<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 June 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 July
22, 1999: 13,057,161 shares.
<PAGE>
DAVOX CORPORATION & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
-------
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
for the Three Months and Six Months Ended June 30, 1999
and 1998 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 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 - 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,814 $ 31,759
Marketable securities 24,589 27,711
Accounts receivable, net of reserves of
$1,137 and $1,175 in 1999 and
1998, respectively 17,578 15,959
Interest receivable 409 739
Prepaid expenses and other current assets 1,390 1,776
Deferred tax assets 4,887 4,887
------------ ------------
Total current assets 79,667 82,831
Property and equipment, net 4,953 5,298
Other assets 1,114 1,294
------------ ------------
$ 85,734 $ 89,423
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,044 $ 4,965
Accrued expenses 8,794 9,461
Customer deposits 2,314 1,892
Deferred revenue 6,177 3,778
------------ ------------
Total current liabilities 22,329 20,096
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000 shares
Issued - 14,387 and 14,349
shares in 1999 and 1998, respectively 1,439 1,435
Additional paid-in capital 73,755 73,555
Accumulated foreign currency translation adjustment (3) 11
Accumulated deficit (1,545) (5,650)
------------ ------------
73,646 69,351
Less - Treasury stock, 1,330 and 3 shares, at cost,
in 1999 and 1998, respectively (10,241) (24)
------------ ------------
Total stockholders' equity 63,405 69,327
------------ ------------
$ 85,734 $ 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>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Product revenue $ 12,389 $ 15,072 $ 23,821 $ 31,426
Service revenue 9,619 9,118 18,436 17,184
---------- ---------- ---------- ----------
Total revenue 22,008 24,190 42,257 48,610
---------- ---------- ---------- ----------
Cost of product revenue 2,188 2,804 4,405 5,951
Cost of service revenue 5,320 4,789 10,574 9,561
---------- ---------- ---------- ----------
Total cost of revenue 7,508 7,593 14,979 15,512
---------- ---------- ---------- ----------
Gross profit 14,500 16,597 27,278 33,098
---------- ---------- ---------- ----------
Operating expenses:
Research, development and engineering 3,137 2,918 6,259 6,022
Selling, general and administrative 9,155 8,930 17,452 18,137
Non-recurring merger transaction costs ----- 1,329 ----- 1,329
Non-recurring merger-related integration costs ----- 597 ----- 597
---------- ---------- ---------- ----------
Total operating expenses 12,292 13,774 23,711 26,085
---------- ---------- ---------- ----------
Income from operations 2,208 2,823 3,567 7,013
Other income (primarily interest income) 625 724 1,264 1,472
---------- ---------- ---------- ----------
Income before provision for income taxes 2,833 3,547 4,831 8,485
Provision for income taxes 425 1,206 724 2,885
---------- ---------- ---------- ----------
Net income $ 2,408 $ 2,341 $ 4,107 $ 5,600
========== ========== ========== ==========
Earnings per share:
Basic $ 0.18 $ 0.17 $ 0.30 $ 0.40
========== ========== ========== ==========
Diluted $ 0.17 $ 0.16 $ 0.29 $ 0.37
========== ========== ========== ==========
Weighted average shares outstanding:
Basic 13,453 14,077 13,892 13,991
========== ========== ========== ==========
Diluted 13,940 14,870 14,368 14,956
========== ========== ========== ==========
</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>
Six Months
Ended June 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 4,107 $ 5,600
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 1,891 1,580
Changes in current assets and liabilities -
Accounts receivable (1,619) (7,398)
Interest receivable 330 (1,073)
Prepaid expenses and other current assets 386 (172)
Accounts payable 79 764
Accrued expenses (667) 3,698
Customer deposits 422 (796)
Deferred revenue 2,399 1,556
---------- ----------
Net cash provided by operating activities 7,328 3,759
---------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment (1,546) (1,820)
Decrease in other assets 180 12
Purchases of marketable securities (45,514) (42,506)
Sales of marketable securities 48,635 31,626
---------- ----------
Net cash provided by (used in) investing activities 1,755 (12,688)
---------- ----------
Cash Flows From Financing Activities:
Principal payments of long-term obligations ----- (475)
Payment of note receivable from officer ----- 414
Purchases of treasury stock (10,217) -----
Proceeds from exercise of stock options 43 875
Proceeds from employee stock purchase plan 160 205
---------- ----------
Net cash provided by (used in) financing activities (10,014) 1,019
---------- ----------
Effect of exchange rate differences on cash (14) (49)
---------- ----------
Net decrease in cash and cash equivalents (945) (7,959)
Cash and cash equivalents, beginning of period 31,759 28,639
---------- ----------
Cash and cash equivalents, end of period $ 30,814 $ 20,680
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 788 $ 804
========== ==========
</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 necessary
to present fairly the Company's financial position and results of operations.
