<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, 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
April 26, 1999: 14,381,968 shares.
<PAGE>
DAVOX CORPORATION & SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements: Page No.
-------
<S> <C>
Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Statements of Income
for the Three Months ended
March 31, 1999 and 1998 4
Statements of Cash Flows
for the Three Months ended March 31, 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 - 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,695 $ 31,759
Marketable securities 29,071 27,711
Accounts receivable, net of reserves of
$1,146 and $1,175 in 1999 and
1998, respectively 16,712 15,959
Interest receivable 841 739
Deferred tax assets 4,887 4,887
Prepaid expenses and other current assets 1,819 1,776
--------- ---------
Total current assets 85,025 82,831
Property and equipment, net 5,044 5,298
Other assets 1,087 1,294
--------- ---------
Total $ 91,156 $ 89,423
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,188 $ 4,965
Accrued expenses 8,952 9,461
Customer deposits 1,853 1,892
Deferred revenue 4,618 3,757
--------- ---------
Total current liabilities 20,611 20,075
Deferred revenue, less current portion 23 21
--------- ---------
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000 shares
Issued - 14,382 and 14,349
shares in 1999 and 1998, respectively 1,438 1,435
Additional paid-in capital 73,742 73,555
Accumulated foreign currency translation adjustment 4 11
Accumulated deficit (3,952) (5,650)
--------- ---------
71,232 69,351
Less - Treasury stock,
83 and 3 shares at cost in 1999 and 1998, respectively (710) (24)
--------- ---------
Total stockholders' equity 70,522 69,327
--------- ---------
Total $ 91,156 $ 89,423
========= =========
</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 Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------
1999 1998
---------- -------------
<S> <C> <C>
Product revenue $ 11,432 $ 16,354
Service revenue 8,817 8,066
---------- ----------
Total revenue 20,249 24,420
---------- ----------
Cost of product revenue 2,217 3,146
Cost of service revenue 5,254 4,772
---------- ----------
Total cost of revenue 7,471 7,918
---------- ----------
Gross profit 12,778 16,502
---------- ----------
Operating expenses:
Research, development and engineering expenses 3,122 3,104
Selling, general and administrative expenses 8,297 9,207
---------- ----------
Total operating expenses 11,419 12,311
---------- ----------
Income from operations 1,359 4,191
Other income (primarily interest income) 639 749
---------- ----------
Income before provision for income taxes 1,998 4,940
Provision for income taxes 299 1,680
---------- ----------
Net income $ 1,699 $ 3,260
========== ==========
Earnings per share:
Basic $ 0.12 $ 0.25
========== ==========
Diluted $ 0.11 $ 0.22
========== ==========
Weighted average shares outstanding:
Basic 14,335 13,118
========== ==========
Diluted 14,802 14,860
========== ==========
</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 Three Months
Ended March 31,
---------------------------------------------
1999 1998
---------------- -------------------
<S> <C>
Cash Flows From Operating Activities:
Net income $ 1,699 $ 3,260
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 947 789
Changes in current assets and liabilities -
Accounts receivable (753) (2,077)
Interest receivable (102) (543)
Prepaid expenses and other current assets (43) (138)
Accounts payable 223 105
Accrued expenses (509) 2,465
Customer deposits (39) (1,234)
Deferred revenue 861 2,852
-------- --------
Net cash provided by operating activities 2,284 5,479
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (692) (625)
(Increase) decrease in other assets 207 (495)
Purchases of treasury stock (686) -----
Purchases of marketable securities (23,667) (22,640)
Sales of marketable securities 22,307 12,340
-------- --------
Net cash used in investing activities (2,531) (11,420)
-------- --------
Cash Flows From Financing Activities:
Principal borrowings of long-term obligations ----- 49
Proceeds from exercise of stock options 30 385
Proceeds from employee stock purchase plan 160 205
-------- --------
Net cash provided by financing activities 190 639
-------- --------
Effect of exchange rate differences on cash (7) (43)
Net (decrease) increase in cash and cash equivalents (64) (5,345)
Cash and cash equivalents, beginning of period 31,759 28,639
-------- --------
Cash and cash equivalents, end of period $ 31,695 $ 23,294
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 568 $ 154
======== ========
Cash paid during the period for interest $ - $ 11
======== ========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
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 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 period ended March 31,
1999 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. The
acquisition was accounted for as a pooling of interests under Accounting
Principles Board Opinion No. 16. Accordingly, the historical information for
1998 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:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
1998
---------------------
<S> <C>
Davox
---------------
Total revenue $23,160
Net income $ 4,433
AnswerSoft
---------------
Total revenue $ 1,260
Net loss $(1,173)
Combined
---------------
Total revenue $24,420
Net Income $ 3,260
</TABLE>
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. Provision for Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year. Cumulative
adjustments to the tax provision are recorded in the interim period in which a
change in the estimated annual effective rate is determined.
