<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 DECEMBER 31, 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 FEBRUARY 8, 1999
Common Stock, No Par Value 4,562,860
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<PAGE>
ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1998
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
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 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE 18
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 Nine Months Ended
December 31, December 31,
----------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $16,629 $14,063 $44,334 $40,365
Cost of goods sold 8,127 5,402 20,676 16,739
-------------- -------------- -------------- --------------
Gross profit 8,502 8,661 23,658 23,626
Operating expenses:
Research and development 3,568 2,191 10,169 6,605
Sales and marketing 4,440 3,813 12,636 10,984
General and administrative 2,014 1,884 6,106 4,436
-------------- -------------- -------------- --------------
Total operating expenses 10,022 7,888 28,911 22,025
-------------- -------------- -------------- --------------
Operating income (loss) (1,520) 773 (5,253) 1,601
Interest expense (17) (50)
Interest income 49 142 289 469
-------------- -------------- -------------- --------------
Income (loss) before income taxes and
minority interest (1,488) 915 (5,014) 2,070
Income tax benefit (provision) 39 (270) 1,249 (621)
Minority interest in loss (income)
of consolidated subsidiary (41) (27) (40) 35
-------------- -------------- -------------- --------------
Net income (loss) $(1,490) $ 618 $(3,805) $ 1,484
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Earnings (loss) per share:
Basic $(0.32) $ 0.13 $ (0.82) $0.32
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted $(0.32) $ 0.13 $ (0.82) $0.32
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 342 $ 1,550
Marketable securities 1,752 3,407
Accounts receivable, less allowances 11,906 11,331
Inventories 6,261 10,122
Income taxes receivable 1,552 652
Deferred tax asset 1,282 1,340
Prepaid expenses and other assets 3,652 3,103
------------------ -----------------
Total current assets 26,747 31,505
Marketable securities 1,694 3,680
Furniture and equipment, net 4,676 3,539
Other assets 4,271 2,420
------------------ -----------------
Total assets $37,388 $41,144
------------------ -----------------
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,379 $ 3,931
Notes payable 173
Accrued compensation and benefits 2,116 1,256
Other accrued expenses 2,489 1,493
------------------ -----------------
Total current liabilities 7,157 6,680
Commitments
Minority interest (81) (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 15,093 18,996
Accumulated other comprehensive income 12 40
Less 374,073 repurchased shares (313,067 at
March 31, 1998), at cost (2,099) (1,703)
------------------ -----------------
Total stockholders' equity 30,312 34,595
Total liabilities and stockholders' equity $37,388 $41,144
------------------ -----------------
------------------ -----------------
</TABLE>
Note: The consolidated 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
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
----------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(3,805) $ 1,484
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,260 958
Provisions for accounts receivable 269 340
Deferred income taxes 62 (250)
Loss on disposal of equipment 17 12
Minority interest in income (loss) of consolidated subsidiary 40 (35)
Changes in operating assets and liabilities:
Increase in accounts receivable (844) (1,323)
Decrease (increase) in inventories 3,861 (1,006)
Increase in prepaid expenses and
other assets (3,471) (2,884)
Decrease in accounts payable (1,552) (321)
Increase in other liabilities 1,858 604
------------------ ------------------
Net cash used in operating activities (2,305) (2,421)
INVESTING ACTIVITIES
Purchases of marketable securities and investments (1,886)
Proceeds from sale and maturity of marketable securities 3,629 5,891
Acquisition of business (467)
Purchases of furniture and equipment (2,243) (1,899)
------------------ ------------------
Net cash provided by investing activities 1,386 1,639
FINANCING ACTIVITIES
Repurchase of common stock (800) (416)
Net issuance of short term notes payable 173
Proceeds from employee stock option and stock
purchase plans 348 498
------------------ ------------------
Net cash provided by (used in) financing activities (279) 82
Effect of exchange rate changes on cash and cash equivalents (10) 8
Decrease in cash and cash equivalents (1,208) (692)
Cash and cash equivalents at beginning of period 1,550 1,542
------------------ ------------------
Cash and cash equivalents at end of period $ 342 $ 850
------------------ ------------------
------------------ ------------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 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 and
nine month periods ended December 31, 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>
December 31, 1998 March 31, 1998
---------------------- ----------------------
<S> <C> <C>
Computer equipment $3,802 $5,494
Custom component parts 1,666 3,907
Supplies 793 721
---------------------- ----------------------
$6,261 $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>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------- ------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(1,490) $618 $(3,805) $1,484
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares 4,629,223 4,633,753 4,655,378 4,621,668
Effect of dilutive securities:
Stock options ** 66,121 ** 51,648
-------------- -------------- -------------- --------------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares
and assumed conversions 4,629,223 4,699,874 4,655,378 4,673,316
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Basic earnings (loss) per share: $ (0.32) $ 0.13 $ (0.82) $ 0.32
Diluted earnings (loss) per share: $ (0.32) $ 0.13 $ (0.82) $ 0.32
</TABLE>
- ------------------------------------------------------------------------------
** Net effect of stock options not included in calculation of diluted EPS as
effect would be antidilutive.
