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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
[ ] 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 0-22804
ACTIVE VOICE CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1235111
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2901 Third Avenue, Suite 500
Seattle, Washington 98121
(Address of principal executive officers) (Zip Code)
(206) 441-4700
(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based on the closing price on June 15, 2000, as reported by the
Nasdaq Stock Market was $100,787,958.(1)
The number of shares of the registrant's Common Stock outstanding as of
June 15, 2000, was 11,198,662.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's 2000
Annual Meeting of Shareholders to be held on August 17, 2000, are incorporated
by reference into Part III of this Report.
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(1) Excludes shares held of record on that date by directors and officers of the
registrant. Exclusion of such shares should not be construed to indicate that
any such person directly or indirectly possesses the power to direct or cause
the direction of the management of the policies of the registrant.
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TABLE OF CONTENTS
PART I PAGE
Item 1. Business........................................................................................1
Industry........................................................................................1
Strategy........................................................................................3
Products........................................................................................4
Sales and Marketing.............................................................................7
Product Development............................................................................10
Manufacturing..................................................................................10
Competition....................................................................................10
Proprietary Rights.............................................................................12
Employees......................................................................................13
Item 2. Properties.....................................................................................13
Item 3. Legal Proceedings..............................................................................13
Item 4. Submission of Matters to a Vote of Security Holders............................................14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..........................17
Item 6. Selected Financial Data........................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................................18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk......................................29
Item 8. Financial Statements and Supplementary Data....................................................30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.........................................................49
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................49
Item 11. Executive Compensation.........................................................................49
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................49
Item 13. Certain Relationships and Related Transactions.................................................49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................49
SIGNATURES.....................................................................................56
PART I.
ITEM 1. BUSINESS
Active Voice Corporation (Active Voice or the Company) is a leading manufacturer
of call processing systems, including unified messaging systems and PC-based
computer telephony integration (CTI) solutions, with more than 90,000
installations in virtually every kind of business in over 60 countries. Active
Voice develops technology that helps businesses communicate better. Active Voice
products are sold through a global network of independent telecommunications
dealers, telephone equipment manufacturers, and computer resellers. Active Voice
corporate headquarters are located in Seattle, with representatives throughout
the United States, as well as offices in Australia, Canada, China, France,
Germany, Italy, The Netherlands, Sweden, and the United Kingdom.
The Company's software and servers enable people to manage information and
communicate more effectively by integrating their traditional office telephone
systems (also known as telephone switches) with personal computers, the local
area network (LAN), and the Internet. Its products allow businesses to
incorporate telephony functions including PC-based unified messaging, voice mail
and desktop call handling into their daily operations. Unified messaging is the
ability to get any message from any device at anytime. CTI allows people to
control all voice, fax, and e-mail messages, as well as inbound and outbound
telephone calls, and to control them visually using a personal computer. The
Company was one of the first voice processing manufacturers to offer a truly
unified product that permits on-screen desktop management of the entire spectrum
of personal communications, and has continued to research, develop, market, and
distribute novel CTI solutions.
Founded in 1983, the Company was one of the pioneers of PC-based voice
processing and is now a recognized leader in CTI applications. The Company's
product philosophy originates from research performed at Massachusetts Institute
of Technology's Media Laboratory for Speech and Artificial Intelligence. The
Company believes its focus on comprehensive solutions that are both simple to
learn and easy to use, combined with its commitment to continued product
innovation, give it a competitive advantage in a dynamic industry.
INDUSTRY
According to industry statistics, the domestic market for voice processing
systems comprises more than 50 manufacturers, whose voice messaging products
accounted for aggregate end user revenues of approximately $2.3 billion in 1999.
Manufacturers of voice processing systems include switch suppliers such as
Lucent Technologies, Inc., Nortel Networks Corporation and Siemens Business
Communication Systems, Inc.; independent manufacturers of proprietary systems
such as BayPoint Innovations (a division of Mitel Corporation), Octel
Communications (now a division of Lucent Technologies), and Comverse Technology,
Inc.; and independent manufacturers of PC-based, open-architecture systems such
as Active Voice and AVT Corporation. According to industry statistics for total
number of domestic voice processing systems shipped in 1999, the Company ranked
third only behind Lucent Technologies and Nortel Networks Corporation.
References in this paragraph, as well as elsewhere in this Report, to industry
statistics concerning sales and shipments by the Company and its competitors are
based on estimates compiled relative to the U.S. market by Dataquest
Corporation, an independent research firm specializing in high technology
industries.
Traditionally, the term "call processing" has referred to various ways to
facilitate interaction over the telephone between a caller, one or more persons,
and a computer. These systems have traditionally been offered as stand-alone
products by different vendors and distributors and were based on expensive
proprietary hardware and software.
The first call processing systems performed basic applications. The three most
common of these basic call processing features are: 1) VOICE MAIL - which allows
a caller to store voice messages in a computer.
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Typical voice mail features include the ability to screen callers, record,
store, and delete messages, as well as to direct messages to multiple
subscribers. 2) AUTOMATED ATTENDANT - which allows a caller to direct the
computer to switch the call automatically to a telephone extension different
from the one dialed. Both Voice Mail and Auto Attendant are also known in the
industry as "voice processing". 3) INTERACTIVE VOICE RESPONSE (IVR) - which
allows a caller to obtain requested information in voice form from a local or
remote database. An example of IVR is simply selecting announcements from a list
of options stored in the computer (also known as audiotext). These three basic
call processing functions offer integrated and simplified access to various
types of communications and information through the traditional telephone
system.
As the demand to integrate communication technologies, lower product costs, and
reduce the time to market of new products increased, and as significant advances
in personal computer hardware and software were made, three trends developed
that facilitated the creation of more advanced messaging applications. The first
trend was a shift from proprietary hardware and software. As the costs of
personal computers and their operating systems decreased, it became more
economical for system developers to create scaleable, non-proprietary (also
known as open-architecture) products that used standard hardware and software.
Historically, the Company has focused its development efforts on open
architecture-based systems, an approach that has allowed the Company to take
advantage of rapid improvements in third-party hardware and software.
The second trend was a shift from central office, or centralized, computing
environments to client-server, groupware architectures that utilized a company's
local area network (LAN; also known as the Intranet) and the Internet. This
created demand for new communications solutions that would provide
communications networking between branch offices.
The third trend is the convergence of voice and data technologies. While voice
has traditionally been carried separately from data, the proliferation of the
Internet has led many industry watchers to conclude that voice traffic will soon
become a subset of the data now being carried on a larger data network. The
Company believes the union of voice and data traffic on a single network may
transform the office environment at a fundamental level.
As a result of these developments, call processing systems now provide more
advanced functions that enable users to utilize voice, personal computers, and
touchtone telephones in different ways to manipulate calls, interact with
computer databases, and access and respond to messages or data. Examples of
advanced applications include the ability to visually manage all telephone
traffic from a personal computer, listen to voice messages using the PC speaker,
redirect calls or voice messages with a mouse, use touchtones to route a fax or
an e-mail to the nearest facsimile machine for printout, and the ability to
listen and reply to textual e-mail messages over a telephone. The Company has
developed products that take advantage of these trends in the market, thereby
making internal and external communications more efficient.
In addition to developments in computer hardware and software, over the past
decade there has been a proliferation of new methods of business communication,
such as facsimile (fax), electronic mail (e-mail), and Internet telephony (the
ability to make voice phone calls over the Internet). These advances in
technology and communications infrastructure make it easier to exchange voice
and data using pagers, cellular phones, and portable computers with
communications capabilities. As a result, voice processing systems can now
access and interact with a wide range of communications devices, such as
cellular telephones, palm devices and pagers. The creation of each new
communications device, accompanied by the integration of telephone systems with
computers on an Intranet or the Internet, give rise to the demand for innovative
technologies that can streamline the message retrieval process and allow the
user to access all electronic messages using the most convenient communications
device from anywhere in a cost effective way.
The Company has responded to this market demand by developing unified messaging
products that store all messages in one location for access via virtually any
device or application. Unified messaging means all messages are stored and
maintained on a groupware database with one single list of users for e-mail,
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fax, voice, telephones, and computers-saving IS departments resources. The
products take advantage of groupware standards such as Internet-connectivity,
scalability to very large sizes, and automatic synchronization of messages
between numerous servers. The connectivity among various means of electronic
communication (the merging of data networks and telephones) gives people more
choices of how and when they wish to access information.
STRATEGY
MISSION STATEMENT: Active Voice makes products that empower people to
communicate in the easiest, most efficient, and unified way. With Active Voice
open standards-based software running on its servers and PCs, an organization's
employees and customers can communicate all over the world, at any time, and
control multimedia messages (voice mail, e-mail, or fax mail) with whatever
medium (currently desktop and laptop computers, wired and wireless telephones,
and pagers) is most convenient.
The Company's strategy is to develop innovative, easy-to-use, cost efficient,
PC-based voice processing systems and computer telephony integration solutions
to offer integrated access to a broad range of communications with other people
and databases.
The Company's strategy is based on five basic elements:
EMPHASIZE SOFTWARE, NOT HARDWARE. The Company concentrates its development
efforts on software rather than on the design or modification of hardware. The
Company believes product value is created most efficiently by emphasizing
software solutions to meet customer needs.
USE STANDARD, OPEN SYSTEMS AND HARDWARE. The Company's products use standard,
open-architecture PC platforms, operating systems and groupware, like Microsoft
NT, Exchange and BackOffice, DOS or OS2, rather than proprietary computer
hardware and operating systems. As a result, the Company can rapidly adopt new
PC-based technologies and capitalize on the substantial expenditures made by
third parties that develop new technologies for the general PC environment. The
use of commonly available hardware components and software minimizes the
Company's manufacturing activity and helps reduce the overall cost of its
products while continuing to add enhanced functionality.
MAKE PRODUCTS EASY TO USE, INSTALL, AND MODIFY. The Company strives to maximize
ease-of-use for the end user, the system manager, and the installer. The
Company's products are designed to be "people-oriented," with features that can
be used readily without special training or manuals. For example, companies can
choose from numerous telephone user interfaces like the Company's 1 FOR YES, 2
FOR NO-Registered Trademark- user dialogue which gives first time voice mail
users easy and immediate access to all of the system's features or a "legacy
emulated" telephone user interface whereby when the Company's product replaces
an existing voice mail system, no training is required. Also, the Company
programs into its products installation procedures, screens, and menus that
allow automatic configuration to over 200 different PBX, key system, and Centrex
switches and enable the system manager to modify features to meet user needs.
MINIMIZE DISTRIBUTION OVERHEAD. The Company achieves broad market coverage for
its products domestically and internationally, currently with only a minimal
direct sales force, through a nationwide network of independent telephone system
dealers, and through strategic partners. With the emergence of CTI, the Company
has utilized an additional distribution channel -- the Value Added Resellers
(VARs). These experienced data professionals specialize in industry solutions
and sell not only servers, but also desktop software to businesses and offices.
This diversified distribution structure gives the Company exposure to the
substantial customer bases of these different types of organizations.
FOCUS ON SMALL- TO MEDIUM-SIZED OFFICES WITH COST COMPETITIVE SOLUTIONS; LARGER
OFFICES BY LEVERAGING OPEN STANDARDS. The Company's products are designed for
use by businesses and offices in a wide range of enterprises, including
manufacturing, retail, service, healthcare, and governmental institutions. Since
1986, the Company's products have offered many of the features commonly
available in large, proprietary voice processing systems, at price points more
affordable to the small- to medium-sized
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businesses. The Company is also entering the larger end user market through its
relationships with strategic partners. Numerous larger businesses, including
Fortune 500 companies, have expressed interest in the Company's open standards
platform and the direction the Company is headed with its strategy. The Company
believes its strategic relationships will play a significant role in its
strategy to increase market share, as well as provide opportunities for the
Company to have a greater presence in the larger end user market.
PRODUCTS
The Company's products offer a full range of voice mail and CTI solutions, from
basic through advanced applications, and have been designed to fit the
functional and financial needs of specific market segments. All Active Voice
products offer voice mail, automated attendant, audiotext, and fax mail features
and most require the assistance of a dealer or other trained installer to
configure them to the end user's telephone. The Company also offers vertical
market applications, switch integrations, fax products, replacement hardware,
and other miscellaneous items. The Company's products are utilized by a broad
variety of enterprises in manufacturing, retail, service, healthcare,
governmental, and institutional settings.
The Company offers six products: Unity-TM-, Repartee-Registered Trademark-,
embedded systems, Lingo-TM-, Replay-Registered Trademark-, and Replay-Registered
Trademark- Plus. The Company's voice processing products typically include the
following principal components: a PC compatible platform; one or more voice
processing circuitboards (voice boards) which contain signal processors to
compress and digitize voice and detect various tones; and the Company-designed
software. To keep costs down, Lingo runs Company-designed software on a
proprietary platform. In addition, the Company's embedded systems run
Company-designed software on a single board inserted inside the telephone
system.
The Company has developed software that enables most of its products to
integrate with more than 200 different PBX, key system, and Centrex telephone
switching systems from 70 different manufacturers. The Company's new product,
Unity, is engineered to handle streaming media and integrates with TAPI
compliant, H.323 compliant IP based (IP-PBX) switches. The Company believes this
number of integrations represents approximately 90% of the installed switches in
the United States, and views its ability to integrate with such a large portion
of available telephone systems as one of its key competitive advantages.
UNITY -- Unity is an NT Exchange-based communications server which features true
unified messaging where all messages share a common message store and address
database and delivers lower total cost of ownership benefits. Unity was released
to general availability on March 31, 1999 and represents the culmination of
three years of research and development. Features include visual voice and fax
message management on Microsoft's Outlook application, single address book, a
unified HTML system administration interface, and listening to textual e-mail
via text-to-speech. Designed from the ground up to integrate with the Microsoft
Exchange server, Unity uses NT's native 32-bit architecture, streaming media,
scaleability, networking, and LDAP (lightweight directory access protocol)
directory services to give its products a competitive advantage in the
marketplace. Unity integrates with numerous third-party fax providers. Sales of
Unity accounted for approximately 7% of the Company's fiscal 2000 revenue.
On March 31, 2000, the Company merged with PhoneSoft Inc. which offers a Lotus
Notes/Domino - based product that also offers true unified messaging and has
similar features to Unity. This allows the Company to address a market which is
approximately as large as the NT Exchange-based marketplace. It is the Company's
intent to market PhoneSoft's product under the Unity label.
REPARTEE -- The Company's first product, Repartee, was introduced in 1986.
Repartee offers the largest call handling capacity of the Company's products up
to 96 ports, plus additional features such as fax detect and transfer, fax mail
(the ability to verbally annotate, collect, and store faxes), fax-on-demand (the
ability to request via a touchtone telephone that a specific fax be sent to the
caller's fax machine), call screening, e-mail messaging using text-to-speech
conversion, multi-office networking, and easy message access via touchtone
telephone or personal computer.
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In February 1998 the Company released Repartee version 7.44. This release split
the product into two models, Repartee VP and Repartee CTI, and incorporated the
most powerful features of the Company's Replay and Replay Plus voice messaging
platforms. (For a discussion of Replay and Replay Plus, see below.) Both
Repartee VP and CTI run on IBM's OS/2 Warp 4.0 operating system, use Dialogic
voice boards and are available as a turnkey product (already assembled) or as a
kit that the dealer may assemble on site. Repartee's target market is small- to
medium-sized businesses.
REPARTEE VP -- provides users with basic applications such as voice mail,
automated attendant, and fax capabilities from any touchtone telephone. It can
network remote sites, has multilingual capabilities, and can run the Company's
lodging industry software package, Hospitality. (For a discussion of
Hospitality, see below.) Repartee VP is available in two- and four-port
configurations, and offers up to 100 hours of storage.
To make it quicker and easier for users of the system to add optional software
packages, or to upgrade from Repartee VP to Repartee CTI, all software comes on
one CD-ROM, and is installed by purchasing a code from the Company and then
inputting it into the server. This seamless upgrade path from Repartee VP to
Repartee CTI, and the simplified process of adding software packages through the
use of upgrade codes, is a strategy the Company believes increases the product's
marketability.
REPARTEE CTI -- offers all the basic communications applications found in
Repartee VP, and also works with the Company's suite of computer telephony
integration software, known as TeLANophy-Registered Trademark-, to provide users
with advanced integrated messaging and call control applications. Users with
TeLANophy have the ability to access and manage all their messages visually from
a personal computer. TeLANophy allows the user to use the PC mouse and keyboard
to perform the functions normally done on the telephone keypad.
ViewCall-Registered Trademark- Plus, ViewMail-Registered Trademark-, ViewMail
for Microsoft Messaging, Message Integration for Novell GroupWise,
ViewFax-Registered Trademark-, and E-Mail Integration are all modules of
TeLANophy. The Company sees this multiple user interface as a benefit to
consumers, since it offers the ability to control their messages in the most
convenient way.
- - VIEWCALL PLUS - allows users to see incoming calls on their personal
computer screens and manage multiple calls as they arrive. When Repartee CTI
routes a call to an extension, ViewCall Plus 2.0 alerts users with visual and
audio cues. With their PC mouse, users click on buttons to take calls, ask
callers to hold, take messages, or transfer calls to a different extension.
Additionally, ViewCall Plus 2.0's monitor feature allows the user to listen to a
voice message as it is being recorded by the caller and, if the user wishes to
speak to the caller, he or she can pull the caller out of voice mail and
transfer the call to his or her extension.
