<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, 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
CLASS AT AUGUST 10, 2000
<S> <C>
Common Stock, No Par Value 11,230,916
</TABLE>
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<PAGE>
ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
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................. 14
SIGNATURE PAGE.............................................. 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
------------------------
2000 1999
----------- ----------
<S> <C> <C>
Net sales................................................... $ 11,357 $ 18,336
Cost of goods sold.......................................... 4,581 8,141
----------- ----------
Gross profit................................................ 6,776 10,195
Operating expenses:
Research and development.................................. 4,036 4,143
Sales and marketing....................................... 5,134 5,194
General and administrative................................ 2,176 2,015
----------- ----------
Total operating expenses................................ 11,346 11,352
----------- ----------
Operating loss.............................................. (4,570) (1,157)
Interest expense............................................ (4) (68)
Interest income............................................. 302 59
Impairment of strategic investment.......................... (1,169)
Gain on sale of technology assets........................... 16,504
----------- ----------
Income (loss) before income taxes and minority interest..... (4,272) 14,169
Income tax provision........................................ (4,163)
Minority interest in earnings of consolidated subsidiary.... (6) (88)
----------- ----------
Net income (loss)........................................... $ (4,278) $ 9,918
=========== ==========
Earnings (loss) per share:
Basic..................................................... $ (0.38) $ 1.06
=========== ==========
Diluted................................................... $ (0.38) $ 1.03
=========== ==========
Shares used in earnings (loss) per share calculation:
Basic..................................................... 11,172,843 9,340,660
=========== ==========
Diluted................................................... 11,172,843 9,603,284
=========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $10,960 $15,557
Marketable securities....................................... 2,063 3,907
Accounts receivable, less allowances........................ 7,871 8,064
Inventories............................................... 7,738 8,546
Income taxes receivable................................... 3,457 3,356
Prepaid expenses and other assets......................... 1,841 1,682
------- -------
Total current assets.................................... 33,930 41,112
Marketable securities....................................... 6,039 3,745
Furniture and equipment, net................................ 5,610 5,793
Other assets................................................ 2,312 2,399
------- -------
Total assets............................................ $47,891 $53,049
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 735 $ 1,681
Accrued compensation and benefits......................... 2,114 2,553
Other accrued expenses.................................... 1,847 1,831
------- -------
Total current liabilities............................... 4,696 6,065
Commitments
Minority interest........................................... 75 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--11,230,916
(11,163,792 at March 31, 2000)........................ 27,264 26,798
Retained earnings......................................... 15,735 20,013
Accumulated other comprehensive income.................... 121 101
------- -------
Total stockholders' equity.................................. 43,120 46,912
------- -------
Total liabilities and stockholders' equity.............. $47,891 $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>
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(4,278) $ 9,918
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................. 441 456
Provisions for accounts receivable........................ 29 77
Deferred income taxes..................................... 62
(Gain) loss on disposal of equipment...................... (10) 6
Minority interest in earnings of consolidated
subsidiary.............................................. 2 88
Gain on sale of technology assets......................... (16,504)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.............. 164 (721)
Decrease in inventories................................. 808 775
Decrease (increase) in prepaid expenses and other
assets................................................ (230) 2,043
Decrease in accounts payable............................ (946) (2,415)
Increase (decrease) in other liabilities................ (423) 2,903
------- --------
Net cash used in operating activities................. (4,443) (3,312)
INVESTING ACTIVITIES
Proceeds from sale of technology assets..................... 18,000
Purchases of marketable securities.......................... (1,813)
Proceeds from sale and maturity of marketable securities.... 176
Purchases of furniture and equipment........................ (191) (332)
------- --------
Net cash provided by (used in) investing activities... (638) 17,844
FINANCING ACTIVITIES
Net issuance of short term notes payable.................... 4,522
Proceeds from employee stock option and stock purchase
plans..................................................... 466 238
------- --------
Net cash provided by financing activities............. 466 4,760
Effect of exchange rate changes on cash and cash
equivalents............................................... 18 38
------- --------
Increase (decrease) in cash and cash equivalents............ (4,597) 19,330
Cash and cash equivalents at beginning of period............ 15,557 1,692
------- --------
Cash and cash equivalents at end of period.................. $10,960 $ 21,022
======= ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 three
month period ended June 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>
JUNE 30, 2000 MARCH 31, 2000
------------- --------------
<S> <C> <C>
Computer equipment................................ $5,543 $6,156
Custom component parts............................ 1,240 1,297
Supplies.......................................... 955 1,093
------ ------
$7,738 $8,546
====== ======
</TABLE>
3. COMPREHENSIVE INCOME
Total comprehensive income (loss) was ($4,258,000) and $9,947,000 for the
three month periods ended June 30, 2000 and 1999, respectively.
