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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, 1997 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
--- ---
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 1, 1997
Common Stock, No Par Value 4,621,025
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ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
PART I - FINANCIAL INFORMATION PAGE
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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 13
SIGNATURE PAGE 14
EXHIBITS 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
Three Months Ended June 30,
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1997 1996
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Net sales $11,779 $11,113
Cost of goods sold 4,821 4,455
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Gross profit 6,958 6,658
Operating expenses:
Research and development 2,266 1,558
Sales and marketing 3,274 3,113
General and administrative 980 1,050
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Total operating expenses 6,520 5,721
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Operating income 438 937
Interest income 166 197
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Income before income taxes and minority interest 604 1,134
Income tax provision (178) (363)
Minority interest in loss of consolidated subsidiary 29
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Net income $ 455 $ 771
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Net income per common share $0.10 $0.17
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Average number of common and dilutive common
equivalent shares outstanding 4,637,826 4,628,114
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See notes to consolidated financial statements.
3
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
June 30, 1997 March 31, 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 1,905 $ 1,542
Marketable securities 6,020 6,223
Accounts receivable, less allowances 9,313 10,410
Inventories 7,486 7,009
Deferred tax asset 975 1,008
Prepaid expenses and other assets 1,153 1,258
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Total current assets 26,852 27,450
Marketable securities 7,462 7,531
Furniture and equipment, net 2,717 2,408
Other assets 1,565 1,552
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Total assets $38,596 $38,941
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,029 $ 2,342
Accrued compensation and benefits 846 1,682
Other accrued expenses 1,300 933
Income taxes payable 104 4
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Total current liabilities 4,279 4,961
Commitments
Minority interest (133) (104)
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 17,060 17,003
Retained earnings 19,310 19,026
Unrealized gain on marketable securities 24 3
Accumulated translation adjustments 4 4
Less 357,908 repurchased shares (358,859 at
March 31, 1997), at cost (1,948) (1,952)
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Total stockholders' equity 34,450 34,084
Total liabilities and stockholders' equity $38,596 $38,941
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Note: The balance sheet at March 31, 1997 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 consolidated financial statements.
4
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Three Months Ended June 30,
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1997 1996
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OPERATING ACTIVITIES
Net income $ 455 $ 771
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 251 215
Provisions for accounts receivable 14 166
Deferred income taxes 44 (151)
Loss on disposal of equipment 2 4
Minority interest in loss of consolidated subsidiary (29)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,083 (405)
Increase in inventories (477) (206)
Decrease (increase) in prepaid expenses and
other assets 63 (82)
Decrease in accounts payable (313) (606)
Decrease in other liabilities (314) (480)
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Net cash provided by (used in) operating activities 779 (774)
INVESTING ACTIVITIES
Purchases of marketable securities and investments (652) (1,097)
Proceeds from sale and maturity of marketable securities 934 1,281
Purchases of furniture and equipment (533) (283)
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Net cash used in investing activities (251) (99)
FINANCING ACTIVITIES
Repurchase of common stock (416)
Proceeds from employee stock option and stock
purchase plans 251 76
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Net cash provided by (used in) financing activities (165) 76
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Increase (decrease) in cash and cash equivalents 363 (797)
Cash and cash equivalents at beginning of period 1,542 3,390
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Cash and cash equivalents at end of period $1,905 $2,593
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See notes to consolidated financial statements.
5
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Active Voice Corporation
and subsidiaries (the Company) are unaudited. In the opinion of the Company's
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information set forth therein. Results of operations for the three month
period ended June 30, 1997 are not necessarily indicative of future financial
results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended March 31, 1997.
2. INVENTORIES
Inventories are comprised of the following (in thousands):
June 30, 1997 March 31, 1997
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Computer equipment $4,145 $3,602
Custom component parts 2,768 2,730
Supplies 573 677
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$7,486 $7,009
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3. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, The Financial Accounting Standards Board issued Statement No.
128 "Earnings per Share" (SFAS 128), which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. Adoption of the SFAS 128 is
not expected to result in a change in basic (formerly primary) or diluted
(formerly fully diluted) earnings per share for the three month periods ended
June 30, 1997 and 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Active Voice Corporation (the Company) is a leading manufacturer of PC-based
voice processing systems and computer telephone integration (CTI) products. The
Company's products are sold worldwide through a network of independent
telecommunications dealers, telephone equipment manufacturers and computer
resellers. The Company markets three principal products: Repartee, Replay Plus
and Replay. Repartee, the Company's flagship and most feature-rich product,
offers the largest call handling capacity. In addition, Repartee serves as the
base for TeLANophy, a suite of the Company's CTI modules which provides complete
call management and unified messaging capabilities. 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. The Company's Replay
product provides basic voice processing features at a price point attractive to
the small business market.