- - VIEWMAIL -- makes voice and fax messages available on a desktop PC.
Using a Microsoft Windows interface, ViewMail displays the sender's name,
subject, and the date and time messages were sent. Messages are managed with a
few clicks of ViewMail's easy-to-use buttons, letting the user hear, reply,
redirect, archive, delete, and leave messages, as well as rewind, pause, and
fast forward them during playback.
- - VIEWMAIL FOR MICROSOFT MESSAGING (VMM) -- offers Microsoft Exchange and
Outlook users the benefits of unified messaging, including the ability to access
voice, fax, and e-mail messages from within one application. All messages are
stored in one inbox, eliminating the need to check messages in separate
applications. A user can save voice and fax messages indefinitely along with
e-mail in Exchange and Outlook folders, send voice and fax messages to an e-mail
address (even if the recipient does not have a voice mail system), and download
voice and fax messages to work with off line.
- - VIEWFAX -- gives a user graphical fax handling capabilities. With
ViewFax, users can send, receive, and manipulate faxes from any networked
personal computer. ViewFax displays the fax on the computer screen.
5
- - TEXT-TO-SPEECH E-MAIL INTEGRATION - provides 24-hour retrieval and
response of e-mail over a touchtone telephone via synthesized speech.
Repartee version 7.48 is currently shipping worldwide. Sales of Repartee
accounted for approximately 56% of the Company's fiscal 2000 revenue.
EMBEDDED SYSTEMS -- The Company manufactures a line of embedded products for one
of its strategic partners. Embedded systems are comprised of software and
hardware incorporated directly into the telephone switch. Developing embedded
systems allows the Company to leverage its core competency of software
development to deliver full voice mail functionality. Currently the Company's
embedded systems software ships on approximately 65% of the specific NEC
telephone system for which it was designed. The Company has contracts signed
with certain other manufacturers of telephone systems to supply them with
embedded systems. Sales of embedded systems accounted for approximately 10% of
the Company's fiscal 2000 revenue.
LINGO AND LINGO XL -- In 1997 the Company released Lingo, a full-featured voice
mail system designed at a lower price point for small businesses, the market
segment the Company believes least penetrated by voice mail products. The
Company strongly believes success in the small business market depends upon its
ability to deliver a product that offers powerful features while being
affordable, easy to use, install, and maintain. The Company feels Lingo fits
this profile.
Lingo is a turnkey product that offers voice mail, automated attendant,
audiotext, and fax detect, route, and notify capabilities from any touchtone
telephone. Lingo is a stand-alone unit that runs on an embedded PC-DOS operating
system. The product comes in two- or four-port configurations with two or four
hours of storage. In addition, Lingo is a solid-state system with no moving
parts; a design the Company believes reduces the possibility of product
malfunction while increasing its marketability. For customers who want more
voice storage capabilities, Lingo XL includes a hard drive providing 72 hours of
voice storage. The Company plans to increase the product's distribution on a
country-by-country basis during the calendar year 2000. Sales of Lingo accounted
for approximately 5% of the Company's fiscal 2000 revenue.
REPLAY - The Company introduced Replay to segment its target market and appeal
to more price-sensitive, smaller enterprises. A simple "plug and play" voice
processing product intended for small office settings, Replay provides automated
attendant, voice mail, audiotext, and facsimile capabilities. Replay does not
require a computer screen or keyboard, and most of the installation is performed
by the end user.
Replay runs on the Microsoft DOS operating system, and features an HTML
(hypertext markup language) system administrator interface that simplifies
installation and customization. With the HTML graphical interface, system
administration can be accomplished remotely via a corporate Intranet or the
Internet. Routine maintenance and modifications can also be done via modem.
Replay is currently offered to some strategic partners and in all the Company's
markets outside North America. Sales of Replay accounted for approximately 2% of
the Company's fiscal 2000 revenue.
REPLAY PLUS -- Replay Plus offers all the functionality of Replay, including the
HTML system administration interface, as well as support for fax-on-demand,
hotel and motel specific features, and the ability to customize nearly all voice
mail features. The product runs on the Microsoft DOS operating system. Replay
Plus is currently offered in all the Company's markets outside North America.
Sales of Replay Plus accounted for approximately 4% of the Company's fiscal 2000
revenue.
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OTHER PRODUCTS AND FEATURES
ACTIVEFAX -- gives users of Repartee and Replay Plus fax handling capabilities.
It includes fax mail to store incoming faxes electronically, and fax-on-demand
to let outside callers retrieve documents from a fax library.
HOSPITALITY -- provides hotel guests with easy, timely and convenient messaging,
and is available in several multi-lingual guest conversation modules. Taking
advantage of its core product technology, the Company has developed this
specialized vertical market application for the lodging and hospitality
industry. Hospitality is designed to increase the efficiency of the hotel office
staff by providing unified messaging and on-screen call management.
Other optional features for the Company's products, such as tape backup, disk
redundancy and tool kits, are offered with Repartee and Replay Plus, and can be
configured by dealers according to a particular end user's application. Revenues
for other products and features accounted for approximately 16% of the Company's
fiscal 2000 revenue.
The Company does not presently customize its products for dealers or end users,
but does perform limited feature customizations as requested by certain
strategic partners.
Pronexus Inc.
In January 1997, the Company acquired a majority interest in privately held
Pronexus Inc., a leading provider of Visual Basic (VB) voice application tools
that enable developers to quickly and easily create Windows NT-based,
interactive voice response applications. IVR allows people to access, manipulate
and process information from computer databases with any touchtone telephone,
even while away from the office. An example of IVR is conducting business with
the bank by using a touchtone telephone to transfer money from a savings to a
checking account, review account balances, or make payment on a credit card. The
Company believes its majority ownership of Pronexus creates synergies in
distribution channels, sales and marketing, and strategic partnerships and
enable the Company to provide additional enhanced features to its product
base. On June 29, 2000, the Company exercised its option to acquire the
remaining 49% interest in Pronexus Inc. in a cash transaction. The purchase
price will be based on an independent third-party appraisal. The transaction
will be accounted for using the purchase price method of accounting.
Allocation of the purchase price will be determined in the second quarter of
the Company's fiscal year.
SALES AND MARKETING
The Company achieves broad market coverage for its products through a variety of
wholesale and direct distribution channels, which the Company believes to be
optimal considering the technical knowledge and skill required to sell and
install voice processing products. Domestically, the Company distributes its
products through a nationwide network of more than 700 independent telephone
system dealers, and also through strategic partner arrangements with various
manufacturers of telephone systems and business equipment. While the Company
supports its dealers and strategic partners with Company personnel, this
distribution strategy limits the Company's selling expense overhead by largely
avoiding the costs of direct sales, installation, and customer support
activities. The Company leverages its sales efforts through its affiliation with
numerous established dealer, strategic partner, and VAR sales organizations,
thereby achieving exposure to the substantial installed customer bases of these
organizations. A similar distribution strategy is utilized by the Company for
its international sales. During FYE 2000 the Company began direct sales and
marketing efforts in the Fortune 500 enterprise space.
The Company has employees engaged in domestic and international sales, sales
management, and dealer and strategic partner support activities. The Company has
sales representatives in Australia, Canada, China, France, Germany, Italy, The
Netherlands, Sweden, and the United Kingdom, and has distribution relationships
with dealers, distributors, or strategic partners in 42 other foreign countries.
7
The Company maintains an in-house marketing and public relations team. In
international markets, the Company has been experiencing a demand for larger
systems, and therefore has expanded its marketing and sales efforts to meet
these demands. Products are marketed principally by attending trade shows and
advertising in periodicals oriented toward dealers and end users. The Company
provides its dealers with marketing materials, and provides specialized
documentation to its strategic partners.
AMERICAS DEALER NETWORK
The Company's Americas dealer network consists of more than 700 independent
telephone system dealers in the United States, Canada, and Latin America. The
dealer network is managed by regional and divisional managers, who often
accompany dealers on sales calls and are compensated through a commission plan
based on quarterly quotas. A typical dealer for the Company's products is a
small business operator who primarily sells telephone systems to small- and
medium-sized businesses and relies upon the Company's products to augment such
sales. Most dealers also handle competing voice processing products. The Company
attempts to maintain relationships with a large number of dealers and, because
of the potential for dealer turnover, considers it advantageous not to become
overly dependent upon a few dealers.
The Company believes that the loyalty of its dealers is dependent upon
maintaining and enhancing the value inherent in its products and the quality of
its dealer support. Dealers are encouraged to attend initial Company-sponsored
training sessions on system usage, installation, maintenance, and customer
support. In addition, the Company provides advanced training on an ongoing
basis. Since the Company began selling Unity and TeLANophy, it has been
necessary to augment advanced training for its dealer network because the sale
and installation of Unity and TeLANophy requires both telephony and computer
networking expertise.
Dealers generally purchase turnkey voice processing systems from the Company,
but may also purchase voice board-and-software kits that they can combine with
PCs of their own selection. Dealers are subject to agreements with the Company
covering matters such as payment terms, protection of proprietary rights, and
nonexclusive sales territories, but these agreements do not restrict the
dealer's ability to sell competing products and are terminable by either party
on short notice.
STRATEGIC PARTNERS
The next major channel of distributing the Company's products is through 11
domestic and international strategic partners (historically known as original
equipment manufacturers or OEMs), who are typically manufacturers of telephone
systems, including NEC Corporation and its subsidiaries; Siemens Business
Communication Systems, Inc.; Alcatel Business Systems; Executone Information
Systems, Inc.; ECI Telcom; Harris Corporation; and Philips Communication
Systems, B.V.
The Company has had long term relationships with a number of these
manufacturers. It believes that its strategic partner relationships enable it to
develop up-to-date switch integrations with broader features for the strategic
partner's switches, to develop exclusive embedded products and to gain early
insight into market trends. In addition, by designing its products to take
advantage of the unique features of a specific strategic partner telephone
system, the Company is able to further establish its voice processing systems as
the product of choice for companies wanting to leverage their existing hardware
and software investments.
Strategic partners generally market the Company's products under their own brand
name, with their own literature, and through their own sales and technical
support networks. The Company will, however, supply strategic partners with
specialized technical publications featuring the strategic partner's company and
brand names. Strategic partner contracts typically have a term of one or more
years and provide for volume discounts and some product customization.
In May 1999, the Company signed a master purchase agreement with NEC Corporation
which covers all of the Company's products sold to NEC and its affiliates. The
agreement provides uniform terms and
8
conditions for all NEC affiliates globally, including delivery and payment
terms, and limited warranties. The initial term of the contract is five years
and automatically renews for one year terms thereafter unless either party gives
notice to the contrary. The contract may also be terminated by either party for
cause, including breach of a material term, or the bankruptcy of or appointment
of a receiver for the other party.
INTERNATIONAL SALES
In the last few years, the Company has increased its focus on international
sales and made substantial investments in expanding its penetration in
international markets. Competition has increased over the last few years,
primarily due to market acceptance and advances being made to change the
regulatory requirements and technology barriers that have characterized the
international marketplace. As international markets develop, the Company
believes that small- to medium-sized businesses will become more familiar with
voice processing and its benefits and therefore increase the demand for its
products' enhanced features and specialized applications. In addition, the
Company considers the current markets in Australia, Asia Pacific, and much of
Western Europe to exhibit characteristics similar to the U.S. market, but with
penetration in these markets being approximately two to three years behind the
domestic market. In these regions, generally only the large organizations have
installed voice processing systems. Although the Company believes that smaller
enterprises in most developed countries have the same needs for improved
telecommunications as in the U.S., it is difficult to predict the rate and
extent of demand for voice processing products in these markets.
In the last few years the Company has increased its research and development
efforts to localize its core products. Sales of voice processing products in
foreign countries often require additional configuration to adapt to local
telephone systems or signal standards. Conversion to foreign language and local
conversation patterns has historically been performed by the local dealer,
distributor, or strategic partner, and the Company believes alliances with local
entities familiar with local telephone systems and local business conditions, as
well as hiring local employees, are important to successful penetration of most
foreign markets. The Company does, however, maintain a Globalization Group to
research and implement localization of its products. The Company's Repartee,
Replay Plus, and Replay products are currently available in 16 conversation-only
languages and dialects. Replay Plus and Replay are fully localized in four
languages. Foreign sales also frequently require governmental approvals of part
or all of the voice processing system, typically relative to electrical safety
and compatibility with that country's public telephone network, and local
telephone systems and equipment. To date, component approvals have been obtained
primarily by the voice board manufacturer.
VALUE-ADDED RESELLERS (VARS)
The greater technical complexity of CTI products and the need for both PC, LAN,
and IP-PBX technical knowledge and support capability has made it advantageous
for the Company to utilize new channels of distribution for these products. The
Company currently has a VAR agreement with Inacom Corporation, a technology
management services company, and an agreement with Ingram Micro, Inc., a
wholesale distributor of technology products and services. Because the Company's
new product, Unity, works in an IP-PBX environment, the Company has begun to
market its products to data VARs that resell those IP-PBX switches. These new
channels offer industry and technical solutions and provide both LAN and
software expertise; the Company also believes they have the ability to assist
the Company in selling and distributing its products to a new and much broader
audience.
PRODUCT SUPPORT
The Company's dealers and strategic partner customers are primarily responsible
for supporting end users who purchase the Company's products. The Company
provides technical and sales support to its dealers and strategic partner
customers. The Company maintains a technical support staff, devoted to dealer
and strategic partner support. Technical support can be reached on a toll-free
number 12 hours per day on weekdays and emergency support is available on
weekends and holidays. The Company also provides a limited warranty on elements
of its products and permits product returns, without charge, if within 30 days.
9
PRODUCT DEVELOPMENT
The Company believes that it has numerous product development opportunities,
which it intends to pursue through the development of new software products, and
enhancements to its existing products. The Company considers its current
products to be competitive with products offered by others in its industry
segment. Nonetheless, it is convinced that it must continue to make substantial
expenditures on research and development in order to maintain its competitive
position. The Company has not to date capitalized any of its software
development costs.
Three engineering groups perform the Company's product development efforts. The
NT Products Group responds to the needs of the high-end product offering, Unity.
The DOS/OS2 Products Group supports Repartee, TeLANophy, Replay Plus, Replay,
Lingo and embedded systems, as well as switch integrations and vertical market
applications. The Advanced Products and Technology group focuses on the
development of new products and features that the Company believes will be
important on a three to five year horizon.
A separate staff of engineers is devoted to product testing and quality
assurance. Voice processing systems are often considered crucial to an end
user's business. The importance of incoming business calls, coupled with the
real-time nature of voice processing functions, makes system reliability an
important competitive requirement. The Company believes that the ongoing
research within its various business groups assures the continued high
reliability of its current and future products. To date, the Company has not
experienced any significant post-release errors or bugs in its products, but
there can be no assurance that such problems will be avoided in the future,
particularly as its products become more complex and sophisticated.
MANUFACTURING
The Company's product strategy emphasizes the development of software as opposed
to hardware, and the use of standard PC-related hardware components in its
products, in part to limit its manufacturing activity. The Company's
manufacturing operations consist primarily of final assembly and quality control
testing of materials, subassemblies and systems. The Company does not
manufacture or perform significant modifications on any hardware components, and
is therefore dependent upon third-party manufacturers or vendors of certain
critical hardware components such as PCs and voice boards.
The Company's products incorporate a number of commercially available
application cards, fax boards, voice boards, and other circuitboards that enable
integration with certain telephone systems. Voice boards are available in
quantity from very few domestic suppliers. Traditionally, the Company's products
have incorporated voice boards manufactured by Dialogic Corporation, primarily
because of the cost and effort required to develop telephone switch integrations
for an alternate voice board.
To minimize its manufacturing costs, the Company signed an agreement with Dell
Computer Corporation to ship the Company's turnkey voice processing systems on
Dell computers.
COMPETITION
The voice processing industry, specifically the segment that supplies voice
processing systems to small- and medium-sized businesses and offices, is highly
competitive, and the Company believes that the competitive pressures it faces
will continue to intensify. The Company has, however, been successful in this
competitive environment in the past, ranking third behind only Lucent
Technologies and Nortel Networks Corporation in total domestic voice messaging
systems shipped in 1999, according to industry statistics. According to the
PELORUS Group, a leading industry analyst firm, the Company is the world's
largest independent manufacturer of unified messaging solutions.
10
The domestic market for voice processing systems comprises more than 50
manufacturers. Manufacturers of voice processing systems include switch
suppliers (such as Lucent Technologies, Inc., Nortel Networks Corporation, and
Siemens Business Communication Systems, Inc.); manufacturers of proprietary
systems (such as BayPoint Innovations, and Comverse Technology, Inc., and
independent manufacturers of PC-based, open-architecture systems (such as the
Company and AVT Corporation).
The segment of the industry that supplies voice processing systems to small- and
medium-sized businesses and offices has endured intense price competition and
pressure on margins in the past few years. This industry segment has also
experienced several new market entrants and consolidations of smaller
competitors into larger entities.
For interconnect dealers, product pricing, system features, ease of use and
installation, technical and sales support, and product reliability are the
primary bases of competition. Voice processing system manufacturers compete
intensely for the loyalties and attention of these independent telephone system
dealers. For strategic partner and VAR customers, product pricing is important
but other factors such as product quality and reliability, ease of use, and
support are also significant competitive factors.
