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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 SEPTEMBER 30, 2000 COMMISSION FILE NUMBER 0-22804
------------------------
ACTIVE VOICE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WASHINGTON 91-1235111
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2901 THIRD AVENUE, SUITE 500 98121-9800
SEATTLE, WASHINGTON (Zip Code)
(Address of principal executive offices)
</TABLE>
(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.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OCTOBER 31, 2000
<S> <C>
Common Stock, No Par Value 11,436,453
</TABLE>
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<PAGE>
ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <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 4. Submission of Matters to a Vote by Security Holders......... 15
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................................... $13,887 $20,669 $25,244 $39,005
Cost of goods sold...................................... 4,632 8,492 9,213 16,632
------- ------- ------- -------
Gross profit............................................ 9,255 12,177 16,031 22,373
Operating expenses:
Research and development.............................. 4,209 3,833 8,245 7,977
Sales and marketing................................... 5,064 5,712 10,198 10,905
General and administrative............................ 2,729 2,356 4,905 4,372
------- ------- ------- -------
Total operating expenses............................ 12,002 11,901 23,348 23,254
------- ------- ------- -------
Operating income (loss)................................. (2,747) 276 (7,317) (881)
Interest expense........................................ -- (191) (4) (259)
Interest income......................................... 316 278 618 337
Impairment of strategic investment...................... (1,169)
Gain on sale of technology assets....................... 16,504
------- ------- ------- -------
316 87 614 15,413
------- ------- ------- -------
Income (loss) before income taxes and minority
interest.............................................. (2,431) 363 (6,703) 14,532
Income tax provision.................................... -- (101) -- (4,264)
Minority interest in (gain) loss of consolidated
subsidiary............................................ 8 (43) 2 (131)
------- ------- ------- -------
Net income (loss)....................................... $(2,423) $ 219 $(6,701) $10,137
======= ======= ======= =======
Earnings (loss) per share:
Basic................................................. $ (0.22) $ 0.02 $ (0.60) $ 1.08
======= ======= ======= =======
Diluted............................................... $ (0.22) $ 0.02 $ (0.60) $ 1.04
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH, 31
2000 2000
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $15,717 $15,557
Marketable securities..................................... 3,872 3,907
Accounts receivable, less allowances...................... 7,928 8,064
Inventories............................................... 7,099 8,546
Income taxes receivable................................... -- 3,356
Prepaid expenses and other assets......................... 1,954 1,682
------- -------
Total current assets.................................... 36,570 41,112
Marketable securities....................................... 2,298 3,745
Furniture and equipment, net................................ 5,426 5,793
Other assets................................................ 2,219 2,399
------- -------
Total assets............................................ $46,513 $53,049
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 903 $ 1,681
Accrued compensation and benefits......................... 2,259 2,553
Other accrued expenses.................................... 1,999 1,831
------- -------
Total current liabilities............................... 5,161 6,065
Commitments
Minority interest........................................... 67 72
Stockholders' equity:
Preferred stock, no par value:
Authorized shares--2,000,000--none outstanding
Common stock, no par value:
Authorized shares--60,000,000
Issued and outstanding shares, 11,307,516 (11,163,792 at
March 31, 2000)....................................... 27,686 26,798
Retained earnings......................................... 13,312 20,013
Accumulated other comprehensive income.................... 287 101
------- -------
Total stockholders' equity.................................. 41,285 46,912
Total liabilities and stockholders' equity.............. $46,513 $53,049
======= =======
</TABLE>
------------------------
Note: The consolidated balance sheet at March 31, 2000 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>
SIX MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(6,701) $10,137
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................. 1,030 992
Provisions for accounts receivable........................ 179 192
Deferred income taxes..................................... (566)
Gain (loss) on disposal of equipment...................... 6 6
Minority interest in earnings of consolidated
subsidiary.............................................. (8) 131
Gain on sale of technology assets......................... -- (16,504)