CERTAIN STATEMENTS IN THIS QUARTERLY 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, 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. INVESTORS ARE
ENCOURAGED TO CONSIDER THE RISKS DETAILED IN THOSE FILINGS. 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
Three Months Ended June 30, 1997 1996 Change
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(Dollars In Thousands)
Net sales $11,779 $11,113 6.0%
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Effective April 1, 1997, the Company rearranged its domestic and international
distribution channels and certain sales personnel who support them. The
Company's Canadian customers, which were previously under the umbrella of
international sales, joined with the U.S. dealer channel to create the North
America dealer channel. The new Corporate Sales channel replaces the OEM channel
and includes both international strategic partners, which were previously
included in the international sales channel, and value-added resellers (VARs)
which were previously included in the domestic dealer channel. The Company made
this adjustment to better focus its resources on meeting the unique product and
service needs of its diverse customer base. The following discussion assumes the
adjustment had been made on April 1, 1996.
Net sales to the Company's North America dealer network during the three months
ended June 30, 1997 decreased by approximately 8% from the comparable period in
the prior fiscal year. Net sales to the North America dealers represented 66.3%
of total net sales for the three months ended June 30, 1997 compared to 76.0% of
total net sales in the three months ended June 30, 1996. The decrease in net
sales to the North America dealer channel is primarily attributable to decreased
unit sales of Replay Plus and Replay. The decrease in unit sales of Replay Plus
and Replay was partially offset by an increase in unit sales of Repartee and
TeLANophy software, due to successful sales promotions. The Company has
experienced a shift in product mix toward Repartee and TeLANophy, the Company's
CTI product offerings, from the
7
Replay Plus and Replay traditional voice processing systems over the last
several quarters. In addition, some of the decrease in sales to the North
America dealer channel is attributable to the success of the Company's strategic
partner relationships as some dealers now purchase the Company's products
through these corporate accounts.
Net sales to the corporate sales channel increased by approximately 65% for the
three months ended June 30, 1997 over the comparable period in the prior fiscal
year. Net sales to corporate sales customers represented 20.5% and 13.2% of
total net sales for the three month periods ended June 30, 1997 and 1996,
respectively. Of the increase in sales to corporate customers, greater than
one-third was attributable to increased unit sales of Repartee systems,
primarily to two of the Company's newer customers. Approximately one-third of
the increase in corporate sales was attributable to increased unit sales of
Replay systems. As of June 30, 1997, the Company had eleven corporate sales
customers, the largest of which accounted for approximately 40% of total
corporate sales and approximately 8% of total Company sales.
Net sales to international customers increased by approximately 30% during the
three months ended June 30, 1997, reflecting increased penetration of
international voice mail markets. International sales represented 13.2% and
10.8% of total net sales for the three month periods ended June 30, 1997 and
1996, respectively. Revenue contribution from Repartee and related TeLANophy
software continued to increase due to higher unit sales. The Company's
localization efforts have improved product acceptance and demand in the
international marketplace. 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.
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.
GROSS MARGIN
Three Months Ended June 30, 1997 1996 Change
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(Dollars In Thousands)
Gross Profit $6,958 $6,658 4.5%
Percentage of net sales 59.1% 59.9%
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The Company's gross margin varies in part depending upon the mix of
higher-margin voiceboard-and-software kit sales (offered to all customers) and
software-only sales (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 by each distribution channel
also affects the overall gross margin, as international sales have historically
had higher gross margins than sales in the other distribution channels.
The decline in gross margin as a percentage of net sales between the three
months ended June 30, 1997 and 1996 was principally due to increased turnkey
system sales of both the Repartee and Replay products to strategic partner
accounts. Increased sales of TeLANophy software in all sales channels and the
shift in the product mix toward Repartee in the international channel partially
offset the decline in gross margin caused by the increased sales of turnkey
systems to corporate accounts.
8
RESEARCH AND DEVELOPMENT
Three Months Ended June 30, 1997 1996 Change
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(Dollars In Thousands)
Research and development $2,266 $1,558 45.4%
Percentage of net sales 19.2% 14.0%
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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 compensation related costs associated with additional
engineering and development personnel and project-based contract development
staff and associated recruiting costs. The increase in engineering personnel is
attributable to the Company's development of new Windows NT-based products as
well as to the addition of the Pronexus, Inc. development staff. In addition,
engineering salaries have increased due to the competitive nature of the labor
market and the Company's effort to attract and retain skilled employees. The
Company continues to allocate significant 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. 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, 1997 1996 Change
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(Dollars In Thousands)
Sales and marketing $3,274 $3,113 5.2%
Percentage of net sales 27.8% 28.0%
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The increase in sales and marketing expenses during the three month period ended
June 30, 1997 over the comparable period in the prior fiscal year was primarily
attributable to increased compensation-related expenses associated with minor
growth in sales and marketing personnel. Sales and marketing expenses include
both costs that are essentially fixed as well as costs that vary 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.