6
<PAGE>
4. NEW ACCOUNTING PRONOUNCEMENTS
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 December 31, 1998 and 1997, total
comprehensive income (loss) amounted to $(1,448,000) and $622,000, respectively.
For the nine month periods ended December 31, 1998 and 1997, total comprehensive
income (loss) amounted to $(3,833,000) and $1,520,000, respectively.
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 products, available only to the Company's
strategic partners, combine 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.
FORWARD LOOKING INFORMATION
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 OF SOME OF THE
INVOLVED RISKS AND UNCERTAINTIES.)
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Net sales $16,629 $14,063 18.2% $44,334 $40,365 9.8%
- -----------------------------------------------------------------------------------------------------------
</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.
8
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1998
Net sales to the Company's Americas dealer network during the quarter ended
December 31, 1998 decreased by 1% from the comparable period in the prior fiscal
year. Net sales to the Americas dealers represented 49% of total net sales for
the three months ended December 31, 1998 compared to 58% of total net sales in
the three months ended December 31, 1997. The decrease in net sales in the
Americas dealer channel as a percentage of total net sales can be credited to
the continued 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. Revenues relating to the Company's Year
2000 (Y2K) program, which provides discounts to dealers who upgrade their
customers' non-Y2K compliant systems, reduced the decline in sales to the
Americas dealer channel for the period ended December 31, 1998.
Net sales to the corporate sales channel increased by approximately 71% for the
three months ended December 31, 1998 over the comparable period in the prior
fiscal year. Net sales to corporate sales customers represented 31% and 22% of
total net sales for the three month periods ended December 31, 1998 and 1997,
respectively. This increase was primarily attributable to the successful
introduction of Lingo in the channel's product line and the continued success of
in-switch when compared to the prior year's comparable quarter. The Company's
largest corporate customer, NEC Corporation and its subsidiaries, accounted for
approximately 65% of total corporate sales and approximately 20% of total net
sales during the three months ended December 31, 1998.
Net sales to international customers increased by approximately 21% during the
three months ended December 31, 1998 in comparison to the prior year's same
quarter. International sales represented 16% of total net sales for the three
month period ended December 31, 1998 and 15% of total net sales for the three
month period ended December 31, 1997. The increase in the international channel
can be primarily attributed to the European market, where the Company benefited
from increased voice mail penetration rates. The Company believes its ongoing
localization efforts have contributed to the improved product acceptance and
demand in the European market.
Other revenue comprised approximately 4% and 5% of the Company's net sales for
the quarters ended December 31, 1998 and 1997, respectively. These revenues
primarily represent contributions from the Company's Pronexus subsidiary through
sales of Visual Basic-based voice application tools and the receipt of patent
license fees related to the Company's stutter detect patent in the quarter ended
December 31, 1997.
NINE MONTHS ENDED DECEMBER 31, 1998
Net sales to the Company's Americas dealer network for the current period
declined approximately 5% when compared to the nine month period ended December
31, 1997. Net sales to the Americas dealers represented approximately 52% of
total net sales for the nine months ended December 31, 1998, compared to
approximately 60% of total net sales for the nine months ended December 31,
1997. The reason for the decline mirrors the discussion of the decrease in the
three month period comparison, where certain dealers are now purchasing products
through the strategic partner channel, for the reasons outlined above. Although
this distribution model often comes at the expense of the dealer channel, the
Company believes that strategically this transition increases its voice mail
attach rate, resulting in larger overall unit volumes of its messaging products.
Lingo sales have offset some of the decline in overall dealer revenue, as has
the Company's Y2K upgrade program.
