-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Karpq5kCcMianMbr5QXN+2ESB+HesPWaypLrakugIb8JCGSWbtHX1xbMLN1Sp2oW tdUgn3I3Fv/3QBcE1zlVDA== 0000927016-99-002754.txt : 19990809 0000927016-99-002754.hdr.sgml : 19990809 ACCESSION NUMBER: 0000927016-99-002754 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVOX CORP CENTRAL INDEX KEY: 0000811640 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 020364368 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15578 FILM NUMBER: 99675840 BUSINESS ADDRESS: STREET 1: 6 TECHNOLOGY PARK DR CITY: WESTFORD STATE: MA ZIP: 01886 BUSINESS PHONE: 5089520200 MAIL ADDRESS: STREET 1: 6 TECHNOLOGY PARK DRIVE STREET 2: 6 TECHNOLOGY PARK DRIVE CITY: WESTFORD STATE: MA ZIP: 01886 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission file number 0-15578 DAVOX CORPORATION (Exact name of registrant as specified in its charter) Delaware No. 02-0364368 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification Number) 6 Technology Park Drive Westford, Massachusetts 01886 (Address of principal executive offices) (Zip Code) Telephone: (978) 952-0200 (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: Common Stock, par value $.10 per share, outstanding as of July 22, 1999: 13,057,161 shares. DAVOX CORPORATION & SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Page No. ------- Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 3 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS DAVOX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands) (Unaudited)
June 30, December 31, ASSETS 1999 1998 ------------ ------------ Current assets: Cash and cash equivalents $ 30,814 $ 31,759 Marketable securities 24,589 27,711 Accounts receivable, net of reserves of $1,137 and $1,175 in 1999 and 1998, respectively 17,578 15,959 Interest receivable 409 739 Prepaid expenses and other current assets 1,390 1,776 Deferred tax assets 4,887 4,887 ------------ ------------ Total current assets 79,667 82,831 Property and equipment, net 4,953 5,298 Other assets 1,114 1,294 ------------ ------------ $ 85,734 $ 89,423 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,044 $ 4,965 Accrued expenses 8,794 9,461 Customer deposits 2,314 1,892 Deferred revenue 6,177 3,778 ------------ ------------ Total current liabilities 22,329 20,096 Stockholders' equity: Common stock, $.10 par value - Authorized - 30,000 shares Issued - 14,387 and 14,349 shares in 1999 and 1998, respectively 1,439 1,435 Additional paid-in capital 73,755 73,555 Accumulated foreign currency translation adjustment (3) 11 Accumulated deficit (1,545) (5,650) ------------ ------------ 73,646 69,351 Less - Treasury stock, 1,330 and 3 shares, at cost, in 1999 and 1998, respectively (10,241) (24) ------------ ------------ Total stockholders' equity 63,405 69,327 ------------ ------------ $ 85,734 $ 89,423 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 3 PART I. FINANCIAL INFORMATION (continued) DAVOX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, ------------------------- ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Product revenue $ 12,389 $ 15,072 $ 23,821 $ 31,426 Service revenue 9,619 9,118 18,436 17,184 ---------- ---------- ---------- ---------- Total revenue 22,008 24,190 42,257 48,610 ---------- ---------- ---------- ---------- Cost of product revenue 2,188 2,804 4,405 5,951 Cost of service revenue 5,320 4,789 10,574 9,561 ---------- ---------- ---------- ---------- Total cost of revenue 7,508 7,593 14,979 15,512 ---------- ---------- ---------- ---------- Gross profit 14,500 16,597 27,278 33,098 ---------- ---------- ---------- ---------- Operating expenses: Research, development and engineering 3,137 2,918 6,259 6,022 Selling, general and administrative 9,155 8,930 17,452 18,137 Non-recurring merger transaction costs ----- 1,329 ----- 1,329 Non-recurring merger-related integration costs ----- 597 ----- 597 ---------- ---------- ---------- ---------- Total operating expenses 12,292 13,774 23,711 26,085 ---------- ---------- ---------- ---------- Income from operations 2,208 2,823 3,567 7,013 Other income (primarily interest income) 625 724 1,264 1,472 ---------- ---------- ---------- ---------- Income before provision for income taxes 2,833 3,547 4,831 8,485 Provision for income taxes 425 1,206 724 2,885 ---------- ---------- ---------- ---------- Net income $ 2,408 $ 2,341 $ 4,107 $ 5,600 ========== ========== ========== ========== Earnings per share: Basic $ 0.18 $ 0.17 $ 0.30 $ 0.40 ========== ========== ========== ========== Diluted $ 0.17 $ 0.16 $ 0.29 $ 0.37 ========== ========== ========== ========== Weighted average shares outstanding: Basic 13,453 14,077 13,892 13,991 ========== ========== ========== ========== Diluted 13,940 14,870 14,368 14,956 ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 PART I. FINANCIAL INFORMATION (continued) DAVOX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited)
