
====== ====== ====== ======
</TABLE>
For the three month periods ended September 30, 1999 and 1998,
1,598,573 and 1,777,602 common equivalent shares, respectively, were not
included in the diluted weighted average shares outstanding, as they were
antidilutive. For the nine month periods ended September 30, 1999 and 1998,
1,607,478 and 1,180,787 common equivalent shares, respectively, were not
included in the diluted weighted average shares outstanding, as they were
antidilutive.
5. Comprehensive Income
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income $3,476 $1,883 $7,583 $7,483
Foreign currency translation adjustments 36 (5) 21 (54)
------ ------ ------ ------
Comprehensive income $3,512 $1,878 $7,604 $7,429
====== ====== ====== ======
</TABLE>
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Segment and Geographic Information
Product revenue from international sources totaled approximately $3.9
million and $3.7 million for the third quarter of 1999 and 1998, respectively,
and totaled approximately $8.7 million and $8.5 million for the nine month
periods ended September 30, 1999 and 1998 respectively. The Company's revenue
from international sources was primarily generated from customers located in
Europe, Canada, Asia/Pacific, and Latin America. All of the Company's product
revenue for the periods presented was shipped from its headquarters located in
the United States.
The following table represents the Company's percentage of product revenue
by geographic region from customers for the three month and nine month periods
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
1999 1998 1999 1998
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. 72.2% 68.9% 77.1% 80.4%
Europe 23.0 15.0 19.8 9.9
Asia/Pacific 2.1 6.0 1.9 3.1
Latin America 1.8 3.8 0.8 1.5
Canada 0.9 6.3 0.4 5.1
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. Statements set forth herein may
contain "forward-looking" information that involves risks and uncertainties.
Actual future financial or operating results may differ materially from such
forward-looking statements. Statements indicating that the Company "expects,"
"estimates," "believes," "is planning," or "plans to" are forward looking, as
are other statements concerning future financial or operating results, product
offerings or other events that have not yet occurred. There are several
important factors that could cause actual results or events to differ materially
from those anticipated by the forward-looking statements. Such factors are
described in greater detail under Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Future Results. Although the Company has sought to identify the most significant
risks to its business, the Company cannot predict whether, or to what extent,
any of such risks may be realized nor can there be any assurance that the
Company has identified all possible issues that the Company may face.
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, 1999 and 1998
Total revenue for the third quarter of 1999 increased approximately $3.1
million, or 14.8%, to $24.0 million compared to the same period in 1998, while
total revenue for the first nine months of 1999 decreased approximately $3.2
million, or 4.7%, to $66.3 million compared to the same period in 1998.
Product revenue for the third quarter of 1999 increased approximately $2.3
million, or 19.4%, to $14.0 million compared to the same period in 1998, while
product revenue for the first nine months of 1999 decreased approximately $5.3
million, or 12.3%, to $37.9 million compared to the same period in 1998. The
increase in the third quarter of 1999 was due to increased sales in the U.S. and
Europe, primarily for Unison(R) systems used for collections applications. The
decrease for the first nine months of 1999 was due to the effect of lower sales
of Unison(R) systems in the first and second quarters of 1999 compared to the
same periods in 1998.
Cost of product revenue for the third quarter of 1999 increased
approximately $324,000, or 13.8%, to $2.7 million compared to the same period in
1998. Cost of product revenue for the first nine months of 1999 decreased
approximately $1.2 million, or 14.7%, to $7.1 million compared to the same
period in 1998. The increase in the third quarter of 1999 was due to increased
product shipments compared to the third quarter of 1998. The decrease in the
first nine months of 1999 was attributable to lower product shipments in the
first nine months of 1999 compared to the same period in 1998.
Service revenue for the third quarter of 1999 increased approximately
$831,000, or 9.1%, to $10.0 million compared to the same period in 1998.
Service revenue for the first nine months of 1999 increased approximately $2.1
million, or 7.9%, to $28.4 million compared to the same period in 1998. The
increase in service revenue was primarily the result of growth in the Company's
installed customer base, resulting in increased new and renewed contract
maintenance, professional services, and educational services revenue in 1999, as
compared to 1998.
Cost of service revenue for the third quarter of 1999 decreased
approximately $79,000, or 1.5%, to $5.2 million compared to the same period in
1998. Cost of service revenue for the first nine months of 1999 increased
approximately $934,000, or 6.3%, to $15.7 million compared to the same period in
1998. The decrease during the third quarter was attributable to lower third
party consulting costs and lower travel costs, which were only partially offset
by higher payroll and related expenses resulting from customer service headcount
increases. The increase during the first nine months of 1999 was due primarily
to increased payroll and related expenses.