Net sales to the Company's corporate sales channel during the nine months ended
December 31, 1998 increased by approximately 53% from the comparable period in
the prior fiscal year. Net sales to corporate sales customers represented 29%
and 21% of total net sales for the nine month periods ended December
9
<PAGE>
31, 1998 and 1997, respectively. Increased unit sales of Lingo and in-switch
accounted for the majority of the revenue growth, as customers in this
channel have responded to the simplicity and price point of Lingo, and the
integrated solution offered by in-switch. The largest corporate customer, NEC
Corporation and its subsidiaries, accounted for approximately 62% of total
corporate sales and approximately 18% of total net sales during the nine
months ended December 31, 1998.
Net sales to international customers increased 8% for the nine months ended
December 31, 1998, representing 15% of total sales in each of the nine month
periods ended December 31, 1998 and 1997. This increase is primarily
attributable to the strength of the European market. The Company's sales in this
market have been enhanced by the acquisition of the Company's European
distributor in September 1997. The Company anticipates that recent
country-specific localization of the Company's products, particularly for France
and Germany, will further extend the Company's product acceptance in the
European market.
For each of the nine month periods ended December 31, 1998 and December 31,
1997, other revenue contributed 4% of the Company's total net sales, as the
Company's Pronexus subsidiary posted greater than a 50% revenue increase over
the prior year.
GROSS MARGIN
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Gross profit $8,502 $8,661 (1.8%) $23,658 $23,626 0.1%
Percentage of net sales 51.1% 61.6% 53.4% 58.5%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Company's gross margin varies in part depending upon the mix of
higher-margin voiceboard-and-software kit sales (offered to all customers) and
software-only sales (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 by each distribution channel also
affects the overall gross margin, as international sales have historically had
higher gross margins than sales in the other distribution channels.
Revenue from the Company's Y2K upgrade program has reduced the overall gross
margin percentage in both the three and nine month periods ended December 31,
1998 in comparison to the comparable periods in the prior fiscal year. The PC
hardware components of the Company's products carry a lower gross margin
percentage, and the percentage of revenue from each unit sold under the Y2K
program attributable to PC hardware is greater than in the Company's non-Y2K
business. During the three month period ended December 31, 1997 the Company
recognized the receipt of patent licenses fees related to its stutter-detect
patent, as well as a favorable settlement for third-party vendor hardware
problems. The absence of similar items in the current fiscal year accounted
for nearly one-half and one-third of the gross margin percentage decrease in
the three and nine month periods ended December 31, 1998 and December 31,
1997, respectively. The relatively higher margin contribution from in-switch
in the strategic partner channel, for which the Company combines its software
with third-party vendor hardware, has reduced some of the overall decline.
10
<PAGE>
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Research and development $3,568 $2,191 62.8% $10,169 $6,605 54.0%
Percentage of net sales 21.5% 15.6% 22.9% 16.4%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The increases in research and development expenses, both in dollar amount and
as a percentage of net sales between the three month and nine month periods
ended December 31, 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
increase in engineering personnel is attributable to the Company's
development of Unity, the Company's Windows NT-based product, as well as to
the addition of Quality Assurance staff in preparation for Unity's release.
To accommodate the development staff expansion, the Company built out
additional office space, thereby increasing its rent expense. 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. Included in the three months ended December 31, 1997 is the
benefit from the modification of terms of a third party development contract,
which reduced previously incurred expenditures. Incentive compensation
programs for the Unity development staff will accelerate as development
milestones are achieved and the product is launched. As a result, the Company
anticipates increased compensation expense during the final three months of
fiscal year 1999. The Company also continues to allocate resources to the
localization of products for international markets and customization of
products for strategic partner accounts.
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 increases in the dollar amount of research and development
expenditures to taper after the release of Unity, and that these expenses as
a percentage of sales will vary from period to period.
SALES AND MARKETING
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Sales and marketing $4,440 $3,813 16.4% $12,636 $10,984 15.0%
Percentage of net sales 26.7% 27.1% 28.5% 27.2%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The increases in sales and marketing expenses during the three month and nine
month periods ended December 31, 1998 over the comparable periods in the prior
fiscal year were primarily attributable to increased compensation-related
expenses associated with growth in sales and marketing personnel and higher
commission expense due to increased sales levels. 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 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.
11
<PAGE>
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
General and administrative $2,014 $1,884 6.9% $6,106 $4,436 37.6%
Percentage of net sales 12.1% 13.4% 13.8% 11.0%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The increases in general and administrative expenses between comparable periods
were primarily attributable to increased compensation-related expenses due to
additional general and administrative personnel and higher salary levels.