Six Months Ended June 30, ------------------------- 1999 1998 ---------- ---------- Cash Flows From Operating Activities: Net income $ 4,107 $ 5,600 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 1,891 1,580 Changes in current assets and liabilities - Accounts receivable (1,619) (7,398) Interest receivable 330 (1,073) Prepaid expenses and other current assets 386 (172) Accounts payable 79 764 Accrued expenses (667) 3,698 Customer deposits 422 (796) Deferred revenue 2,399 1,556 ---------- ---------- Net cash provided by operating activities 7,328 3,759 ---------- ---------- Cash Flows From Investing Activities: Purchases of property and equipment (1,546) (1,820) Decrease in other assets 180 12 Purchases of marketable securities (45,514) (42,506) Sales of marketable securities 48,635 31,626 ---------- ---------- Net cash provided by (used in) investing activities 1,755 (12,688) ---------- ---------- Cash Flows From Financing Activities: Principal payments of long-term obligations ----- (475) Payment of note receivable from officer ----- 414 Purchases of treasury stock (10,217) ----- Proceeds from exercise of stock options 43 875 Proceeds from employee stock purchase plan 160 205 ---------- ---------- Net cash provided by (used in) financing activities (10,014) 1,019 ---------- ---------- Effect of exchange rate differences on cash (14) (49) ---------- ---------- Net decrease in cash and cash equivalents (945) (7,959) Cash and cash equivalents, beginning of period 31,759 28,639 ---------- ---------- Cash and cash equivalents, end of period $ 30,814 $ 20,680 ========== ========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for income taxes $ 788 $ 804 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements 5 PART 1. FINANCIAL INFORMATION (continued) DAVOX CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Preparation The unaudited consolidated financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K, Commission File No. 0-15578, that was filed with the Securities and Exchange Commission on March 8, 1999. In the opinion of management, the accompanying consolidated financial statements include all adjustments necessary to present fairly the Company's financial position and results of operations. The results of operations for the three month and six month periods ended June 30, 1999 may not be indicative of the results that may be expected for the full fiscal year. 2. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 3. Provision for Income Taxes In accordance with generally accepted accounting principles, the Company provides for income taxes on an interim basis using its estimated annual effective income tax rate. The Company is providing for income taxes in 1999 at an effective tax rate of 15%, which is lower than the combined federal and state statutory tax rates due primarily to utilization of tax credits, benefits derived from the Company's foreign sales corporation, and net operating loss carryforwards. 4. Earnings Per Share Basic earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding and the effect of dilutive stock options using the treasury stock method. A reconciliation of basic and diluted weighted average shares outstanding is as follows (in thousands): 6 PART I. FINANCIAL INFORMATION (continued) DAVOX CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 4. Earnings Per Share (continued)
Three Months Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Basic weighted average shares outstanding 13,453 14,077 13,892 13,991 Effect of dilutive stock options 487 793 476 965 ------ ------ ------ ------ Diluted weighted average shares outstanding 13,940 14,870 14,368 14,956 ====== ====== ====== ======
For the three month periods ended June 30, 1999 and 1998, 1,648,996 and 1,230,585 weighted average common equivalent shares, respectively, were not included in the diluted weighted average shares outstanding, as they were antidilutive. For the six month periods ended June 30, 1999 and 1998, 1,882,900 and 605,576 weighted average common equivalent shares, respectively, were not included in the diluted weighted average shares outstanding, as they were antidilutive. 5. Comprehensive Income The components of comprehensive income are as follows (in thousands):
Three Months Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Net Income $ 2,408 $ 2,341 $ 4,107 $ 5,600 Foreign currency translation adjustments (7) (6) (14) (49) ------- ------- ------- ------- Comprehensive income $ 2,401 $ 2,335 $ 4,093 $ 5,551 ======= ======= ======= =======
7 PART I. FINANCIAL INFORMATION (continued) DAVOX CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited) 6. Segment and Geographic Information Product revenue from international sources was approximately $2.4 million and $2.5 million in the second quarter of 1999 and 1998, respectively, and approximately $4.8 million in both of the six month periods ended June 30, 1999 and 1998. The Company's revenue from international sources was primarily generated from customers located in Europe, Canada, Asia/Pacific, and Latin America. All of the Company's product sales for the periods presented were shipped from its headquarters located in the United States. The following table represents the percentage of product revenue by geographic region from customers for the three month and six month periods ended June 30, 1999 and 1998: Three Months Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 ---- ---- ---- ---- U.S. 80.5% 83.5% 80.0% 84.7% Europe 16.7 7.2 18.0 7.9 Asia/Pacific 2.6 0.8 1.7 2.1 Latin America 0.2 1.1 0.2 0.6 Canada --- 7.4 0.1 4.7 Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== CAUTIONARY STATEMENTS The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward-looking statements. Statements set forth herein may contain "forward-looking" information that involves risks and uncertainties. Actual future financial or operating results may differ materially from such forward-looking