The results of operations for the three month and six month periods ended June
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 utilization of tax credits, benefits
derived from the Company's foreign sales corporation, and net operating loss
carryforwards.
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 Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 13,453 14,077 13,892 13,991
Effect of dilutive stock options 487 793 476 965
------ ------ ------ ------
Diluted weighted average shares outstanding 13,940 14,870 14,368 14,956
====== ====== ====== ======
</TABLE>
For the three month periods ended June 30, 1999 and 1998, 1,648,996
and 1,230,585 weighted average common equivalent shares, respectively, were not
included in the diluted weighted average shares outstanding, as they were
antidilutive. For the six month periods ended June 30, 1999 and 1998, 1,882,900
and 605,576 weighted average 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 Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 2,408 $ 2,341 $ 4,107 $ 5,600
Foreign currency translation adjustments (7) (6) (14) (49)
------- ------- ------- -------
Comprehensive income $ 2,401 $ 2,335 $ 4,093 $ 5,551
======= ======= ======= =======
</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 was approximately $2.4 million
and $2.5 million in the second quarter of 1999 and 1998, respectively, and
approximately $4.8 million in both of the six month periods ended June 30, 1999
and 1998. 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 sales for the periods presented 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 and six month periods ended
June 30, 1999 and 1998:
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
U.S. 80.5% 83.5% 80.0% 84.7%
Europe 16.7 7.2 18.0 7.9
Asia/Pacific 2.6 0.8 1.7 2.1
Latin America 0.2 1.1 0.2 0.6
Canada --- 7.4 0.1 4.7
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
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 Six Months Ended June 30, 1999 and 1998
Total revenue for the second quarter of 1999 decreased approximately $2.2
million, or 9.0%, to $22.0 million compared to the same period in 1998, while
total revenue for the first six months of 1999 decreased approximately $6.4
million, or 13.1%, to $42.3 million compared to the same period in 1998.
Product revenue for the second quarter of 1999 decreased approximately $2.7
million, or 17.8%, to $12.4 million compared to the same period in 1998, while
product revenue for the first six months of 1999 decreased approximately $7.6
million, or 24.2%, to $23.8 million compared to the same period in 1998. These
decreases were caused primarily by lower sales of Unison(R) outbound call
management systems, which were partially offset by sales of Allbound(TM)
inbound/outbound blended call management systems.
Cost of product revenue for the second quarter of 1999 decreased
approximately $616,000, or 22.0%, to $2.2 million compared to the same period in
1998. Cost of product revenue for the first six months of 1999 decreased
approximately $1.5 million, or 26.0%, to $4.4 million compared to the same
period in 1998. These decreases were mainly attributable to lower product
shipments in the three month and six month periods ended June 30, 1999 compared
to 1998, and also is a result of a decrease in product shipments requiring
hardware components.
Service revenue for the second quarter of 1999 increased approximately
$501,000, or 5.5%, to $9.6 million compared to the same period in 1998. Service
revenue for the first six months of 1999 increased approximately $1.3 million,
or 7.3%, to $18.4 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, renewal of maintenance contracts and increased consulting and
professional services revenue in 1999, as compared to 1998.
Cost of service revenue for the second quarter of 1999 increased
approximately $531,000, or 11.1%, to $5.3 million compared to the same period in
1998. Cost of service revenue for the first six months of 1999 increased $1.0
million, or 10.6%, to $10.6 million compared to the same period in 1998. These
increases during 1999 were attributable to higher payroll and related expenses
resulting from customer service headcount increases, higher third party
maintenance costs and increased consulting costs.
Research, development and engineering expenses increased approximately
$219,000, or 7.5%, to $3.1 million for the second quarter of 1999 as compared to
the same period in 1998. Research, development and engineering expenses
increased approximately $237,000, or 3.9%, to $6.3 million for the first six
months of 1999 compared to the same period in 1998. The increase for both
periods was primarily due to higher headcount and related expenses to support
continued new product development efforts, specifically Ensemble(TM) and
Unison/(R)/ 4.0.
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 $225,000, or 2.5%, to $9.2 million for the second quarter of 1999
compared to the same period in 1998. This increase was due primarily to higher
payroll and related expenses resulting from increased headcount in the sales and
marketing functions. SG&A expenses decreased by approximately $685,000, or
3.8%, to $17.5 million for the first six months of 1999 compared to the same
period in 1998. This decrease was mainly attributable to lower travel and
related expenses, and a decrease in commission expense.