Changes in operating assets and liabilities:
Increase in accounts receivable......................... (43) (1,864)
Decrease in inventories................................. 1,447 949
Decrease in prepaid expenses and other assets........... 3,207 3,635
Decrease in accounts payable............................ (778) (3,028)
Increase (decrease) in other liabilities................ (126) 868
------- -------
Net cash used in operating activities................. (1,787) (5,052)
INVESTING ACTIVITIES
Proceeds from sale of technology assets..................... -- 18,000
Proceeds from sale and maturity of marketable securities.... 3,721 653
Purchases of marketable securities.......................... (2,233) (6,523)
Purchases of furniture and equipment........................ (612) (1,811)
------- -------
Net cash provided by (used in) investing activities... 876 10,319
FINANCING ACTIVITIES
Net issuance of short term notes payable.................... 4,112
Proceeds from employee stock option and stock purchase
plans..................................................... 888 708
------- -------
Net cash provided by financing activities............. 888 4,820
Effect of exchange rate changes on cash and cash
equivalents............................................... 183 24
------- -------
Increase in cash and cash equivalents....................... 160 10,111
Cash and cash equivalents at beginning of period............ 15,557 1,692
------- -------
Cash and cash equivalents at end of period.................. $15,717 $11,803
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
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 six month
period ended September 30, 2000 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, 2000.
2. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
------------- ---------
<S> <C> <C>
Computer equipment.................................... $4,945 $6,156
Custom component parts................................ 1,395 1,297
Supplies.............................................. 759 1,093
------ ------
$7,099 $8,546
====== ======
</TABLE>
3. REVENUE RECOGNITION POLICY
The Company's revenues primarily consist of system sales and software
licenses. System sales typically include both software and hardware components.
Software licenses consist of software applications that operate on third party
industry standard hardware that is available from the Company and other vendors.
Revenue from system sales and software licenses is recognized upon shipment of
the product to the customer. As revenues are recognized, the Company accrues
estimated costs related to no charge telephone support to customers, which are
not significant to the individual sale and typically are provided within one
month from the date of shipment. The Company does not offer unspecified upgrades
or enhancements to its products. Revenue from training services is not
significant and is recognized as the related services are provided.
The Company allows product returns without charge within the initial thirty
days following the date of sale and provides an allowance for estimated product
returns based on historical experience. The Company generally offers a one-year
warranty on all its software products. As the cost of software replacement under
the warranty is not significant, the Company does not provide for future
warranty claims.
4. COMPREHENSIVE INCOME
Total comprehensive income (loss) was ($2,257,000) and $197,000 for the
three month periods ended September 30, 2000 and 1999, respectively. Total
comprehensive income (loss) was ($6,515,000) and $10,144,000 for the six month
period ended September 30, 2000 and 1999, respectively.
6
<PAGE>
5. TECHNOLOGY LICENSES, LITIGATION AND CONTINGENCIES
On September 21, 2000 the Company entered into a Non-Exclusive License and
Settlement Agreement with CIDCO Incorporated granting a worldwide, non-exclusive
license to the Company's caller identification products under Patent
No. 5,327,493. All claims of CIDCO against the Company were dismissed. The
Company received a license fee of $2,000,000 in September 2000.
6. 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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)............................... $ (2,423) $ 219 $ (6,701) $ 10,137
========== ========= ========== =========
Denominator:
Denominator for basic earnings (loss) per
share--
Weighted average shares....................... 11,268,109 9,428,310 11,220,476 9,384,484
Effect of dilutive securities:
Stock purchase warrant........................ -- 124,028 -- 85,492
Stock options................................. -- 402,742 -- 309,216
---------- --------- ---------- ---------
Denominator for diluted earnings (loss) per
share--
Adjusted weighted average shares and assumed
conversions................................. 11,268,109 9,955,080 11,220,476 9,779,192
========== ========= ========== =========
Basic earnings (loss) per share:................ $ (0.22) $ 0.02 $ (0.60) $ 1.08
Diluted earnings (loss) per share:.............. $ (0.22) $ 0.02 $ (0.60) $ 1.04
</TABLE>
------------------------
The effect on earnings per share of outstanding stock options has been
excluded as the effect is antidilutive.
