FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission file number 0-15578
DAVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 02-0364368
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6 Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 952-0200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
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 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]
Aggregate market value, as of February 27, 1998 of Common Stock held by non-
affiliates of the registrant: $352,073,568 based on the last reported sale price
on the National Market System as reported by Nasdaq on that date.
Number of shares of Common Stock outstanding at February 27, 1998: 11,902,378
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1997. Portions of such Proxy Statement are incorporated by reference in Part
III.
PART I
ITEM 1 - BUSINESS
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GENERAL
Davox Corporation ("Davox" or the "Company") is principally a software and
systems integration company that develops, markets, implements, supports and
services management systems for call center operations. These call center
operations are responsible for business applications including
credit/collections, customer service, telephone sales and fund raising. Davox
systems assist calling operations, integrate existing voice and data systems,
manage outbound and inbound calling applications and focus on improving the
quality of each customer contact, as well as the quantity of calls handled. This
increased productivity and efficiency, documented by Davox users, has resulted
in lower labor costs, increased revenue and/or increased transaction capacity
for the user organization, and improved service levels. Davox systems include
intelligent outbound calling, inbound call handling, inbound/outbound call
blending and call center network management.
Davox, through its direct sales force and through its distribution channel,
has provided unified call center solutions to banks, consumer finance
organizations, retailers, entertainment companies, telemarketing organizations,
telecommunications companies and utilities. Among the Company's current
customers are: British Telecom, Chemical Bank, General Electric Capital
Corporation (GECC), Household Finance, NationsBank, May Companies, AT&T, NYNEX,
Precision Response Corporation, Superstar Satellite Entertainment, Gottschalks
Department Stores, USAA Federal Savings Bank, TeleTech Holding, Unitel
Corporation, and WGBH television.
Statements in this Form 10-K that are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See also "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Factors That May Affect Future
Results."
The Company was incorporated in Massachusetts in 1981 and reorganized in
Delaware in 1982. The Company's principal offices are located at 6 Technology
Park Drive, Westford, Massachusetts 01886 and its telephone number is (978) 952-
0200.
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OVERVIEW
Today's businesses realize that their most important asset and source for
additional business is their customer; therefore, within most corporations,
several departments are in almost constant contact with buyers or users of their
goods or services. These departments, or call centers, place and/or receive
phone calls, email and faxes supplying information to or receiving information
from the customer, or processing account information from a database. The
mission of call center management is to increase the productivity of telephone
agents, improve the efficiency of the calling operation and enhance the quality
of customer service.
To achieve the mission of the call center, businesses have invested in
different types of technology to accommodate different types of customer
contact, such as incoming and outgoing calls. However, these discrete
proprietary systems result in an environment characterized as "islands of
technology" which limit the productivity and efficiency of the call center and
may degrade customer service. The majority of today's businesses are under
economic and competitive pressure to protect their investment in technology and
require a method for integrating existing disparate technologies. By
integrating these technologies, a business can share its resources and provide
its customers a higher quality of service.
Davox recognized the growing demand for systems that would unify these
disparate resources and calling applications. To deliver the level of
integration necessary to unite a business' customer contact applications, Davox
introduced in late 1993 the Unison(R) call center management system which
represented a new generation technology for the outbound call center market.
UNISON(R) FAMILY OF CALL CENTER MANAGEMENT SOLUTIONS
Unison(R) technology today is incorporated into systems specifically
designed for call centers with outbound, inbound and inbound/outbound call
blended requirements. This Unison(R) family of call center management systems
combines open system, client/server, and relational database technology with
sophisticated applications.
The Company currently markets three distinct Unison products:
. Unison(R) call center management system for credit/collections
. Unison(R) call center management system for telemarketing
. IN/UNISON(TM) call center management system for inbound call centers
Davox also offers optional SCALE(TM) software functionality that
incorporates computer telephony integration to blend inbound and outbound calls,
allowing a single agent to efficiently handle both types of calls.
UNISON(R) APPLICATIONS SOFTWARE
. UNISON STRATEGIST(TM) Applications Software lets supervisors specify and
modify comprehensive calling strategies.
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. UNISON TACTICIAN(TM) Applications Software makes it easy for supervisors
to monitor agent productivity during individual campaigns and shift
resources quickly when needed.
. UNISON PRECISION DIAL(TM) Applications Software streamlines call center
operations by allowing the supervisor to control the parameters that
affect the actual call placement, freeing agents to focus on engaging in
productive conversations with customers.
THE UNISON(R) OPEN SYSTEMS ENVIRONMENT
A single Unison(R)-based agent workstation can handle voice/data tasks
associated with calls -- incoming or outgoing, regardless of point of origin.
