<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 0-22804
ACTIVE VOICE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1235111
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2901 THIRD AVENUE, SUITE 500 98121-9800
SEATTLE, WASHINGTON (Zip Code)
(Address of principal executive offices)
(206) 441-4700
(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, as of the latest practicable date.
OUTSTANDING AT
CLASS AUGUST 3, 1998
Common Stock, No Par Value 4,678,859
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<PAGE>
ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE PAGE 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
------- -------
<S> <C> <C>
Net sales $13,404 $11,779
Cost of goods sold 5,930 4,821
------- -------
Gross profit 7,474 6,958
Operating expenses:
Research and development 3,330 2,266
Sales and marketing 3,986 3,274
General and administrative 1,857 980
------- -------
Total operating expenses 9,173 6,520
------- -------
Operating income (loss) (1,699) 438
Interest expense (20)
Interest income 167 166
------- -------
Income (loss) before income taxes and minority interest (1,552) 604
Income tax benefit (provision) 533 (178)
Minority interest in loss (income) of consolidated
subsidiary (1) 29
------- -------
Net income (loss) $(1,020) $ 455
------- -------
------- -------
Earnings (loss) per share:
Basic $(0.22) $0.10
------- -------
------- -------
Diluted $(0.22) $0.10
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 920 $ 1,550
Marketable securities 2,858 3,407
Accounts receivable, less allowances 10,357 11,331
Inventories 8,801 10,122
Income taxes receivable 536 652
Deferred tax asset 1,518 1,340
Prepaid expenses and other assets 2,837 3,103
------- -------
Total current assets 27,827 31,505
Marketable securities 3,672 3,680
Furniture and equipment, net 4,078 3,539
Other assets 4,178 2,420
------- -------
Total assets $39,755 $41,144
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,244 $ 3,931
Notes payable 759
Accrued compensation and benefits 1,511 1,256
Other accrued expenses 1,676 1,493
------- -------
Total current liabilities 6,190 6,680
Commitments
Minority interest (124) (131)
Stockholders' equity:
Preferred stock, no par value:
Authorized shares - 2,000,000 - none outstanding
Common stock, no par value:
Authorized shares - 10,000,000
Issued shares, including repurchased shares -
4,976,933 17,306 17,262
Retained earnings 17,966 18,996
Unrealized gain on marketable securities 27 33
Accumulated translation adjustments 12 7
Less 298,074 repurchased shares (313,067 at
March 31, 1998), at cost (1,622) (1,703)
------- -------
Total stockholders' equity 33,689 34,595
Total liabilities and stockholders' equity $39,755 $41,144
------- -------
------- -------
</TABLE>
Note: The balance sheet at March 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to consolidated financial statements.
4
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ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,020) $ 455
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 445 251
Net provisions for accounts receivable (68) 14
Deferred income taxes (175) 44
Loss on disposal of equipment 11 2
Minority interest in income (loss) of consolidated
subsidiary 1 (29)
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,042 1,083
Decrease (increase) in inventories 1,321 (477)
Decrease (increase) in prepaid expenses and
other assets (1,549) 63
Decrease in accounts payable (1,687) (313)
Increase (decrease) in other liabilities 555 (314)
------ ------
Net cash provided by (used in) operating
activities (1,124) 779
INVESTING ACTIVITIES
Purchases of marketable securities and investments (652)
Proceeds from sale and maturity of marketable securities 548 934
Purchases of furniture and equipment (938) (533)
------ ------
Net cash used in investing activities (390) (251)
FINANCING ACTIVITIES
Repurchase of common stock (416)
Net increase in notes payable 759
Proceeds from employee stock option and stock
purchase plans 114 251
------ ------
Net cash provided by (used in) financing
activities 873 (165)
Effect of exchange rate changes on cash and cash
equivalents 11
Increase (decrease) in cash and cash equivalents (630) 363
Cash and cash equivalents at beginning of period 1,550 1,542
------ ------
Cash and cash equivalents at end of period $ 920 $1,905
------ ------
------ ------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Active Voice Corporation
and subsidiaries (the Company) are unaudited. In the opinion of the Company's
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information set forth therein. Results of operations for the three month
period ended June 30, 1998 are not necessarily indicative of future financial
results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended March 31, 1998.
2. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Computer equipment $5,106 $5,494
Custom component parts 2,947 3,907
Supplies 748 721
------ ------
$8,801 $10,122
------ ------
------ ------
</TABLE>
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except shares and per share data):
<TABLE>
<CAPTION>
Quarter Ended June 30, June 30, 1998 June 30, 1997
- ---------------------- ------------- -------------
<S> <C> <C>
Numerator:
Net income (loss): $(1,020) $455
--------- ---------
--------- ---------
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares 4,664,492 4,609,827
Effect of dilutive securities:
Stock options ** 27,999
--------- ---------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares
and assumed conversions 4,664,492 4,637,826
--------- ---------
--------- ---------
Basic earnings (loss) per share: $(0.22) $0.10
Diluted earnings (loss) per share: $(0.22) $0.10
--------- ---------
</TABLE>
** Net effect of dilutive stock options not included in quarterly calculation of
diluted EPS as effect would be antidilutive.
4. NEW ACCOUNTING PRONOUNCEMENTS
6
<PAGE>
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of Statement 130.
During the three month periods ended June 30, 1998 and 1997, total comprehensive
income (loss) amounted to $(1,021,000) and $475,000, respectively.
Effective April 1, 1998 the Company adopted SOP 97-2, "Software Revenue
Recognition." The adoption of the SOP 97-2 did not result in a material impact
to the Company's consolidated results of operations, financial position or cash
flows.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Active Voice Corporation (the Company) is a leading manufacturer of PC-based
voice processing systems and computer-telephone integration (CTI) products. The
Company's products are sold worldwide through a network of independent
telecommunications dealers, telephone equipment manufacturers and computer
resellers. The Company currently markets five principal products: Repartee,
Replay Plus, Replay, Lingo and In-switch. Repartee, the Company's flagship and
most feature-rich product, offers the largest call handling capacity and comes
in two models, VP and CTI. In addition, Repartee serves as the base for
TeLANophy, a suite of the Company's CTI modules which provides complete call
management and unified messaging capabilities. Replay Plus, the Company's mid-
priced product, offers most of the voice processing features found in Repartee
with the exception of the CTI functionality. The Company's Replay product
provides basic voice processing features at a price point attractive to the
small business market. Lingo offers all basic voice processing features in a
single proprietary hardware unit, and is an affordable solution for small
businesses as it does not utilize PC hardware and requires minimal dealer effort
in its installation. In-switch, available only to the Company's strategic
partners, combines Active Voice software with a board that incorporates directly
into the phone switch, offering a less expensive alternative than a traditional
PC-based voice mail system.
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT (FOR EXAMPLE, STATEMENTS USING THE
EXPRESSIONS, "THE COMPANY BELIEVES" OR "THE COMPANY ANTICIPATES" AND OTHER
SIMILAR STATEMENTS) CONTAIN "FORWARD LOOKING" INFORMATION (AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) INVOLVING RISKS AND
UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, PROJECTIONS FOR SALES AND
EXPENDITURES, TREND PROJECTIONS AND DEVELOPMENT SCHEDULES. ACTUAL FUTURE RESULTS
AND TRENDS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS, INCLUDING,
BUT NOT LIMITED TO, THE RISKS DISCUSSED IN DOCUMENTS FILED BY THE COMPANY WITH
THE SECURITIES AND EXCHANGE COMMISSION. INVESTORS ARE ENCOURAGED TO CONSIDER
THE RISKS DETAILED IN THOSE FILINGS. THE COMPANY ASSUMES NO OBLIGATION TO
RELEASE PUBLICLY ANY CHANGES TO THESE "FORWARD LOOKING STATEMENTS" THAT MAY
ARISE FROM THE DEVELOPMENT OF UNANTICIPATED EVENTS OR CIRCUMSTANCES THAT OCCUR
AFTER THE DATE OF THE ORIGINAL PROJECTION. (REFER TO THE SECTION ENTITLED
"FACTORS AFFECTING FUTURE OPERATING RESULTS" FOR A FURTHER DISCUSSION ON SOME OF
THE INVOLVED RISKS AND UNCERTAINTIES.)
