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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996 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
incorporation or organization) Identification No.)
2901 THIRD AVENUE, SUITE 500 98121-9800
SEATTLE, WASHINGTON (Zip Code)
(Address of principal executive offices)
(206) 441-4700
(Registrant's telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS AUGUST 2, 1996
Common Stock, No Par Value 4,574,778
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ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE PAGE 13
EXHIBITS 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30,
---------------------------
1996 1995
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Net sales $11,113,372 $10,406,945
Cost of goods sold 4,454,948 3,800,526
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Gross profit 6,658,424 6,606,419
Operating expenses:
Research and development 1,558,717 1,232,181
Sales and marketing 3,113,187 2,486,173
General and administrative 1,049,847 957,249
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Total operating expenses 5,721,751 4,675,603
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Operating income 936,673 1,930,816
Interest income 197,467 154,037
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Income before income taxes 1,134,140 2,084,853
Income tax provision 362,900 656,700
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Net income $ 771,240 $ 1,428,153
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Net income per common share $0.17 $0.31
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Average number of common and common
equivalent shares outstanding 4,628,114 4,629,297
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See notes to financial statements.
3
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, March 31,
1996 1996
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ASSETS (NOTE)
Current assets:
Cash and cash equivalents $ 2,592,956 $ 3,389,760
Marketable securities 6,920,856 7,216,738
Accounts receivable, less allowances 8,867,325 8,628,280
Inventories 5,688,201 5,482,704
Deferred tax asset 1,161,218 1,023,324
Prepaid expenses and other assets 790,667 774,316
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Total current assets 26,021,223 26,515,122
Marketable securities 8,613,006 8,461,607
Furniture and equipment, net 2,158,830 2,094,480
Other assets 393,602 328,503
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Total assets $37,186,661 $37,399,712
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,531,923 $ 2,138,073
Accrued compensation and benefits 1,302,159 1,871,755
Other accrued expenses 798,340 762,340
Income taxes payable 819,624 830,888
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Total current liabilities 4,452,046 5,603,056
Commitments
Stockholders' equity:
Preferred stock, no par value:
Authorized shares - 2,000,000 -
none outstanding
Common stock, no par value:
Authorized shares - 10,000,000
Issued shares, including repurchased
shares - 4,976,933 16,862,940 16,790,931
Retained earnings 18,066,329 17,301,477
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34,929,269 34,092,408
Less 403,405 and 421,988 shares repurchased
at June 30, and March 31, 1996,
respectively, at cost (2,194,654) (2,295,752)
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Total stockholders' equity 32,734,615 31,796,656
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Total liabilities and stockholders' equity $37,186,661 $37,399,712
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Note: The balance sheet at March 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. See notes to financial statements.
4
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended June 30,
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1996 1995
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OPERATING ACTIVITIES
Net income $ 771,240 $1,428,153
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 215,314 193,960
Provisions for accounts receivable 166,000 170,000
Deferred income taxes (151,434) (88,091)
Loss on disposal of equipment 3,624 24,624
Changes in operating assets and liabilities:
Increase in accounts receivable (405,045) (702,079)
Increase in inventories (205,497) (531,297)
Increase in prepaid expenses and
other assets (81,450) (115,746)
Increase (decrease) in accounts payable (606,150) 245,266
Decrease in other liabilities (480,262) (347,041)
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Net cash provided by (used in)
operating activities (773,660) 277,749
INVESTING ACTIVITIES
Purchases of marketable securities (1,096,965)
Proceeds from sales of marketable securities 1,281,272 73,741
Purchases of furniture and equipment (283,288) (333,863)
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Net cash used in investing activities (98,981) (260,122)
FINANCING ACTIVITIES
Repurchase of common stock (20,625)
Proceeds from exercise of common stock options 75,837 205,804
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Net cash provided by financing
activities 75,837 185,179
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Increase (decrease) in cash and cash equivalents (796,804) 202,806
Cash and cash equivalents at beginning of period 3,389,760 649,553
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Cash and cash equivalents at end of period $2,592,956 $ 852,359
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See notes to financial statements.
5
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Active Voice Corporation
and subsidiary (the Company) are unaudited. In the opinion of the Company's
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information set forth therein. Results of operations for the three month
period ended June 30, 1996 are not necessarily indicative of future financial
results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended March 31, 1996.
2. ACCOUNTING POLICIES
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". Statement No. 121 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. The adoption of
Statement No. 121 had no effect on the Company's financial position and results
of operations as of the date of adoption and for the period ended June 30, 1996.
Effective April 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," using the
intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25,
as allowed for in the statement. The adoption of Statement No. 123 had no
effect on the Company's financial position and results of operations as of the
date of adoption and for the period ended June 30, 1996.