5. 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 plus the
effect of outstanding stock options using the treasury stock method. A
reconciliation of basic and diluted weighted average shares outstanding is as
follows (in thousands):
<TABLE>
<CAPTION>
For the three month period ended:
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Basic weighted average shares outstanding 14,335 13,118
Effect of dilutive stock options 467 1,742
------ ------
Diluted weighted average shares outstanding 14,802 14,860
====== ======
</TABLE>
For the three-month period ended March 31, 1999, 1,833,294 weighted
average common equivalent shares were not included in the diluted weighted
shares outstanding as they were antidilutive. For the three-month period ended
March 31, 1998, 185,046 weighted average common equivalent shares were not
included in the diluted weighted average shares outstanding as they were
antidilutive.
7
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Comprehensive Income
The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
For the three month period ended:
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Net income 1,699 3,260
Foreign currency translation adjustments (7) (43)
----- -----
Comprehensive income 1,692 3,217
===== =====
</TABLE>
7. Segment and Geographic Information
Product revenues from international sources were approximately $2.3 million
in both the first quarter of 1999 and 1998. The Company's revenues from
international sources were primarily generated from customers located in Europe,
Canada, Asia/Pacific, and Latin America. All of the Company's product sales for
the quarters ended March 31, 1999 and 1998 were shipped from its headquarters
located in the United States.
The following table represents the percentage of product revenue by
geographic region from customers for the three-month period ended March 31, 1999
and 1998:
<TABLE>
<CAPTION>
For the three month period ended:
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
U.S. 79.5% 85.9%
Europe 19.3 8.6
Canada 0.2 2.2
Asia/Pacific 0.7 3.3
Latin America 0.3 0.0
----- -----
Total 100.0% 100.0%
===== =====
</TABLE>
8
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
Total revenue for the first quarter of 1999 decreased approximately $4.2
million, or 17.1% to $20.2 million compared to the same period in 1998.
Product revenue for the first quarter of 1999 decreased approximately $4.9
million, or 30.1% to $11.4 million compared to the first quarter of 1998. This
decrease was due to lower sales of Unison(R) outbound calling systems, which was
partially offset by increased sales resulting from the introduction of
Allbound(TM) inbound/outbound blended systems.
Cost of product revenue for the first quarter of 1999 decreased
approximately $929,000 or 29.5% to $2.2 million compared to the same period in
1998. As a percentage of product revenue, the cost of product revenue remained
substantially consistent at 19% in the first quarter of 1999 compared to the
same period in 1998. The decrease in the cost of product revenue was due
primarily to the lower volume of product sales in the quarter.
Service revenue for the first quarter of 1999 increased approximately
$751,000, or 9.3% to $8.8 million compared to the same period in 1998. The
increase in service revenue was due primarily to increases in maintenance
revenue in the first quarter of 1999 as compared to the same period in 1998,
resulting from increases in the installed base of the Company's products.
9
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Cost of service revenue for the first quarter of 1999 increased
approximately $482,000, or 10.1% to $5.3 million compared to the same period in
1998. As a percentage of service revenue, the cost of service revenue increased
by 0.4% in the first quarter of 1999 compared to the same period in 1998. These
increases were attributable to higher travel and third party consulting expenses
in 1999.
Research, development and engineering expenses remained relatively constant
at approximately $3.1 million for the first quarter of 1999 and the same period
in 1998. Higher depreciation expense due to capital equipment purchases in 1999
were somewhat offset by lower consulting expenses.
Selling, general and administrative (SG&A) expenses decreased by
approximately $910,000, or 9.9% to $8.3 million for the first quarter of 1999
compared to the same period in 1998. This decrease was due to lower payroll and
related expenses resulting from headcount decreases, and also to decreases in
commission and travel related expenses.