statements. Statements indicating that the Company "expects," "estimates," "believes," "is planning," or "plans to" are forward looking, as are other statements concerning future financial or operating results, product offerings or other events that have not yet occurred. There are several important factors that could cause actual results or events to differ materially from those anticipated by the forward-looking statements. Such factors are described in greater detail under Management's Discussion and Analysis of Financial Condition and Results of Operations--Certain Factors That May Affect Future Results. Although the Company has sought to identify the most significant risks to its business, the Company cannot predict whether, or to what extent, any of such risks may be realized nor can there be any assurance that the Company has identified all possible issues that the Company may face. 8 PART I. FINANCIAL INFORMATION (continued) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three Months and Six Months Ended June 30, 1999 and 1998 Total revenue for the second quarter of 1999 decreased approximately $2.2 million, or 9.0%, to $22.0 million compared to the same period in 1998, while total revenue for the first six months of 1999 decreased approximately $6.4 million, or 13.1%, to $42.3 million compared to the same period in 1998. Product revenue for the second quarter of 1999 decreased approximately $2.7 million, or 17.8%, to $12.4 million compared to the same period in 1998, while product revenue for the first six months of 1999 decreased approximately $7.6 million, or 24.2%, to $23.8 million compared to the same period in 1998. These decreases were caused primarily by lower sales of Unison(R) outbound call management systems, which were partially offset by sales of Allbound(TM) inbound/outbound blended call management systems. Cost of product revenue for the second quarter of 1999 decreased approximately $616,000, or 22.0%, to $2.2 million compared to the same period in 1998. Cost of product revenue for the first six months of 1999 decreased approximately $1.5 million, or 26.0%, to $4.4 million compared to the same period in 1998. These decreases were mainly attributable to lower product shipments in the three month and six month periods ended June 30, 1999 compared to 1998, and also is a result of a decrease in product shipments requiring hardware components. Service revenue for the second quarter of 1999 increased approximately $501,000, or 5.5%, to $9.6 million compared to the same period in 1998. Service revenue for the first six months of 1999 increased approximately $1.3 million, or 7.3%, to $18.4 million compared to the same period in 1998. The increase in service revenue was primarily the result of growth in the Company's installed customer base, renewal of maintenance contracts and increased consulting and professional services revenue in 1999, as compared to 1998. Cost of service revenue for the second quarter of 1999 increased approximately $531,000, or 11.1%, to $5.3 million compared to the same period in 1998. Cost of service revenue for the first six months of 1999 increased $1.0 million, or 10.6%, to $10.6 million compared to the same period in 1998. These increases during 1999 were attributable to higher payroll and related expenses resulting from customer service headcount increases, higher third party maintenance costs and increased consulting costs. Research, development and engineering expenses increased approximately $219,000, or 7.5%, to $3.1 million for the second quarter of 1999 as compared to the same period in 1998. Research, development and engineering expenses increased approximately $237,000, or 3.9%, to $6.3 million for the first six months of 1999 compared to the same period in 1998. The increase for both periods was primarily due to higher headcount and related expenses to support continued new product development efforts, specifically Ensemble(TM) and Unison/(R)/ 4.0. 9 PART I. FINANCIAL INFORMATION (continued) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Selling, general and administrative (SG&A) expenses increased by approximately $225,000, or 2.5%, to $9.2 million for the second quarter of 1999 compared to the same period in 1998. This increase was due primarily to higher payroll and related expenses resulting from increased headcount in the sales and marketing functions. SG&A expenses decreased by approximately $685,000, or 3.8%, to $17.5 million for the first six months of 1999 compared to the same period in 1998. This decrease was mainly attributable to lower travel and related expenses, and a decrease in commission expense. During the second quarter of 1998, the Company incurred approximately $1.9 million in non-recurring merger costs in relation to the acquisition of AnswerSoft, Inc. Other income in 1999 was derived primarily from investments in commercial paper, taxable auction securities, Eurodollar bonds, and money market instruments, net of investment fees. Other income decreased 13.7% for the second quarter of 1999 compared to the same period in 1998, and decreased 14.1% for the first six months of 1999 compared to the same period in 1998. These decreases are primarily due to lower marketable securities balances resulting from the repurchase of 1,246,400 shares of Davox common stock during the second quarter of 1999 for approximately $9.5 million. The total common stock repurchased during