As the Company's products evolve to further integrate telephones with PCs, the
Company anticipates that it will encounter a broader variety of unified
messaging competitors, including new entrants from related computer, internet
application service providers and wireless communications industries. The
Company seeks to augment its distribution network to include more dealers with
PC and LAN expertise. The Company's principal competitors, at present, fall into
two main categories: telephone equipment manufacturers and independent voice
processing system manufacturers. The telephone equipment manufacturers offer
their voice processing products, or a private label strategic partner system not
produced by the Company (for example Lucent Technologies, Nortel Networks
Corporation, Fujitsu Business Communications, and Toshiba America Information
Systems, Inc.), and sell the systems along with their PBXs. Telephone equipment
manufacturers have the benefit of the large installed-base of their own
switches, and they have been able to increase competition by lowering prices
while providing a single source for companies to secure both their voice
processing and telephone systems needs.
Independent voice processing system manufacturers whose products integrate with
multiple telephone systems, and are either based on proprietary hardware (e.g.,
Centigram Communications Corporation, and Comverse Technology, Inc. ), or are
PC-based, (e.g., AVT Corporation), also compete directly with the Company. The
Company believes that it competes successfully in the industry because of the
richness and ease of use of its product features; its dynamic system
applications and capabilities, including leading edge CTI applications; its
strong dealer and strategic partner networks; and its large investments in
research and development.
The same principal competitors are encountered in all the Company's distribution
channels. The Company's strategic partner customers compete with the Company's
dealer network for sales to certain customers. The Company's voice processing
systems also compete indirectly with voice processing services offered by
independent service bureaus and other companies. Such services are offered by
most Regional Bell Operating Companies (RBOCs), which could also become
significant direct competitors if certain existing judicial restrictions on
their business activities were to be relaxed. The Company does not presently
have dealer or strategic partner relationships with any RBOCs.
Since many of the voice processing industry technologies overlap, mergers and
acquisitions have become more prevalent in the industry, particularly in the
last couple of years. There are many advantages to be gained from the synergies
created by these combinations, including the offering of a more complete product
suite to end users, combining research and development budgets and products,
convergence of prior competing sales channels, and consolidation of capital
investments and operating costs. The Company evaluates opportunities to acquire
complementary technologies on an ongoing basis.
11
PROPRIETARY RIGHTS
The Company currently holds twelve patents (eleven in the U.S. and one in
Canada), expiring on dates ranging from 2008 to 2017 relating to: (1) detection
of telephone signaling tones; (2) detection of stutter tones for CO-based voice
mail (this patent has also been issued in Canada); (3) a method and apparatus
for processing a live incoming call in a communications system; (4) a
configurable telephone interface for electronic devices; (5) a method for
displaying call notification and allowing choice of greetings to send to a
caller; (6) a method for displaying visual voice mail features and permitting
playback of a voice mail message on a PC sound device; (7) a method for
monitoring a caller's name while using a telephone; (8) a method for monitoring
a message as it is being left in voice mail; 9) a telecommunication management
system and user interface; 10) a method and device for managing a
telecommunication system, including call forwarding, with a LAN integrated with
a PBX; and 11) a method for managing telephony functions with a mouse interface.
In general, however, the Company has limited patent protection for its products
and believes that patents generally will not impose significant barriers to
entry into the Company's market, especially by companies with established
technical capabilities and market positions in related technologies. While the
Company's success will depend in part upon its ability to protect its
technology, the Company believes that technological expertise, innovation, and
product value are more critical to its success. The Company has copyrights on
elements of its products, and also attempts to protect its software through a
trade secrets program that involves, among other things, using various forms of
copy protection in its systems as well as obtaining confidentiality agreements.
The Company cannot guarantee that its efforts to protect its intellectual
property will be effective to prevent misappropriation, reverse engineering, or
independent development by competitors.
The Company has initiated actions to enforce certain patent rights against third
parties. To date, the Company has granted six nonexclusive, nontransferable
licenses under its stutter detect patent. The Company does not believe that
licensing revenues will have a material effect on its financial condition;
nevertheless, it considers it important to protect its intellectual property and
assert its position in the highly competitive market.
In the course of its product development efforts the Company periodically
identifies certain technologies owned by third parties that either would be
useful to incorporate in its products or are necessary in order to remain
competitive in light of industry trends. In these cases, the Company has in the
past sought to obtain licenses of such third-party technologies. In October
1999, the Company entered into a cross-licensing agreement with Lucent
Technologies, Inc. under which the parties released each other from claims of
patent infringement and granted each other a five year license to use the
respective patents. Based on an assessment of the age and use of the technology
of the underlying Lucent patents, the related claims by Lucent and the Company's
recent revenue composition, the Company estimated that $2.5 million of the net
settlement was attributable to the release from claims relating to prior
periods. The remaining balance of $0.5 million was estimated to be attributable
to the five year license to use the Lucent patents, net of the estimated value
of the Company's patented technology being licensed to Lucent. The Company
expects that it will continue to find it desirable or necessary to obtain
additional technology licenses from third parties, but there can be no assurance
that any particular license will be available at all, or available on acceptable
terms, at any future time.
The voice processing industry is witnessing numerous allegations of patent
infringement among competitors, and considerable related litigation. The Company
has received claims of patent infringement from several parties, including
certain competitors. In response to certain prior infringement claims, the
Company has pursued and obtained nonexclusive licenses entitling the Company to
utilize certain fundamental patented voice mail and automated attendant
functions that are widely licensed and used in the voice processing industry.
The Company's investigation of other claims has been limited by the claims' lack
of specificity, by the limited availability of factual information and
documentation related to the claims, and by the expense of pursuing exhaustive
patent reviews. The Company believes, based in part upon its investigations and
upon discussions and correspondence with its patent counsel, that its systems do
not currently infringe on valid patents. Although the Company believes that it
currently owns or has
12
adequate rights to utilize all material technologies relating to its products,
as it continues to develop new products and features in the future, it
anticipates that it may receive additional claims of patent infringement. Such
claims could result in the Company's incurring substantial legal expenses and
being required to obtain licenses, pay damages for infringement, or cease
offering products that infringe such patents.
Active Voice, Repartee, Replay, TeLANophy, ViewMail, ViewCall, and ViewFax are
registered trademarks and Unity and Lingo are trademarks of Active Voice. All
other trademarks used herein are the property of their respective owners. The
names of the Company and its products are also protected or sought to be
protected to varying degrees by filings in various foreign countries.
EMPLOYEES
At March 31, 2000, the Company had 346 full-time employees, including: 43 in
finance and administration; 32 in manufacturing; 150 in engineering, product
development, and quality assurance; 121 in sales, marketing and technical
support; and 35 part-time employees. Company employees enter into agreements
containing confidentiality restrictions, as well as provisions relative to
non-competition during employment with the Company and for six months after
termination. The Company has never had a work stoppage and no employees are
represented by a labor organization. The Company considers its employee
relations to be good.
At March 31, 2000, Pronexus Inc. had 31 full-time employees, including: 5 in
finance and administration; 15 in engineering and product development; 11 in
sales, marketing and technical support; and one part-time employee.
ITEM 2. PROPERTIES
The Company's headquarters and administrative, engineering, manufacturing, and
marketing operations are located in leased space in Seattle, Washington under a
lease expiring in July 2009. Sales offices in Australia, The Netherlands and the
United Kingdom are located in leased facilities under leases expiring in May
2003, March 2003 and September 2000, respectively. The Company believes that
these facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available as needed in the future on
commercially reasonable terms. See Note 7 of "Notes to Consolidated Financial
Statements."
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings or claims, either asserted or
unasserted, that arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, management does not believe
that any pending legal matters will have a material adverse effect on the
Company. In April 1999, CIDCO Incorporated filed suit against the Company
alleging that the Company's Patent No. 5,327,493 was invalid and not infringed
by CIDCO. CIDCO later also alleged that the Company's caller identification
products infringed CIDCO's Patent No. 4,366,348. The Company responded denying
CIDCO's allegations and alleging that CIDCO violated the Company's patent. In
December, the US Patent and Trademark Office ordered CIDCO's patent into
reexamination, so all proceedings concerning the CIDCO patent have been stayed
until the Patent office completes the re-examination. Discovery is proceeding on
the Company's infringement claim against CIDCO. The Company believes CIDCO's
claims are without merit and will continue to defend the action should the stay
be lifted. However due to the preliminary status of the proceedings, it is not
possible to predict the ultimate outcome of the case or its financial impact on
the Company.
In addition, the Company has been served with four class action lawsuits, one
each in Alabama, Indiana, Massachusetts and Texas state courts, related to the
alleged inability of the Company's Replay, Replay Plus and Repartee products
released prior to Repartee 7.44 to function properly with respect to the year
2000. The plaintiffs in the suits seek to require the Company to remedy the
alleged defect in these products and also seek damages. The Company has filed
its answers in Alabama, Indiana,
13
Massachusetts, and Texas. The Company believes that the claims stated in the
cases are without merit, that the cases are not appropriate for class action,
and the Company intends to defend itself vigorously. In the Massachusetts
action, the Massachusetts Superior Court has denied without prejudice
plaintiff's motion for class certification on the grounds that the plaintiff
failed to meet its burden in establishing the requirements for class
certification. Due to the preliminary status of the proceedings, it is not
possible to predict the ultimate outcome of the cases or their financial impact
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Shareholders on March 8, 2000 to approve
an increase in the Company's authorized common stock in order to accommodate a
two-for-one stock split. As of March 8, 2000, shareholders of the Company held
4,680,840 shares of common stock. The number of votes cast for the stock split
was 3,918,478, and 760,454 shares were voted against the proposal. The number of
absentions was 1,908. There were no broker non-votes and other non-votes
totalled 380,552.
14
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected annually at the meeting of the
Board of Directors held in conjunction with the annual meeting of stockholders.
The following are the names, ages and current positions of the individuals
serving as executive officers of the Company at March 31, 2000.
NAME AGE POSITION
- --------------------------------------------------------------------------------------------------------
Robert L. Richmond 49 Chairman of the Board
Frank J. Costa 46 Chief Executive Officer and President
Jose S. David 43 Chief Financial Officer
Ken Myer 42 Executive Vice President of Sales and Marketing
Douglass S. Anderson(1) 49 Vice President of Sales
Kevin L. Chestnut 45 Chief Technology Officer and Vice President -- Advanced Products
and Technology
Edward F. Masters 41 Vice President of Product Development
- --------------------------------------------------------------------------------------------------------
Robert L. Richmond, a co-founder of the Company, has been Chairman of the Board
of the Company since its inception in 1983. Until June 1999, he also served as
its Chief Executive Officer. From 1980 to 1983, Mr. Richmond was a project
manager for Intermetrics Incorporated, a public software company, performing
software validation for NASA and The Boeing Company, and creating new products
for the airline industry. From 1971 to 1980, Mr. Richmond was a consultant. Mr.
Richmond holds a Bachelor of Computer Science and Engineering from Massachusetts
Institute of Technology.
Frank J. Costa joined the Company in December 1996 as Chief Operating Officer
and President and was appointed Chief Executive Officer on June 1, 1999. From
1992 to 1996, Mr. Costa was the President and Chief Executive Officer of his own
consulting firm, Concept One, Inc. From 1993 to 1994, Mr. Costa served as the
General Manager and Product Group Vice President of Mentor Graphics. Mr. Costa
has a Bachelor of Science degree in Electrical Engineering from Massachusetts
Institute of Technology and a Masters of Business Administration in Finance,
Business Policy and International Business from the University of Chicago.
Jose S. David joined the Company in 1989 as Controller and Manager of Operations
and was named Chief Financial Officer in July 1992, and is also the Company's
Corporate Secretary and Treasurer. Mr. David serves on the board of directors of
its subsidiaries. From 1984 to 1989, Mr. David was Manager of Finance for Wang
Laboratories, Inc., a computer manufacturer. From 1978 to 1983, Mr. David was
employed by Price Waterhouse LLP, an independent public accounting firm. Mr.
David is a Certified Public Accountant and holds a Bachelor of Arts in Business
Administration, Accounting, from the University of Washington.
Ken Myer joined the Company on June 21, 1999 as Executive Vice President of
Sales and Marketing. Prior to that, Mr. Myer was the general manager of the
Northwest and Intermountain Region for IBM Corporation. Mr. Myer served in a
number of positions for IBM Northwest, including financial manager, manager of
pricing and sales support, marketing manager, and account representative. Mr.
Myer holds an Executive Masters of Business Administration degree and a Masters
of Arts degree in Speech Communications from the University of Washington.
Douglass S. Anderson joined the Company in 1989 as National Sales Manager and
was appointed Vice President of Sales in July 1995. Mr. Anderson was Vice
President-Sales and Marketing at Automation Electronics Corporation between 1986
and 1989. Prior to that, he served as Western Regional Sales Manager for
Code-A-Phone. Mr. Anderson holds a Bachelor of Science in Marketing from the
University of Southern California and a Master of Business Administration from
Arizona State University.
- ----------
(1) Mr. Anderson left the Company on April 7, 2000.
15
Kevin L. Chestnut joined the Company in 1991 as a Technical Writer and was
appointed Chief Technology Officer and Vice President - Advanced Products and
Technology in December 1997. From 1981 to 1990, Mr. Chestnut was Director of
Software Development of Real Estate Software Company, Inc., a software startup
company that he founded. Mr. Chestnut attended Georgia Institute of Technology,
majoring in chemistry.
Edward F. Masters joined the Company in 1991 as Manager of Customer Engineering
and was appointed Vice President of Product Development in December 1996. Mr.
Masters served as a Product Marketing Engineer at TeleCalc from 1988 to 1991.
From 1982 to 1991, Mr. Masters served as a Project Engineer at Flow Systems. Mr.
Masters holds a Bachelor of Science in Industrial Technology from Western
Washington University and a Masters of Business Administration from Seattle
University.
16
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded over the counter under the symbol
ACVC and is an authorized security for quotation on the NASDAQ National Market
("NASDAQ"). The following table shows for the periods indicated, the market
sales price range for the Company's Common Stock as reported by NASDAQ.
Year Ended March 31, 2000 1999
- -------------------------------------------------------------------------------------------------
High Low High Low
First Quarter $9.13 $4.25 $7.00 $ 5.00
Second Quarter 8.88 5.44 5.44 3.75
Third Quarter 19.94 7.44 4.19 2.19
Fourth Quarter $44.00 $ 11.50 $5.69 $3.88
- -------------------------------------------------------------------------------------------------
The prices in this table have been adjusted to reflect the 2-for-1 stock split
effected March 22, 2000.
The Company has not paid cash dividends on its Common Stock. At present, the
Company intends to retain earnings for the expansion of its business and does
not anticipate declaring a cash dividend in the near future. The Company's
dividend policy is reviewed from time to time by the Company's Board of
Directors in light of its earnings and financial conditions and such other
business considerations as the Board of Directors considers relevant. As of June
15, there were approximately 100 stockholders of record and approximately 4,500
beneficial owners of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA(1)
Year Ended March 31, 2000(2) 1999 1998 1997(3) 1996
- -------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operations Data:
Net sales $74,427 $62,640 $53,385 $49,515 $45,138
Operating (loss) income (7,576) (6,468) (1,112) 2,569 6,871
Net income (loss) 6,127 (4,916) 179 1,751 5,162
Earnings (loss) per share:
Basic $0.62 $(0.52) $ 0.02 $ 0.38 $ 1.14
Diluted $0.57 $(0.52) $ 0.02 $ 0.38 $ 1.11
Balance Sheet Data:
Working capital $35,047 $18,306 $24,842 $22,489 $20,912
Total assets 53,049 38,693 41,237 38,941 37,400
Total debt - - - - -
Total stockholders' equity $46,912 $29,041 $34,616 $34,067 $31,797
- -------------------------------------------------------------------------------------------------
(1) Reflects restatement for the merger with PhoneSoft which was accounted for
as a pooling of interests. See Note 12 of Notes to Consolidated Financial
Statements.
17
(2) Includes the impact of a $16,504,000 gain on the sale of real time Internet
communications technology assets that increased basic earnings per share by
$1.32, a $2,521,000 non-recurring charge for a license fee associated with the
release of claims of patent infringement with Lucent Technologies, Inc. that
reduced basic earnings per share by $0.20, and a $1,169,000 impairment loss on a
strategic investment that reduced basic earnings per share by $0.09.
(3) Includes the impact of a $1,769,000 non-recurring charge for purchased,
in-process research and development in connection with the acquisition of a
majority interest in Pronexus Inc. that reduced basic earnings per share by
$0.38.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Active Voice Corporation (the Company) is a leading manufacturer of call
processing, including unified messaging systems and PC-based computer telephony
integration (CTI) solutions. The Company's products are sold worldwide through a
network of independent telecommunications dealers, telephone equipment
manufacturers and computer resellers. The Company currently markets six
principal products: Unity, Repartee, embedded systems, Lingo, Replay, and Replay
Plus. Unity, the Company's most recent product introduction, offers fully
unified messaging, including single point administration for e-mail, voice mail
and fax mail user accounts, address and distribution lists, and single point of
administration. Repartee, the Company's well established mid-market product
comes in two versions, CTI and VP. Repartee serves as the base for TeLANophy, a
suite of CTI application modules which provides complete call management and
integrated messaging capabilities. Embedded systems, available only to the
Company's strategic partners, combines Active Voice software with a board that
incorporates directly into the phone switch, offering a less expensive
alternative than a traditional PC-based voice mail system. Lingo offers all
basic voice processing features in a single proprietary hardware unit, and is an
affordable solution for small businesses as it does not utilize PC hardware and
requires minimal dealer effort in its installation. The Company's Replay product
provides basic voice processing features at a price point attractive to the
small business market. Replay Plus, the Company's mid-priced product, offers
most of the voice processing features found in Repartee with the exception of
the CTI functionality.