During the second quarter of 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 investments in commercial
paper, taxable auction securities, Eurodollar bonds, and money market
instruments, net of investment fees. Other income decreased 13.7% for the
second quarter of 1999 compared to the same period in 1998, and decreased 14.1%
for the first six months of 1999 compared to the same period in 1998. These
decreases are primarily due to lower marketable securities balances resulting
from the repurchase of 1,246,400 shares of Davox common stock during the second
quarter of 1999 for approximately $9.5 million. The total common stock
repurchased during the first six months of 1999 was 1,326,400 shares of Davox
common stock 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 utilization of tax credits, benefits
derived from the Company's foreign sales corporation, and net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's principal sources of liquidity were its
cash and cash equivalent balances of approximately $30.8 million as well as its
marketable securities of approximately $24.6 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 Davox common stock for approximately $10.2
million.
Net cash provided by operating activities for the first six months of 1999
was approximately $7.3 million, compared to approximately $3.8 million for the
first six months of 1998. The increase in cash provided by operating activities
for the first six months of 1999 was due primarily to net income of $4.1
million, and to an increase in deferred revenue of $2.4 million for the first
six months of 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 and sales of
marketable securities and purchases of property and equipment. Property and
equipment purchases were approximately $1.5 million during the first six months
of 1999, compared to approximately $1.8 million during the first six months of
1998. Purchases and sales of marketable securities generated a net cash inflow
of approximately $3.1 million during the first six months of 1999, compared to a
net cash outflow of approximately $10.9 million during the same period of 1998.
Cash used in financing activities during the first six months of 1999
totaled approximately $10.0 million, and was primarily attributable to the
repurchase of 1,326,400 shares of Davox common stock. Cash provided by financing
activities during the first six months of 1998 totaled approximately $1.0
million, 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 proceeds from
the payment of long-term debt.
At June 30, 1999, the working capital of the Company decreased to
approximately $57.3 million from approximately $62.7 million as of December 31,
1998. This decrease was primarily attributable to the lower cash and marketable
securities balance at June 30, 1999 compared to December 31, 1998, due to the
repurchase of 1,326,400 shares of Davox common stock for approximately $10.2
million, and was partially offset by $7.3 million of cash generated from
favorable operating results.
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 June 30, 1999.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments. As of June 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
SFAS No. 107. All of the Company's investments are short-term; commercial paper,
taxable auction securities, Eurodollar bonds, 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.
11
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
Status of Investigation - Product Readiness
The Company has established Year 2000 date operability standards against
which the most current versions of its software products are being tested. The
Company has completed testing of its current line of Unison software products
and believes the most current versions conform to these standards and are Year
2000 ready. In connection with the acquisition of AnswerSoft, Inc. in May 1998,
the Company acquired the Concerto line of software tool products. The Company
has completed testing of the 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.
12
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
The Company has tested many, but not all, prior versions of its products
and continually tests the current versions of its products as each 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.
13
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Status of Investigation - 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 has finalized its
testing of all internal systems as of June 30, 1999. As a result of such
testing, the Company has not identified any significant problems associated with
the systems tested.
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 will continue to perform
these assessments and testing as they are identified during 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 are integral to its operation for which
the cost and time to integrate alternative components or software into these
products would be material.
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.
The Company is in the process of coordinating additional staffing resources
surrounding the last day of 1999. The additional staffing will supplement and
assist the Company's help center to address any unusual influx of additional
telephone inquiries as a result of Year 2000 related issues.
14
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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 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.
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
15
<PAGE>
PART I. FINANCIAL INFORMATION (continued)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
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.
16
<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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of security holders of the Company was held on May
4, 1999. The number of directors was fixed at four and the following
persons were elected as directors:
Nominee Total Votes for Nominee Total Votes Against
Nominee
Alphonse M. Lucchese 12,176,281 525,299
Michael D. Kaufman 12,176,668 524,912
Walter J. Levison 12,176,668 524,912
R. Scott Asen 12,176,867 524,713
A proposal to approve an increase in the number of shares of the Corporation's
Common Stock, $.10 par value, available for issuance under the Corporation's
1996 Stock Plan to 2,700,000 shares, was adopted and approved, with 4,257,808
shares voting in favor, 3,573,293 shares voting against, and 48,748 shares
abstaining.
The selection of the firm Arthur Andersen LLP as auditors for the fiscal year
ending December 31, 1999 was ratified, with 12,556,239 shares voting in favor,
125,488 shares voting against and 19,853 shares abstaining.
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
20, 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 June 30,
1999.
17
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAVOX CORPORATION
Date: August 2, 1999 By: /s/ Alphonse M. Lucchese
------------------------
Alphonse M. Lucchese
Chief Executive Officer
and Chairman (Principal
Executive Officer)
Date: August 2, 1999 By: /s/ John J. Connolly
--------------------
John J. Connolly
Sr. Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
18
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