the first six months of 1999 was 1,326,400 shares of Davox common stock for approximately $10.2 million. In accordance with generally accepted accounting principles, the Company provides for income taxes on an interim basis using its estimated annual effective income tax rate. The Company is providing for income taxes in 1999 at an effective tax rate of 15%, which is lower than the combined federal and state statutory tax rates due primarily to utilization of tax credits, benefits derived from the Company's foreign sales corporation, and net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, the Company's principal sources of liquidity were its cash and cash equivalent balances of approximately $30.8 million as well as its marketable securities of approximately $24.6 million. At December 31, 1998, the Company's cash and cash equivalent balances were approximately $31.8 million and its marketable securities were approximately $27.7 million. These decreases are primarily due to lower cash and marketable securities balances resulting from the repurchase of 1,326,400 shares of Davox common stock for approximately $10.2 million. Net cash provided by operating activities for the first six months of 1999 was approximately $7.3 million, compared to approximately $3.8 million for the first six months of 1998. The increase in cash provided by operating activities for the first six months of 1999 was due primarily to net income of $4.1 million, and to an increase in deferred revenue of $2.4 million for the first six months of 1999. 10 PART I. FINANCIAL INFORMATION (continued) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company's primary investing activities were purchases and sales of marketable securities and purchases of property and equipment. Property and equipment purchases were approximately $1.5 million during the first six months of 1999, compared to approximately $1.8 million during the first six months of 1998. Purchases and sales of marketable securities generated a net cash inflow of approximately $3.1 million during the first six months of 1999, compared to a net cash outflow of approximately $10.9 million during the same period of 1998. Cash used in financing activities during the first six months of 1999 totaled approximately $10.0 million, and was primarily attributable to the repurchase of 1,326,400 shares of Davox common stock. Cash provided by financing activities during the first six months of 1998 totaled approximately $1.0 million, primarily from exercises of stock options, purchases of stock through the Company's employee stock purchase plan, and from the repayment of a note receivable from a former officer of AnswerSoft, Inc., offset by proceeds from the payment of long-term debt. At June 30, 1999, the working capital of the Company decreased to approximately $57.3 million from approximately $62.7 million as of December 31, 1998. This decrease was primarily attributable to the lower cash and marketable securities balance at June 30, 1999 compared to December 31, 1998, due to the repurchase of 1,326,400 shares of Davox common stock for approximately $10.2 million, and was partially offset by $7.3 million of cash generated from favorable operating results. The Company has an agreement for a working capital line of credit with a bank for up to $2.0 million based on eligible receivables, as defined. There were no outstanding balances under the line of credit as of June 30, 1999. Management believes, based on its current operating plan, that the Company's existing cash and marketable securities, cash generated from operations, and amounts available under its working capital line of credit will be sufficient to meet the Company's cash requirements for the next twelve months. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments. As of June 30, 1999, the Company did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 107. All of the Company's investments are short-term; commercial paper, taxable auction securities, Eurodollar bonds, and money market accounts that are carried on the Company's books at amortized cost, which approximates fair market value. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments. 11 PART I. FINANCIAL INFORMATION (continued) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) YEAR 2000 Year 2000 Readiness Disclosure - made pursuant to the Year 2000 Information and Readiness Disclosure Act, Pub. L. No. 105-271 (1998) The Year 2000 presents potential concerns and issues for the Company as well as other companies in the information technology industry. In general, Year 2000 readiness issues typically arise in computer software and hardware systems that use two digit date formats, instead of four digit dates, to represent a particular year. Users must test their unique combination of hardware, system software (including databases, transaction processors, and operating systems) and application software in order to achieve Year 2000 readiness. Year 2000 Committee The Company has established a Year 2000 steering committee under the auspices of the Company's senior technical executive to evaluate, plan and implement policies and practices, including contingency planning, and to address the impact of the Year 2000 on the Company and its products. The Company's Year 2000 readiness preparations fall into three categories: (1) product readiness, addressing product functionality; (2) internal