7. SUBSEQUENT EVENTS
On October 12, 2000 the Company completed the purchase of the remaining 49%
of the outstanding common stock of Pronexus, Inc. ("Pronexus"). The purchase
price of approximately $2.8 million was paid in cash and 122,589 unregistered
shares of the Company's Common stock. The Company will account for the
transaction as a purchase and expects to perform the preliminary allocation of
the purchase price during the quarter ending December 31, 2000.
On November 10, 2000 the Company entered into a definitive agreement to be
acquired by Cisco Systems, Inc. ("Cisco"). Under the terms of the agreement,
Cisco will pay approximately $266 million in Cisco common stock for Active
Voice's Unity-TM- operation comprised of IP-based unified messaging solutions.
Cisco will also pay approximately $30 million in stock for Active Voice's
circuit switched PBX voicemail solutions, which will be sold after the
acquisition closes, to a newly formed entity comprised of former Active Voice
employees for $30 million. The purchase price will be shared by all Active Voice
security holders. As of November 9, 2000, there were approximately 14.8 million
shares of Active Voice outstanding on a fully diluted basis. The acquisition is
expected to be complete in the third quarter of the Company's fiscal year 2001.
The acquisition has been approved by the board of directors of each company and
is subject to various closing conditions including Active Voice shareholder
approval and approval under the Hart Scott Rodino Antitrust Improvements Act.
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 call
processing, including unified messaging systems and PC-based computer telephony
integration (CTI) solutions. The Company's products are sold worldwide through a
network of independent telecommunications dealers, telephone equipment
manufacturers and computer resellers. The Company currently markets six
principal products: Unity, Repartee, embedded systems, Lingo, Replay, and Replay
Plus. Unity, the Company's most recent product introduction, offers fully
unified messaging, including single point administration for e-mail, voice mail
and fax mail user accounts, address and distribution lists, and single point of
administration. Repartee, the Company's well established mid-market product
comes in two versions, CTI and VP. Repartee serves as the base for TeLANophy, a
suite of CTI application modules which provides complete call management and
integrated messaging capabilities. Embedded systems, 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. 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. The Company's Replay product
provides basic voice processing features at a price point attractive to the
small business market. 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.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THIS QUARTERLY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE FEDERAL SECURITIES LAWS AND IS SUBJECT TO ITS SAFE HARBORS. THE
FORWARD LOOKING STATEMENTS REFLECT MANAGEMENT'S FORECAST OF CERTAIN ASPECTS OF
THE COMPANY'S FUTURE. THEY ARE BASED ON CURRENT INFORMATION THAT WE HAVE
ASSESSED, BUT WHICH BY ITS NATURE IS DYNAMIC AND SUBJECT TO RAPID AND EVEN
ABRUPT CHANGES. FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO
STATEMENTS REGARDING: (A) THE ESTIMATED COMPLETION OF THE PROPOSED TRANSACTION
WITH CISCO SYSTEMS, INC. (SEE NOTE 7) AND (B) THE TRANSITION.
THE FOLLOWING ARE AMONG THE RISK FACTORS THAT MAY CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS: THE FOLLOWING WHILE NOT
INCLUSIVE, ARE AMONG THE RISK FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS: COMPETITIVE PRESSURES FROM NEW
ENTRANTS TO THE CTI MARKET, INCLUDING LARGE SOFTWARE COMPANIES AND TELEPHONE
SWITCH MANUFACTURERS WITH GREATER RESOURCES, THE INTRODUCTION OF NEW PRODUCTS BY
OUR COMPETITORS, INCREASING PRICE COMPETITION IN THE MARKETPLACE; UNANTICIPATED
DELAYS IN RELEASING NEW PRODUCTS, UNANTICIPATED DELAYS IN NEW PRODUCT
DEVELOPMENT, INCREASES IN RESEARCH AND DEVELOPMENT SPENDING, AND THE INCREASE IN
OUR INTERNATIONAL SALES MAY REQUIRE NOTABLE INCREASES IN DEVELOPMENT SPENDING
ASSOCIATED WITH LOCALIZATION OF PRODUCTS FOR FOREIGN MARKETS. OTHER POTENTIAL
RISKS AND UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED IN MORE DEPTH IN ACTIVE
VOICE'S FILINGS WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION.
