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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 quarterly period ended September 30, 1996
Commission File Number 0-25186
APPLIED VOICE TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Washington 91-1190085
(State of incorporation) (I.R.S. Employer
Identification Number)
11410 NE 122nd Way
Kirkland, WA 98034
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 820-6000
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
The number of outstanding shares of the Registrant's Common Stock as of October
24, 1996 was 5,416,967.
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1
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
FORM 10-Q
For the Quarter Ended September 30, 1996
Table of Contents
Page
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.....................11
Signatures.............................................................12
Exhibit Index..........................................................13
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------- -----------------
ASSETS (in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,450 $ 12,249
Short-term investments 8,149 12,197
Accounts receivable, net 5,216 4,755
Inventories 2,425 1,728
Deferred income taxes 937 891
Prepaid expenses and other 800 994
-------------- -----------------
Total current assets 34,977 32,814
----------------- -----------------
Equipment and leasehold
improvements, net 1,348 954
Intangibles, net 5,063 3,164
----------------- -----------------
$ 41,388 $ 36,932
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,723 $ 1,103
Accrued compensation and benefits 1,467 644
Other accrued liabilities 1,045 849
Note payable - current portion 622 537
Federal income taxes payable 33 11
----------------- -----------------
Total current liabilities 4,890 3,144
----------------- -----------------
Note payable 464 899
Shareholders' equity:
Preferred stock, par value
$.01 per share, 1,000,000
authorized; none outstanding - -
Common stock, par value
$.01 per share, 30,000,000
authorized; 5,416,967 and
5,144,040 shares outstanding 54 51
Additional paid-in capital 27,367 24,222
Retained earnings 8,602 8,628
Less deferred compensation - (34)
Unrealized gain on investments 11 22
----------------- -----------------
Total shareholders' equity 36,034 32,889
----------------- -----------------
$ 41,388 $ 36,932
================= =================
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended .. Nine months ended
September 30, .. September 30,
----------------- -----------------
1996 1995 1996 1995
------- ------ ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales ............................ $11,221 $7,959 $31,457 $ 22,883
Cost of sales ........................ 4,202 3,199 12,084 9,475
------- ------ ------- --------
Gross profit ....................... 7,019 4,760 19,373 13,408
Operating expenses:
Research and development ........... 1,093 692 3,029 1,952
Sales, general and administrative .. 3,719 2,154 10,565 6,345
Write-off of in-process research and
development ........................ -- -- 4,140 --
------- ------ ------- --------
Total operating expenses ........... 4,812 2,846 17,734 8,297
Operating income ..................... 2,207 1,914 1,639 5,111
Other income, net .................... 252 246 650 887
------- ------ ------- --------
Income before income tax expense ..... 2,459 2,160 2,289 5,998
Income tax expense ................... 886 658 2,315 1,959
------- ------ ------- --------
Net income (loss) .................... $ 1,573 $1,502 $(26) $ 4,039
======== ======== ======== ========
Net income (loss) per common share ... $ 0.26 $ 0.26 $ (-) $ 0.70
Weighted average common shares
outstanding ..................... 6,106 5,705 6,064 5,740
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
------------------------
1996 1995
---------- -----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income
$ (26) $4,039
-------- --------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization .................... 1,035 577
Write-off of in-process research and development . 4,140 --
Stock compensation expense ....................... 34 65
Changes in current assets and liabilities,
net of effects of acquisition:
Accounts receivable .......................... 895 (820)
Inventories .................................. (518) (272)
Deferred income tax asset .................... 4 --
Prepaid expenses and other assets ............ (12) (341)
Accounts payable ............................. (69) 198
Accrued compensation and benefits ............ 729 70
Other accrued liabilities .................... (13) (624)
Federal income taxes payable ................. (576) (750)
-------- --------
Total adjustments ............................ 5,649 (1,897)
-------- --------
Net cash provided by operating activities 5,623 2,142
-------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements . (647) (531)
Cash paid in acquisition, net of cash acquired ... (3,318) --
Purchase of short-term investments ............... -- (20,359)
Net proceeds from the sale of investments ........ 4,037 --
Purchase of intangibles and other long-term assets (397) (1,970)
-------- --------
Net cash used by investing activities .......... (325) (22,860)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt ...................... (399) --
Net proceeds from exercise of overallotment ...... -- 2,040
Proceeds from exercise of stock options .......... 302 151
-------- --------
Net cash (used) provided by financing ..........