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
$337,000, or 11.2%, to $3.4 million for the third quarter of 1999 as compared to
the same period in 1998. Research, development and engineering expenses
increased approximately $574,000, or 6.3%, to $9.6 million for the first nine
months of 1999 compared to the same period in 1998. These increases were
primarily due to higher salaries and related expenses, higher depreciation
expense resulting from equipment purchases and higher consulting costs related
to new product development, specifically Ensemble(TM).
Selling, general and administrative (SG&A) expenses increased by
approximately $1.3 million, or 16.0%, to $9.5 million for the third quarter of
1999 compared to the same period in 1998. SG&A expenses increased by
approximately $623,000, or 2.4%, to $27.0 million for the first nine months of
1999 compared to the same period in 1998. The increase for the third quarter of
1999 was attributable to higher commission and bonus expenses, increased
marketing program expenditures and increased salary and related expenses
compared to the same period in 1998. The increase for the first nine months of
1999 is due primarily to increased marketing program expenditures and higher
bonus expenses, partially offset by lower travel and related expenses compared
to the same period in 1998.
For the nine month period ended September 30, 1998, the Company incurred
approximately $1.9 million in non-recurring merger costs in relation to the
acquisition of AnswerSoft, Inc.
Other income in 1999 was derived primarily from interest income from
investments in commercial paper, corporate bonds, Eurodollar bonds, and similar
financial instruments, net of investment fees. Other income increased 2.9% for
the third quarter of 1999 compared to the same period in 1998, and decreased
8.5% for the first nine months of 1999 compared to the same period in 1998. The
increase for the third quarter of 1999 is due to the higher average cash and
investment balance compared to the same period in 1998. The decrease for the
first nine months of 1999 is primarily due to lower marketable securities
balances in the first and second quarters of 1999 resulting from the repurchase
of 1,326,400 shares of the Company's common stock during the period for
approximately $10.2 million.
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 1999 at
an effective tax rate of 15%, which is lower than the combined federal and state
statutory tax rates due primarily to net operating loss carryforwards,
utilization of tax credits and benefits derived from the Company's foreign sales
corporation.
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
As of September 30, 1999, the Company's principal sources of liquidity were
its cash and cash equivalent balances of approximately $24.3 million, as well as
its marketable securities of approximately $33.3 million. At December 31, 1998,
the Company's cash and cash equivalent balances were approximately $31.8 million
and its marketable securities were approximately $27.7 million. These decreases
are primarily due to lower cash and marketable securities balances resulting
from the repurchase of 1,326,400 shares of the Company's common stock during the
first and second quarters of 1999 for approximately $10.2 million.
Net cash provided by operating activities for the first nine months of 1999
was approximately $10.1 million, compared to approximately $6.1 million for the
first nine months of 1998. The increase in cash provided by operating
activities for the first nine months of 1999 was due primarily to net income of
approximately $7.6 million, a non-cash adjustment for depreciation expense of
approximately $2.6 million and an increase in deferred revenue of approximately
$1.9 million, partially offset by an increase in accounts receivable of
approximately $4.2 million for the period.
The Company's primary investing activities were purchases and maturities of
marketable securities and purchases of property and equipment. Purchases and
maturities of marketable securities generated a net cash outflow of
approximately $5.6 million during the first nine months of 1999, compared to a
net cash outflow of approximately $10.1 million during the same period in 1998.
Property and equipment purchases were approximately $2.6 million during the
first nine months of 1999, compared to approximately $2.9 million during the
same period in 1998.
Cash used in financing activities during the first nine months of 1999
totaled approximately $9.6 million, and was primarily attributable to the
repurchase of 1,326,400 shares of the Company's common stock, which was
partially offset by cash provided from exercises of stock options and purchases
of stock through the Company's employee stock purchase plan. Cash provided by
financing activities during the first nine months of 1998 totaled approximately
$1.4 million, resulting primarily from exercises of stock options, purchases of
stock through the Company's employee stock purchase plan and from the repayment
of a note receivable from a former officer of AnswerSoft, Inc., offset by cash
used for the payment of long-term obligations.