Other income in 1999 was derived primarily from interest income from
investments in Eurodollar bonds, commercial paper, and money market instruments,
net of investment fees. Other income decreased 14.7% for the first quarter of
1999 compared to the same period in 1998. This decrease reflects the lower
investment yields obtained in 1999 compared to 1998.
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 income tax rate of 15%, which is lower than the combined federal
and state statutory tax rates due primarily to the utilization of tax credits,
benefits derived from the Company's foreign sales corporation, and net operating
loss carryforwards utilized as a result of the AnswerSoft acquisition.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's principal sources of liquidity were its
cash and cash equivalent balances of approximately $31.7 million as well as its
marketable securities of approximately $29.1 million. As of 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. The overall
increase of approximately $1.3 million in the total cash and marketable
securities was due primarily to favorable operating results. This was offset by
the purchase of property and equipment, and the repurchase of the company's
common stock. Additionally, 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, 1999.
10
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 $692,000 during the first three months
of 1999, compared to approximately $625,000 during the first three months of
1998. Purchases and sales of marketable securities generated a net cash outflow
of approximately $1.4 million during the first three months of 1999, compared to
a net cash outflow of approximately $10.3 million during the first three months
of 1998.
Cash provided by financing activities during the first three months of 1999
totaled approximately $190,000, and was generated primarily from proceeds from
exercises of stock options, and from purchases of stock through the Company's
employee stock purchase plan. Cash provided by financing activities during the
first three months of 1998 totaled approximately $639,000, and was generated
primarily from exercises of stock options, purchases of stock through the
employee stock purchase plan, and from borrowings of long-term obligations.
In January 1999, the Board of Directors authorized, effective February
1,1999, the purchase of up to 3,000,000 shares of the Company's common stock, at
such times when the Company deems such purchases to be an effective use of cash.
Shares that are repurchased may be used for various purposes including the
issuance of shares pursuant to the Company's stock option plans. Under the stock
repurchase program, shares may be repurchased, at management's discretion, from
time to time at prevailing prices in the open market. During the first quarter
of fiscal 1999, the Company repurchased 80,000 shares of its common stock for
approximately $686,000. Since March 31, 1999, and up through April 26, 1999, the
Company has repurchased an additional 828,900 shares of its common stock for
approximately $6,093,000.
At March 31, 1999, the working capital of the Company increased to
approximately $64.4 million from approximately $62.8 million as of December 31,
1998. This increase was primarily attributable to the higher total cash and
marketable securities balance from favorable operating results in 1999, and from
an increase in accounts receivable.
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.
11
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments. As of March 31, 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
SFAS No. 107. All of the Company's investments are short-term, Euro dollar
bonds, investment-grade commercial paper, and money market accounts 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.
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 has reported 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.
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 are being tested. The
Company has completed testing of its current line of Unison(R) 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(TM) line of software tool products. The
Company has completed testing of the current releases of Concerto(TM) 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(TM), 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 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. 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.
Status of Investigation -- Internal Readiness
The Company is 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 include
third party hardware, firmware, and software. The Company anticipates
finalizing its testing of internal systems on or about June 30, 1999.
Status of Investigation -- Third Party Readiness
The Company is continuing to assess 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.
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
At the present time, the Company is in the process of outlining
contingency plans 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 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 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
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 key reasons for the acquisition of
AnswerSoft, 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
development, and statements relating to expansion of the Business Partners
Program, and 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 and
the sufficiency of working capital, 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.
15
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
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.
16
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
17
<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 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
27 Article 5 -- Summary Financial Data Schedule (Edgar only)
(b) On March 25, 1999, the Company filed a Report on Form 8-K stating that
an announcement was made on March 4, 1999, that John J. Connolly,
Davox's Vice-President Finance and Chief Financial Officer was to
resign effective March 31, 1999. The Form 8-K also stated that an
announcement was made on March 15, 1999, stating that Mr. Connolly
would remain with Davox as Vice-President Finance and Chief Financial
Officer.
18
<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: April 30, 1999 By: /s/ Alphonse M. Lucchese
------------------------
Alphonse M. Lucchese
Chief Executive Officer
and Chairman (Principal
Executive Officer)
Date: April 30, 1999 By: /s/ John J. Connolly
--------------------
John J. Connolly
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
19
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