readiness, addressing the Year 2000 operability of internal information technology ("IT") systems and mission critical non-IT systems; and (3) third party readiness, addressing the preparedness of relevant third parties and the Year 2000 operability of products furnished for internal use and resale. After reviewing these areas, the committee has reported to the Board of Directors specific areas of concern and a plan for resolving and further testing of any remaining Year 2000 issues. The committee will also formulate a contingency plan in the event that the committee reasonably determines that certain Year 2000 issues may not be resolved by the end of 1999 or if unforeseen problems arise. Status of Investigation - Product Readiness The Company has established Year 2000 date operability standards against which the most current versions of its software products are being tested. The Company has completed testing of its current line of Unison software products and believes the most current versions conform to these standards and are Year 2000 ready. In connection with the acquisition of AnswerSoft, Inc. in May 1998, the Company acquired the Concerto line of software tool products. The Company has completed testing of the current releases of Concerto software products and believes them to be Year 2000 ready, except IIR. All versions of IIR are believed to be not Year 2000 ready. All customers have been told to upgrade to SmartRoute, which is Year 2000 ready. Despite the Company's testing, there can be no assurance that the Company's products do not contain undetected errors or defects related to Year 2000 operability that may result in material costs to the Company or that the Company's products contain all features and functionality considered necessary by customers, end users and distributors to be Year 2000 ready. 12 PART I. FINANCIAL INFORMATION (continued) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) In early 1994, the Company discontinued its Computerized Automated Dialing System ("CAS") and Communications Resource Server ("CRS") product lines and introduced the Unison brand line of software products. Support of the CAS and CRS products will be discontinued as of December 31, 1999. The Company has not tested the CAS and CRS product lines and believes they do not conform to its test standards and are not Year 2000 ready. The Company has actively been notifying known users of these products that support is being discontinued and that users may experience Year 2000 related operability issues. Users of these discontinued or "legacy" products are being encouraged to migrate to the Unison product line. The Company's exposure arising from its legacy products is not known. The Company does expect to incur additional costs associated with migrating users of legacy products, but does not believe these costs will be material. While the Company believes that most of its current releases of products are Year 2000 ready, other factors may result in an application created using the Company's products not being Year 2000 ready. Some of these factors include improper programming techniques used by third parties in creating the application, customization, or non-compliance of hardware, software or firmware not provided by the Company with which the products operate. The Company does not believe that it would be liable in such an event. However, due to the unprecedented nature of the potential litigation related to Year 2000 readiness as discussed in the industry and popular press, the most likely worst case scenario is that the Company would be subject to litigation. It is uncertain whether or to what extent the Company may be affected by such litigation. The Company has tested many, but not all, prior versions of its products and continually tests the current versions of its products as each are released. The Company currently believes that it has contacted and updated the majority of its known customer's systems to the Year 2000 Ready system. The Company will continue to endeavor to contact all remaining customers. Further, the Company cautions users of such products to conduct their own Year 2000 operability testing to determine if continued use of the products allows them to meet their own Year 2000 readiness objectives. While most customers have been or will be upgraded to Year 2000 ready versions of products under maintenance coverage, if eligible, in the normal course, the Company expects to incur some additional expenses associated with the furnishing of upgrades and modifications. In addition, the ability of the Company to implement upgrades in time to meet customer's Year 2000 readiness requirements requires the continued availability of qualified technical personnel and the Company may incur additional costs to attract and retain such personnel as the Year 2000 draws closer. At this time the Company does not believe that the cost of potential upgrades or modifications will have a material effect on the Company's business, financial condition and operating results. 