The system tracks all calls in real-time, allowing managers to identify quickly
both positive and negative trends as they develop. As a result, adjustments can
be made instantly to correct unfavorable trends and exploit positive ones.
One characteristic of the Unison(R) system is its Rules-Based(TM)
management software which allows a call center manager to design, adjust, refine
and implement calling strategies in real-time. With this Rules-Based(TM)
management capability, the Unison(R) system's user can target outbound calling
campaigns based on user-defined criteria such as location, income level, or
outstanding balance.
This capability also allows call centers to match specific customers with
telephone agents who have the necessary skills to handle these customer
accounts. For example, foreign language speaking agents can be automatically
assigned to handle calls to or from households where only that language is
spoken; or agents skilled in handling a specific product can be assigned to
those accounts.
Using the Unison(R) system's Rules-Based management capability, a call
center manager can set the calling "rules" for each campaign, such as:
. The order in which phone numbers will be called
. Acceptable talk time
. The time of day clients will be called
. Acceptable after call work time
. Which accounts will be called
The Unison(R) system monitors each campaign in real-time, notifying the
call center's supervisors immediately if performance deviates from the
prescribed norm, enabling the supervisor to take immediate corrective action.
The Rules-Based(TM) management capability provides Unison(R) system users with
real-time information to adapt their system "on the fly" to changing priorities
within the call center. Unison users have reported that this Rules-Based(TM)
management capability also helps them to maintain compliance with FTC/FCC
regulations.
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KEY FUNCTIONALITY FOR MANAGING THE CALL CENTER
The SMART MANAGEMENT CENTER(R) (SMC(R)) console is the central management
engine which implements the Unison(R) system's Rules-Based(TM) management
strategies and a broad range of software-driven features that allow the
intelligent, strategic integration of call center resources. The SMC(R) (a
UNIX(TM) RISC-based management system built on the Sun Microsystems, Inc.
Ultra(TM) architecture) manages, monitors, processes, reports, communicates,
integrates and controls a broad range of telephony and data-oriented call center
tasks -- all in real-time and using a friendly, point-and-click graphical user
interface. The SMC(R) utilizes limited run time Sybase Incorporated relational
database management software which supports the Rules-Based(TM) management
capability and is integral to call center improvements in the areas of quality
contact, productivity, effectiveness and resource management.
The Company's ONESTATION(TM) software product provides universal agent
audio connectivity to an existing PBX/ACD. In conjunction with installed data
resources, ONEStation(TM) functionality allows agents to access available voice
and data resources from any single existing workstation located anywhere in the
company's data network.
The Company's SMART ACCESS(TM) software product provides a flexible
management network allowing users to:
. Access, monitor and control multiple calling sites in real-time
. Distribute information and outbound call campaigns to any center on the
network
CALL MANAGEMENT FEATURES AUTOMATE, STREAMLINE OUTBOUND OPERATIONS
The Unison(R) system's sophisticated dial and pacing technology, campaign
flow, dynamic campaign generation and filter capabilities streamline outbound
call operations by automating a number of time-consuming processes. Supervisors
control the parameters that affect the actual call placement, freeing agents to
focus on engaging in productive conversations with customers. Layered upon this
powerful dialing engine is Davox's broad array of real-time campaign
management/measurement capabilities.
INTELLIGENT INTEGRATION OPTIONS FOR CALL BLENDING
Because Davox understands that a single call blending solution may not be
appropriate for every call center, the Company offers both a Computer Telephony
Integration (CTI) and a non-CTI Unison(R) system option.
The Company's SCALE(TM) (Seamless Call and Agent Load Equalization)
software is available for call centers that wish to utilize CTI for their call
handling. With SCALE(TM) functionality, all designated agents function as both
inbound and outbound agents, and the movement of those agents from inbound to
outbound calls is automatic; no separate login procedures are required. The
standard Unison(R) system campaign management capabilities are
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available to SCALE(TM) users. In addition, Unison(R) agent management and real-
time voice and data reporting features are available for inbound as well as
outbound agents.
The Company's SMART ACD(TM) software product provides non-CTI
inbound/outbound notification. Smart ACD(TM) software:
. Interfaces with a call center's existing ACD and PBX
. Monitors all designated ACD queues and displays inbound traffic
information in real-time
. Automatically and intelligently instructs agents to handle ACD queues
and outbound calling lists as necessary to maximize productivity while
maintaining the proper service levels
WEB-BASED BROWSER TECHNOLOGY TO BUILD AND DEPLOY APPLICATIONS
Perhaps the most exciting new product to emerge from the Company's labs in
1997 was the LYRICall(TM) application and script design software scheduled for
general availability in the first quarter of 1998. The Company believes this is
the first product of its kind to bring browser-based technology to the call
center agent's desktop.