CERTAIN STATEMENTS IN THIS ANNUAL REPORT (FOR EXAMPLE, STATEMENTS USING THE
EXPRESSIONS, "THE COMPANY BELIEVES" OR "THE COMPANY ANTICIPATES" AND OTHER
SIMILAR STATEMENTS) CONTAIN "FORWARD LOOKING" INFORMATION (AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) INVOLVING RISKS AND
UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, PROJECTIONS FOR SALES AND
EXPENDITURES, TREND PROJECTIONS AND DEVELOPMENT SCHEDULES. ACTUAL FUTURE RESULTS
AND TRENDS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS, INCLUDING,
BUT NOT LIMITED TO, THE RISKS DISCUSSED IN THIS REPORT. INVESTORS ARE ENCOURAGED
TO CONSULT ANY FURTHER DISCLOSURES MADE ON RELATED SUBJECTS IN OUR FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY ASSUMES NO OBLIGATION TO
RELEASE PUBLICLY ANY CHANGES TO THESE "FORWARD LOOKING STATEMENTS" THAT MAY
ARISE FROM THE DEVELOPMENT OF UNANTICIPATED EVENTS OR CIRCUMSTANCES THAT OCCUR
AFTER THE DATE OF THE ORIGINAL PROJECTION. (REFER TO THE SECTION ENTITLED
"FACTORS AFFECTING FUTURE OPERATING RESULTS" FOR A FURTHER DISCUSSION ON SOME OF
THE INVOLVED RISKS AND UNCERTAINTIES.)
RESULTS OF OPERATIONS
NET SALES
2000 Change 1999 Change 1998
- ------------------------------------------------------------------------------------
(Dollars in thousands)
Net sales $74,427 18.8% $62,640 17.3% $53,385
- ------------------------------------------------------------------------------------
18
Fiscal 2000 Compared to Fiscal 1999
For the year ended March 31, 2000, net sales to the Company's Americas dealer
network increased 12.9% to $36.2 million in 2000 from $32.1 million in 1999. Net
sales to the Americas dealer network represented 48.7% and 51.1% of total net
sales in the years ended March 31, 2000 and 1999, respectively. The increase in
net sales in the Americas dealer channel was primarily attributable to revenues
associated with the Company's Year 2000 (Y2K) program, particularly during the
first nine months of the year. The Company's Y2K program provided discounts to
dealers upgrading their customers' non-Y2K compliant systems to current software
versions and hardware platforms. The Company experienced a significant decline
in revenue from the Y2K program in the fourth quarter of fiscal 2000, as the
January 1, 2000 milestone date was crossed without significant disruptions to
its customers' business systems. As a result of decreased concern over the Y2K
issue, the Company experienced a significant decline in revenue during the
fourth quarter reflecting general market uncertainty surrounding PBX sales,
attributed to the emergence of IP-based phone systems and PC-based phone
technologies. It is not anticipated that customers who have yet to upgrade their
systems will continue to take advantage of the Company's Y2K upgrade program to
the extent they did during the first nine months of the fiscal year. Sales of
Unity contributed to the increase in net sales when compared to the previous
year, although sales of Unity represented less than 10% of the channel's revenue
overall.
Net sales to the strategic partner sales channel increased 19.7% to $23.0
million in 2000 from $19.2 million on 1999. Net sales to strategic partner
customers represented 30.9% and 30.7% of total net sales for the fiscal years
ended March 31, 2000 and 1999, respectively. A significant portion of the
increase is attributable to increased sales of embedded systems and Repartee.
Revenue from Unity also contributed to the increase, accounting for
approximately 4% of the total sales in the channel. Offsetting these increases
was a decline in sales of the Lingo product in the channel, as the Company's
main distributor of Lingo migrated to other solutions. As of March 31, 2000 the
Company had 11 significant strategic partner relationships. NEC, Inc., the
largest strategic partner, accounted for approximately 73% of total strategic
partner sales and approximately of 22% total net sales during the year ended
March 31, 2000.
Net sales to the international sales channel increased 34.3% to $11.9 million in
2000 from $8.8 million in 1999. International sales represented 15.9% and 14.1%
of total net sales for the fiscal years ended March 31, 2000 and 1999,
respectively. The increase in net sales in the international channel is
primarily attributable to continued strength in the European market, where unit
sales of Repartee, Replay and Replay Plus have increased with the release of
localized versions of those products. Revenue from sales of Unity also accounted
for some of the increase, although it represented less than 5% of the channel's
sales overall. Sales of Lingo remained strong in the United Kingdom market,
accounting for approximately one-third of that office's revenues. Revenues in
the Asia/Pacific market also increased, as the weakness in that region's economy
improved when compared to the prior fiscal year. Beyond the usual risks
associated with international sales (currency fluctuations and restrictions;
export-import regulations; customs matters; foreign collection problems; and
military, political and transportation risks), the Company's international sales
involve additional governmental regulation, product adaptations to local
languages and switching systems, and uncertainties arising from local business
practices and cultural considerations.
Other revenue increased 32.5% to $3.4 million in 2000 from $2.5 million in 1999,
representing 4.5% and 4.1% of the Company's total net sales in the years ended
March 31, 2000 and 1999, respectively. The increase in other revenue is
primarily attributable to increased sales of Visual Basic-based voice
application tools and custom application design services through the Company's
majority-owned Pronexus subsidiary. The Company also recognized royalty revenues
from licensing its stutter-detect patents to third parties.
The Company experiences significant quarterly variability in the level of sales
through its three distinct distribution channels. The diversification provided
by these three channels has in the past reduced the quarterly volatility of
aggregate net sales.
19
Fiscal 1999 Compared to Fiscal 1998
Net sales to the Company's Americas dealer network during the year ended March
31, 1999 increased 3.1% to $32.1 million in 1999 from $31.1 million in 1998. Net
sales to the Americas dealer network represented 51.2% and 58.3% of total net
sales in the years ended March 31, 1999 and 1998, respectively. The decrease in
net sales in the Americas dealer channel as a percentage of total net sales is
primarily attributable to the continued success of the Company's strategic
partner relationships as some dealers purchase the Company's products through
these corporate sales customers rather than directly from the Company. The
Company feels this is an efficient method of distributing its basic voice mail
products, due to lower distribution and product support costs. The increase in
overall revenue in the dealer channel when compared to the prior year was
primarily attributable to the incremental sales provided by the Company's Year
2000 (Y2K) program, which provides discounts to dealers who upgrade their
customers' non-Y2K compliant systems. To a lesser extent, the introduction of
new switch integrations and additional features for Repartee, and the first full
year of sales of the Lingo product, also contributed to the revenue increase in
the channel. During the fourth quarter of the fiscal year ended March 31, 1999
the Company released Unity 2.0 to general availability for all customers.
Revenues from Unity were not material for the year ended March 31, 1999.
Net sales to the Company's strategic partner sales channel increased 55.9% to
$19.2 million in 1999 from $12.3 million in 1998. Net sales to strategic
partners represented 30.7% and 23.1% of total net sales for the fiscal years
1999 and 1998, respectively. Embedded sytems and Lingo revenues accounted for
the majority of the increase in net sales to strategic partner customers. These
two products were introduced during the second half of fiscal year 1998 and the
benefit of a full year's sales of these products in fiscal 1999 resulted in a
five-fold increase in embedded systems revenue and more than a ten-fold increase
in Lingo revenue. Sales of embedded systems benefited from the success of NEC's
ElectraElite switch sales, a high percentage of which are now sold with voice
mail. In fiscal 1999, the strategic partner sales channel experienced growth in
larger system sales, and year over year revenue from all major strategic
partners increased. The Company reached an agreement with Alcatel in the quarter
ended March 31, 1999 to jointly develop and deliver a fully customized
Unity-based product to Alcatel customers. As of March 31, 1999 the Company had
11 significant strategic partner relationships. The largest corporate customer
represented 65% of total strategic partner sales, and 20% of total Company net
sales.
Net sales to the international sales channel grew 11.2% in 1999 to $8.8 million
from $7.9 million in 1998. International sales represented 14.1% and 14.9% of
total net sales for fiscal years 1999 and 1998, respectively. The increase in
international sales can be partially attributed to the success of the
international rollout of the Company's Lingo product, particularly in the United
Kingdom and Australia/Pacific markets. In addition, the Company continued to
successfully supply Replay systems to Crane Telecommunications in the United
Kingdom. The Company's sales in the Asia/Pacific region continued to struggle
due to the effects of the weak Asian economy in the first half of the year but
began to improve during the second half of fiscal 1999. The Company continued to
see the positive results of its product localization efforts for various
mainland European countries, as evidenced by the increase in Replay and Replay
Plus units shipped there. The Company continued to increase its volume of
business with Phillips, and anticipated further development of this relationship
with the release of an embedded product to Phillips in fiscal 2000. Recent
developments in the international channel included the opening of new sales
offices in Germany and Italy.
Other revenue comprised 4.1%, or $2.5 million, of the Company's fiscal 1999 net
sales, compared to 3.8%, or $2.0 million in fiscal 1998. This increase primarily
represented revenue contributed from the Company's Pronexus subsidiary, which
grew 50% in fiscal 1999 compared to the prior fiscal year.
20
GROSS PROFIT
2000 Change 1999 Change 1998
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Gross profit $43,292 28.2% $33,756 11.0% $30,402
Percentage of net sales 58.2% 53.9% 56.9%
- ---------------------------------------------------------------------------------------------
The Company's gross margin varies in part depending upon the mix of
higher-margin voice board-and-software kit sales (offered to all customers) and
software-only sales, such as embedded systems (available only to strategic
partner accounts) as opposed to turnkey system sales (which include the cost of
a PC and other related hardware). The proportion of sales contributed from each
distribution channel also affects the overall gross margin, as international
sales have historically had higher gross margins than sales through the other
distribution channels.
Fiscal 2000 Compared to Fiscal 1999
Gross margin as a percentage of net sales was 58.2% in 2000, compared to 59.9%
in 1999. The increase in gross margin percentage in 2000 is primarily
attributable to increased unit sales of software-only embedded products to
certain of the Company's strategic partners. Lower PC hardware component costs
also contributed to the increase in gross margin percentage, reflected primarily
in improved gross margins of the Company's Repartee product, particularly
through the dealer channel. In addition, the Company sold a higher proportion of
software under the Y2K upgrade program during the year ended March 31, 2000 when
compared to the previous year, contributing to the increased gross margin
percentage. Sales of Unity also contributed to improved gross margin
percentages, due to the higher software content of most Unity sales as a
percentage of product revenues when compared to traditional sales.
Fiscal 1999 Compared to Fiscal 1998
Gross margin as a percentage of net sales was 53.9% in 1999, compared to 56.9%
in 1998. The decrease in gross margin percentage in 1999 is primarily
atributable to a substantial portion of revenue consisting of the Company's Y2K
upgrade program. The PC hardware components of the Company's products carry a
lower gross margin percentage, and the percentage of revenue from each unit sold
under the Y2K program attributable to PC hardware is greater than in the
Company's non-Y2K business. Another factor contributing to the decline was the
continuing shift of a larger portion of the Company's revenue through the
strategic partner channel, which has resulted in increased unit volume at the
expense of higher margin percentages. Specifically, the Company's Lingo sales,
which contribute a higher proportion of margin dollars in fiscal 1999 than the
prior fiscal year, but at a lower gross margin percentage, also accounted for
the decline in gross margin percentage between the comparable periods. The
overall decline was partially offset by the Company's embedded systems, which
carry a higher software component than traditional turnkey system sales.
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT
2000 Change 1999 Change 1998
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Research and development $15,848 9.7% $14,450 48.2% $9,752
Percentage of net sales 21.3% 23.1% 18.3%
- ---------------------------------------------------------------------------------------------
21
Fiscal 2000 Compared to Fiscal 1999
The Company increased research and development expenses in 2000 to $15.8 million
(21.3% of net sales) from $14.4 million (23.1% of net sales) in 1999. The
increase in research and development expenses for the fiscal year ended March
31, 2000 was primarily attributable to an increase in compensation-related
costs. The increased compensation expense was associated with additional
engineering and development personnel and higher engineering salaries due to the
competitive nature of the labor market and the Company's effort to attract and
retain skilled employees. The higher compensation expense included payroll taxes
associated with the exercise of non-qualified stock options by research and
development employees. Subsequent to the initial release of Unity, the Company's
research and development personnel continued to add features and enhance the
functionality of the product. The Company also continues to allocate substantial
resources to the localization of products for international markets and
customization of products for strategic partner accounts.
The Company believes that in order to remain competitive in a rapidly changing
technological environment, it will continue to be necessary to allocate
significant resources to the development of new products, globalization of
products for international markets and customization of products for strategic
partners. The general release of Unity 2.0 completed in March 1999 has caused
the growth rate of research and development expenditures to slow in comparison
to the last year, but the Company expects that these expenses as a percentage of
sales will vary from period to period.
Fiscal 1999 Compared to Fiscal 1998
The Company increased research and development expenses in 1999 to $14.4 million
(23.1% of net sales) from $9.8 million (18.3% of net sales) in 1998. The
increase in research and development expenses was primarily due to the
acceleration of the development effort associated with the Company's Windows
NT-based product, Unity. The substantial development resources required to build
a native NT unified messaging product from the ground up necessitated the dollar
growth in research and development expenses. As the development expenditures
associated with Unity, which was released at the end of the fourth quarter of
fiscal 1999, were in advance of actual product revenues, the research and
development expenses as a percentage of sales also increased. Contract
development staff and employee compensation-related expenses were the largest
components of the increase. A one-time bonus in the fourth quarter of fiscal
1999 was awarded to the Unity development staff for meeting the product's
targeted release date, and accounted for approximately 10% of the incremental
expenses. The customization of products for the Company's strategic partners and
the ongoing globalization of products for international markets also contributed
to the increase. In addition, the competitive nature of the labor market and the
Company's effort to attract and retain skilled employees led to an overall
increase in engineering salaries.
SALES AND MARKETING
2000 Change 1999 Change 1998
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Sales and marketing $23,116 31.2% $17,613 13.0% $15,585
Percentage of net sales 31.1% 28.1% 29.2%
- ---------------------------------------------------------------------------------------------
Fiscal 2000 Compared to Fiscal 1999
Sales and marketing expenses increased 31.2% to $23.1 million in 2000 from $17.6
million in 1999. The increase in sales and marketing expenses during the fiscal
year ended March 31, 2000 was primarily attributable to increased
compensation-related expenses associated with the growth in sales and marketing
personnel and higher commissions due to increased sales levels. Sales and
marketing expenses also increased as a result of restructuring sales channels
and investing in the development of
22
new sales channels to take advantage of opportunities in the Enterprise and IP
markets. Travel expenses also contributed to the increase, particularly as a
result of increased business through the Company's international sales channels
and the roll-out of products to strategic partners Alcatel, Siemens and Phillips
on the European continent. The Company continues to devote resources to the
development of training programs to improve its customers' technical and sales
knowledge and better leverage sales of the Unity product. Sales and marketing
expenses include both costs that are essentially fixed as well as costs that
vary from period to period relative to sales volume and thus can be expected to
fluctuate both in dollar amount and as a percentage of net sales from period to
period.
Fiscal 1999 Compared to Fiscal 1998
Sales and marketing expenses increased 13.0% to $17.6 million in 1999 from $15.6
million in 1998. The increase in sales and marketing expenses for the fiscal
year ended March 31, 1999 was primarily attributable to increased
compensation-related expenses associated with growth in sales and marketing
personnel and higher commissions due to increased sales levels. Leveraging these
additional expenses over a growing revenue base resulted in a decline in sales
and marketing expenses as a percentage of net sales. The increase in unit volume
also caused expenses to be higher when compared to the prior year, as more
resources were devoted to supporting a larger number of systems. Training
expenses and technical staff were necessary to strengthen the Company's product
support infrastructure in preparation for the release of Unity.
GENERAL AND ADMINISTRATIVE
2000 Change 1999 Change 1998
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
General and administrative $9,383 15.0% $8,161 32.1% $6,177
Percentage of net sales 12.6% 13.0% 11.6%
- ---------------------------------------------------------------------------------------------
Fiscal 2000 Compared to Fiscal 1999
General and administrative expenses increased 15% to $9.4 million in 2000 from
$8.1 million in 1999. The increase in general and administrative expenses for
the fiscal year ended March 31, 2000 was primarily attributable to increased
compensation-related expenses due to the hiring of additional general and
administrative personnel and higher salary levels. Consulting expenses
associated with the implementation of the Company's accounting and manufacturing
system also contributed to the increase. Legal costs, primarily related to
intellectual property, litigation and contract matters, also increased
significantly over the prior periods. These expenses were mitigated to an extent
by the reduction of bad debts expense, due to improved collection statistics,
and a decrease in bonuses awarded to executive personnel. General and
administrative expenses, being relatively fixed in nature, can be expected to
fluctuate as a percentage of net sales from period to period.