At September 30, 1999, the working capital of the Company decreased to
approximately $61.0 million from approximately $62.7 million as of December 31,
1998. This decrease was primarily attributable to a lower cash and marketable
securities balance at September 30, 1999 compared to December 31, 1998, due to
the repurchase of 1,326,400 shares of the Company's common stock for
approximately $10.2 million, which was partially offset by $7.6 million of cash
generated from favorable operating results.
11
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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, 1999.
Management believes, based on its current operating plan, that the
Company's existing cash and marketable securities balances, cash generated from
operations, and amounts available under its working capital line of credit are
sufficient to meet the Company's cash requirements for the next twelve months.
YEAR 2000
Year 2000 Readiness Disclosure - made pursuant to the Year 2000 Information and
Readiness Disclosure Act, Pub. L. No. 105-271 (1998)
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 readiness 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 reported to the Board of Directors specific areas of concern and has
taken action to resolve any Year 2000 issues. The committee continues to update
the Board of Directors periodically relating to the Committee's progress. The
Committee has formulated a contingency plan in the event that Year 2000 issues
pose an increased number of calls to our help desk. See below for the current
status as reported by the Committee.
12
<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 were 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 current releases of Concerto software products and
believes them to be Year 2000 ready, except IIR. All versions of IIR are
believed to be not Year 2000 ready. All customers have been told to upgrade to
SmartRoute, which is Year 2000 ready. Despite the Company's 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 current releases of 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.
13
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company has tested many, but not all, prior versions of its products
and tests new versions as they are released. The Company currently believes that
it has contacted and updated the majority of its known customer's systems to the
Year 2000 Ready system. The Company will continue to endeavor to contact all
remaining customers. 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 most customers have been or 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 additional 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. At this time, 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.
Internal Business Systems, Facilities, and Third Party Suppliers
The Company has conducted a Year 2000 readiness audit of its internal
systems, including business, telecommunication, facilities management and
safety/security systems. The Company finalized Year 2000 testing and validation
of its mission critical internal systems on August 30, 1999. It will continue
to monitor ongoing information from its business and facilities system vendors
regarding Year 2000 and their respective notifications of Year 2000 patch
releases. As required, the Company will apply the appropriate patches and take
the necessary steps to assure its systems remain Year 2000 ready.
Although the Company is not presently aware of any material operational
issues or costs associated with preparing its internal information technology
and non-information technology systems for the Year 2000, the Company will
continue to monitor such systems, but 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 has evaluated the Year 2000 readiness of its key third party
suppliers and periodically monitors their most current status. After reviewing
available information, the Company believes its key suppliers are positioned to
support its business needs in order to transact business into the new millenium.
14
<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
The Company is in the process of coordinating additional staffing
resources surrounding the last day of 1999, the first few days of January 2000,
and the leap year date of February 29, 2000. The additional staffing will
supplement and assist the Company's help center to address any unusual influx of
additional telephone inquiries and other types of support requests as a result
of Year 2000 related issues. 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 modify its contingency plans
accordingly.
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 its
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.
15
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 3: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
As of September 30, 1999, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under Statement of Financial Standards
(SFAS) No. 107. All of the Company's investments are short-term; commercial
paper, corporate bonds, Eurodollar bonds, and similar financial instruments that
are carried on the Company's books at amortized cost, which approximates fair
market value. Accordingly, the Company has no quantitative information
concerning the market risk of participating in such investments.
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments.
The Company's exposure to currency exchange rate fluctuations has been
and is expected to continue to be modest due to the fact that the operations of
its international subsidiaries are almost exclusively conducted in their
respective local currencies. International subsidiary operating results are
translated into U.S. dollars and consolidated for reporting purposes. The
impact of currency exchange rate movements on intercompany transactions was
immaterial for the nine month period ended September 30, 1999. Currently the
Company does not engage in foreign currency hedging activities.
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 and
Exchange Commission (including Form 10-Q and Form 10-K) may contain statements
which are not historical facts, so-called "forward-looking statements". Such
forward-looking statements involve risks and uncertainties, which may adversely
impact, whether or not such forward-looking statements come true. In particular,
but without limitation, statements in Form 10-K "Item 1. Business", relating to
the size or growth of call centers, the expectation to tightly integrate Davox
and AnswerSoft products, the Form 10-K "1999 Product Development" subsection,
the plan to broaden its product distribution and customer support in Europe,
potential product
16
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 3: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
(continued)
development, statements relating to expansion of the Business Partners Program,
in the Form 10-K "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to the Company's intent to broaden
its customer base and decrease reliance on its largest customers, the
sufficiency of working capital and the on-time release of the Company's
Ensemble(TM) customer contact suite by the end of the fourth quarter of 1999,
may be forward-looking statements. The Company's actual future results may
differ significantly from those stated in any forward-looking statements.
