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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 1997
Commission File Number 0-25186
APPLIED VOICE TECHNOLOGY, INC.
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(Name of Registrant as Specified in Its Charter)
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Washington 91-1190085
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(State of incorporation) (I.R.S. Employer
Identification Number)
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11410 NE 122nd Way
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Kirkland, WA 98034
(Address of principal executive offices)
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Registrant's telephone number, including area code: (425) 820-6000
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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.
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Yes X No
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The number of outstanding shares of the Registrant's Common Stock as of July 22,
1997 was 5,653,196.
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<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
FORM 10-Q
For the Quarter Ended June 30, 1997
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 4. Submission of Matters to a Vote of
Security Holders .............................. 12
Item 6. Exhibits and Reports on Form 8-K............... 12
Signatures.......................................................... 13
Exhibits............................................................ 14
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
------------ ------------
ASSETS (in thousands)
Current assets:
Cash and cash equivalents $ 11,189 $ 12,195
Short-term investments 12,849 15,484
Accounts receivable, net 7,005 6,106
Inventories 4,693 2,458
Deferred income taxes 2,504 1,056
Prepaid expenses and other 835 502
------------ ------------
Total current assets 39,075 37,801
Equipment and leasehold improvements, net 2,025 1,479
Intangibles, net 6,313 6,847
------------ ------------
$ 47,413 $ 46,127
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,048 $ 2,033
Accrued compensation and benefits 1,067 1,252
Other accrued liabilities 1,936 2,715
Note payable - current portion 612 586
Federal income taxes payable 1,168 345
------------ ------------
Total current liabilities 6,831 6,931
------------ ------------
Note payable - 313
Commitments and Contingencies
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; 5,623,194 and
5,425,713 shares outstanding 56 54
Additional paid-in capital 29,387 28,267
Retained earnings 11,139 10,562
------------ ------------
Total shareholders' equity 40,582 38,883
------------ ------------
$ 47,413 $ 46,127
============ ============
See accompanying notes to consolidated financial statements.
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter ended June Six months ended
30, June 30,
------------------ -------------------
1997 1996 1997 1996
--------- -------- ---------- --------
(in thousands)
Net sales $ 13,660 $ 10,680 $ 25,722 $ 20,236
Cost of sales 4,958 4,105 9,548 7,882
--------- -------- -------- ---------
Gross profit 8,702 6,575 16,174 12,354
Operating expenses:
Research and development 1,571 1,001 3,069 1,936
Sales, general and
administrative 4,640 3,538 8,823 6,846
Write-off of acquired,
in-process research and
development - - 3,898 4,140
--------- -------- -------- --------
Total operating
expenses 6,211 4,539 15,790 12,922
--------- -------- -------- --------
Operating income (loss) 2,491 2,036 384 (568)
Other income, net 278 225 518 398
--------- -------- -------- --------
Income (loss) before income tax
expense 2,769 2,261 902 (170)
Income tax expense 997 821 325 1,429
--------- -------- -------- --------
Net income (loss) $ 1,772 $ 1,440 $ 577 $(1,599)
=========== ========== ========= =========
Net income (loss) per common
share $ 0.29 $ 0.24 $ 0.09 $ (0.27)
Weighted average common shares
outstanding 6,092 6,033 6,080 5,978
See accompanying notes to consolidated financial statements.