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 CHANGE 2000 1999 CHANGE
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $13,887 $20,669 (32.8)% $25,244 $39,005 (35.2)%
</TABLE>
8
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Net sales to the Company's Americas dealer network during the quarter ended
September 30, 2000 decreased by 44% from the comparable period in the prior
fiscal year. Net sales to the Americas dealers represented 37% of total net
sales for the three months ended September 30, 2000 compared to 45% of total net
sales for the three months ended September 30, 1999. The decrease in net sales
in the Americas dealer channel in the current fiscal period when compared to the
prior year's quarter was primarily attributable to a decline in revenues
associated with the Company's Year 2000 (Y2K) program. Repartee and Lingo sales
declined as a result of the post-Y2K slowdown. Management believes the lower
revenues also reflect an industry-wide trend of delayed purchases while
customers considered their communications strategies, and the various equipment
and technology options available. Sales of the Company's unified messaging
product, Unity, continued to sequentially improve from quarter to quarter,
representing approximately 30% of the channel's net revenues during the quarter
ended September 30, 2000.
Net sales to the strategic partner sales channel decreased by 50% for the
three months ended September 30, 2000 over the comparable period in the prior
fiscal year. Net sales to strategic partner customers represented 28% and 37% of
total net sales for the three month periods ended September 30, 2000 and 1999,
respectively. The majority of the decrease in strategic partner sales is
attributable to a decline in switch sales by the Company's strategic partners.
Revenues from Unity during the quarter ended September 30, 2000 accounted for
approximately 19% of total strategic partner net sales. The Company's largest
strategic partner accounted for approximately 58% of total strategic partner
sales and approximately 16% of total net sales during the three months ended
September 30, 2000.
Net sales to international customers decreased by 32% during the three
months ended September 30, 2000 in comparison to the prior year same quarter.
International sales represented 14% of total net sales for the three month
period ended September 30, 2000 and 14% of total net sales for the three month
period ended September 30, 1999. The reasons for the decrease in net sales to
the international channel mirror the America's channel, and revenues declined in
each of the Company's international regions.
Other revenue increased 260% on a year over year basis during the quarter
ended September 30, 2000 and represented 21% of the Company's total net sales
versus 4% of sales in the comparable prior year quarter. The increase in other
revenue is attributable to the license fee of $2.0 million from CIDCO
Incorporated (See Note 5) and increased sales of Visual Basic-based voice
application tools and custom application design services through the Company's
majority-owned Pronexus subsidiary.
SIX MONTHS ENDED SEPTEMBER 30, 2000
Net sales to the Company's Americas dealer network decreased approximately
46% in the six months ended September 30, 2000 over the comparable period in the
prior fiscal year. Net sales to the Americas dealer channel represented
approximately 39% of total net sales for the six months ended September 30, 2000
compared to approximately 47% of total net sales for the six months ended
September 30, 1999. The majority of the decrease in net sales was attributable
to the same reasons discussed above for the quarter ended September 30, 2000.
Sales of Unity for the six months ended September 30, 2000 represented
approximately 25% of sales for the channel.
Net sales to the strategic partner sales channel during the six months ended
September 30, 2000 decreased by approximately 39% from the comparable period in
the prior fiscal year. Net sales to strategic partners represented 32% and 34%
of total net sales for the six month periods ended September 30, 2000 and 1999,
respectively. The decrease in net sales to strategic partners was primarily due
to decreased unit sales of embedded systems. The largest strategic partner
customer accounted for approximately 62% of total strategic partner sales and
approximately 19% of total net sales during the six months ended September 30,
2000. Sales of Unity for the six months ended September 30, 2000 represented
approximately 30% of the channel.