Fiscal 1999 Compared to Fiscal 1998
The majority of the increase in general and administrative expenses for the year
ended March 31, 1999 was attributable to higher compensation-related expenses.
Specifically, the Company added information system staff and devoted more
resources to internal workstation and network support. Depreciation associated
with the Company's continued investment in its management information system
infrastructure as well as higher software costs also contributed to the
increase. The Company's international general and administrative expenses also
increased when compared to the prior year, due to the acquisition of its
European distributor in mid-fiscal 1998, and to the conversion of its Australian
and UK offices from branch to subsidiary operations.
23
LICENSE FEE
In October 1999, the Company entered into a cross-licensing agreement with
Lucent Technologies, Inc. under which the parties released each other from
claims of patent infringement and granted each other a five year license to use
the respective patents. Based on an assessment of the age and use of the
technology of the underlying Lucent patents, the related claims by Lucent and
the Company's recent revenue composition, the Company estimated that $2.5
million of the net settlement was attributable to the release from claims
relating to prior periods. The remaining balance of $0.5 million was estimated
to be attributable to the five year license to use the Lucent patents, net of
the estimated value of the Company's patented technology being licensed to
Lucent. Accordingly, the $2.5 million has been recognized as a License Fee for
the year ended March 31, 2000. The remaining balance of $0.5 million is
capitalized as other long-term assets and is amortized on a straight-line basis
as cost of goods sold over the estimated remaining useful life of three years.
See Note 9 of "Notes to Consolidated Financial Statements."
INTEREST EXPENSE AND INTEREST INCOME
2000 Change 1999 Change 1998
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest expense ($338) 227.7% ($103) 100.0%
Interest income $849 102.6% $419 (26.9%) $573
- ---------------------------------------------------------------------------------------------
Fiscal 2000 Compared to Fiscal 1999
Interest expense increased to $0.3 million in 2000 from $0.1 million in 1999.
The increase in interest expense for the fiscal year ended March 31, 2000 was
primarily attributable to $4.0 million advanced under a borrowing agreement with
a significant customer, which was converted into common stock in connection with
the exercise of a stock purchase warrant. The increase in interest income was
primarily due to higher average invested cash and marketable security balances.
Average invested cash and marketable security balances increased as a result of
the $18.0 million sale of technology assets on June 30, 1999, described below.
Balances also increased due to the exercise of employee stock options and the
stock purchase warrant. See "Liquidity and Capital Resources."
Fiscal 1999 Compared to Fiscal 1998
The Company incurred interest expense in 1999 of $0.1 million as it borrowed
against its line of credit to fund operations. Interest income decreased to $0.4
million in 1999 from $0.6 million in 1998. The decrease in interest income was
primarily attributable to lower average invested cash and marketable security
balances as the Company allowed its investments to mature without reinvesting
the proceeds. Average cash and marketable security balances decreased due
primarily to the Company's net loss.
GAIN ON SALE OF TECHNOLOGY
On June 30, 1999, the Company sold real-time Internet communications technology
and related intangible assets (the Technology) for $18.0 million. Legal and
compensation costs associated with the transaction were approximately $1.5
million, resulting in a $16.5 million gain, or $13.0 million after tax. See Note
10 of "Notes to Financial Statements."
24
IMPAIRMENT OF STRATEGIC INVESTMENT
During the year ended March 31, 2000, the Company recorded a $1.2 million
impairment loss on a strategic investment. The loss represented the Company's
$1.0 million investment for an 8% ownership interest in a small hardware vendor,
plus an additional $169,000 temporarily advanced for working capital. Greater
than one-half of the vendor's total sales were made to the Company. The
impairment was recorded due to the uncertain financial viability of the vendor
due to the Company's selection of an alternate source for the components
supplied by the vendor. See Note 11 of "Notes to Consolidated Financial
Statements."
INCOME TAX BENEFIT (PROVISION)
2000 Change 1999 Change 1998
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
Income tax ($2,015) 254.1% $1,308 89.8% $689
Effective tax rate 24.4% 21.3% 127.8%
- ---------------------------------------------------------------------------------------------
Variations in the customary relationship between the income tax provision and
the statutory income tax rate of 34% result from certain nondeductible expenses,
tax exempt investment income, research and development tax credits, and the
benefit provided by the Company's foreign sales corporation. The Company expects
the effective tax rate to fluctuate in the future due to the impact of utilizing
net operating loss carryforwards and research and development tax credits, tax
exempt interest income, and tax benefits of the foreign sales corporation. In
addition, the Company anticipates that its operations may fall under the
jurisdiction of additional taxing authorities as its operations continue to
expand into new geographical areas.
Fiscal 2000 Compared to Fiscal 1999
The Company's effective tax rate was 24.4% in the fiscal year ended March 31,
2000. As a result of the first quarter gain on the sale of technology assets
described above, the Company reversed the previously established valuation
allowance of $885,000 on deferred tax assets. Research and Development credits
reduced the Company's effective tax rate by 5%.
Under Financial Accounting Standard No. 109, "Accounting for Income Taxes" (FAS
109), a deferred tax asset is recognized for deductible future temporary
differences. A valuation allowance against this asset is recognized if, based
upon the weight of the available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. FAS 109 requires
an assessment of all available evidence both positive and negative. For the year
ended March 31, 2000 the Company established a full valuation allowance of
$3,361,000 against its deferred tax assets, primarily due to the Company's
operating losses generated in each of the past three years. As a result, the
Company will generally not record financial tax expense or benefit until such
time it is determined that its deferred tax assets are realizable, and that a
valuation allowance is no longer necessary. There can be no assurance that the
Company will generate taxable income or that all of its deferred tax assets will
be realized. See Note 6 of the "Notes to Consolidated Financial Statements."
During fiscal 2000 the Company generated net operating loss carryforwards
primarily attributable to significant tax deductions related to the exercise of
stock options in the fourth quarter of fiscal 2000. These tax deductions
resulted in the Company being able to file for a refund of income taxes
previously paid. These deductions also directly impacted the need to establish a
full valuation allowance, as discussed above. Accordingly, the charge for the
establishment of the valuation allowance has been
25
recorded net of the benefit of stock option deductions recorded in stockholders'
equity. Future reductions of this valuation allowance, if any, will be recorded
as an increase in stockholders' equity.
Fiscal 1999 Compared to Fiscal 1998
The Company's effective tax rate decreased to 21.1% (benefit rate as a result of
pretax losses) in 1999 from 127.8% in 1998. During the year the Company
exhausted all net operating loss (NOL) carrybacks. Remaining NOL's were carried
forward. As a result of the Company's pretax losses for the year ended March 31,
1999, the Company received a refund of income taxes previously paid.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
2000 Change 1999 Change 1998
- -----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Net income (loss) $6,127 2,246.3% ($4,916) (2,846.4%) $179
Percentage of net sales 8.2% (7.8%) 0.3%
Earnings (loss) per share:
Basic $0.62 2,192.3% ($0.52) (2,700.0%) $0.02
Diluted $0.57 2,096.2% ($0.52) (2,700.0%) $0.02
- -----------------------------------------------------------------------------------------------
Fiscal 2000 Compared to Fiscal 1999
The net income and earnings per share for the year ended March 31, 2000
increased in comparison to 1999 primarily as a result of the gain on sale of
technology assets described above. In addition, operating results before
one-time items improved as revenue growth exceeded growth in operating expenses.
An increase in gross margin percentage also contributed to the improvement in
net income and earnings per share. Exercises of employee stock options and stock
warrants by the Company's largest customer resulted in an increase in the number
of common and common equivalent shares outstanding when compared to the prior
year.
Fiscal 1999 Compared to Fiscal 1998
Net income (loss) and earnings (loss) per share for the year ended March 31,
1999 decreased in comparison to 1998 was primarily a result of the increased
operating expenses, as discussed above under the individual income statement
captions. The Company believes these investments were essential to prepare for
new product direction and future growth. These investments in the development,
marketing and support of new products continued into the next year. Furthermore,
the declines in gross margin as a percentage of net sales also contributed to
the decreases in net income and earnings per share. The number of common and
common equivalent shares outstanding during the two periods was comparable.
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities increased to
$23.2 million, or 43.8% of total assets, at March 31, 2000 from $4.5 million, or
11.6% of total assets, at March 31, 1999. The increase is due primarily to the
$18.0 million proceeds from the sale of technology during the quarter ended June
30, 1999 (see above). The Company also received proceeds of $6.5 million from
the exercise of stock warrants by a significant customer (see below), as well as
additional proceeds from the exercise of employee stock options. The proceeds
from these transactions were offset by the Company's net operating loss. Cash
flow used in operations totaled $7.6 million during the twelve months ended
March 31, 2000 compared to $727,000 in 1999. The Company had net working capital
of $35.0 million at March 31, 2000.
26
Accounts receivable, net of allowances, decreased to $8.1 million at March 31,
2000 from $13.7 million at March 31, 1999. The decrease in accounts receivable
balances was due primarily to lower net sales in the fourth quarter of the
current fiscal year compared to net sales in the comparable quarter of the prior
fiscal year. Days' sales outstanding at March 31, 2000 declined approximately
2.6% from March 31, 1999. Inventory increased to $8.5 million at March 31, 2000
from $5.9 million at March 31, 1999, as the Company secured a large purchase of
PC platforms at favorable terms during the quarter ended December 31, 1999.
During the fiscal year ended March 31, 2000 the Company made $3.0 million in
capital expenditures, compared to $2.8 million during 1999. Approximately $1.2
million of the additions during the year ended March 31, 2000 represented the
Company's investment in a new accounting and manufacturing business system that
was implemented during the year. The majority of the remaining capital
expenditures during fiscal year 2000 consisted of computer hardware and
software used to augment the Company's management information systems
infrastructure, as well as additions and upgrades of computer equipment for
employees. The Company currently has no specific commitments with respect to
future capital expenditures, but expects to spend an aggregate of
approximately $2.0 million for the next fiscal year.
The Company has a $10.0 million revolving credit line from a bank for financing
working capital. No borrowings were outstanding under this agreement as of March
31, 2000. The agreement expires on June 30, 2000. The Company is currently in
the process of negotiating a renewal. There is no guarantee that the Company
will be able to amend or extend its existing agreeement or that alternative
financing will be available in amounts or at terms favorable to the Company.
Should the Company be unsuccessful in extending its existing revolving line of
credit facility, there is no assurance that the Company will have sufficient
resources to finance its operations.
During the year ended March 31, 2000, the Company's largest customer exercised a
warrant and purchased 1,000,000 shares of the Company's common stock at $6.50
per share. The customer completed the transaction in two steps. On November 5,
1999 the customer exercised a warrant and purchased 615,384 shares, canceling
the outstanding $4.0 million balance on a related borrowing agreement initiated
earlier in fiscal 2000. On March 8, 2000 the customer exercised and purchased
the remaining 384,616 shares for $2.5 million.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations and the financing
arrangements described above will provide sufficient resources to finance
operations for at least the next year.
YEAR 2000 UPDATE
An issue that affected the Company and others is the inability of many computer
systems and applications to correctly process date data in and between the
twentieth and twenty-first centuries. The Company completed its assessment of
the year 2000 readiness of its internal business process systems and
applications and crossed in January 2000 without significant disruption. The
Company believes that its internal systems are year 2000 ready, but intends to
continue monitoring its systems through the year 2000. The Company has spent
approximately $100,000 to replace or upgrade internal systems solely to achieve
year 2000 readiness, and does not anticipate further expenditures.
The Company also implemented programs to assist customers with older versions of
its products in obtaining year 2000 readiness by making software upgrades or
replacement hardware available and offering programs for migrations to current
product versions. The Company estimates that the cost of creating software
patches and administering its upgrade programs for customers was approximately
$400,000, and does not anticipate further expenditures. However, the Company is
dependent on its customers to have taken any necessary steps, and if any
customers have not or do not make any necessary modifications, conversions,
migrations, or upgrades, it could have a material adverse effect on the Company
in the form of legal costs or the loss of customers.
The Company has been served with four class action lawsuits, one each in
Alabama, Indiana, Massachusetts, and Texas state courts, related to the alleged
inability of the Company's Replay, Replay
27
Plus and Repartee products released prior to Repartee 7.44 to function properly
with respect to the year 2000. The plaintiffs in the suits seek to require the
Company to remedy the alleged defect in these products and also seek damages.
The Company has filed its answers in Alabama, Indiana, Massachusetts, and
Texas. The Company believes that the claims stated in the cases are without
merit, that the cases are not appropriate for class action, and the Company
intends to defend itself vigorously. In the Massachusetts action, the
Massachusetts Superior Court has denied without prejudice plaintiff's motion for
class certification on the grounds that the plaintiff failed to meet its burden
in establishing the requirements for class certification. Due to the preliminary
status of the proceedings, it is not possible to predict the ultimate outcome of
the cases or their financial impact on the Company.
The Company contacted its third-party suppliers to assess and seek reasonable
assurances concerning the year 2000 readiness of their products and has
contacted its primary suppliers concerning the year 2000 readiness of their
internal systems as well. The Company does not believe its third-party suppliers
experienced any significant disruptions. The Company also requested and assessed
any available information from major customers concerning their internal year
2000 readiness. The Company does not believe its major customers experienced any
significant disruptions.
Assessments of the potential effects of year 2000 issues varied widely among
different consultants, commentators, economists, governments and companies, and
although the most dire predictions appear not to have come true, there is still
some risk of continuing impact. Because of this uncertainty, the Company intends
to continue its monitoring, but believes most of the risk has been avoided.
RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain statements contained herein are dependent upon numerous factors,
circumstances and contingencies. The following factors, while not all inclusive,
could cause actual results to differ materially from historical results or those
anticipated:
- - Competitive pressure from new entrants to the marketplace, including large
software companies and telephone switch manufacturers with greater
resources, could adversely affect the Company's business. Introduction of
new products by the Company or its competitors and the extent of their
success or failure could produce significant fluctuations in market demand
for the Company's products. New product introductions by the Company may be
delayed, resulting in lost customers or allowing competitors to gain market
share.
- - Increasing price competition in the Company's marketplace could influence
the amount and timing of changes in the Company's prices to its customers,
and therefore negatively impact the Company's gross margins. Gross margins
may also either increase or decrease as a result of further shifts in
product mix depending upon the percentage of net sales contributed by
software only sales in comparison to turnkey system sales.
- - The extent and timing of new product development and the need or desire to
modify existing products may cause notable increases in research and
development spending.
- - If the Company experiences delays in shipments (whether due to delays from
customers or as a result of the timing of new product introductions by the
Company) in a given quarter, or if new order bookings do not meet
anticipated levels, substantial fluctuations in operating results will
occur. Frequently, these developments may not become apparent to the
Company until near or at the end of the quarter. In addition, changes in
the product and channel mix, and the timing of customer orders, will
continue to affect the variability of quarterly results of operations in
future quarters.
- - Dependence on continued sales to significant customers could have a
significant impact on the Company's operations as there is no assurance
that any particular customer will continue to purchase similar volumes of
the Company's products.
28
- - Risks associated with the Company's effort to move into the larger end user
market, such as product acceptance, long sales cycles and failure to have
the adequate infrastructure to support large enterprises, could affect the
Company's future performance.
- - Growth strategies involving acquisitions, strategic relationships, and
vendor relationships may encounter legal and/or unforeseeable business
risks beyond the Company's control.
- - Risks associated with foreign operations such as gains and losses on the
conversion of foreign currencies to U.S. dollars; export-import
regulations; customs matters; foreign collection problems; and military,
political and transportation risks may significantly affect the Company's
operating results. In addition, the Company's international sales involve
additional risks associated with governmental regulation, product
adaptation to local languages and switching systems, and uncertainties
arising from local business practices and cultural considerations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not use or hold any derivative financial instruments. The
Company is exposed to both foreign currency and interest rate risk, either of
which could have an adverse effect on the Company's results of operations,
financial position or cash flows. The Company has assets and liabilities
denominated in certain foreign currencies related to international sales,
distribution and support subsidiaries. The Company has not hedged its
translation risk on these assets and liabilities as the Company has the ability
to hold them for an indefinite period and does not expect that a sudden or
significant change in foreign exchange rates would have a material impact on
results of operations, financial position or cash flows. The Company generally
invests in high-grade commercial paper and municipal securities, which are
classified as available-for-sale, to minimize its exposure to interest rate
risk. The Company believes that the market risk associated with its marketable
security holdings is not material. See Note 2 and Note 13 of "Notes to
Consolidated Financial Statements."