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
---------------------------
1997 1996
------------ ------------
(in thousands)
Cash flows from operating activities:
Net income(loss) $ 577 $ (1,599)
------------- --------------
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and amortization 975 650
Write-off of acquired in-process
research and development 3,898 4,140
Stock compensation expense - 34
Changes in current assets and
liabilities:
Accounts receivable (622) 965
Inventories (1,512) (329)
Deferred income tax asset (1,448) (49)
Prepaid expenses and other assets (333) (160)
Accounts payable (117) 259
Accrued compensation and benefits (185) 282
Other accrued liabilities (20) 45
Federal income taxes payable 823 (594)
------------- --------------
Total adjustments 1,459 5,243
------------- --------------
Net cash provided by
operating activities 2,036 3,644
------------- --------------
Cash flows from investing activities:
Purchase of equipment and leasehold
improvements (730) (362)
Cash paid in acquisition, net of
cash acquired (5,052) (3,318)
Net proceeds from the sale of
investments 2,635 7,869
Purchase of intangibles and other
long-term assets (30) -
------------- --------------
Net cash (used) provided
by investing activities (3,177) 4,189
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Cash flows from financing activities:
Repayment of long-term debt (287) (263)
Proceeds from exercise of stock
options 422 263
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Net cash provided by
financing activities 135 -
------------- --------------
Net (decrease) increase
in cash (1,006) 7,833
Cash and cash equivalents at
beginning of period 12,195 12,249
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Cash and cash equivalents at end of
period $ 11,189 $ 20,082
============= ==============
Noncash transactions:
Unrealized loss on investments $ - $ (4)
Stock and warrants issued in
acquisitions 700 2,846
See accompanying notes to consolidated financial statements.
<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 six month
period ended June 30, 1997, 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, 1996.
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 June 30, 1997
consisted of municipal notes and bonds whose amortized cost approximates
estimated fair value. The average maturity for these investments is four months.
3. Inventories
Inventories consisted of the following:
June 30, December 31,
1997 1996
--------------- --------------
(in thousands)
Raw materials and
service parts $ 4,243 $ 2,193
Finished goods 450 265
=============== ==============
$ 4,693 $ 2,458
=============== ==============
<PAGE>
APPLIED VOICE TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Business Acquired
On January 3, 1997, the Company acquired selected assets and liabilities
of Telcom Technologies, Inc., a developer of NT-based open-architecture
automatic call distribution (ACD) systems. The purchase price for the
acquisition was $3.5 million in cash, plus warrants to purchase 100,000 shares
of the Company's common stock exercisable at $13.36 per share, which may be
exercised at any time prior to January 3, 2002. The Company accounted for the
business combination as a purchase and recognized a nonrecurring charge of $3.9
million in the first quarter of 1997, representing the value of the purchased,
in-process research and development acquired.
On January 2, 1996, the Company acquired Cracchiolo & Feder, Inc. (d/b/a
RightFAX), a privately held developer of fax server software for local area
networks, through a merger of RightFAX into a wholly owned subsidiary of the
Company. The purchase price for the acquisition paid at the closing was $4.2
million in cash plus 163,000 shares of the Company's common stock. In addition,
the Company paid consideration of $1.4 million in cash and 95,000 shares of the
Company's common stock in 1997, relating to the 1996 earn out and guaranteed
value of the Company's common stock. As a result of the earn out, the Company
recorded an additional $2.0 million of goodwill at December 31, 1996. The former
shareholders of RightFAX will be further entitled to receive additional
consideration worth $1.8 million in a combination of cash and the Company's
common stock over the next two years, if certain revenue and profit margin goals
are achieved by RightFAX.
5. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128), and No. 129, Disclosure of Information About Capital Structure (SFAS 129),
which are effective for periods beginning after December 15, 1997. SFAS 128
establishes new standards for computing and presenting earnings per share (EPS).
Companies will now report basic EPS and diluted EPS compared to primary and
fully diluted EPS, which were previously reported. Under the new standard, the
Company's basic EPS for the quarter ended June 30, 1997, was net income per
share of $0.32. For the six months ended June 30, 1997, the basic EPS was $0.10
per share. For both periods, the diluted EPS is equivalent to the reported
primary EPS. SFAS 129 requires companies to disclose in their financial
statements details of their capital structure and EPS calculations, both of
which are currently disclosed in exhibits to the Company's 10-K and 10-Q
filings.