9
<PAGE>
Net sales through the international channel decreased by approximately 34%
during the six months ended September 30, 2000 from the comparable period in the
prior fiscal year. International sales represented 15% and 15% of total net
sales for the six month periods ended September 30, 2000 and 1999, respectively.
The reasons for the decrease in net sales to the international channel mirror
the America's channel, and revenues declined in each of the Company's
international regions.
Other revenue increased by 126% during the six months ended September 30,
2000 in comparison to the prior year same period and represented 14% and 4% of
the Company's total net sales for the six month periods ended September 30, 2000
and 1999, respectively. The increase in other revenue is attributable to the
license fee of $2.0 million from CIDCO Incorporated (See Note 5) offset by
slightly decreased sales of Visual Basic-based voice application tools and
custom application design services through the Company's majority-owned Pronexus
subsidiary.
GROSS MARGIN
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 CHANGE 2000 1999 CHANGE
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross profit............. $9,255 $12,177 (24.0)% $16,031 $22,373 (28.3)%
Percentage of net
sales.................. 66.6% 58.9% 63.5% 57.4%
</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.
The increase in the gross margin percentage in the three and six month
periods ended September 30, 2000 compared to the prior year's three and six
month periods are the result of higher revenue contributions from embedded
systems and Unity, which both carry higher software components. Gross margin
percentage in the quarter and six months ended September 30, 1999 reflected a
higher hardware sales mix when compared to the current quarter, as sales of PC
hardware components associated with the Company's Y2K program accounted for a
greater percentage of revenues than the Company's other business. Excluding the
$2.0 million license fee from CIDCO, the margins were approximately 61% and 60%
of net sales for the three and six months ended September 30, 2000.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 CHANGE 2000 1999 CHANGE
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Research and development.... $4,209 $3,833 9.8% $8,245 $7,977 3.4%
Percentage of net sales..... 30.3% 18.5% 32.7% 20.5%
</TABLE>
The increases in research and development expenses between the three month
and six month periods ended September 30, 2000 and 1999, were attributable to an
increase in compensation-related costs and depreciation on hardware used in the
development of Unity. The increased compensation expense was associated with
additional engineering and development personnel and higher engineering salaries
due to the competitive nature of the labor market and the Company's effort to
attract and retain skilled employees. The increase in engineering personnel is
attributable to the continued development of and enhancements to the feature set
of Unity. The Company also continues to allocate substantial resources to
10
<PAGE>
the localization of products for international markets and customization of
products for strategic partner accounts.
SALES AND MARKETING
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 CHANGE 2000 1999 CHANGE
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales and marketing....... $5,064 $5,712 (11.3)% $10,198 $10,905 (6.5)%
Percentage of net sales... 36.5% 27.6% 40.4% 28.0%
</TABLE>
The decrease in sales and marketing expenses during the three and six month
periods ended September 30, 2000 over the comparable periods in the prior fiscal
year was primarily attributable to lower commission expenses due to decreased
sales levels. The lower commission expenses were offset by increased
compensation-related expenses for the sales and marketing group, with the
continued emphasis on channel and strategic department development. The Company
also continues to devote resources to the development of training programs to
improve its customers' technical and sales knowledge and better leverage sales
of the Unity product. 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.
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 CHANGE 2000 1999 CHANGE
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
General and
administrative............ $2,729 $2,356 15.8% $4,905 $4,372 12.2%
Percentage of net sales..... 19.7% 11.4% 19.4% 11.2%
</TABLE>
The increase in general and administrative expenses for the three and six
months ended September 30, 2000 was primarily attributable to legal costs
related to intellectual property, litigation and contract matters when compared
to the prior year comparable periods. Compensation-related expenses also
increased as the result of additional general and administrative personnel and
higher salary levels when compared to the prior year comparable periods. 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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 CHANGE 2000 1999 CHANGE
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest expense................ -- $(191) 100.0% $ (4) $(259) (98.5)%
Interest income................. $316 $ 278 13.7% $618 $ 337 83.4%
</TABLE>
The decrease in interest expense between the three and six month periods
ended September 30, 2000 and 1999 is primarily attributable to $4.0 million
advanced under a borrowing agreement with a significant customer in the prior
year's comparable quarter. In November 1999, the customer subsequently converted
the loan into common stock in connection with the exercise of a stock purchase
warrant and exercised the remaining balance of the warrant resulting in an
additional $2.5 million in proceeds to the Company. The increase in interest
income during the three and six month periods ended September 30, 2000 in
comparison to the corresponding period in the prior fiscal year was primarily
attributable to higher average invested cash and marketable security balances,
primarily as the result of the $18.0 million sale of technology assets described
below. Refer to "Liquidity and Capital Resources."