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997 Change
- --------------------------- ------- ------- ------
<S> <C> <C> <C>
(Dollars in thousands)
Net sales $13,404 $11,779 13.8%
------- ------- ------
</TABLE>
Effective April 1, 1998, the Company's South and Central American customers,
which were previously under the umbrella of international sales, joined with the
North American dealer channel to create the "Americas" dealer channel.
Furthermore, in order to provide better information as to the Company's core
product revenue, the Company has also added a fourth revenue segment to the
following analysis, denoted "Other". This segment includes revenue from the
Company's majority-owned subsidiary, Pronexus, Inc. (Pronexus), as well as other
ancillary items not directly related to sales of the Company's primary products,
such as royalties on patents. For comparison purposes, the following discussion
assumes these adjustments were made on April 1, 1997.
Net sales to the Company's Americas dealer network during the quarter ended June
30, 1998 increased 1.1% from the comparable period in the prior fiscal year.
Net sales to the Americas dealers represented approximately 56% of total net
sales for the three months ended June 30, 1998 compared to 63% of total net
sales in the three months ended June 30, 1997. The decrease in net sales in the
Americas dealer channel as a
8
<PAGE>
percentage of total net sales can be credited to the success of the Company's
strategic partner relationships as some dealers now purchase the Company's
products through these corporate sales customers. The Company feels this
transition is a more efficient method of distributing its lower-end products,
as the Company's dealers are more adept at providing CTI-capable solutions,
while the strategic partners' expertise is selling basic voice processing
systems. This strategy is illustrated by the 180% increase in new Repartee
units within the channel, which serves as the base platform for TeLANophy.
Driving this shift was the decision to discontinue offering Replay Plus and
Replay in the channel in the fourth quarter of fiscal 1998, with the
offsetting revenues diverting to Repartee and Lingo. Lingo sales have
replaced some unit sales of Replay at the low end of the market, and
contributed 10% of the channel's revenue in the latest quarter.
Net sales to the corporate sales channel increased by approximately 57% for the
three months ended June 30, 1998 over the comparable period in the prior fiscal
year. Net sales to corporate sales customers represented 26% and 19% of total
net sales for the three month periods ended June 30, 1998 and 1997,
respectively. More than a third of the increase in net sales to corporate sales
customers was attributable to increased unit sales of Repartee, partially a
result of the Company's success in developing relationships with its partners.
The Company's successful launch of Lingo to one of its partners has broadened
the product offerings in the channel, with the resultant revenue from Lingo more
than offsetting the decline in Replay systems. Another new product introduced
since the June 1997 quarter was the In-switch product, which contributed almost
half of the total increase in year over year sales. These two high-volume
products have resulted in a substantial increase in units shipped within the
channel, nearly tripling over the prior year's comparable quarter. The Company's
largest corporate customer, NEC Corporation and its subsidiaries, accounted for
approximately 50.9% of total corporate sales and approximately 13.3% of total
net sales during the three months ended June 30, 1998.
Net sales to international customers increased by approximately 8% during the
three months ended June 30, 1998 in comparison to the prior year's same quarter.
International sales represented approximately 14% of total net sales in each of
the three month periods ended June 30, 1998 and 1997. The increase in
international sales can be attributed to the evolution of the Company's
international strategy towards a decentralized approach, providing the local
sales managers the latitude to take advantage of the unique opportunities in
their markets. The Company's HTML interface for the Replay Plus and Replay
product lines, combined with increased localization efforts, contributed to the
increase in sales over the prior year's quarter, particularly in the European
market.
Other revenue comprised approximately 4% of the Company's net sales for the
quarters ended June 30, 1998 and 1997. These revenues primarily represent
contributions from the Company's Pronexus subsidiary through sales of Visual
Basic-based voice application tools.