<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 software products and systems for the rapidly
growing computer telephony integration (CTI) market. CTI encompasses a wide
range of products that allow two of the most essential business instruments,
telephones and personal computers (PCs), to work together. Some CTI products let
people access and control telephone functions through a PC; others let people
access and control computer functions through a telephone. The CTI market has
emerged from the convergence of these two powerful and useful tools each with a
different technological origin and marketing orientation.
The Company has implemented a dual-pronged strategy to address the CTI
market - developing telephony-oriented products marketed through a
telephony-oriented distribution channel and computer-oriented products marketed
through a computer-oriented channel. The telephony-oriented products are: the
recently-released CallXpressNT, the Company's premier, multi-application, high
capacity CTI product; CallXpress3, a high-performance multi-application CTI
platform; AgentXpressNT, a call center management system; PhoneXpress, a
full-featured call answering and routing and voice mail system; and PhoneXpress
Entree, a basic voice mail and call answering system for the small business
market. The computer-oriented product line is RightFAX, the Company's premier,
high performance, LAN-based fax server.
These products address the needs of four segments of the CTI market:
advanced CTI applications, "CTI-ready" systems, basic messaging systems, and
installed base add-ons and service. Advanced CTI applications products include
CallXpressNT and CallXpress3 systems sold with at least one advanced CTI
application module (in addition to voice mail/automated attendant), RightFAX and
AgentXpressNT servers. "CTI-ready" systems are CallXpressNT and CallXpress3
systems sold initially with voice mail/automated attendant capabilities only,
but which can be easily upgraded to full advanced CTI features. The basic
messaging market is addressed by the PhoneXpress and PhoneXpress Entree
products. Sales of non-CTI capability-enhancing add-ons, capacity-increasing
upgrades, and service parts to the installed base represent the fourth market
segment.
The Company's strategies are focused on addressing these market segments,
and results of operations are reported accordingly. In January 1997, the Company
acquired selected assets and liabilities of Telcom Technologies, a developer of
WindowsNT-based, open-architecture automatic call distribution systems. The
Company released AgentXpressNT in March 1997 utilizing the core technology
acquired from Telcom Technologies.
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, 1996. 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 results 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.
<PAGE>
Results of Operations
Net sales. Net sales increased 28% to $13,660,000 in the quarter ended June
30, 1997, from $10,680,000 in the comparable 1996 quarter. The increase resulted
primarily from sales of advanced CTI applications, which increased 49% from the
comparable prior-year quarter, and represented 57% of total sales, as compared
with 49% in the comparable prior-year quarter. The low-margin basic messaging
market continues to be affected by price pressures from competitive offerings.
Basic messaging sales declined 20% in the quarter from the comparable prior-year
quarter. Sales to the installed base increased 79% from the comparable
prior-year quarter due to accelerated marketing efforts of telephony-oriented
products and the inclusion of maintenance and spare parts sales related to the
January 1997 acquisition of the assets of Telcom Technologies. International
sales for the quarter increased 56% from the comparable prior-year quarter, and
represented 20% of total net sales.
For the six months ended June 30, 1997, net sales increased 27% to
$25,722,000 from $20,236,000 in the comparable prior-year period, due primarily
to sales of advanced CTI application products which increased 55% and
represented 57% of 1997 sales. International sales increased 48% and represented
20% of 1997 total net sales.
Gross profit. Gross profit as a percentage of sales improved to 63.7% in the
quarter as compared with 61.6% 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.
For the six months ended June 30, 1997, gross profit as a percentage of
sales improved to 62.9% from 61.1% in the comparable prior-year period, due to
the favorable sales mix.