6
<PAGE>
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 2000
4. 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>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Numerator:
Net income (loss):.................................. $ (4,278) $ 9,918
========== ==========
Denominator:
Denominator for basic earnings (loss) per share--
weighted average shares........................... 11,172,843 9,340,660
Effect of dilutive securities:
Stock purchase warrant............................ 46,934
Stock options..................................... 215,690
---------- ----------
Denominator for diluted earnings (loss) per share--
adjusted weighted average shares.................. 11,172,843 9,603,284
========== ==========
Basic earnings (loss) per share:.................... $ (0.38) $ 1.06
========== ==========
Diluted earnings (loss) per share:.................. $ (0.38) $ 1.03
========== ==========
</TABLE>
The calculation of diluted earnings per share for the three months ended
June 30, 2000 did not include the effect of 415,877 weighted average shares from
outstanding stock options as their inclusion would have been antidilutive.
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.
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 THIS REPORT. INVESTORS ARE ENCOURAGED
TO CONSULT ANY FURTHER DISCLOSURES MADE ON RELATED SUBJECTS IN OUR FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION. 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 "RISK
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, 2000 1999 CHANGE
--------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net sales......................................... $11,357 $18,336 (38.1)%
</TABLE>
Net sales to the Company's Americas dealer network during the quarter ended
June 30, 2000 decreased 49% from the comparable period in the prior fiscal year.
Net sales to the Americas dealers represented 41% of total net sales for the
three months ended June 30, 2000 compared to 50% of total net sales for the
three months ended June 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 20% of
the channel's net revenues during the quarter ended June 30, 2000.
8
<PAGE>
Net sales to the strategic partner sales channel decreased 23% for the three
months ended June 30, 2000 over the comparable period in the prior fiscal year.
Net sales to strategic partners represented 36% and 30% of total net sales for
the three month periods ended June 30, 2000 and 1999, respectively. The majority
of the decrease is attributable to a decline in switch sales by the Company's
strategic partners caused by the aforementioned industry-wide trend of delayed
purchases of telecom equipment, resulting in less units for the Company's voice
mail systems to attach to. Revenues from Unity to strategic partners offset some
of the decrease, contributing 9% of the channel's revenue. The Company's largest
corporate customer accounted for approximately 67% of total net corporate sales
and approximately 24% of total net sales during the three months ended June 30,
2000.
Net sales to international customers decreased 34% during the three months
ended June 30, 2000 in comparison to the prior year same quarter. International
sales represented 17% of total net sales for the three month period ended
June 30, 2000 and 16% of total net sales for the three month period ended
June 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 decreased 21% on a year over year basis and made up 6% of the
Company's total net sales in the quarter ended June 30, 2000 and 4% for the
quarter ended June 30, 1999. Other revenue primarily represents sales of Visual
Basic-based voice application tools through the Company's majority-owned
Pronexus subsidiary.
GROSS MARGIN
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 1999 CHANGE
--------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross profit....................................... $6,776 $10,195 (33.5)%
Percentage of net sales............................ 59.7% 55.6%
</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 month period ended
June 30, 2000 compared to the prior year's quarter is the result of higher
revenue contributions from embedded systems and Unity, which both carry higher
software components. Gross margin percentage in the quarter ended June 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.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 1999 CHANGE
--------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Research and development............................ $4,036 $4,143 (2.6)%
Percentage of net sales............................. 35.5% 22.6%
</TABLE>
The decrease in research and development expenses between the three month
periods ended June 30, 2000 and 1999 was attributable to lower contractor costs
associated with the prior year's release and subsequent enhancements of Unity.
Although compensation-related expenses are slightly up from the prior year's
quarter, the rate of increase has declined as the emphasis on dedicated Unity
personnel has subsided with the product's release. Staffing levels in the
research and development group have declined
9
<PAGE>
when compared to the previous year, but the Company's effort to retain skilled
employees has resulted in higher engineering salaries due to the competitive
nature of the labor market.