GROSS MARGIN
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997 Change
- --------------------------- ------ ------- ------
<S> <C> <C> <C>
(Dollars in thousands)
Gross profit $7,474 $6,958 7.4%
Percentage of net sales 55.8% 59.1%
------ ------- ------
</TABLE>
The Company's gross margin varies in part depending upon the mix of
higher-margin voice board-and-software kit sales (offered to all customers) and
software-only sales, such as In-switch (available only to strategic partner
accounts) as opposed to turnkey system sales (which include the cost of a PC and
other related hardware). The proportion of sales contributed from each
distribution channel also affects the overall gross margin, as international
sales have historically had higher gross margins than sales to the other
distribution channels.
The decrease in gross margin as a percentage of net sales between the comparable
three month periods is primarily attributable to two factors: the sales mix
shift towards the historically lower-margin strategic partner accounts and the
Company's Year 2000 compliance promotion, which has a higher hardware
composition.
9
<PAGE>
International gross margins have also declined, due to the impacts of
Asia/Pacific exchange rates on revenue, which are not correspondingly offset
by the predominantly U.S.-sourced cost of product. In the Americas channel,
margins decreased primarily as a result of the shift of Replay and Replay
Plus to lower average port size Repartee units.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997 Change
- ---------------------------- ------- ------ --------
<S> <C> <C> <C>
(Dollars in thousands)
Research and development $3,330 $2,266 47.0%
Percentage of net sales 24.8% 19.2%
------- ------ --------
</TABLE>
The increases in research and development expenses, both in dollar amount and as
a percentage of net sales between the fiscal years ending 1998 and 1997 were
primarily attributable to an increase in compensation-related costs associated
with additional engineering and development personnel and project-based contract
development staff. The development of Unity, the Company's forthcoming Windows
NT-based product, is the predominant factor contributing to the increased
research and development personnel, and the Company has recently augmented its
Quality Assurance staff in preparation for the release. In addition, engineering
salaries have increased due to the competitive nature of the labor market and
the Company's effort to attract and retain skilled employees.
The Company believes that in order to remain competitive in a rapidly changing
technological environment, it will continue to be necessary to allocate
significant resources to the development of new products. The Company expects
the dollar amount of research and development expenditures to continue to
increase for the foreseeable future, and that these expenses as a percentage of
sales will vary from period to period.
SALES AND MARKETING
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997 Change
- --------------------------- ------- ------- -------
<S> <C> <C> <C>
(Dollars in thousands)
Sales and marketing $3,986 $3,274 21.7%
Percentage of net sales 29.7% 27.8%
------- ------- -------
</TABLE>
The increases in sales and marketing expenses during the three month period
ended June 30, 1998 over the comparable period in the prior fiscal year were
primarily attributable to additional compensation-related expenses associated
with growth in sales and marketing personnel, and higher commission expenses due
to incentives and increased sales levels. Much of this headcount growth was in
the technical and strategic partner support arenas, as well as the acquisition
of the Company's European distributor, whose personnel are not reflected in the
June 30, 1997 figures. The increase in technical support personnel is
attributable to the demand for network and desktop support resources as a result
of the product shift to Repartee and CTI offerings. The increase in unit volume
has also caused expenses to be higher when compared to the prior year, as more
resources have been devoted to supporting a larger number of systems. Sales and
marketing expenses include both costs that are essentially fixed as well as
costs that vary from period to period relative to sales volume and thus can be
expected to fluctuate both in dollar amount and as a percentage of net sales
from period to period.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997 Change
- --------------------------- ------- ------- -------
<S> <C> <C> <C>
(Dollars in thousands)
General and administrative $1,857 $980 89.5%
Percentage of net sales 13.9% 8.3%
------- ------- -------
</TABLE>
10
<PAGE>
The increases in general and administrative expenses, both in dollar amount and
as a percentage of net sales, between comparable periods was primarily
attributable to increased compensation-related and consulting expenses
associated with the Company's continued investment in its management information
systems infrastructure. Also, for the quarter ended June 30, 1997 the company
reduced its provision for doubtful accounts receivable due to improved
collection statistics, resulting in some of the dollar and percentage increases
when compared to the quarter ended June 30, 1998. General and administrative
expenses can be expected to fluctuate as a percentage of net sales from period
to period.
INTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997 Change
- --------------------------- ------ ------- ------
<S> <C> <C> <C>
(Dollars in thousands)
Interest income $167 $166 0.6%
------ ------- ------
</TABLE>
The slight increase in interest income during the three month periods ended June
30, 1998 in comparison to the corresponding period in the prior fiscal year was
attributable to the implementation of finance charges on overdue accounts
receivable balances. Offsetting this was lower average invested cash and
marketable security balances. Average cash and marketable security balances
decreased due to a decline in accounts payable, a net loss and equipment
purchases. See "Liquidity and Capital Resources."
INCOME TAX PROVISION
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997 Change
- --------------------------- ------ ------ -------
<S> <C> <C> <C>
(Dollars in thousands)
Income tax benefit (provision) $533 $(178) (399.4%)
Effective tax rate 34.3% 29.5%
------ ------ -------
</TABLE>
Variations in the customary relationship between the income tax benefit
(provision) and the statutory income tax rate of 34% result from tax exempt
investment income, research and development tax credits, and the benefit
provided by the Company's foreign sales corporation (FSC) and certain
nondeductible expenses. The Company expects the effective tax rate to fluctuate
in the future due to the impact of changing research and development tax
credits, tax exempt interest income, and foreign sales corporation benefits as a
percentage of taxable income. In addition, the Company anticipates that it may
fall under the jurisdiction of additional taxing authorities as its operations
continue to expand into new geographical areas.
As a result of the Company's pretax loss, the Company will receive a refund of
income taxes previously paid. The Company's effective tax rate increased to
34.3% (benefit rate as a result of a pretax loss) in the quarter ended June 30,
1998 from 29.2% in the comparable prior year's quarter. The expiration of the
federal research and development credit on June 30, 1998 resulted in a reduction
in the income tax benefit rate as the annual credit amount will only apply to
three months of research and development expenditures.
11
<PAGE>
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998 1997 Change
- --------------------------- ------ ------ ------
<S> <C> <C> <C>
(Dollars in thousands, except per share data)
Net income (loss) $(1,020) $455 (324.2%)
Percentage of net sales (7.6%) 3.9%
Earnings (loss) per share:
Basic $(0.22) $0.10 (320.0%)
Diluted $(0.22) $0.10 (320.0%)
------ ------ ------
</TABLE>
Net income (loss) and earnings (loss) per share in the quarter ended June 30,
1998 decreased in comparison to the corresponding period in the prior fiscal
year due primarily to increased operating expenses, as discussed under the
individual income statement captions. The Company believes these investments
are essential to prepare for new product direction and future growth. This
investment in the development of new offerings and distribution channels, and
the individuals that support them, is expected to continue throughout the fiscal
year. The number of common and common equivalent shares outstanding during the
two periods was comparable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities and investments
decreased to $7.5 million or 19% of total assets at June 30, 1998 from $8.6
million or 21% of total assets at March 31, 1998. The majority of the decrease
is due to the net loss, a substantial decrease in accounts payable, and
purchases of hardware and software equipment to augment the Company's management
information systems. Cash flow used in operations totaled $1.1 million during
the three months ended June 30, 1998. The Company had net working capital of
$21.6 million at June 30, 1998.
Accounts receivable, net of allowances, decreased to $10.4 million at June 30,
1998 from $11.3 million at March 31, 1998. The decrease in accounts receivable
balances was due to a 3% decline in days' sales outstanding and the emphasis on
collecting current rather than older accounts. Inventory levels decreased to
$8.8 million at June 30, 1998 from $10.1 million at March 31, 1998. Inventory
levels were unusually high at March 31, 1998, due to lower than expected fourth
quarter fiscal 1998 sales, thus reducing the incremental stocking requirements
for the first quarter of fiscal 1999.