3. INVENTORIES
Inventories are comprised of the following:
June 30, March 31
1996 1996
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Computer equipment $2,960,234 $2,544,034
Custom component parts 1,976,562 2,211,527
Supplies 751,405 727,143
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$5,688,201 $5,482,704
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6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Three Months Ended June 30,
1996 1995 Change
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(Dollars In Thousands)
Net sales $11,113 $10,407 6.8%
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Net sales to the Company's domestic dealer network increased 15.5% in the three
months ended June 30, 1996 compared to the corresponding period in the prior
fiscal year, reflecting continued increased customer demand for PC-based voice
processing systems. Net sales to the domestic dealer network represented 75.1%
and 69.5% of total net sales in the three month periods ended June 30, 1996 and
1995, respectively. Of the increase in domestic dealer net sales, approximately
one-half was attributable to a 120% increase in unit sales of Replay, which was
partially offset by lower average selling prices. Approximately 40% of the
increase in domestic dealer net sales was attributable to increased unit sales
of TeLANophy software, hospitality and fax products, telephone switch
integration packages and miscellaneous hardware components.
Net sales to original equipment manufacturers (OEMs) decreased by 32.0% during
the quarter ended June 30, 1996 compared to the quarter ended June 30, 1995. Net
sales to OEM customers represented 11.1% of total net sales for the three months
ended June 30, 1996, compared to 17.4% of total net sales for the three months
ended June 30, 1995. The aggregate decrease in net sales in the OEM channel was
attributable to an approximate 90% decline in unit sales of Repartee kits.
During February 1996, the Company's historically largest OEM customer, which was
primarily a purchaser of Repartee kits, announced the acquisition of a competing
manufacturer of voice processing products. This customer accounted for
approximately 9.4% of total net sales during the quarter ended June 30, 1995
compared to just 1.3% of total net sales in the quarter ended June 30, 1996. As
of June 30, 1996, the Company had six domestic OEM relationships. The largest
OEM customer accounted for approximately 70% of total OEM net sales, and
approximately 8% of total Company net sales during the three months ended June
30, 1996.
Net sales to international customers increased by 12.3% during the three months
ended June 30, 1996, compared to the corresponding period in the preceding
fiscal year, reflecting increased penetration of international voice processing
markets and the successful launch of new products for international OEM
customers. International sales represented 13.8% of total net sales for the
quarter ended June 30, 1996, compared to 13.1% of total net sales for the
quarter ended June 30, 1995. Approximately 50% of the increase in net sales to
international customers was attributable to increased unit sales of Replay Plus.
An additional one third of the increase was attributable to increased unit sales
of Replay. Decreases of 54% and 34% in unit sales of Repartee systems and
Repartee kits, respectively, partially offset the increased revenue attributable
to the increased unit sales of Replay and Replay Plus. Beyond the usual risks
associated with foreign 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.
7
During the three months ended June 30, 1996, revenue from TeLANophy was not
significant (less than 5%); however, the Company has experienced growing demand
for TeLANophy systems and client workstation software over the last three
quarters. The Company is forming a new channel of distribution for these
products and is in the process of developing new initiatives to sell client
software directly to its substantial installed end user customer base.
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
total net sales.
GROSS MARGIN
Three Months Ended June 30,
1996 1995 Change
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(Dollars In Thousands)
Gross profit $6,658 $6,606 0.8%
Percentage of net sales 59.9% 63.5%
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The Company's gross margin varies in part depending upon the mix of
higher-margin voiceboard-and-software kit sales (an option available only with
Repartee and Replay) and software-only sales (available only to OEM customers)
as opposed to turnkey system sales. The proportion of sales contributed by each
distribution channel also affects the overall gross margin, as OEM and
international sales historically have had higher gross margins than sales to the
domestic dealer network.
The decrease in gross margin between the first quarter of fiscal 1997 and the
first quarter of fiscal 1996 was attributable to a shift in the sales mix to the
lower margin Replay product line. The Company implemented a 25% price reduction
on the Replay product during the third quarter of fiscal 1996 which contributed
to the shift in sales mix and reduced the gross margin on Replay units. In
addition, a reduction in unit sales of Repartee kits in the OEM channel, as
discussed under "Net Sales" also contributed to the decline in gross margin.
Management expects that gross margins will continue to decline steadily as a
result of price competition and further shifts in product mix.
RESEARCH AND DEVELOPMENT
Three Months Ended June 30,
1996 1995 Change
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(Dollars In Thousands)
Research and development $1,559 $1,232 26.5%
Percentage of net sales 14.0% 11.8%
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The increase in research and development expenses both in dollar amount and as a
percentage of net sales between comparable periods, was primarily attributable
to an increase in project-based contract development staff and an increase of
approximately 5% in engineering personnel. The increase in contract staff and
engineering personnel was primarily attributable to the Company's continuing
effort to localize products for new international markets, as well as
customization of products for new OEM customers, and new product development,
particularly CTI-related products.
8
During fiscal 1996, the Company announced its intention to allocate additional
resources to the development of products for the international market. The
Company believes that the international market has significant growth
opportunities but that localization of its products will be necessary to
successfully penetrate the world market for voice processing equipment. The
Company also 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. The Company expects
the dollar amount of research and development expenditures to continue to
increase for the foreseeable future, and that these expenses as a percentage of
sales will vary from period to period.