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended March 31,
----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Net sales $74,427 $62,640 $53,385
Cost of goods sold 31,135 28,884 22,983
-------------- -------------- --------------
Gross profit 43,292 33,756 30,402
Operating expenses:
Research and development 15,848 14,450 9,752
Sales and marketing 23,116 17,613 15,585
General and administrative 9,383 8,161 6,177
Non-recurring charge for licensed
technology 2,521 - -
-------------- -------------- --------------
Total operating expenses 50,868 40,224 31,514
-------------- -------------- --------------
Operating income (loss) (7,576) (6,468) (1,112)
Interest expense (338) (103) -
Interest income 849 419 573
Impairment of strategic investment (1,169) - -
Gain on sale of technology assets 16,504 - -
-------------- -------------- --------------
Income (loss) before income taxes and
minority interest 8,270 (6,152) (539)
Income tax benefit (provision) (2,015) 1,308 689
Minority interest in (earnings) loss
of consolidated subsidiary (128) (72) 29
-------------- -------------- --------------
NET INCOME (LOSS) $6,127 $(4,916) $ 179
============== ============== ==============
EARNINGS (LOSS) PER SHARE:
Basic $0.62 $(0.52) $0.02
============== ============== ==============
Diluted $0.57 $(0.52) $0.02
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
30
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
March 31,
-------------------------------------
2000 1999
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,557 $ 1,692
Marketable securities 3,907 1,113
Accounts receivable, less allowances
of $1,675 ($1,700 in 1999) 8,064 13,676
Inventories 8,546 5,924
Income taxes receivable 3,356 741
Deferred tax asset - 1,650
Prepaid expenses and other assets 1,682 3,217
---------------- ----------------
Total current assets 41,112 28,013
Marketable securities 3,745 1,701
Furniture and equipment, net 5,793 4,602
Other assets 2,399 4,377
---------------- ----------------
TOTAL ASSETS $53,049 $38,693
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,681 $5,001
Accrued compensation and benefits 2,553 2,500
Other accrued expenses 1,831 2,206
---------------- ----------------
Total current liabilities 6,065 9,707
Commitments
Minority interest 72 (55)
Stockholders' equity:
Preferred stock, no par value:
Authorized shares - 2 million - none outstanding
Common stock, no par value:
Authorized shares - 60 million
Issued and outstanding shares - 11,163,792 at March 31,
2000 and 9,333,728 at March 31, 1999 26,798 17,314
Retained earnings 20,013 13,980
Accumulated other comprehensive income 101 20
Less 790,306 repurchased shares at March 31, 1999 - (2,273)
---------------- ----------------
Total stockholders' equity 46,912 29,041
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $53,049 $38,693
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
31
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
--------------------------------
2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $ 6,127 $ (4,916) $ 179
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 2,034 1,882 1,494
Provisions for accounts receivable 93 287 (155)
Deferred income taxes 1,669 (306) (347)
Loss (gain) on disposal of equipment (12) 59 49
Minority interest in earnings (loss) of
consolidated subsidiary 128 72 (29)
Gain on sale of technology assets (16,504) -- --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 5,519 (2,572) (826)
Decrease (increase) in inventories (2,622) 4,198 (3,113)
Decrease (increase) in prepaid expenses
and other assets 843 (2,394) (2,430)
Increase (decrease) in accounts payable (3,320) 1,057 1,602
Increase (decrease) in other liabilities (1,577) 1,906 (354)
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES (7,622) (727) (3,930)
INVESTING ACTIVITIES
Purchases of marketable securities (9,890) -- (2,294)
Proceeds from sales of marketable securities 4,997 4,258 9,006
Proceeds from sale of technology assets 18,000 -- --
Acquisition of business -- -- (467)
Purchases of furniture and equipment (3,008) (2,766) (2,495)
-------- -------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 10,099 1,492 3,750
FINANCING ACTIVITIES
Proceeds from employee stock option and stock
purchase plans 4,847 484 644
Effect of Phonesoft merger (76) -- (17)
Proceeds from exercise of common stock warrant 6,500 -- --
Repurchase of common stock -- (1,131) (416)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,271 (647) 211
Effect of exchange rate changes on cash
and cash equivalents 117 (4) 5
-------- -------- --------
Increase in cash and cash equivalents 13,865 114 36
Cash and cash equivalents at beginning of year 1,692 1,578 1,542
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 15,557 $ 1,692 $ 1,578
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares)
Common Stock Accumulated
----------------------- Other Total
Shares Retained Comprehensive Repurchased Stockholders'
Outstanding Amount Earnings Income Shares Equity
----------------------------------------------------------------------------
Balance at April 1, 1997 9,406,316 $17,004 $19,008 $7 $(1,952) $34,067
Issuance of shares upon
exercise of stock options 107,426 27 (160) - 451 318
Issuance of shares related to
employee stock purchase plan 64,158 124 (12) - 214 326
Tax benefit related to
employee stock plans - 108 - - - 108
Repurchase of common stock (80,000) - - - (416) (416)
Comprehensive income:
Net unrealized gain on
marketable securities - - - 30 - 30
Translation adjustment 3 - 3
Net income - - 179 - - 179
-------------
Total 212
----------------------------------------------------------------------------
Balance at March 31, 1998 9,497,900 17,263 19,015 40 (1,703) 34,615
Issuance of shares upon
exercise of stock options 7,500 1 (11) - 22 12
Issuance of shares related to
employee stock purchase plan 148,328 41 (108) - 538 472
Tax benefit related to
employee stock plans - 9 - - - 9
Repurchase of common stock (320,000) - - - (1,131) (1,131)
Comprehensive income:
Net unrealized loss on
marketable securities - - - (11) - (11)
Translation adjustment - - - (9) - (9)
Net loss - - (4,916) - - (4,916)
-------------
Total (4,936)
----------------------------------------------------------------------------
Balance at March 31, 1999 9,333,728 17,314 13,980 20 (2,273) 29,041
Issuance of shares upon
exercise of stock options 724,546 3,808 (10) - 372 4,170
Issuance of shares related to
employee stock purchase plan 105,518 455 (4) - 226 677
Tax benefit related to
employee stock plans - 241 - - - 241
Conversion of debt and
exercise of warrants 1,000,000 4,976 - - 1,675 6,651
Contributed capital, Phonesoft - 4 - - - 4
Dividends, Phonesoft - - (80) - - (80)
33
Comprehensive income:
Net unrealized loss on
marketable securities - - - (36) - (36)
Translation adjustment - - - 117 - 117
Net income - - 6,127 - - 6,127
-------------
Total 6,208
----------------------------------------------------------------------------
Balance at March 31, 2000 11,163,792 $26,798 $20,013 $101 $0 $46,912
============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
34
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Active Voice Corporation (the Company) is a leading manufacturer of call
processing, including unified messaging systems and PC-based computer telephony
integration (CTI) solutions. The Company's products are sold worldwide through a
global network of independent telecommunications dealers, telephone equipment
manufacturers and computer resellers.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. Intercompany accounts and transactions have
been eliminated.
Foreign Currency Translation
The local currency is considered the functional currency of the Company's
foreign operations. Financial statements of foreign subsidiaries are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and a weighted average exchange rate for each period for
revenues and expenses. Resulting translation adjustments are excluded from
results of operations and reported in accumulated other comprehensive income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash equivalents. Excess cash
is primarily invested in treasury bills, securities of government agencies, and
commercial paper. Cash equivalents are carried at amortized cost, which
approximates fair market value.
Marketable Securities
Marketable securities are carried at market value. Market values are determined
based on quoted market prices on the balance sheet date. Marketable securities
are classified in the balance sheet as current and noncurrent based on maturity
dates and the Company's expectation of sales and redemptions in the following
year.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined
on a first-in, first-out (FIFO) basis.
The Company currently purchases the majority of its voice boards, a significant
component of its products, from one supplier. Although there are a limited
number of manufacturers of voice boards, management believes that other
suppliers could provide similar product on comparable terms. A change
35
in suppliers, however, could cause a delay in manufacturing and a possible loss
of sales, which would adversely affect operating results.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed using
both accelerated and straight-line methods over the estimated useful lives of
the assets. Estimated useful lives are as follows: furniture and fixtures, seven
years; office and computer equipment, three to five years; and leasehold
improvements, the lesser of ten years or the remainder of the lease term.
Repairs and maintenance that do not improve or extend the lives of the
respective assets are expensed in the period incurred.
Effective April 1, 1998, the Company changed its method of depreciation for
furniture and equipment placed in service after March 31, 1998 from an
accelerated method to the straight-line method and shortened the estimated
useful lives of some computer equipment from five years to three years. The
Company changed its method of depreciation based on management's belief that the
straight-line method provides a better matching of revenue and expense and that
it is the predominant industry practice. Estimated useful lives of computer
equipment were shortened due to rapid technological obsolescence associated with
these assets. These changes did not have a material effect on the Company's
results of operations for the years ended March 31, 2000 or 1999.
Goodwill
Goodwill represents costs in excess of the fair market value of net assets of
acquired businesses. Goodwill is being amortized over periods ranging from three
to five years, using the straight-line method. The carrying value of goodwill is
reviewed periodically. In the event that the sum of expected undiscounted future
cash flows is less than the reported book value, the carrying value will be
reduced to its fair value. Cumulative amortization expense as of March 31, 2000
was $641,000, and amortization expense for the years ended March 31, 2000, 1999
and 1998 amounted to $206,000, $229,000 and $182,000, respectively. The net book
value of goodwill, which is included in other assets, was $271,000 at March 31,
2000.
Revenue Recognition
The Company's revenues primarily consist of system sales and software licenses.
System sales typically include both software and hardware components. Software
licenses consist of software applications that operate on industry standard
hardware that is available from the Company and other vendors. Revenue from
system sales and software licenses is recognized upon shipment of the product to
the customer. The Company accrues estimated costs of no charge telephone support
to customers, which are not significant to the individual sale and typically
provided within one month from the date of shipment, as the related revenues are
recognized. The Company does not offer unspecified upgrades or enhancements to
its products. Revenue from training services is not significant and is
recognized as the related services are provided.
The Company allows product returns without charge within the initial thirty days
following the date of sale and provides an allowance for estimated returns based
on historical experience. The Company generally offers a one-year warranty on
its software products. As the cost of software replacement under the warranty is
not significant, the Company does not provide for future warranty claims.
Software Development Costs
No software development costs have been capitalized to date. Under the Company's
current practices of developing new products and enhancements, the technological
feasibility of the underlying software is not established until substantially
all related product development is complete and the product is released for
production.
36
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred $113,000,
$263,000 and $172,000 in advertising costs during the years ended March 31,
2000, 1999 and 1998, respectively.
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation cost for stock options is measured as the excess,
if any, of the fair value of the Company's common stock at the date of the
grant, over the stock option exercise price.
Income Taxes
The provision for income taxes includes federal and state taxes currently
payable and deferred taxes arising from temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes as well as operating loss and tax
credit carryforwards. Deferred income taxes have been recorded using the
liability method in recognition of these temporary differences.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share is computed by dividing net income by the sum of the weighted
average number of shares of common stock outstanding plus the net effect of
dilutive common stock equivalents outstanding during the period using the
treasury stock method. Common stock equivalents consist of employee stock
options.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Unrealized gains and losses on available-for-sale
securities and foreign currency translation adjustments are reported as
components of other comprehensive income.
Business Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company maintains single sales, marketing, research and
development and administrative functions for all of its products and geographic
regions. Based on the criteria of SFAS No. 131, the Company has determined that
it has a single reportable segment, computer telephony products.
Recent Accounting Standards
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 did not impact the
Company's revenue recognition policies and is not anticipated to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows. The Company will continue to monitor the possible effect of
further interpretations of SAB 101.
37
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." As amended by
SFAS No. 137, SFAS No. 133 is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts, and
for hedging activities. The Statement requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
these derivatives at fair value. SFAS No. 133 also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. The Company does not expect the adoption of this
Statement to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.
NOTE 2. MARKETABLE SECURITIES
Management determines the appropriate classification of marketable debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Management has classified the Company's marketable
securities as available-for-sale. Accordingly, the securities are carried at
fair value, with unrealized holding gains and losses excluded from net income
and recorded (net of tax) in accumulated other comprehensive income until
realized. Interest, dividends, and realized gains and losses are included in net
income.
The following is a summary of marketable securities at March 31 (in thousands),
all of which are classified as available-for-sale:
2000 Amortized Cost Gross Gross
Unrealized Unrealized Estimated Fair
Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
Municipal bonds:
Due in one year or less $3,914 $ 1 ($ 8) $3,907
Due after one year through three
years 3,758 2 (15) 3,745
- ----------------------------------------------------------------------------------------------------------
$7,672 $3 ($23) $7,652
- ----------------------------------------------------------------------------------------------------------
Gross Gross
1999 Amortized Cost Unrealized Unrealized Estimated Fair
Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
Municipal bonds:
Due in one year or less $1,107 $ 6 $0 $1,113
Due after one year through three
years 1,673 28 $0 1,701
- ----------------------------------------------------------------------------------------------------------
$2,780 $34 $0 $2,814
- ----------------------------------------------------------------------------------------------------------
Net unrealized holding gains (losses) of $(36,000), $(11,000) and $30,000, net
of federal income taxes were included in comprehensive income during the years
ended March 31, 2000, 1999 and 1998, respectively.
NOTE 3. INVENTORIES
Inventories are comprised of the following (in thousands):
March 31, 2000 1999
- --------------------------------------------------------------------------------------------------------
Computer equipment $6,156 $3,049
Custom component parts 1,297 1,918
Supplies 1,093 957
- --------------------------------------------------------------------------------------------------------
$8,546 $5,924
- --------------------------------------------------------------------------------------------------------
38
NOTE 4. FURNITURE AND EQUIPMENT
Major classes of furniture and equipment are as follows (in thousands):
March 31, 2000 1999
- --------------------------------------------------------------------------------------------------------
Office and computer equipment $9,505 $7,147
Furniture and fixtures 2,564 2,390
Leasehold improvements 914 587
- --------------------------------------------------------------------------------------------------------
12,983 10,124
Accumulated depreciation (7,190) (5,522)
- --------------------------------------------------------------------------------------------------------
$5,793 $4,602
- --------------------------------------------------------------------------------------------------------
NOTE 5 . LINE OF CREDIT
The Company has a $10.0 million revolving line of credit from a bank secured by
the Company's marketable securities portfolio. Borrowings under this agreement
bear interest at the bank's prime rate less .25% or at LIBOR plus 1.5%, at the
election of the Company. At March 31, 2000 and 1999 there were no borrowings
outstanding under this agreement. This agreement contains financial covenants
that require the Company to maintain certain financial ratios. Borrowings under
this agreement are payable on demand if these covenants are not met, or upon the
expiration of the agreement in June 2000.
NOTE 6. INCOME TAXES
Income (loss) before income taxes consisted of (in thousands):
Year ended March 31, 2000 1999 1998
- ------------------------------------------------ ----------------- ------------------ -----------------
Domestic $9,321 $(5,517) $(518)
Foreign (1,051) (635) (21)
- ------------------------------------------------ ----------------- ------------------ -----------------
$8,270 $(6,152) $(539)
- ------------------------------------------------ ----------------- ------------------ -----------------
The benefit (provision) for income taxes, primarily related to U.S. federal
income taxes, is as follows (in thousands):
Year ended March 31, 2000 1999 1998
- ------------------------------------------------ ----------------- ------------------ -----------------
Current taxes on income $(3,701) $1,003 $342
Deferred income taxes 1,686 305 347
- ------------------------------------------------ ----------------- ------------------ -----------------
$(2,015) $1,308 $689
- ------------------------------------------------ ----------------- ------------------ -----------------
Significant components of the Company's deferred tax asset are as follows (in
thousands):
March 31, 2000 1999
- ----------------------------------------------------------- ---------------------- ---------------------
Accounts receivable allowances $ 570 $ 578
Inventory valuation allowances 190 233
Accrued compensation and benefits 391 292
Accrued royalties 106 318
Net operating loss and tax credit carryforward 1,273 885
Other items, net 831 229
- ----------------------------------------------------------- ---------------------- ---------------------
Total deferred tax asset before valuation allowance 3,361 2,535
Valuation allowance (3,361) (885)
- ----------------------------------------------------------- ---------------------- ---------------------
Net deferred tax asset $ 0 $1,650
- ----------------------------------------------------------- ---------------------- ---------------------
39
The Company is required to establish a valuation allowance to reduce deferred
tax assets if, based on the weight of the available evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. In determining the need for a valuation allowance, the Company is
required to assess all available evidence, both positive and negative.
Management has determined that a full valuation allowance of $3,361,000 against
its deferred tax assets is necessary at March 31, 2000, attributable primarily
to uncertainties about the Company's ability to use net operating loss
carryforwards (NOLs) and tax credit carryforwards, including foreign NOLs.
The Company believes that had it not been for the substantial stock option
deductions during the year ended March 31, 2000, the current deferred tax assets
would have been realizable as a result of carryback opportunities. Under SFAS
109, any increases or decreases in the valuation allowance caused by items other
than income from continued operations, such as stock option deductions, should
not be recorded through operations, but recorded as an adjustment to the stock
option benefit recorded in stockholders' equity. Until such time that the
Company establishes a track record of operating profitability, or identifies a
tax strategy allowing the recoverability of deferred tax assets, any future
changes in deferred tax assets will be offset by a corresponding increase or
decrease in the valuation allowance. When and if the Company determines it does
not require a valuation allowance against its deferred tax assets as a result of
the above, part of the resulting benefit will be recorded as an increase to
stockholders' equity to the extent of the $3,361,000 valuation allowance
established in fiscal 2000, which was related to the benefit of the stock option
exercises. The Company does not intend to record tax benefits from losses or tax
expense on profits until such time as it becomes more likely than not that the
deferred tax assets can be realized through operations.