activities (97) 2,191
-------- --------
Net change in cash ..................... 5,201 (18,527)
Cash and cash equivalents at beginning of period ...... 12,249 22,685
======== ========
Cash and cash equivalents at end of period ............ $ 17,450 $ 4,158
======== ========
Noncash transactions:
Unrealized loss on investments ................... $ (11) $ (12)
Stock issued in acquisition 2,846 --
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
The accompanying consolidated financial statements of Applied Voice
Technology, Inc. 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 nine
month period ended September 30, 1996 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 December 31, 1995.
2. Short-Term Investments
In accordance with FAS 115, the Company has classified its investments
as "available-for-sale" and recorded these investments at estimated fair value
with unrealized gains and losses reported as a separate component of
Shareholders' Equity.
Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income over the term of the
investment. The cost of securities sold is based upon the specific
identification method. Available-for-sale securities as of September 30, 1996
consisted of:
Amortized ... Unrealized Estimated
Cost ........ Gain Fair Value
--------- ---------- ---------
(in thousands)
Municipal notes/bonds ................ $ 8,138 $ 11 $ 8,149
3. Inventories
Inventories consisted of the following:
September 30, December 31,
1996 1995
------------ ------------
(in thousands)
Raw materials and service parts $ 2,171 $ 1,477
Finished goods 254 251
=========== ============
$ 2,425 $ 1,728
=========== ============
6
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Business Acquired
On January 2, 1996, the Company acquired Cracchiolo and Feder,
Inc. (d/b/a RightFAX), a privately-held developer of fax server software for
local area networks. As previously reported on Form 8-K dated January 2, 1996,
the purchase price for the acquisition was $4.3 million in cash plus 163,291
shares of the Company's common stock. In addition, the Company may pay up to an
additional $3.8 million in a combination of cash and common stock over the next
three years, contingent upon certain future results. The shareholders of
RightFAX will further be entitled to receive additional consideration to the
extent the value of the Company's common stock issued to the shareholders of
RightFAX is less than $2.8 million at the end of 1996.
7
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Founded in 1982, the Company develops, manufactures, markets and
supports a broad line of open systems-based advanced computer telephony
integration (CTI) software products and basic call answering and voice messaging
systems. CTI encompasses a wide range of products that unite two of the most
essential business instruments - PCs and telephones. The Company's product lines
include CallXpress3, the Company's premier CTI product; RightFAX, a
high-performance local area network-based enhanced fax server CTI product;
PhoneXpress, a high-performance call answering and routing and voice mail
system; and px100, a basic voice mail and call answering system for the small
business market.
When used in this discussion, the words "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Factors which could
affect the Company's financial results are described below and in Item 1
(Business) of the Company's Annual Report on Form l0-K for the year ended
December 31, 1995. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrences of
unanticipated events.
Results of Operations
Net sales. Sales of the Company's products fall into the following
categories: advanced CTI applications, "CTI-ready" systems, basic messaging
systems, and installed base add-ons and service. Advanced CTI application sales
include CallXpress3 systems and kits which include at least one advanced CTI
module (unified messaging applications such as Desktop for Windows, E-mail
Access, and Faxmail; interactive voice response such as Automated Agent; and
enhanced fax products such as Faxtext) installed upon initial shipment, advanced
CTI application modules sold as add-ons to existing CallXpress3 systems, and the
RightFAX line of high-performance, LAN-based fax servers. "CTI-ready" systems
represent CallXpress3 systems and kits sold initially with only call answering
and routing and voice messaging capabilities, but whose architecture provides
for easy upgrade to an advanced CTI application. Basic messaging systems perform
only call answering and routing and voice messaging capabilities, and include
the Company's PhoneXpress and px100 products. The final category consists of
capacity upgrades, feature add-ons, spare parts, and services to its customers.