SALES AND MARKETING
Three Months Ended June 30,
1996 1995 Change
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(Dollars In Thousands)
Sales and marketing $3,113 $2,486 25.2%
Percentage of net sales 28.0% 23.9%
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Approximately one half of the increase in sales and marketing expenses was due
to increased travel and trade show related expenses. The increase in travel and
trade show-related expenses was primarily attributable to increased selling
efforts in international markets. An additional 40% of the increase in sales and
marketing expenses was due to increased compensation-related expenses associated
with an increase of approximately 20% in sales and marketing personnel. The
increase in personnel primarily reflected additions to the Company's domestic
and international sales force, and to a lesser extent, additional product
support representatives. Sales and marketing expense as a percentage of net
sales increased during the three months ended June 30, 1996 primarily due to
growth in sales and marketing personnel exceeding the growth in net sales.
GENERAL AND ADMINISTRATIVE
Three Months Ended June 30,
1996 1995 Change
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(Dollars In Thousands)
General and administrative $1,050 $957 9.7%
Percentage of net sales 9.4% 9.2%
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The increase in general and administrative expenses during the first quarter of
fiscal 1997 was due to increased compensation-related expenses associated with
an increase of approximately 25% in general and administrative 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.
INTEREST INCOME
Three Months Ended June 30,
1996 1995 Change
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(Dollars In Thousands)
Interest income $197 $154 28.2%
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The increase in interest income during the first quarter of fiscal 1997 compared
to the first quarter of fiscal 1996 was primarily attributable to higher average
invested cash and marketable security balances and to a lesser extent, higher
average yields earned on investments.
9
INCOME TAX PROVISION
Three Months Ended June 30,
1996 1995 Change
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(Dollars In Thousands)
Income tax provision $363 $657 (44.7%)
Effective tax rate 32.0% 31.5%
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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 increase in the
Company's effective tax rate for the first quarter of fiscal 1997 over the
comparable period in the prior year was primarily attributable to the expiration
of the research and development tax credit at June 30, 1995. The Company expects
the effective tax rate to continue to increase in the future due to the impact
of declining tax exempt interest income and foreign sales corporation benefits
as a percentage of taxable income.
NET INCOME AND NET INCOME PER SHARE
Three Months Ended June 30,
1996 1995 Change
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(Dollars In Thousands, except per share data)
Net income $771 $1,428 (46.0%)
Percentage of net sales 6.9% 13.7%
Net income per share $0.17 $0.31 (46.0%)
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The decrease in net income and net income per share in the quarter ended June
30, 1996 compared to the comparable period in the prior fiscal year was
primarily attributable to a 3.6% decline in gross margin combined with a 22.4%
increase in operating expenses. The number of common and common equivalent
shares outstanding was comparable in the three month periods ended June 30, 1996
and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities decreased to
$18,127,000, or 48.7% of total assets, at June 30, 1996 from $19,068,000, or
51.0% of total assets, at March 31, 1996. Cash flow used in operations totaled
$774,000 during the three months ended June 30, 1996 due to lower accounts
payable balances and increases in accounts receivable and inventory. The Company
had net working capital of $21,569,000 at June 30, 1996.
Accounts receivable, net of allowances, increased marginally to $8,867,000 at
June 30, 1996 from $8,628,000 at March 31, 1996, due to increasing sales and a
minor increase in days' sales outstanding. Inventory levels increased to
$5,688,000 at June 30, 1996 from $5,483,000 at March 31, 1996 to meet the
increasing raw material stocking requirements of a growing sales base and an
increase in the number of available hardware platform options.
The Company made $283,000 in capital expenditures during the three months ended
June 30, 1996, compared to $334,000 during the comparable period of the prior
fiscal year. The majority of the capital expenditures during the quarter ended
June 30, 1995 consisted of computer equipment and related hardware for new
employees and contract development staff. The Company currently has no specific
commitments with respect to additional capital expenditures during the remainder
of fiscal 1997, but expects to spend an aggregate of approximately $1,100,000
for the year.
10
The Company has a $10,000,000 revolving credit line from a bank for financing
working capital. No borrowings were outstanding under this agreement at June 30
or March 31, 1996. The agreement expires on September 30, 1996. The agreement
has historically been renewed on an annual basis.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with funds from operations and the revolving credit line,
will provide sufficient funds to finance operations for the next several years.
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT 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, AND VARIOUS BUSINESS ENVIRONMENT AND TREND PROJECTIONS.
ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF
FACTORS, INCLUDING, BUT NOT LIMITED TO, THE RISKS DISCUSSED IN DOCUMENTS FILED
BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1996.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Active Voice Corporation
(Registrant)
Date: August 9, 1996 By: /s/ Jose S. David
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Jose S. David
Chief Financial Officer
Signing on behalf of registrant and
as principal financial officer
13