GENERAL AND ADMINISTRATIVE
Three Months Ended June 30, 1997 1996 Change
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(Dollars In Thousands)
General and administrative $980 $1,050 (6.7%)
Percentage of net sales 8.3% 9.4%
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The decrease in general and administrative expenses, both in dollar amount and
as a percentage of net sales, between comparable periods was primarily
attributable to a reduction in the provision for doubtful accounts receivable
due to improved collection statistics. General and administrative expenses,
being relatively fixed in nature, can be expected to fluctuate as a percentage
of net sales from period to period.
9
INTEREST INCOME
Three Months Ended June 30, 1997 1996 Change
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(Dollars In Thousands)
Interest income $166 $197 (15.7%)
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The decrease in interest income during the three month period ended June 30,
1997 in comparison to the corresponding period in the prior fiscal year was
primarily attributable to lower average invested cash and marketable security
balances. Average cash and marketable security balances decreased due to
increased inventory holdings and the Company's January 1997 purchase of a
majority interest in Pronexus, Inc. Refer to "Liquidity and Capital Resources"
section below.
INCOME TAX PROVISION
Three Months Ended June 30, 1997 1996 Change
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(Dollars In Thousands)
Income tax provision $178 $363 (51.0%)
Effective tax rate 29.5% 32.0%
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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 Company expects
the effective tax rate to fluctuate in the future due to the impact of changing
research and development tax credits, tax exempt interest income, and foreign
sales corporation benefits as a percentage of taxable income. In addition, the
Company anticipates that it may fall under the jurisdiction of additional taxing
authorities as its operations expand into new geographical areas, which would
cause the effective tax rate to increase.
The decrease in the Company's effective tax rate for the three month period
ended June 30, 1997 over the comparable period in the prior fiscal year was
primarily attributable to increases in the research and development tax credit
and foreign sales corporation benefit as a percentage of taxable income. The
federal research and development tax credit was not available during the three
months ended June 30, 1996, while it was in effect during April and May 1997.
NET INCOME AND NET INCOME PER SHARE
Three Months Ended June 30, 1997 1996 Change
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(Dollars In Thousands, except per share amounts)
Net income $455 $771 (41.0%)
Percentage of net sales 3.9% 6.9%
Net income per share $0.10 $0.17 (41.2%)
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The decreases in net income and net income per share for the three month period
ended June 30, 1997 in comparison to the corresponding period in the prior
fiscal year were primarily attributable to a 45% increase in research and
development expenses, as discussed above. Research and development accounted for
approximately 90% of the increase in total operating expenses between comparable
periods. The number of common and common equivalent shares outstanding was
comparable in the three month periods ended June 30, 1997, and 1996.
10
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities and investments
increased to $15.4 million or 40% of total assets at June 30,1997 from $15.3
million or 39% of total assets at March 31, 1997. Cash flow provided by
operations totaled $779,000 during the three months ended June 30, 1997. The
Company had net working capital of $22.6 million at June 30, 1997. During the
three months ended June 30, 1997, the Company repurchased 40,000 shares of its
common stock for approximately $416,000 under its previously announced share
repurchase program.
Accounts receivable, net of allowances, decreased to $9.3 million at June 30,
1997 from $10.4 million at March 31, 1997. The decrease in accounts receivable
balances was due to lower net sales in the three months ended June 30, 1997
compared to net sales in the three months ended March 31, 1997. Days' sales
outstanding increased by approximately one percent during the quarter ended June
30, 1997. Inventory levels increased to $7.5 million at June 30, 1997 from $7.0
million at March 31, 1997. The increase in inventory levels was primarily
attributable to short-term product delays for strategic partner accounts in the
corporate sales channel which curtailed shipments originally scheduled to occur
prior to June 30, 1997.
The Company made $533,000 in capital expenditures during the three months ended
June 30, 1997, compared to $283,000 during the comparable period of the prior
fiscal year. The majority of the capital expenditures during the three months
ended June 30, 1997 consisted of computer hardware and software used to augment
the Company's management information systems infrastructure. Additional computer
equipment was purchased for use in research and development. 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 $1.5 million for the year.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with funds from operations will provide sufficient funds to
finance operations for the next several years.
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 CTI market, 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.
- - Increasing price competition in the Company's marketplace could influence
the amount of and timing of changes in the Company's prices to its
customers, and therefore negatively impact the Company's gross margin.
Gross margins may 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.
- - If the Company experiences delays in shipments (whether it is 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.
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- - 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.
- - Risks associated with the Company's movement into the larger end-user
market, such as product acceptance and demand and failure to attract
sufficient market share, could affect the Company's future performance.
- - 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. Increasing international sales may require notable
increases in development spending associated with localization of products
for foreign markets.
- - Growth strategies involving acquisitions and strategic relationships may
encounter legal and/or unforeseeable delays 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 may significantly affect
the company's operating results.
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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, 1997.
13
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 13, 1997 By: /s/ JOSE S. DAVID
-----------------------------------
Jose S. David
Chief Financial Officer
Signing on behalf of registrant and
as principal financial officer
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