The principal reason for variations in the customary relationship between the
provision for income taxes and the statutory tax rate applied to income before
taxes is the effect of certain nondeductible expenses, nontaxable income, and
the utilization of net operating loss carryforwards and research and development
tax credits. Reconciliation from the U.S. statutory rate to the effective tax
rate is as follows:
Year ended March 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
Tax at U.S. statutory rate 34.0% 34.0% 34.0%
Research and development credit (5.1) 5.0 46.2
Tax exempt income (0.7) 1.3 30.7
Foreign sales corporation benefit (1.3) 2.1 18.9
Valuation allowance change (6.0) (14.3)
Foreign losses providing no current
benefit 4.9 (6.3)
Other items, net (1.4) (0.5) (2.0)
- -------------------------------------------------------------------------------------------------------
24.4% 21.3% 127.8%
- -------------------------------------------------------------------------------------------------------
As of March 31, 2000, the Company has net operating loss and research and
development tax credit carryforwards of approximately $1,168,000 and $730,000,
respectively, which will begin to expire from 2011 to 2019. Approximately
$2,415,000 of foreign net operating loss carryforwards are available to offset
future foreign taxable income. Certain foreign net operating losses begin to
expire in the year 2005. The Company made cash payments of income taxes, net of
refunds received, of $2.7 million during the year ended March 31, 2000. The
Company received a net refund of income taxes previously paid totaling $0.9
million during the year ended March 31, 1999, and made cash payments of income
taxes, net of refunds received, of $0.2 million during the year ended March 31,
1998.
NOTE 7. LEASE COMMITMENTS
The Company leases its facilities under operating leases with initial terms of 5
to 12 years. Certain leases contain renewal and escalation clauses and space
expansion provisions. The Company incurred $2.9
40
million, $2.5 million and $1.7 million of rent expense for the fiscal years
ended March 31, 2000, 1999 and 1998, respectively.
Future minimum rental payments required per fiscal year under leases with
non-cancelable lease terms in excess of one year at March 31, 2000 are as
follows (in thousands):
- ------------------------------------------------------------- ------------------------------------------
2001 $ 3,369
2002 3,413
2003 3,618
2004 3,619
2005 3,461
Thereafter 15,351
- ------------------------------------------------------------- ------------------------------------------
$32,831
- ------------------------------------------------------------- ------------------------------------------
In connection with the execution of a lease and related amendments, the Company
prepaid rent by paying certain architectural and real estate fees and costs on
behalf of the lessor. The prepayments of $141,000 and $562,000 at March 31, 2000
and 1999, respectively, bear interest at the prime rate plus 2% and are included
in prepaid expenses in the accompanying consolidated balance sheets. The
prepayments are used to offset a portion of the monthly lease payments.
NOTE 8. STOCKHOLDERS' EQUITY
Stock Split
On March 22, 2000, the Company effected a 2-for-1 common stock split in the form
of a stock dividend for shareholders of record on March 8, 2000. The
accompanying consolidated financial statements have been restated to reflect the
stock split.
Stock Warrants
During the year ended March 31, 2000, the Company's largest customer exercised a
warrant for the purchase of 1,000,000 shares of the Company's common stock at
$6.50 per share in a private offering. The customer completed the transaction in
two steps. On November 5, 1999 the customer exercised a warrant for the purchase
of 615,384 shares, canceling the outstanding $4.0 million balance on a related
borrowing agreement initiated earlier in fiscal 2000. On March 8, 2000 the
customer exercised the balance of the warrant for the purchase of the remaining
384,616 shares for $2.5 million.
Stock Options
The Company has stock option plans under which employees, officers and directors
may be granted options to purchase the Company's common stock. Stock options are
granted at or above fair market value, typically vest over three to four years
and expire ten years from the date of grant. At March 31, 2000 there were
3,204,858 shares of common stock reserved for future issuance under existing
stock option plans of which 326,836 shares represent options available for
future grant. Options which expire or are terminated revert back to shares
available for future grant with the exception of 37,000 options outstanding from
dormant plans.
Had compensation cost for stock option grants been determined using the fair
value method consistent with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net income (loss)
and earnings (loss) per share would have been reduced to the following pro forma
amounts (in thousands, except per share data):
41
Year Ended March 31, 2000 1999 1998
- ------------------------------------------------------ ----------------- ---------------- ------------------
Net income (loss) - as reported $ 6,127 $(4,916) $179
Net income (loss) - pro forma $ 3,666 $(5,904) $(1,118)
Basic earnings (loss) per share - pro forma $ 0.37 $(0.63) $ (0.11)
Diluted earnings (loss) per share - pro forma $ 0.34 $(0.63) $ (0.11)
- ------------------------------------------------------ ----------------- ---------------- ------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: risk free interest rates of
6.0%, 5.0% and 6.0%, respectively; expected volatility of 75%, 60% and 55%,
respectively; expected life of five years; and no dividends. The weighted
average fair value of options granted during the years ended March 31, 2000,
1999 and 1998 was $5.25, $2.87 and $3.28, respectively. Because the Statement
No. 123 method of accounting has not been applied to options granted prior to
April 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
A summary of the activity of the Company's stock options is as follows:
2000 1999 1998
-------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Exercise Price Exercise Price Exercise Price
- -------------------------------------------------------------------------------------------------------------
Outstanding,
April 1 1,944,460 $5.94 1,631,582 $6.75 1,199,726 $6.91
Granted 1,849,172 7.99 564,728 5.12 683,184 6.06
Expired (191,064) 5.70 (244,350) 9.72 (143,902) 7.65
Exercised (724,546) 5.75 (7,500) 6.46 (107,426) 2.96
- -------------------------------------------------------------------------------------------------------------
Outstanding,
March 31 2,878,022 $7.32 1,944,460 $5.94 1,631,582 $6.75
- -------------------------------------------------------------------------------------------------------------
Exercisable,
March 31 567,426 $6.63 867,556 $6.43 601,508 $7.26
- -------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
March 31, 2000:
Outstanding Exercisable
------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Prices Options Life (Years) Price Options Price
- --------------------------------------------------------------------------------------------------------
$ 2.63 - $ 5.74 400,224 7.9 $4.78 140,616 $ 4.44
$ 5.75 - $ 5.99 1,197,060 8.6 5.78 170,222 5.85
$ 6.00 - $ 9.99 412,298 7.7 6.99 195,520 7.00
$10.00 - $10.24 753,372 9.6 10.03 0 0
$10.25 - $27.38 115,068 6.3 $15.54 61,068 $12.63
-------------------- -------------
2,878,022 8.5 $7.32 567,426 $6.63
- --------------------------------------------------------------------------------------------------------
42
Employee Stock Purchase Plan
The 1996 Employee Stock Purchase Plan (ESPP) allows employees the right to
purchase the Company's common stock on a quarterly basis at 85% of the lower of
the market price at the beginning or end of each three-month offering period.
Employee contributions to the ESPP totaled $677,000, $472,000 and $326,000 for
the fiscal years ended March 31, 2000, 1999 and 1998, respectively. Shares
issued pursuant to the ESPP totaled 105,518, 148,328 and 64,158 for the fiscal
years ended March 31, 2000, 1999 and 1998, respectively. At March 31, 2000,
349,404 shares were reserved for future issuance pursuant to the ESPP.
Share Repurchase
On March 18, 1997, the Company's Board of Directors authorized the repurchase of
up to 200,000 shares of the Company's common stock. An additional 400,000 shares
were authorized for repurchase on October 16, 1998. During the fiscal year ended
March 31, 2000 no shares were repurchased. In the fiscal years ended March 31,
1999 and 1998, 320,000 and 80,000 shares were repurchased at a total price of
$1,131,000 and $416,000, respectively.
Certain Transactions with Corporate Officers and Others
The Company and two of its directors and principal shareholders, are parties to
an Amended and Restated Buy-Sell Agreement (the "Agreement"). Under the
Agreement, the Company is required to maintain $4.3 million of term insurance on
the life of each shareholder. Upon the death of one of the shareholders, the
Company is required to buy up to one-half of the shareholder's common stock
holdings, and the redemption is fully funded by an insurance policy. The value
of the stock subject to redemption is limited to the exact proceeds of the
insurance policy. The per share price is determined by a formula set forth in
the Agreement, and is to be paid in cash. The Agreement and related insurance
policy were terminated on June 1, 2000.
NOTE 9. TECHNOLOGY LICENSES, LITIGATION AND CONTINGENCIES
The Company is subject to legal proceedings or claims, either asserted or
unasserted, that arise in the ordinary course of business. The voice processing
industry is witnessing numerous allegations of patent infringement among
competitors, and considerable related litigation. The Company has received
claims of patent infringement from several parties, including certain
competitors. In response to certain prior infringement claims, the Company has
pursued and obtained nonexclusive licenses entitling the Company to utilize
certain fundamental patented voice mail and automated attendant functions that
are widely licensed and used in the voice processing industry. The Company's
investigation of other claims has been limited by the claims' lack of
specificity, by the limited availability of factual information and
documentation related to the claims, and by the expense of pursuing exhaustive
patent reviews. The Company believes, based in part upon its investigations and
upon discussions and correspondence with its patent counsel, that its systems do
not currently infringe on valid patents. Although the Company believes that it
currently owns or has adequate rights to utilize all material technologies
relating to its products, as it continues to develop new products and features
in the future, it anticipates that it may receive additional claims of patent
infringement. Such claims could result in the Company's incurring substantial
legal expenses and being required to obtain licenses, pay damages for
infringement, or cease offering products that infringe such patents.
In October 1999, the Company entered into a cross-licensing agreement with
Lucent Technologies, Inc. under which the parties released each other from
claims of patent infringement and granted each other a five year license to use
the respective patents. Based on an assessment of the age and use of the
technology of the underlying Lucent patents, the related claims by Lucent and
the Company's recent revenue composition, the Company estimated that $2.5
million of the net settlement was attributable to the release from claims
relating to prior periods. The remaining balance of $0.5 million was estimated
to
43
be attributable to the five year license to use the Lucent patents, net of
the estimated value of the Company's patented technology being licensed to
Lucent. Accordingly, the $2.5 million has been recognized as a License Fee for
the year ended March 31, 2000. The remaining balance of $0.5 million is
capitalized as other long-term assets and is amortized on a straight-line basis
as cost of goods sold over the estimated remaining useful life of three years.
Royalty expense on licensed technology, excluding the Lucent settlement, was
$504,000 $360,000 and $395,000 during the fiscal years ended March 31, 2000,
1999 and 1998, respectively.
In April 1999, CIDCO Incorporated filed suit against the Company alleging that
the Company's Patent No. 5,327,493 was invalid and not infringed by CIDCO. CIDCO
later also alleged that the Company's caller identification products infringed
CIDCO's Patent No. 4,366,348. The Company responded denying CIDCO's allegations
and alleging that CIDCO violated the Company's patent. In December, the US
Patent and Trademark Office ordered CIDCO's patent into reexamination, so all
proceedings concerning the CIDCO patent have been stayed until the Patent office
completes the re-examination. Discovery is proceeding on the Company's
infringement claim against CIDCO. The Company believes CIDCO's claims are
without merit and will continue to defend the action should the stay be lifted.
However due to the preliminary status of the proceedings, it is not possible to
predict the ultimate outcome of the case or its financial impact on the Company.
The Company also faces exposure to claims or potential claims pursuant to other
issues including employment related matters and issues related to the year 2000
readiness of its products. The Company has been served with four class action
lawsuits, one each in Alabama, Indiana, Massachusetts and Texas state courts,
related to the alleged inability of the Company's Replay, Replay Plus and
Repartee products released prior to Repartee 7.44 to function properly with
respect to the year 2000. The plaintiffs in the suits seek to require the
Company to remedy the alleged defect in these products and also seek damages.
The Company has filed its answers in Alabama, Indiana, Massachusetts, and Texas.
The Company believes that the claims stated in the cases are without merit, that
the cases are not appropriate for class action, and the Company intends to
defend itself vigorously. In the Massachusetts action, the Massachusetts
Superior Court has denied without prejudice plaintiff's motion for class
certification on the grounds that the plaintiff failed to meet its burden in
establishing the requirements for class certification. Due to the preliminary
status of the proceedings, it is not possible to predict the ultimate outcome of
the cases or their financial impact on the Company.
NOTE 10. GAIN ON SALE OF TECHNOLOGY ASSETS
On June 30, 1999, the Company sold real-time Internet communications technology
and related intangible assets (the Technology) for $18.0 million. Legal and
compensation costs associated with the transaction were approximately $1.5
million, resulting in a $16.5 million gain, or $13.0 million after tax.
The Technology provides desktop-to-desktop instant messaging similar to the
offerings by numerous internet portal companies such as Yahoo! Messenger, MSN
Hotmail and AOL Instant Messenger, including permission-based instant text,
voice and video messaging, instant file transfer and URL sharing, multi-party
chat, Internet voice and video call support, find-me/follow-me message routing,
access to schedule and availability information, and personal communications Web
pages. At the time of sale, the Company was using the Technology for internal
communications and allowing Company contacts and acquaintances to test the
software. No current or historical revenues were attributable to the Technology
at the time of the sale. In connection with the sale, the Company's instant
messaging group, consisting of four software developers, a software tester and a
market researcher, joined the staff of the acquiring company.
It was the intention of the Company to integrate some of the Technology into its
core product offerings. However, it became apparent in the quarter prior to the
sale that the Company needed working capital. Consequently, the agreement allows
for a license back of certain rights to the Technology, but it is limited
44
to use in conjunction with traditional or Internet Protocol (IP) switching in
the areas of enterprise unified messaging, voice processing, and real-time call
handling.
NOTE 11. IMPAIRMENT OF STRATEGIC INVESTMENT
During the year ended March 31, 2000, the Company recorded a $1.2 million
impairment loss on a strategic investment. The loss represented the Company's
$1.0 million investment for an 8% ownership interest in a small hardware vendor,
plus an additional $169,000 temporarily advanced for working capital. Greater
than one-half of the vendor's total sales were made to the Company. The
impairment was recorded due to the uncertain financial viability of the vendor
due to the Company's selection of an alternate source for the components
supplied by the vendor.
NOTE 12. EMPLOYEE BENEFIT PLAN
The Company provides a defined contribution 401(k) profit-sharing plan covering
employees meeting certain eligibility requirements (generally, 21 years of age).
The Company made discretionary matching contributions of $261,000, $193,000 and
$96,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
NOTE 13. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. The Company distributes
its products through a global network of independent telecommunications dealers,
telephone equipment manufacturers and computer resellers. The Company's largest
customer accounted for approximately 24% and 28% of gross accounts receivable at
March 31, 2000 and 1999, respectively. Accounts receivable denominated in
currencies other than the US Dollar (primarily the Australian Dollar, Canadian
Dollar, Dutch Guilder and British Pound Sterling) comprised approximately 19%
and 13% of gross accounts receivable at March 31, 2000 and 1999, respectively.
The Company is not currently engaged in any significant foreign currency hedging
activities. The Company performs ongoing credit evaluations of its customers'
financial condition, and generally does not require collateral, but may require
alternative payment terms such as cash in advance, cash on delivery (COD) or
letters of credit, when necessary. The Company maintains reserves for credit
losses and such losses have historically been within management's expectations.
NOTE 14. BUSINESS COMBINATION
On March 31, 2000 PhoneSoft Inc. (PhoneSoft) was acquired in a merger with the
Company. Phonesoft is a provider of true unified messaging solutions for
Lotus/Domino Notes. The Company issued 170,168 shares of Active Voice
Corporation common stock in exchange for 132,438 shares of PhoneSoft,
representing all outstanding PhoneSoft shares. The transaction was a tax-free
reorganization and was accounted for as a pooling-of-interests. Accordingly, the
financial statements as presented have been restated to reflect the combined
companies. The Company's revenues reported in the years ended March 31, 2000,
1999 and 1998 have been restated, resulting in increases of $641,000, $423,000
and $234,000. The Company's net income (loss) reported in the years ended March
31, 2000, 1999 and 1998 have been restated, resulting in increases of $59,000,
$54,000 and $37,000, respectively.
NOTE 15. SUBSEQUENT EVENT
On June 29, 2000, the Company exercised its option to acquire the
remaining 49% interest in Pronexus, Inc. in a cash transaction. The purchase
price will be based on an independent third-party appraisal. The transaction
will be accounted for using the purchase price method of accounting.
Allocation of the purchase price will be determined in the second quarter of
the Company's fiscal year.
NOTE 16. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except shares and per share data):
45
Year Ended March 31, 2000 1999 1998
- ------------------------------------------------------- --------------- ---------------- ---------------
Net income (loss) $6,127 $(4,916) $179
--------------- ---------------- ---------------
Denominator for basic earnings (loss) per share -
weighted average shares 9,834,532 9,438,198 9,427,920
Effect of dilutive securities:
Stock warrants 158,892
Stock options 768,531 105,744
=============== ================ ===============
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and assumed
conversions 10,761,955 9,438,198 9,533,644
=============== ================ ===============
Basic earnings (loss) per share: $0.62 ($0.52) $0.02
Diluted earnings (loss) per share: $0.57 ($0.52) $0.02
- ------------------------------------------------------- --------------- ---------------- ---------------
The calculation of diluted earnings per share for the year ended March 31, 1999
did not include 29,016 weighted average shares from outstanding stock options as
their inclusion would have been antidilutive.