Net sales increased 41% to $11,221,000 in the quarter ended September 30,
1996, from $7,959,000 in the comparable 1995 quarter. The increase resulted
primarily from sales of advanced CTI applications, which increased 146% from the
comparable prior-year quarter, and represented 49% of total sales, as compared
with 28% in the comparable prior-year quarter. Sales of basic messaging systems
increased 12% in the current quarter as compared to the comparable prior-year
quarter and represented 26% of total sales. The basic messaging market continues
to be affected by price pressures from competitive offerings. International
sales for the third quarter of 1996 increased 90% compared to the third quarter
of 1995, and represented 17.6% of total net sales.
For the nine months ended September 30, 1996 net sales increased 37% to
$31,457,000 from $22,883,000 in the comparable prior-year period, due primarily
to increased sales of advanced CTI applications which increased 147% during that
period. International sales for the first nine months of 1996 increased 71%
compared to the comparable prior-year period, and represented 17.1% of total
sales.
8
<PAGE>
Gross profit. Gross profit as a percentage of sales improved to 62.6% in
the quarter ended September 30, 1996 as compared with 59.8% in the comparable
prior-year quarter, due to the favorable sales mix of advanced CTI applications
as compared with basic messaging systems. Because advanced CTI application
products contain a higher software content, gross margins are typically higher
than other sales. Also, the basic messaging market continues to be very
competitive, putting pressure on prices and resulting margins.
For the nine months ended September 30, 1996 gross profit as a percentage
of sales improved to 61.6% from 58.6% in the comparable prior-year period, due
to the favorable mix of advanced CTI application sales.
Research and development. Research and development expenses increased to
$1,093,000 in the quarter ended September 30, 1996 from $692,000 in the
comparable prior-year period, due primarily to increased personnel costs
relating to acceleration of certain development projects begun in late 1995 and
the inclusion of RightFAX operations. Research and development expenses for the
current quarter represented 9.7% of net sales as compared with 8.7% of net sales
in the comparable prior-year quarter. For the nine months ended September 30,
1996 research and development expenses increased to $3,029,000 from $1,952,000
in the comparable prior-year period and represented 9.6% of sales.
Sales, general and administrative. Sales, general and administrative
expenses increased to $3,719,000 in the quarter ended September 30, 1996 from
$2,154,000 in the comparable prior-year period, due primarily to increased
personnel-related costs of domestic and international distribution development
programs and inclusion of RightFAX operations. Sales, general and administrative
costs for the current quarter represented 33.1% of net sales as compared with
27.1% in the comparable prior-year period. For the nine months ended September
30, 1996 sales, general and administrative expenses increased to $10,565,000
from $6,345,000 in the comparable prior-year period and represented 33.6% of
sales.
Operating (loss) income. Operating income for the quarter ended September
30, 1996 increased to $2,207,000 (19.7% of sales) from $1,914,000 in the
comparable prior-year quarter. The Company recognized a nonrecurring charge of
$4,140,000 in the first quarter of 1996 representing purchased in-process
research and development associated with the January 1996 acquisition of
RightFAX, Inc. Therefore, for the nine months ended September 30, 1996 the
Company's operating income was $1,639,000. Excluding the nonrecurring charge,
the Company's operating income for the first nine months of 1996 would have been
$5,779,000 (18.4% of net sales), as compared with $5,111,000 in the comparable
prior-year period.
Other income, net. Net other income was $252,000 in the quarter ended
September 30, 1996, unchanged from $246,000 in the comparable prior-year
quarter. For the nine months ended September 30, 1996 net other income was
$650,000 as compared to $887,000 in the comparable prior-year period due
primarily to the shift of short-term investments from taxable to tax-exempt
instruments in 1996 as compared to 1995.