Factors that may cause such differences include, but are not limited to, the
factors discussed below. Each of these factors, and others, are discussed from
time to time in the Company's filings with the Securities and Exchange
Commission.
The Company's future results may be subject to substantial risks and
uncertainties. The Company purchases certain equipment for its products from
third-party suppliers and licenses certain components of its software code from
a number of third-party vendors. While the Company believes that third-party
equipment and software vendors could be replaced if necessary, the Company might
face significant delays in establishing replacement sources or in modifying its
products to incorporate replacement components or software code. There can be
no assurance that the Company will not suffer delays resulting from non-
performance by its vendors or cost increases due to a variety of factors,
including component shortages. The Company uses third party service providers to
fulfill its hardware support obligations with its customers. Additionally, the
Company relies on co-providers to assist its Professional Services organization.
While the Company believes that its currently contracted service providers and
co-providers are adequate at this time, the Company may face significant delays
in establishing replacement providers for such services.
The Company relies on certain intellectual property protections to
preserve its intellectual property rights. Any invalidation of the Company's
intellectual property rights or lengthy and expensive defense of those rights
could have a material adverse affect on the financial position and results of
operations of the Company.
The development of new products, the improvement of existing products and
the continuing evaluation of new technologies is critical to the Company's
success. Successful product development and introduction depends upon a number
of factors, including anticipating and responding to the evolving applications
needs of customers and resellers, timely completion and introduction of new
products, and market acceptance of the Company's products.
The call center management industry is extremely competitive. Certain
current and potential competitors of the Company are more established, benefit
from greater market recognition and have substantially greater financial,
development and marketing resources than the Company.
17
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 3: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
(continued)
Additionally, the Company's quarterly and annual financial and operating
results are affected by a wide variety of factors that could materially
adversely affect revenue and profitability, including: the timing of customer
orders; the Company's ability to introduce new products on a timely basis;
introduction of products and technologies by the Company's competitors; and
market acceptance of the Company's and its competitors' products; effects of
litigation described in Form 10-K Item 3 Legal Proceedings; the ability to hire
and retain key personnel; the ability to efficiently and effectively integrate
the AnswerSoft and Davox products; and difficulties of any nature as a result of
the impact of the Year 2000 on Davox, its customers, its vendors or its
distributors.
International sales are expected to continue to account for a significant
portion of Davox's net sales in future periods. International sales are subject
to certain inherent risks, including, but not limited to, unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, potentially adverse tax treatment, and the inability to expand
distribution channels. As a result of the foregoing and other factors, the
Company may experience material fluctuations in future financial and operating
results on a quarterly or annual basis, which could materially and adversely
affect its business, financial condition, results of operations and stock price.
18
<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, 1998.
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 6, 1999. 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
22, 2000. 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 current reports on Form 8-K were filed during the quarter ended
September 30, 1999.
19
<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 29, 1999 By: /s/ Alphonse M. Lucchese
------------------------
Alphonse M. Lucchese
Chief Executive Officer
and Chairman (Principal
Executive Officer)
Date: October 29, 1999 By: /s/ John J. Connolly
--------------------
John J. Connolly
Senior Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 24,326 0
<SECURITIES> 33,308 0
<RECEIVABLES> 20,147 0
<ALLOWANCES> 1,373 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 84,584 0
<PP&E> 5,239 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 90,886 0
<CURRENT-LIABILITIES> 23,574 0
<BONDS> 0 0
0 0
0 0
<COMMON> 1,454 0
<OTHER-SE> 65,858 0
<TOTAL-LIABILITY-AND-EQUITY> 90,886 0
<SALES> 37,856 43,186
<TOTAL-REVENUES> 66,303 69,549
<CGS> 7,075 8,297
<TOTAL-COSTS> 22,820 23,108
<OTHER-EXPENSES> 9,615 9,041
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 8,921 11,338
<INCOME-TAX> 1,338 3,855
<INCOME-CONTINUING> 7,583 7,483
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,583 7,483
<EPS-BASIC> 0.56 0.53
<EPS-DILUTED> 0.53 0.50
</TABLE>