The Company made $938,000 in capital expenditures during the three months ended
June 30, 1998, compared to $533,000 during the comparable period of the prior
fiscal year. The majority of the capital expenditures during the three months
ended June 30, 1998 consisted of computer hardware and software used to augment
the Company's management information systems infrastructure, as well as
purchases of computer equipment for the expanded Quality Assurance group. The
Company currently has no specific commitments with respect to additional capital
expenditures during the remainder of fiscal 1999, but expects to spend an
aggregate of approximately $5.0 million for the year.
The Company has a $10,000,000 revolving credit line from a bank for financing
working capital. The agreement expires on November 30, 1998. The Company had
$759,000 of borrowings outstanding under financing agreements as of June 30,
1998.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations, will provide sufficient
working capital for use in operations for at least the next year.
12
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
The Company is implementing plans to make its systems year 2000 compliant. The
Company has and will continue to make certain investments to modify or convert
its internal operational software and hardware systems and applications to
ensure that the Company's systems are year 2000 compliant. Although the Company
expects some costs associated with the modifications and conversions, the
financial impact to the Company has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
The Company is also implementing programs for assisting customers to obtain year
2000 compliance by making software or hardware upgrades available and offering
programs for migrations to current product versions. However, if any necessary
modifications, conversions, migrations or upgrades are not made, or not made in
a timely or cost effective manner, the Company or its customers may be unable to
implement appropriate year 2000 solutions, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company has received notice of a lawsuit related to the alleged inability of
the Company's products prior to Repartee 7.44 to function properly with respect
to the year 2000. The Company believes that the lawsuit is without merit and
intends to defend itself vigorously. The final resolution of this lawsuit is
not expected to have a material adverse effect on the Company's results of
operations and financial condition, however, it is not possible to estimate the
possible loss or its ultimate impact. Additionally, if other companies with
which the Company does business, such as its suppliers, distributors and other
customers, do not address year 2000 issues on a timely basis, it could have an
adverse effect on the Company's systems or business transactions.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain statements contained herein are dependent upon numerous factors,
circumstances and contingencies. The following factors, while not all-inclusive,
could cause actual results to differ materially from historical results or those
anticipated:
- Competitive pressure from new entrants to the CTI market, including large
software companies and telephone switch manufacturers with greater
resources, could adversely affect the Company's business. Introduction of
new products by the Company or its competitors and the extent of their
success or failure could produce significant fluctuations in market demand
for the Company's products.
- Increasing price competition in the Company's marketplace could influence
the amount and timing of changes in the Company's prices to its customers,
and therefore negatively impact the Company's gross margins. Gross margins
may also either increase or decrease as a result of further shifts in
product mix depending upon the percentage of net sales contributed by
software only sales in comparison to turnkey system sales.
There can be no assurance that new products will not be delayed, allowing
competitors to gain market share or that such products will be successful
in the marketplace.
- The extent and timing of new product development and the need or desire to
modify existing products may cause notable increases in research and
development spending. Increasing international sales may require notable
increases in development spending associated with localization of products
for foreign markets.
- If the Company experiences delays in shipments (whether it is due to delays
from customers or as a result of the timing of new product introductions by
the Company) in a given quarter, or if new order bookings do not meet
anticipated levels, substantial fluctuations in operating results will
occur. Frequently, these developments may not become apparent to the
Company until near or at the end of the quarter. In addition, changes in
the product and channel mix, and the timing of customer orders, will
continue to affect the variability of quarterly results of operations in
future quarters.
- Dependence on continued sales to significant customers could have a
significant impact on the Company's operations as there is no assurance
that any particular customer will continue to purchase similar volumes of
the Company's products.
13
<PAGE>
- Risks associated with the Company's movement into the larger end-user
market, such as product acceptance and demand and failure to attract
sufficient market share, could affect the Company's future performance.
- Growth strategies involving acquisitions and strategic relationships may
encounter legal and/or unforeseeable delays beyond the Company's control.