NOTE 17. BUSINESS SEGMENTS AND RELATED INFORMATION
Significant operations outside the U.S. include sales, technical support and
distribution subsidiaries in the Netherlands, United Kingdom and Australia, and
the Company's majority-owned Pronexus subsidiary in Canada. Geographic
information for the years ended March 31, 2000, 1999 and 1998 is presented in
the table that follows (in thousands):
Year ended March 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Net sales:
United States $59,378 $51,316 $43,649
Foreign 15,049 11,324 9,736
- --------------------------------------------------------------------------------------------------
$74,427 $62,640 $53,385
- --------------------------------------------------------------------------------------------------
Net sales, as shown in the table, are based upon the geographic area into which
the products were sold and delivered to unaffiliated entities. Substantially all
identifiable long-lived assets are located in the United States.
The Company's largest customer accounted for approximately 22%, 20% and 11% of
total revenues for the years ended March 31, 2000, 1999 and 1998, respectively.
No other single customer accounted for more than 10% of the Company's revenues
in the years ended March 31, 2000, 1999 and 1998.
NOTE 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth the Company's unaudited quarterly financial
information for the fiscal years ending March 31, 2000 and 1999 (in thousands,
except per share data):
46
Fiscal Year 2000
-------------------------------------------------------------------------
June 30(1) September 30 December 31(2) March 31
- ------------------------------------------------------------------------------------------------------------
Net sales $18,336 $20,669 $22,327 $13,095
Gross profit 10,195 12,177 13,230 7,690
Net income (loss) 9,918 218 (1,187) (2,822)
Earnings (loss) per share: (3)
Basic $1.06 $0.02 $(0.12) $(0.26)
Diluted $1.03 $0.02 $(0.12) $(0.26)
- ------------------------------------------------------------------------------------------------------------
Fiscal Year 1999
-----------------------------------------------------------------------
June 30 September 30 December 31 March 31
- ----------------------------------------------------------------------------------------------------------
Net sales $13 ,483 $14,448 $16,680 $18,029
Gross profit 7,541 7,814 8,537 9,864
Net loss (1,003) (1,219) (1,583) (1,111)
Loss per share: (3)
Basic $(0.11) $(0.13) $(0.17) $(0.12)
Diluted $(0.11) $(0.13) $(0.17) $(0.12)
- ----------------------------------------------------------------------------------------------------------
(1) Includes the impact of a $16,504,000 gain ($13,020,000 after tax) on
the sale of real time Internet communications technology assets that
increased basic earnings per share by $1.76 for the quarter and $1.68 for
the year, and a $1,169,000 ($922,000 after tax) impairment loss on a
strategic investment that reduced basic earnings per share by $0.13 for the
quarter and $0.12 for the year.
(2) Includes the impact of a $2,521,000 ($1,697,000 after tax)
non-recurring charge for a license fee associated with the release of
claims of patent infringement with Lucent Technologies, Inc. that reduced
basic earnings per share by $0.26 for the quarter and the year.
(3) The sum of earnings (loss) per share on a quarterly basis will not
necessarily equal the earnings (loss) per share reported for the year since
the average shares and share equivalents outstanding used in the earnings
(loss) per share computation changes throughout the year.
47
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ACTIVE VOICE CORPORATION
We have audited the accompanying consolidated balance sheets of Active Voice
Corporation as of March 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Active
Voice Corporation at March 31, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
May 11, 2000, except for Note 15,
as to which the date is June 29, 2000
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
information contained in part in the sections captioned "Board of
Directors-Nominees for Director" and "Section 16(a) Beneficial Ownership
Reporting" in the Proxy Statement for the Company's Annual Meeting of
Shareholders scheduled to be held on August 17, 2000.
The remaining information required by this Item is contained in the discussion
entitled "Executive Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information contained in the section captioned "Compensation and Benefits" of
the Proxy Statement for the Company's Annual Meeting of Shareholders scheduled
to be held on August 17, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information contained in the section captioned "Voting Securities and Principal
Holders" of the Proxy Statement for the Company's Annual Meeting of Shareholders
scheduled to be held on August 17, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)(1) Index to Consolidated Financial Statements
Consolidated Statements of Operations - Years ended March 31, 2000, 1999 and
1998
Consolidated Balance Sheets - March 31, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended March 31, 2000, 1999 and
1998
Consolidated Statements of Stockholders' Equity - Years ended March 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
14(a)(2) Financial Statement Schedules
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is included in the Consolidated
Financial Statements or notes thereto.
49
14(a)(3) Index to Exhibits
The following exhibits are filed with this report:
Exhibit No. 3: Articles of Incorporation and Bylaws
3.1 Restated Articles of Incorporation of Registrant (incorporated by
reference from Exhibit 3.1 to the Registrant's Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
3.2 Articles of Amendment to Articles of Incorporation dated March 8, 2000
(filed herewith)
3.3 Restated Bylaws of Registrant (incorporated by reference from Exhibit
3.2 to the Registrant's Quarterly Report on Form 10-Q for its fiscal
quarter ended September 30, 1999 (File No. 0-22804))
Exhibit No. 10: Material Contracts
Executive Compensation Plans and Agreements
10.1 Incentive Stock Option Plan (incorporated by reference from Exhibit
10.1 to the Registrant's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on October 29, 1993 (File No.
33-71024))
10.2 1988 Nonqualified Stock Option Plan (incorporated by reference from
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on October 29, 1993
(File No. 33-71024))
10.3 1993 Stock Option Plan (incorporated by reference from Exhibit 10.3 to
the Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on October 29, 1993 (File No.
33-71024))
10.4 Amendment to 1993 Stock Option Plan (incorporated by reference from
Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for its
fiscal quarter ended December 31, 1995 (File No. 0-22804))
10.5 Directors Stock Option Plan (incorporated by reference from Exhibit
10.4 to the Registrant's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on October 29, 1993 (File No.
33-71024))
10.6 1996 Employee Stock Purchase Plan (incorporated by reference from
Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for its
fiscal year ended March 31, 1996 (File No. 0-22804))
10.7 First Amendment to the 1996 Employee Stock Purchase Plan (incorporated
by reference from Exhibit 10.7 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31, 1997 (File No. 0-22804))
10.8 Second Amendment to the 1996 Employee Stock Purchase Plan (incorporated
by reference from Exhibit 10.8 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))
50
10.9 Third Amendment to the 1996 Employee Stock Purchase Plan (incorporated
by reference from Exhibit 10.9 to the Registrant's Annual Report on
Form 10-K for its fiscal year ended March 31, 1999 (File No. 0-22804))
10.10 1996 Stock Option Plan (incorporated by reference from Exhibit 99.1 to
the Registrant's Registration Statement on Form S-8 filed with the
Securities and Exchange Commission on February 13, 1997 (File No.
333-21739))
10.11 First Amendment to the 1996 Stock Option Plan (incorporated by
reference from Exhibit 10.10 to the Registrant's Annual Report on Form
10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))
10.12 1997 Director Stock Option Plan (incorporated by reference from Exhibit
10.11 to the Registrant's Annual Report on Form 10-K for its fiscal
year ended March 31, 1998 (File No. 0-22804))
10.13 Form of Continuing Director Option under the 1997 Director Stock Option
Plan (incorporated by reference from Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended September
30, 1997 (File No. 0-22804))
10.14 Form of Initial Option under the 1997 Director Stock Option Plan
(incorporated by reference from Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended September
30, 1997 (File No. 0-22804))
10.15 Form of Annual Option under the 1997 Director Stock Option Plan
(incorporated by reference from Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended September
30, 1997 (File No. 0-22804))
10.16 First Amendment to the 1997 Director Stock Option Plan (incorporated by
reference from Exhibit 10.16 to the Registrants's Annual Report on Form
10-K for its fiscal year ended March 31, 2000 (File No. 0-22804))
10.17 Amended and Restated 1997 Director Stock Option Plan (incorporated by
reference from Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for its fiscal quarter ended December 31, 1999 (File No.
0-22804))
10.18 1998 Stock Option Plan (incorporated by reference from Exhibit 10 to
the Registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended December 31, 1997 (File No. 0-22804))
10.19 First Amendment to the 1998 Stock Option Plan (incorporated by
reference from Exhibit 10.16 to the Registrant's Annual Report on Form
10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))
10.20 Second Amendment to the 1998 Stock Option Plan (incorporated by
reference from Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for its fiscal quarter ended December 31, 1999 (File No.
0-22804))
10.21 Employment Agreement and Nondisclosure Agreement dated July 6, 1989
between Registrant and Jose S. David (incorporated by reference from
Exhibit 10.15 to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on October 29, 1993
(File No. 33-71024))
10.22 Employment Agreement and Nondisclosure Agreement dated October 2, 1990
between Registrant and Robert L. Richmond (incorporated by reference
from Exhibit 10.16 to the Registrant's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on October 29,
1993 (File No. 33-71024))
51
10.23 Employee Agreement and Nondisclosure Agreement dated December 10, 1996
between Registrant and Frank C. Costa (incorporated by reference from
Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for its
fiscal year ended March 31, 1997 (File No. 0-22804))
10.24 Employee Agreement and Nondisclosure Agreement dated March 22, 1991
between Registrant and Edward F. Masters (incorporated by reference
from Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for
its fiscal year ended March 31, 1997 (File No. 0-22804))
10.25 Employee Agreement and Nondisclosure Agreement dated January 24, 1991
between Registrant and Kevin L. Chestnut (incorporated by reference
from Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for
its fiscal year ended March 31, 1998 (File No. 0-22804))
10.26 Employee Agreement and Proprietary Rights Agreement dated May 18, 1999
between Registrant and Ken Myer (incorporated by reference from Exhibit
10.25 to the Registrant's Annual Report on Form 10-K for its fiscal
year ended March 31, 1999 (File No. 0-22804))
10.27 Split Dollar Agreement/Assignment dated as of April 11, 1994, between
Registrant and Robert L. Richmond (incorporated by reference from
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for its
fiscal year ended March 31, 1995 (File No. 0-22804))
Other Material Contracts
10.28 Office Lease dated January 31, 1991 between Registrant and Martin
Selig, as amended (incorporated by reference from Exhibit 10.6 to the
Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on October 29, 1993 (File No.
33-71024))
10.29 Amendment to Office Lease dated April 27, 1994, between Registrant and
Martin Selig (incorporated by reference from Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for its fiscal quarter ended
June 30, 1994 (File No. 0-22804))
10.30 Amendment to Office Lease dated August 11, 1994, between Registrant and
Martin Selig (incorporated by reference from Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1995 (File No. 0-22804))
10.31 Amendment to Office Lease dated December 19, 1996 between Registrant
and Martin Selig (incorporated by reference from Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1997 (File No. 0-22804))
10.32 Amendment to Office Lease dated December 12, 1997 between Registrant
and Martin Selig (incorporated by reference from Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1998 (File No. 0-22804))
10.33 Amendment to Office Lease dated March 27, 1998 between Registrant and
Martin Selig (incorporated by reference from Exhibit 10.29 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1998 (File No. 0-22804))
10.34 Subordination, Non-Disturbance and Attornment Agreement dated April 9,
1997, between Registrant and Caystar Corp. II (incorporated by
reference from Exhibit 10.30 to the Registrant's Annual Report on Form
10-K for its fiscal year ended March 31, 1998 (File No. 0-22804))
10.35 Line of Credit Agreement between Registrant and Wells Fargo Bank, N.A.
dated November 13, 1997 (incorporated by reference from Exhibit 10.31
to the Registrant's Annual Report on Form 10-K for its fiscal year
ended March 31, 1998 (File No. 0-22804))
52
10.36 Amendment to Line of Credit Agreement between Registrant and Wells
Fargo Bank, N.A. dated August 1, 1998 (incorporated by reference from
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for its
fiscal quarter ended June 30, 1998 (File No. 0-22804))
10.37 Amendment to Line of Credit Agreement between Registrant and Wells
Fargo Bank, N.A. dated June 21, 1999 (incorporated by reference from
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for its
fiscal quarter ended June 30, 1999 (File No. 0-22804))
10.38 Investment Agreement between Registrant and NEC Corporation dated May
5, 1999 (incorporated by reference from Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1999 (File No. 0-22804))
10.39 Master Purchase Agreement between Registrant and NEC Corporation dated
May 5, 1999 (incorporated by reference from Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for its fiscal year ended March
31, 1999 (File No. 0-22804))
10.40 Patent License Agreement dated March 2, 1990, between Registrant and
Dytel Corporation (Confidential treatment has been granted for portions
of this document) (incorporated by reference from Exhibit 10.9 to
Amendment No. 2 to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on December 2, 1993
(File No. 33-71024))
10.41 Automated Attendant Patent License Agreement between Registrant and
VMX, Inc. (Confidential treatment has been granted for portions of this
document) (incorporated by reference from Exhibit 10.10 to Amendment
No. 2 to the Registrant's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on December 2, 1993 (File No.
33-71024))
10.42 Voice Mail Patent License Agreement between Registrant and VMX, Inc.
(Confidential treatment has been granted for portions of this document)
(incorporated by reference from Exhibit 10.11 to Amendment No. 2 to the
Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on December 2, 1993 (File No.
33-71024))
10.43 Assignment of Rights Under Patent Application dated October 22, 1990 by
Robert L. Richmond and Michael J. Robinson (incorporated by reference
from Exhibit 10.12 to the Registrant's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on October 29,
1993 (File No. 33-71024))
10.44 Acknowledgment and Assignment of Proprietary Rights dated October 22,
1990 by Robert C. Greco and Michael J. Robinson (incorporated by
reference from Exhibit 10.13 to the Registrant's Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on
October 29, 1993 (File No. 33-71024))
10.45 Asset Purchase Agreement dated June 30, 1999 between Registrant and
InfoSpace.com, Inc. (incorporated by reference from the Registrant's
Report on Form 8-K filed with the Securities and Exchange Commission on
July 8, 1999 and amended on a Form 8-K/A filed on August 16, 1999 (File
No. 33-71024))
10.46 Patent License Agreement dated October 1, 1999 between Registrant and
Lucent Technologies GRL Corporation (Confidential treatment has been
granted for portions of this document) (incorporated by reference from
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on November 12, 1999 (File
No. 33-71024))
10.47 Stock Acquisition Agreement dated January 28, 2000 between Registrant
and PhoneSoft Inc. (incorporated by reference from the Registrant's
Report on Form 8-K filed with the Securities and Exchange Commission on
February 8, 2000 (File No. 33-71024))
53
Exhibit No. 11: Statement re Computation of Per Share Earnings
The required information is included in Note 13 of "Notes to Consolidated
Financial Statements."
Exhibit No. 21: Subsidiaries of the Registrant
21.1 Subsidiaries of Registrant (incorporated by reference from Exhibit 21.1
to the Registrant's Annual Report on Form 10-K for its fiscal year
ended March 31, 1998 (File No. 0-22804))
Exhibit No. 23: Consent of Experts and Counsel
23.1 Consent of Ernst & Young LLP, Independent Auditors
Exhibit No. 27: Financial Data Schedule
27.1 Financial Data Schedule
14(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated February 8, 2000, regarding a stock
acquisition agreement to acquire PhoneSoft Inc.
54
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
ACTIVE VOICE CORPORATION
Years Ended March 31, 2000, 1999 and 1998
(In thousands)
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------------------------
Additions
-------------------------
Description Balance at Charged to Charged Deductions Balance at
Beginning of Costs and to Other End of
Period Expenses Accounts Period
Year ended March 31, 2000 Deducted from asset accounts:
Allowance for doubtful $1,200 $ 4 $- (a)$ 79 $1,125
accounts
Allowance for sales 500 50 $ - 550
returns
- --------------------------------------------------------------------------------------------------------
Totals $1,700 $54 $- $79 $1,675
- --------------------------------------------------------------------------------------------------------
Year ended March 31, 1999 Deducted from asset accounts:
Allowance for doubtful $1,215 $237 $- (a)$252 $1,200
accounts
Allowance for sales 300 200 $ - 500
returns
- --------------------------------------------------------------------------------------------------------
Totals $1,515 $437 $- $252 $1,700
- --------------------------------------------------------------------------------------------------------
Year ended March 31, 1998 Deducted from asset accounts:
Allowance for doubtful $1,326 $275 $- (a)$386 $1,215
accounts
Allowance for sales 344 - $ (b) 44 300
returns
- --------------------------------------------------------------------------------------------------------
Totals $1,670 $275 $- $430 $1,515
- --------------------------------------------------------------------------------------------------------
(a)Uncollectable accounts written off, net of recoveries
(b)Reduction of estimated future sales returns
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Active Voice Corporation
By: /s/ Jose S. David
------------------------------
Jose S. David
Chief Financial Officer
Dated: June 29, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Frank J. Costa Chief Executive Officer, President June 29, 2000
- ---------------------------------- (Principal Executive Officer)
Frank J. Costa and Director
/s/ Jose S. David Chief Financial Officer, June 29, 2000
- ---------------------------------- Secretary and Treasurer
Jose S. David (Principal Financial and Accounting
Officer)
/s/ Robert L. Richmond Chairman of the Board June 29, 2000
- ----------------------------------
Robert L. Richmond
/s/ Tom A. Alberg Director June 29, 2000
- ----------------------------------
Tom A. Alberg
/s/ Douglas P. Beighle Director June 29, 2000
- ----------------------------------
Douglas P. Beighle
/s/ Robert C. Greco Director June 29, 2000
- ----------------------------------
Robert C. Greco
/s/ Harold H. Kawaguchi Director June 29, 2000
- ----------------------------------
Harold H. Kawaguchi
56