Research and development. Research and development expenses increased to
$1,571,000 in the quarter ended June 30, 1997, from $1,001,000 in the comparable
prior-year period, due primarily to increased personnel costs relating to
acceleration of certain development projects and the inclusion of the recently
formed call center development group, which was acquired from Telcom
Technologies. For the six months ended June 30, 1997, research and development
expenses increased 59% to $3,069,000 from $1,936,000 in the comparable
prior-year period. As a percentage of net sales, research and development
expenses represented 11.5% in the current quarter as compared to 9.4% in the
comparable prior-year quarter, and 11.9% for the six months ended June 30, 1997
as compared to 9.6% in the comparable prior-year period.
Sales, general and administrative. Sales, general and administrative
expenses increased to $4,640,000 in the quarter ended June 30, 1997, from
$3,538,000 in the comparable prior-year quarter, due primarily to increased
personnel-related costs of domestic and international distribution development
of both the telephony-oriented and computer-oriented channels and the new
product launches of CallXpressNT and AgentXpressNT. For the six months ended
June 30, 1997, sales, general and administrative expenses increased to
$8,823,000 from $6,846,000 in the comparable prior-year period.
<PAGE>
Operating income (loss). Operating income for the quarter ended June 30,
1997, increased to $2,491,000 from $2,036,000 in the comparable prior-year
quarter, due to increased sales, higher gross profits and controlled expenses.
In the first quarter of 1997, the Company recognized a nonrecurring charge
of $3,898,000 for the write-off of acquired, in-process research and development
resulting from the acquisition of Telcom Technologies in January 1997. In the
comparable prior-year period, the Company recognized a $4,140,000 similar charge
resulting from the January 1996 acquisition of Cracchiolo & Feder, Inc. (d/b/a/
RightFAX). As a result, the Company recognized operating income of $384,000 in
the six months ended June 30, 1997, and an operating loss of $568,000 in the
comparable prior-year period. Excluding these nonrecurring charges, operating
income for the six month period in 1997 would have been $4,282,000, an increase
of 20% as compared to $3,572,000 in the comparable prior-year period.
Other income, net. Other income in the quarter ended June 30, 1997, was
$278,000 as compared to $225,000 in the comparable prior-year quarter. For the
six months ended June 30, 1997, other income increased to $518,000 from $398,000
in the comparable prior-year period.
Income tax expense. The effective income tax rate in both 1997 and 1996 was
36%. The acquisition of Telcom Technologies was a taxable purchase of assets,
and therefore, the resulting excess of purchase price over net assets acquired
is deductible for income tax purpose. The first quarter 1996 nonrecurring charge
for the write-off of acquired, in-process research and development and the
amortization of goodwill associated with the acquisition of RightFAX were not
tax deductible; therefore the Company recognized income tax expense of $608,000
in that quarter. For the remainder of 1997, the effective tax rate is expected
to continue to be approximately 36%.
Net income (loss). For the quarter ended June 30, 1997, net income increased
23% to $1,772,000 from $1,440,000 in the comparable prior-year quarter. Earnings
per share increased to $0.29 from $0.24 in the prior-year quarter. Due to the
first quarter nonrecurring charges discussed above, the Company recognized net
income for the six months ended June 30, 1997, of $577,000 as compared to a net
loss of $1,599,000 in the comparable 1996 period. Excluding these nonrecurring
charges net income for the six months ended June 30, 1997, would have been
$3,072,000 or $0.51 per share as compared with $2,541,000 or $0.43 per share in
the comparable prior-year period.
Liquidity and Capital Resources
Cash provided by operating activities in the six months ended June 30, 1997,
was $2.0 million due primarily to continuing operating profitability. The
average accounts receivable collection period remained unchanged at
approximately 40 days. Inventories increased to $4.7 million at June 30, 1997
from $2.5 million at December 31, 1996, due primarily to the acquisition of
assets of Telcom Technologies and ramp-up of production of AgentXpressNT and
CallXpressNT.