Software purchases and legal costs also contributed to the increases over the
three and nine month periods ended December 31, 1998 and 1997. Improved
collection statistics have resulted in a reduction of bad debt expense,
contributing to the decline in general and administrative expenses as a
percentage of net sales in the three month period ended December 31, 1998.
General and administrative expenses, being relatively fixed in nature, can be
expected to fluctuate as a percentage of net sales from period to period.
INTEREST EXPENSE AND INTEREST INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest expense $(17) 100.0% $ (50) 100.0%
Interest income $ 49 $142 (65.5%) $ 289 $469 (38.4%)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Company incurred interest expense in the three and nine month periods ended
December 31, 1998 as it borrowed against its line of credit to fund operations.
The decreases in interest income during the three month and nine month periods
ended December 31, 1998 in comparison to the corresponding periods in the prior
fiscal year were primarily attributable to lower average invested cash and
marketable security balances. Average cash and marketable security balances
decreased due primarily to the Company's net loss. See "Liquidity and Capital
Resources."
INCOME TAX PROVISION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Income tax benefit (provision) $39 $(270) (114.4%) $1,249 $(621) (301.1%)
Effective tax rate 2.6% 29.5% 24.9% 30.0%
- -----------------------------------------------------------------------------------------------------------
</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 possible future operating losses and to the impact of
changing research and development tax credits, tax exempt investment 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 expand into new geographical
areas.
The Company's effective tax rate decreased to 2.6% and 24.9% (benefit rates as a
result of pretax losses) in the three month and nine month periods ended
December 31, 1998, respectively, compared to 29.5% and 30.0% income tax
provisions for the prior year's comparable periods. During the quarter ended
December 31,
12
<PAGE>
1998 the Company exhausted all net operating loss (NOL) carrybacks. Any
additional NOL's will be carried forward, resulting in income tax benefits in
future periods with taxable income. As a result of the Company's pretax
losses for the three and nine month periods ended December 31, 1998, the
Company will receive a refund of income taxes previously paid. The Company
had approximately $1.3 million in deferred tax assets at December 31, 1998.
The Company is evaluating the necessity of a valuation allowance against
these assets due to current year losses and the limited availability of NOL
carrybacks.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Net income (loss) $(1,490) $618 (341.1%) $(3,805) $1,484 (356.4%)
Percentage of net sales (9.0%) 4.4% (8.6%) 3.7%
Earnings (loss) per share:
Basic $(0.32) $0.13 (346.2%) $(0.82) $0.32 (356.3%)
Diluted $(0.32) $0.13 (346.2%) $(0.82) $0.32 (356.3%)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Net income (loss) and earnings (loss) per share for the three month and nine
month periods ended December 31, 1998 in comparison to the corresponding periods
in the prior fiscal year were primarily attributable to the increased operating
expenses, as discussed above under the individual income statement captions. The
Company believes these investments are essential to prepare for new product
direction and future growth. These investments in the development, marketing and
support of new products is expected to continue throughout the year.
Furthermore, the declines in gross margin as a percentage of net sales have also
contributed to the decreases in net income and earnings per share. The number of
common and common equivalent shares outstanding was comparable in the three
month and nine month periods ended December 31, 1998, and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities decreased to
$3.8 million or 10% of total assets at December 31, 1998 from $8.6 million or
21% of total assets at March 31, 1998. The decrease is due primarily to the net
loss. Cash flow used in operations totaled $2.3 million during the nine months
ended December 31, 1998. The Company had net working capital of $19.6 million at
December 31, 1998.
Accounts receivable, net of allowances, increased to $11.9 million at December
31, 1998 from $11.3 million at March 31, 1998. The increase in accounts
receivable balances was due to higher net sales in the three months ended
December 31, 1998 compared to net sales in the three months ended March 31,
1998. Days' sales outstanding at December 31, 1998 declined approximately 5%
from March 31, 1998. Inventory decreased to $6.3 million at December 31, 1998
from $10.1 million at March 31, 1998, reflecting the Company's continued efforts
to efficiently manage component stocking levels.
During the nine months ended December 31, 1998, the Company repurchased 120,000
shares of its common stock for approximately $800,000 under previously announced
share repurchase programs. The Company made $2.2 million in capital expenditures
during the nine months ended December 31, 1998, compared to $1.9 million during
the comparable period of the prior fiscal year. The majority of the capital
expenditures during the nine months ended December 31, 1998 consisted of
computer hardware and software used to augment the Company's management
information systems infrastructure, as well as additions and upgrades of
computer equipment for development personnel. 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
$3.5 million for the year.