11
<PAGE>
GAIN ON SALE OF TECHNOLOGY ASSETS AND IMPAIRMENT OF STRATEGIC INVESTMENT
On June 30, 1999, the Company sold real-time Internet communications
technology and related intangible assets (the Technology) for $18.0 million.
Legal and compensation costs associated with the transaction were approximately
$1.5 million, resulting in a $16.5 million gain.
The Technology provides desktop-to-desktop instant messaging similar to the
offerings by numerous internet portal companies such as Yahoo Messenger, MSN
Hotmail and AOL Instant Messenger, including permission-based instant text,
voice and video messaging, instant file transfer and URL sharing, multi-party
chat, Internet voice and video call support, find-me/follow-me message routing,
access to schedule and availability information, and personal communications Web
pages. At the time of sale the Company was using the Technology for internal
communications and allowing company contacts and acquaintances to test the
software. No current or historical revenues were attributable to the Technology
at the time of the sale. In connection with the sale, the Company's instant
messaging group, consisting of four software developers, a software tester and a
market researcher, joined the staff of the acquiring company.
It was the intention of the Company to integrate some of the Technology into
its core product offerings. However, it became apparent in the quarter prior to
the sale that the Company needed working capital. Consequently, the agreement
allows for a license back of certain rights to the Technology, but it is limited
to use in conjunction with traditional or Internet Protocol (IP) switching in
the areas of enterprise unified messaging, voice processing, and real-time call
handling.
During the six months ended September 30, 1999, the Company recorded a
$1.2 million impairment loss on a strategic investment. The loss represented the
Company's $1 million investment for an 8% ownership interest in a small hardware
vendor, plus an additional $169,000 temporarily advanced for working capital.
Greater than one-half of the vendor's total sales were made to the Company. The
impairment was recorded due to the uncertain financial viability of the vendor
due to the Company's selection of an alternate source for the components
supplied by the vendor.
INCOME TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
(DOLLARS IN THOUSANDS) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Income tax provision............................. $0 $(101) $0 $(4,264)
Effective tax rate............................... 0% 27.8% 0% 29.3%
</TABLE>
Variations in the customary relationship between the income tax benefit
(provision) and the statutory income tax rate of 34% result from certain
non-deductible expenses, tax exempt investment income, research and development
tax credits, and the benefit provided by the Company's foreign sales
corporation. The Company expects the effective tax rate to fluctuate in the
future due to varying operating results and 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 did not record a benefit for federal taxes in the quarter and
six months ended September 30, 2000 as the result of the establishment of a
valuation allowance against its deferred tax assets for the year ended
March 31, 2000. As a result, the Company will not record financial tax expense
or benefit until such time it is determined that its deferred tax assets are
realizable, and that a valuation allowance is no longer necessary. There can be
no assurance that the Company will generate taxable income or that all of its
deferred tax assets will be realized. The effective tax rate for the quarter and
six
12
<PAGE>
months ended September 30, 1999 was below the statutory rate due to the
utilization of the Company's net operating loss (NOL) carry-forward from the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities decreased to
$21.9 million or 47% of total assets at September 30, 2000 from $23.2 million or
44% of total assets at March 31, 2000. The decrease is due to the net loss
offset by the receipt of approximately $3.2 million federal tax refund and the
receipt of $2.0 million from CIDCO. Cash flow used in operations totaled
$1.8 million during the six months ended September 30, 2000. The Company had net
working capital of $31.4 million at September 30, 2000.