13 PART I. FINANCIAL INFORMATION (continued) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Status of Investigation - Internal Readiness The Company is engaged in conducting a Year 2000 readiness audit of its internal IT systems (including telecommunication, facilities management, safety and security systems). Although the Company is not presently aware of any material operational issues or costs associated with preparing its internal IT and non-IT systems for the Year 2000, the Company is continuing its investigation and there can be no assurance that the Company will not experience unanticipated negative consequences or material costs caused by undetected errors or defects in the technology used in its internal systems, which include third party hardware, firmware, and software. The Company has finalized its testing of all internal systems as of June 30, 1999. As a result of such testing, the Company has not identified any significant problems associated with the systems tested. Status of Investigation - Third Party Readiness The Company is continuing to assess the Year 2000 readiness of material third parties, such as public utilities and key clients or suppliers, who provide external services to the Company. The Company will continue to perform these assessments and testing as they are identified during 1999. The Company has certain key relationships with suppliers which furnish components and software used by the Company in its products. If these suppliers fail to adequately address the Year 2000 issue for the products they supply the Company, this could have a material adverse effect on the Company's operations, reputation, and financial results. Certain of the Company's products contain third party components and software that are integral to its operation for which the cost and time to integrate alternative components or software into these products would be material. Contingency Plans and Worst Case Scenario At the present time, the Company is in the process of outlining contingency plans to operate in the event that its products, systems, or business partners are not Year 2000 ready. If the Company's investigations suggest that there is a significant risk that certain products, systems, or business partners might not be Year 2000 ready, the Company will modify its contingency plans accordingly. The Company is in the process of coordinating additional staffing resources surrounding the last day of 1999. The additional staffing will supplement and assist the Company's help center to address any unusual influx of additional telephone inquiries as a result of Year 2000 related issues. 14 PART I. FINANCIAL INFORMATION (continued) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Costs, Source of Funds and Accounting Treatment The Company's policy is to expense all costs related to its Year 2000 compliance program unless the useful life of the technological asset is extended or increased. The expenses incurred to date have not had a material impact on the Company's results of operations or financial condition. At this time, the Company intends to fund Year 2000 expenses through cash flows from operations. The impact of the Year 2000 is difficult to discern, but is a risk to be considered when evaluating future growth and performance of the Company. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company, statements made by its employees or information included in its filings with the Securities and Exchange Commission (including Form 10-Q and Form 10-K) may contain statements which are not historical facts, so-called "forward-looking statements". Such forward-looking statements involve risks and uncertainties, which may adversely impact, whether or not such forward-looking statements come true. In particular, but without limitation, statements in Form 10-K "Item 1. Business", relating to the size or growth of call centers, the expectation to tightly integrate Davox and AnswerSoft products, the Form 10-K "1999 Product Development" subsection, the plan to broaden its product distribution and customer support in Europe, potential product development, and statements relating to expansion of the Business Partners Program, and in the Form 10-K "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" relating to the Company's intent to broaden its customer base and decrease reliance on its largest customers and the sufficiency of working capital, may be forward-looking statements. The Company's actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. Each of these factors, and others, are discussed from time to time in the Company's filings with the Securities and Exchange Commission. The Company's future results may be subject to substantial risks and uncertainties. The Company purchases certain equipment for its products from third-party suppliers and licenses certain components of its software code from a number of third-party vendors. While the Company believes that third-party equipment and software vendors could be replaced if necessary, the Company might face significant delays in establishing replacement sources or in modifying its products to incorporate replacement components or software code. There can be no assurance that the Company will not suffer delays resulting from non-performance by its vendors or cost increases due to a variety of factors, including component shortages. The Company uses third party service providers to fulfill its hardware support obligations with its customers. Additionally, the Company relies on co-providers to assist its Professional Services 15 PART I. FINANCIAL INFORMATION (continued) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) organization. While the Company believes that its currently contracted service providers and co-providers are adequate at this time, the Company