13
<PAGE>
The Company has a $10,000,000 revolving credit line from a bank for financing
working capital. The agreement expires on March 31, 1999. The Company had
approximately $200,000 of borrowings outstanding under the line of credit at
December 31, 1998. The Company is currently in the process of negotiating a new
financing agreement.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations and the availability of
alternative financing arrangements will provide sufficient resources to finance
operations for at least the next year.
YEAR 2000 UPDATE
An issue affecting the Company and others is the inability of many computer
systems and applications to correctly process date data in and between the
twentieth and twenty-first centuries. The Company formed task forces to
investigate the year 2000 readiness of its products and of its internal systems.
The Company has completed its initial assessment of the year 2000 readiness of
its critical internal business process systems and applications and continues to
assess other applications and equipment. The assessment of all systems will
continue through 1999. The Company has received assurances from the suppliers
that the Company's most critical business process systems and applications are
currently or will be year 2000 ready by December 31, 1999. The Company believes
that other systems can be modified or replaced prior to January 2000. The
Company estimates that the total cost of replacement or upgrade of internal
systems replaced solely to achieve year 2000 readiness will be less than
$100,000.
The Company has also implemented programs to assist customers with older
versions of its products in obtaining year 2000 readiness by making software
upgrades or replacement PC hardware available and offering programs for
migrations to current product versions. The Company estimates that the costs of
creating software patches and administering its upgrade programs for customers
will be approximately $400,000. The financial impact to the Company of the
development and administration of the upgrade programs has not been and is not
anticipated to be material to its financial position or results of operations in
any given year. However, if any necessary modifications, conversions, migrations
or upgrades are not made, or not made in a timely manner, the Company's
customers may be unable to implement appropriate year 2000 solutions, which
could have a material adverse effect on the Company as a result of the loss of a
significant customer or number of customers or legal costs.
The Company has been served with a class action lawsuit in Massachusetts
state court 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
plaintiffs seek to require the Company to remedy the alleged defect in these
products and also seek damages. The Company has filed its answer. The Company
believes that the claims stated are without merit, that the case is not
appropriate for class action, and intends to defend itself vigorously.
However, due to the preliminary status of the proceedings, it is not possible
to predict the ultimate outcome of the case or its financial impact on the
Company.
The Company is in the process of contacting other third party suppliers to
assess and seek reasonable assurances concerning the year 2000 readiness of
their products. The Company is in the process of requesting information from its
primary suppliers concerning the year 2000 readiness of their internal systems
as well. The Company estimates that it will complete its inquiry process no
later than June 1999. Because the Company has no control over third parties'
products, services or internal operations, the Company cannot ensure year 2000
readiness by its suppliers. The Company intends to develop contingency plans by
September 1999 for any third party suppliers that appear to be at risk.
The Company is also in the process of requesting information from major
customers concerning their internal year 2000 readiness. The Company estimates
that it will complete the inquiry process no later than June 1999. Because the
Company has no control over third parties' products, services or internal
operations, the Company cannot ensure year 2000 readiness by its customers.
14
<PAGE>
The Company has not determined the most likely worst case scenario for the
Company with respect to the year 2000 problem as it is still assessing the year
2000 readiness of its important business partners.
Readers are cautioned that forward looking statements contained in the Year 2000
Update should be read in conjunction with the Company's disclosures under the
heading "Forward Looking Information."
15
<PAGE>
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, resulting
in lost customers or 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.
- - Additional operating losses in excess of management expectations may
cause the Company's existing cash and marketable security balances to be
insufficient to fund its operations. As a result, the Company may be
required to seek alternate sources of financing or may be required to
abate current expense levels. There can be no assurance that alternate
financing will be available on acceptable terms, or at all.
- - Risks that the Company, its suppliers, or its customers do not address any
year 2000 readiness issues in a timely or effective manner. See "Year 2000
Update" above.
- - 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.
- - 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.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 2(d). CHANGES IN SECURITIES AND USE OF PROCEEDS
At September 30, 1998 the Company had remaining net proceeds from
its December 1993 initial public offering of $3,567,000.
During the quarter ended December 31, 1998 the Company used
$1,490,000 to fund its operating loss, leaving remaining net
proceeds of $2,077,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 December 31, 1998.
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.
Active Voice Corporation
(Registrant)
Date: February 11, 1999 By: /s/ Jose S. David
----------------------------------
Jose S. David
Chief Financial Officer
Signing on behalf of registrant and
as principal financial officer
18
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