Accounts receivable, net of allowances, decreased to $7.9 million at
September 30, 2000 from $8.1 million at March 31, 2000. The decrease in accounts
receivable balances was due to the decline in sales volumes. Inventory decreased
to $7.1 million at September 30, 2000 from $8.5 million at March 31, 2000, as
the Company continues to utilize inventory from a previous large PC-stocking
purchase.
The Company made $612,000 in capital expenditures during the six months
ended September 30, 2000, compared to $1,811,000 during the comparable period of
the prior fiscal year. The majority of the capital expenditures during the six
months ended September 30, 2000 consisted of routine upgrades of computer
equipment for employees and the redesign of the Company's decision support
system. The Company currently has no significant commitments with respect to
additional capital expenditures during the remainder of fiscal 2001.
The Company's $10,000,000 revolving credit line from a bank expired on
June 30, 2000.
RISK 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 marketplace, 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. New product introductions by the Company may
be delayed, resulting in lost customers or allowing competitors to gain
market share.
- 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.
- 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.
- If the Company experiences delays in shipments (whether 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.
13
<PAGE>
- 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 effort to move into the larger end
user market, such as product acceptance, long sales cycles and failure to
have the adequate infrastructure to support large enterprises, could
affect the Company's future performance.
- Growth strategies involving acquisitions, strategic relationships, and
vendor relationships may encounter legal and/or unforeseeable business
risks 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Active Voice Corporation was held
on August 17, 2000. A total of 10,236,723 shares of the Company's common
stock were represented in person or by proxy at the meeting, which
comprised 91.1% of the total number of shares of the Company's common
stock outstanding on June 30, 2000, the record date for the meeting.
At the meeting, all of the current directors of the Company, namely, Tom
A. Alberg, Douglas P. Beighle, Frank J. Costa, Robert C. Greco, Harold H.
Kawaguchi, and Robert L. Richmond, were re-elected to serve as directors
of the Company until the 2001 Annual Meeting of Shareholders or until
their earlier retirement, resignation, or removal. The following table
sets forth information regarding the voting in the election for
directors:
<TABLE>
<CAPTION>
VOTES CAST VOTES
NOMINEE FOR NOMINEE WITHHELD
------- ----------- --------
<S> <C> <C>
Tom A. Alberg.......................................... 9,958,056 278,667
Douglas P. Beighle..................................... 9,957,456 279,267
Frank J. Costa......................................... 9,957,365 279,358
Robert C. Greco........................................ 9,957,734 278,989
Harold H. Kawaguchi.................................... 9,957,576 279,147
Robert L. Richmond..................................... 9,958,926 277,797
</TABLE>
The shareholders approved the proposal to approve the 2000 Stock Option
Plan. The following table sets forth information regarding the voting on
the proposal:
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST BROKER & OTHER
FOR PROPOSAL AGAINST PROPOSAL ABSTENTIONS NON-VOTES
------------ ---------------- ----------- --------------
<S> <C> <C> <C>
4,317,294 538,573 78,707 6,302,592
</TABLE>
The shareholders approved the proposal to approve the 2000 Director Stock
Option Plan. The following table sets forth information regarding the
voting on the proposal:
<TABLE>
<CAPTION>
VOTES CAST VOTES CAST BROKER & OTHER
FOR PROPOSAL AGAINST PROPOSAL ABSTENTIONS NON-VOTES
------------ ---------------- ----------- --------------
<S> <C> <C> <C>
4,263,267 585,845 85,462 6,302,592
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 2000.
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.
<TABLE>
<S> <C> <C> <C>
ACTIVE VOICE CORPORATION
(Registrant)
By: /s/ JOSE S. DAVID
----------------------------------------
Jose S. David
Date: November 14, 2000 CHIEF FINANCIAL OFFICER
Signing on behalf of registrant and as
principal financial officer
</TABLE>
16