may face significant delays in establishing replacement providers for such services. The Company relies on certain intellectual property protections to preserve its intellectual property rights. Any invalidation of the Company's intellectual property rights or lengthy and expensive defense of those rights could have a material adverse affect on the financial position and results of operations of the Company. The development of new products, the improvement of existing products and the continuing evaluation of new technologies is critical to the Company's success. Successful product development and introduction depends upon a number of factors, including anticipating and responding to the evolving applications needs of customers and resellers, timely completion and introduction of new products, and market acceptance of the Company's products. The call center management industry is extremely competitive. Certain current and potential competitors of the Company are more established, benefit from greater market recognition and have substantially greater financial, development and marketing resources than the Company. Additionally, the Company's quarterly and annual financial and operating results are affected by a wide variety of factors that could materially adversely affect revenue and profitability, including: the timing of customer orders; the Company's ability to introduce new products on a timely basis; introduction of products and technologies by the Company's competitors; and market acceptance of the Company's and its competitors' products; effects of litigation described in Form 10-K Item 3 Legal Proceedings; the ability to hire and retain key personnel; the ability to efficiently and effectively integrate the AnswerSoft and Davox products; and difficulties of any nature as a result of the impact of the Year 2000 on Davox, its customers, its vendors or its distributors. International sales are expected to continue to account for a significant portion of Davox's net sales in future periods. International sales are subject to certain inherent risks, including, but not limited to, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, potentially adverse tax treatment, and the inability to expand distribution channels. As a result of the foregoing and other factors, the Company may experience material fluctuations in future financial and operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition, results of operations and stock price. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings There were no material changes since the Company's Annual Report on Form 10-K for the period ended December 31, 1998. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of security holders of the Company was held on May 4, 1999. The number of directors was fixed at four and the following persons were elected as directors: Nominee Total Votes for Nominee Total Votes Against Nominee Alphonse M. Lucchese 12,176,281 525,299 Michael D. Kaufman 12,176,668 524,912 Walter J. Levison 12,176,668 524,912 R. Scott Asen 12,176,867 524,713 A proposal to approve an increase in the number of shares of the Corporation's Common Stock, $.10 par value, available for issuance under the Corporation's 1996 Stock Plan to 2,700,000 shares, was adopted and approved, with 4,257,808 shares voting in favor, 3,573,293 shares voting against, and 48,748 shares abstaining. The selection of the firm Arthur Andersen LLP as auditors for the fiscal year ending December 31, 1999 was ratified, with 12,556,239 shares voting in favor, 125,488 shares voting against and 19,853 shares abstaining. Item 5. Other Information Proposals of stockholders intended for inclusion in the proxy statement to be furnished to all stockholders entitled to vote at the next annual meeting of stockholders of the Company must be received at the Company's principal executive offices not later than December 6, 1999. The deadline for providing timely notice to the Company of matters that stockholders otherwise desire to introduce at the next annual meeting of stockholders of the Company is February 20, 2000. In order to curtail any controversy as to the date on which a proposal was received by the Company, it is suggested that proponents submit their proposals by Certified Mail, Return Receipt Requested. Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits Exhibit Number Description of Exhibit ------ ---------------------- 27 Article 5 - Summary Financial Data Schedule (b) No current reports on Form 8-K were filed during the quarter ended June 30, 1999. 17 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. DAVOX CORPORATION Date: August 2, 1999 By: /s/ Alphonse M. Lucchese ------------------------ Alphonse M. Lucchese Chief Executive Officer and Chairman (Principal Executive Officer) Date: August 2, 1999 By: /s/ John J. Connolly -------------------- John J. Connolly Sr. Vice President of Finance and Chief Financial Officer (Principal Financial Officer) 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS 6-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 JUN-30-1999 JUN-30-1998 30,814 0 24,589 0 18,715 0 1,137 0 0 0 79,667 0 4,953 0 0 0 85,734 0 22,329 0 0 0 0 0 0 0 1,439 0 61,966 0 85,734 0 23,821 31,426 42,257 48,610 4,405 5,951 14,979 15,512 6,259 6,022 0 0 1,264 1,472 4,831 8,485 724 2,885 4,107 5,600 0 0 0 0 0 0 4,107 5,600 0.30 0.40 0.29 0.37
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