Income tax expense. Income tax expense for the quarter ended September 30,
1996 was $886,000, an effective rate of 36.0% Because the nonrecurring charge of
in-process research and development and the amortization of goodwill associated
with the acquisition of RightFAX are not tax deductible, the Company has
recognized income tax expense of $2,315,000 in the nine months ended September
30, 1996. For the remainder of 1996, the effective tax rate is expected to
continue to be approximately 36.0%.
9
<PAGE>
Net (loss) income. The Company recognized net income of $1,573,000 or
$0.26 per share for the quarter ended September 30, 1996 as compared to
$1,502,000 or $0.26 per share for the comparable prior-year quarter. Due to the
nonrecurring charge for purchased in-process research and development recognized
in the first quarter 1996, the Company recognized a net loss of $26,000 for the
first nine months of 1996. Excluding this nonrecurring charge net income for the
first nine months of 1996 would have been $4,114,000 or $0.68 per share as
compared with $4,039,000 or $0.70 per share in the comparable prior-year period.
Liquidity and Capital Resources
Cash provided by operating activities in the nine months ended September
30, 1996 was $5.6 million due primarily to continuing profitability and
improvement in average collections of accounts receivable. While accounts
receivable increased to $5.2 million at September 30, 1996 from $4.8 million at
December 31, 1995 due to higher sales volume, the average collection period
decreased by approximately 10 days. Inventories increased to $2.4 million at
September 30, 1996 from $1.7 million at December 31, 1995 due primarily to the
acquisition of RightFAX.
In January 1996, the Company acquired Cracchiolo and Feder, Inc. (d/b/a
RightFAX), a developer of fax server software for local area networks. The
purchase price for the acquisition was $4.3 million in cash plus 163,291 shares
of the Company's common stock. In addition, the Company may pay up to an
additional $3.8 million in a combination of cash and common stock over the next
three years, contingent upon certain future results. The shareholders of
RightFAX will further be entitled to receive additional consideration to the
extent the value of the Company's common stock issued to the shareholders of
RightFAX is less than $2.8 million at the end of 1996.
The Company expects that its current cash, cash flow from operations, and
available bank line of credit will provide sufficient working capital for
operations.
10
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Computation of Earnings Per Share
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, 1996.
11
<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.
Applied Voice Technology, Inc.
(Registrant)
Date: November 12, 1996 By: Roger A. Fukai
-------------------------
Roger A. Fukai
Senior Vice President
Finance and Administration,
Chief Financial Officer
Signing on behalf of registrant and
as principal financial officer
12
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- ---------------------
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
13
Exhibit 11.1
APPLIED VOICE TECHNOLOGY, INC.
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income (loss) $ 1,573 $1,502 $ (26) $4,039
======= ====== ====== ======
Computation of common
and common equivalent shares
outstanding:
Common Stock 5,410 5,102 5,361 5,082
Options 696 603 703 658
Common and common
equivalent shares used in
computing per share amounts 6,106 5,705 6,064 5,740
======= ====== ====== ======
Net income (loss) per share $ 0.26 $ 0.26 $( - ) $ 0.70
======= ====== ====== ======
The fully diluted computation is not presented because the Company does not have
dilutive securities that are not common stock equivalent
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets as of September 30, 1996 (Unaudited) and the
Consolidated Statements of Income for the Nine Months Ended September 30, 1996
(Unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 17,450
<SECURITIES> 8,149
<RECEIVABLES> 5,216
<ALLOWANCES> 0
<INVENTORY> 2,425
<CURRENT-ASSETS> 34,977
<PP&E> 1,348
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,388
<CURRENT-LIABILITIES> 4,890
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 35,980
<TOTAL-LIABILITY-AND-EQUITY> 41,388
<SALES> 31,457
<TOTAL-REVENUES> 31,457
<CGS> 12,084
<TOTAL-COSTS> 12,084
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,289
<INCOME-TAX> 2,315
<INCOME-CONTINUING> (26)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