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, globalization of
products for international markets and customization of products for strategic
partners. The Company expects the growth rate of research and development
expenditures to slow in comparison to the last two years 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, 2000 1999 CHANGE
--------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales and marketing................................. $5,134 $5,194 (1.2)%
Percentage of net sales............................. 45.2% 28.3%
</TABLE>
The decrease in sales and marketing expenses during the three month period
ended June 30, 2000 over the comparable period 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 JUNE 30, 2000 1999 CHANGE
--------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
General and administrative.......................... $2,176 $2,015 8.0%
Percentage of net sales............................. 19.2% 11.0%
</TABLE>
The increase in general and administrative expenses between comparable
periods was primarily attributable to legal costs related to intellectual
property, litigation and contract matters. Compensation-related expenses also
increased as the result of additional general and administrative personnel and
higher salary levels when compared to the prior year. 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 JUNE 30, 2000 1999 CHANGE
--------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest expense...................................... $ (4) $(68) (94.1)%
Interest income....................................... $302 $ 59 411.86%
</TABLE>
The decrease in interest expense between the three month periods ended
June 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. The
increase in interest income during the three month period ended June 30, 2000 in
comparison to the corresponding period in the prior
10
<PAGE>
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. This transaction occurred on June 30, 1999
and as such did not significantly impact interest income for the quarter ended
June 30, 1999 in comparison to the current year. Refer to "Liquidity and Capital
Resources."
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 quarter ended June 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 ENDED JUNE 30, 2000 1999 CHANGE
--------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision.................................. $ 0 $4,163 (100.0)%
Effective tax rate.................................... 29.4%
</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 ended
June 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
11
<PAGE>
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 ended June 30, 1999 was 29.4%,
as the Company utilized its net operating loss (NOL) carryforward from the prior
year, resulting in an effective tax rate below the statutory rate.
NET INCOME AND EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 1999 CHANGE
--------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss).................................. $(4,278) $9,918 (143.1)%
Percentage of net sales............................ (37.7)% 54.1%
Earnings (loss) per share:
Basic............................................ $ (0.38) $ 1.06 (135.9)%
Diluted.......................................... $ (0.38) $ 1.03 (136.9)%
</TABLE>
The decrease in net income and earnings per share for the three month period
ended June 30, 2000 in comparison to the corresponding period in the prior
fiscal year were primarily attributable to the gain associated with the sale of
technology assets described above. In addition, operating results before one-
time items declined as a result of the decrease in sales, also described above.
Exercises of employee stock options and stock warrants by the Company's largest
customer resulted in an increase in the number of common and common equivalent
shares outstanding when compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities decreased to
$19.1 million or 40% of total assets at June 30, 2000 from $23.2 million or 44%
of total assets at March 31, 2000. The decrease is due to the net loss. Cash
flow used in operations totaled $4.4 million during the three months ended
June 30, 2000. The Company had net working capital of $29.2 million at June 30,
2000.
Accounts receivable, net of allowances, decreased to $7.9 million at
June 30, 2000 from $8.1 million at March 31, 2000. The decrease in accounts
receivable balances was due to the decline in sales volumes. Days' sales
outstanding at June 30, 2000 increased approximately 2% from March 31, 2000 to
73 days. Inventory decreased to $7.7 million at June 30, 2000 from $8.5 million
at March 31, 2000, as the Company continues to work its way through a large
PC-stocking purchase.
The Company made $191,000 in capital expenditures during the three months
ended June 30, 2000, compared to $332,000 during the comparable period of the
prior fiscal year. The majority of the capital expenditures during the three
months ended June 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 specific commitments with respect to additional capital
expenditures during the remainder of fiscal 2001, but expects to spend an
aggregate of approximately $2 million for the year.
The Company's $10,000,000 revolving credit line from a bank expired on
June 30, 2000. The Company is currently negotiating terms to a new line of
credit, but anticipates similar terms as the prior agreement. The new agreement
will be secured by the Company's investment portfolio.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations, and the financing
arrangements described above will provide sufficient resources to finance
operations for at least the next year.
12
<PAGE>
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.
- 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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Third Amendment to Active Voice Corporation 1998 Stock
Option Plan
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 June 30, 2000.
14
<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>
ACTIVE VOICE CORPORATION
(Registrant)
By: /s/ JOSE S. DAVID
-----------------------------------------
Jose S. David
Date: August 14, 2000 CHIEF FINANCIAL OFFICER
Signing on behalf of registrant and
as principal financial officer
</TABLE>
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