In January 1997, the Company acquired selected assets and liabilities of
Telcom Technologies, Inc. a developer of WindowsNT-based, open-architecture
automatic call distribution systems. The purchase price for the January 1997
acquisition of Telcom Technologies was $3.5 million in cash, plus warrants to
purchase 100,000 shares of the Company's common stock exercisable at $13.36 per
share, which may be exercised any time prior to January 3, 2002. The Company
accounted for the business combination as a purchase and recognized a
nonrecurring charge of $3.9 million in the first quarter of 1997, representing
the value of the acquired, in-process research and development.
On January 2, 1996, the Company acquired Cracchiolo & Feder, Inc. (d/b/a
RightFAX), a privately held developer of fax server software for local area
networks, through a merger of RightFAX into a wholly owned subsidiary of the
Company. The purchase price for the acquisition paid at the closing was $4.2
million in cash plus 163,000 shares of the Company's common stock. In addition,
the Company paid consideration of $1.4 million in cash and 95,000 shares of the
Company's common stock in 1997, relating to the 1996 earn out and guaranteed
value of the Company's common stock. As a result of the earn out, the Company
recorded an additional $2.0 million of goodwill at December 31, 1996. The former
shareholders of RightFAX will be further entitled to receive additional
consideration worth $1.8 million in a combination of cash and the Company's
common stock over the next two years, if certain revenue and profit margin goals
are achieved by RightFAX.
The Company expects that its current cash, cash flow from operations, and
available bank line of credit will provide sufficient working capital for
operations for the foreseeable future.
<PAGE>
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Applied Voice Technology, Inc.
was held on May 13, 1997. A total of 5,282,381 shares of the Company's
common stock were represented in person or by proxy at the meeting,
which comprised 93.59% of the total number of shares of the Company's
common stock outstanding on March 14, 1997, the record date for the
meeting.
At the meeting James S. Campbell was re-elected to serve as a director
of the Company for a term of three years until the Company's Annual
Meeting of Shareholders in 2000. The votes were as follows:
Votes For Votes
Withheld
--------------- ---------------
James S.Campbell 5,224,466 57,915
Continuing directors are William L. True whose term expires in 1998
and Richard J. LaPorte and Robert L. Lovely whose terms expire in
1999.
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 June 30, 1997.
<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: August 11, 1997 By: /s/ Roger A. Fukai
____________________________
Roger A. Fukai
Executive Vice President
Finance and Administration,
Chief Financial Officer
Signing on behalf of registrant and
as principal financial officer
Exhibit 11.1
APPLIED VOICE TECHNOLOGY, INC.
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Quarter ended Six months
June 30, ended June 30,
-------------- ---------------
1997 1997
-------------- ---------------
(in thousands, except per share data)
Net income $ 1,772 $ 577
============== ===============
Computation of common and
common equivalent shares
outstanding:
Common Stock 5,621 5,597
Options 471 483
-------------- ---------------
Common and common equivalent
shares used in computing per
share amounts 6,092 6,080
============== ===============
Net income per share $ 0.29 $ 0.09
============== ===============
The fully diluted computation is not presented as it is not materially different
from primary earnings per share, calculated above.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial infomation extracted from the
consolidated Balance Sheets as of June 30, 1997 (Unaudited) and the Consolidated
Statements of Income for the Three Months Ended June 30, 1997 (unaudited) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Apr-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 11,189
<SECURITIES> 12,849
<RECEIVABLES> 7,676
<ALLOWANCES> 671
<INVENTORY> 4,693
<CURRENT-ASSETS> 39,075
<PP&E> 5,583
<DEPRECIATION> 3,558
<TOTAL-ASSETS> 47,413
<CURRENT-LIABILITIES> 6,831
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> 40,526
<TOTAL-LIABILITY-AND-EQUITY> 47,413
<SALES> 13,660
<TOTAL-REVENUES> 13,660
<CGS> 4,958
<TOTAL-COSTS> 4,958
<OTHER-EXPENSES> 6,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,769
<INCOME-TAX> 997
<INCOME-CONTINUING> 1,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,772
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