- Risks associated with foreign operations such as gains and losses on the
conversion of foreign currencies to U.S. dollars; export-import
regulations; customs matters; foreign collection problems; and military,
political and transportation risks may significantly affect the company's
operating results. In addition, the Company's international sales involve
additional risks associated with governmental regulation, product
adaptation to local languages and switching systems, and uncertainties
arising from local business practices and cultural considerations.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 2(d). CHANGES IN SECURITIES AND USE OF PROCEEDS
At June 30, 1998, the Company had remaining net proceeds from its
December 1993 initial public offering of $5,882,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment to Line of Credit Agreement between Registrant and
Wells Fargo Bank, N.A. dated August 1, 1998.
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1998.
15
<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.
Active Voice Corporation
(Registrant)
Date: August 12, 1998 By: /s/ Jose S. David
-------------------------
Jose S. David
Chief Financial Officer
Signing on behalf of registrant and
as principal financial officer
16
<PAGE>
EXHIBIT 10.1
August 1, 1998
Active Voice Corporation
Mr. Jose S. David, CFO
2901 3rd Avenue, #500
Seattle, WA 98121
Dear Mr. David:
This letter amendment (this "Amendment") is to confirm the changes agreed
upon between Wells Fargo Bank, National Association ("Bank") and Active Voice
Corporation ("Borrower") to the terms and conditions of that certain letter
agreement between Bank and Borrower dated as of November 13, 1997, as amended
from time to time (the "Agreement"). For valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree
that the Agreement shall be amended as follows to reflect said changes.
1. The following is hereby added to the Agreement as Paragraph I.3:
"3. COLLATERAL:
As security for all indebtedness of Borrower to Bank
under the Line of Credit, Borrower hereby grants to Bank
security interests of first priority in Borrower's Wells
Fargo Bank Institutional Securities Sales Account No.
303464.
All of the foregoing shall be evidenced by and subject
to the terms of such security agreements, financing
statements, deeds of trust and other documents as Bank shall
reasonably require, all in form and substance satisfactory
to Bank. Borrower shall reimburse Bank immediately upon
demand for all costs and expenses incurred by Bank in
connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of
appraisals, audits and title insurance."
<PAGE>
Active Voice Corporation
August 1, 1998
Page 2
2. Paragraph V.9.(d) is hereby deleted in its entirety, without
substitution.
3. Paragraph V.15 is hereby deleted in its entirety, without
substitution.
4. The following is hereby added to the Agreement as Paragraph V.16.:
"16. YEAR 2000 COMPLIANCE. Perform all acts reasonably
necessary to ensure that (a) Borrower and any business in
which Borrower holds a substantial interest, and (b) all
customers, suppliers and vendors that are material to
Borrower's business, become Year 2000 Compliant in a timely
manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all of
Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing
of such systems. As used herein, "Year 2000 Compliant"
shall mean, in regard to any entity, that all software,
hardware, firmware, equipment, goods or systems utilized by
or material to the business operations or financial
condition of such entity, will properly perform date
sensitive functions before, during and after the year 2000.
Borrower shall, immediately upon request, provide to Bank
such certifications or other evidence of Borrower's
compliance with the terms hereof as Bank may from time to
time require."
5. Except as specifically provided herein, all terms and conditions of the
Agreement remain in full force and effect, without waiver or modification. All
terms defined in the Agreement shall have the same meaning when used herein.
This Amendment and the Agreement shall be read together, as one document.
6. Borrower hereby remakes all representations and warranties contained in
the Agreement and reaffirms all covenants set forth therein. Borrower further
certifies that as of the date of Borrower's acknowledgment set forth below there
exists no default or defined event of default under the Agreement or any
promissory note or other contract, instrument or document executed
<PAGE>
Active Voice Corporation
August 1, 1998
Page 3
in connection therewith, nor any condition, act or event which with the
giving of notice or the passage of time or both would constitute such a
default or defined event of default.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
Your acknowledgment of this Amendment shall constitute acceptance of the
foregoing terms and conditions.
Sincerely,
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By: /s/ Greg Milner
---------------------
Greg Milner
Vice President
Acknowledged and accepted as of July 11, 1998:
ACTIVE VOICE CORPORATION
By: /s/ Jose S. David
-------------------------
Jose S. David
Chief Financial Officer
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