LYRICall(TM) software incorporates Web-based browser technology that gives
call center management the ability to easily build and then deploy robust,
platform-independent agent applications. LYRICall(TM) software can be used in
dedicated inbound, outbound, or blended call center environments.
LYRICall(TM) software utilizes open Internet standards such as HTML,
browser technology and Java computing. By incorporating these standards,
LYRICall(TM) software distinguishes itself as a platform-independent product
that enables users to create an application once and then run it on most devices
and operating systems. LYRICall(TM) software can run on any device capable of
running a Netscape browser and Java script, including PCs, UNIX workstations and
network computers.
LYRICall(TM) software gives non-programmers the ability to build
applications. Those designing these applications are guided through application
creation using templates, wizards and intuitive point-and-click operations. This
highly intuitive browser interface guides agents through each call, allowing
them to work more productively and effectively.
LYRICall(TM) software offers telemarketing, collections, support and other
customer service oriented call centers a practical tool for meeting a wide range
of business requirements.
REPORTING SOLUTIONS FOR CALL CENTER PRODUCTIVITY
Davox has always understood that running an effective call center requires
more than simply developing calling strategies and automating operations. At the
heart of a call center's success is its ability to obtain and analyze data in a
timely fashion. In 1997, Davox announced two new product options designed to
significantly broaden the Company's Unison(R) system's reporting capabilities.
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COMPOSE IT(TM) software, which is scheduled for general availability in the
first quarter of 1998, provides a number of pre-designed, standard call center
reports for routine reporting needs. It also features a user-friendly graphical
interface that allows custom report generation with point-and-click navigation.
Users can create, edit, save, print and export reports - without learning SQL
(Structured Query Language) commands or turning to the IS department.
SELECTVIEW(TM) software is an open database connectivity (ODBC) product
that allows users to create custom reports (based on Unison(R) system activity)
from a PC running either Microsoft(R) Windows 95(R), Windows 3.1, or Windows
NT(R). As an ODBC standards-based tool, the SelectView(TM) application offers an
easy way to combine Unison(R) system data with information from a wide variety
of databases on PC, mini, and mainframe platforms.
RELIABILITY AT THE HEART OF THE SYSTEM
In 1997, Davox took steps to identify technology that would provide an
enhanced level of system reliability. In the fourth quarter, the Company
selected for inclusion into its Unison(R) systems a technology that spreads data
across multiple disks and provides a mechanism for reconstruction of data in the
event of damage to any single disk. Known as RAID (Redundant Array of
Inexpensive Disks), this technology is scheduled for availability in the first
quarter of 1998 as an option to Unison(R) systems. This technology is designed
to reconstruct data and ensure the integrity of a customer's file while at the
same time providing high availability of the Unison(R) system.
UNISON SYSTEM PRICING
The Unison(R) system price begins at approximately $90,000. Specific and
variable customer requirements, such as the number of agent positions, extent of
inbound integration and multi-site connectivity determine actual Unison(R)
system prices.
MARKETS AND APPLICATIONS
Davox markets its unified call center solutions to corporations that rely
heavily on the telephone to conduct business with their customers. These
corporations have typically made large investments in building inbound and/or
outbound calling operations. The function of these operations is to place and
receive customer calls. In many cases, these calling operations are responsible
for specific business applications such as collections, customer service, fund-
raising or telephone sales.
The Company believes that Unison(R) systems can significantly increase
productivity in many applications where repetitive tasks can be automated.
Additionally, Davox believes that its products are well suited to meet evolving
CTI standards due to their multi-protocol capabilities, integrated voice
functions and flexible software design.
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SIGNIFICANT CUSTOMERS
In 1997, the Company's largest single customer was Datapoint (a distributor
of Davox products to British Telecom), accounting for 11% of total revenue. In
1996, GE Capital Corporation was the largest single customer, accounting for 4%
of total revenue, and in 1995 AT&T was the Company's largest single customer,
accounting for 12% of the Company's total revenue. Total revenue from the
Company's top three customers amounted to 20% of total revenue in 1997, 12% of
total revenue in 1996 and 20% of total revenue in 1995. The Company believes
that its dependence on any one end user customer is not likely to increase
significantly as the Company continues to penetrate the broader call center
market and expand its alternate distribution channels.
MARKETING AND SALES
Davox takes a solutions-oriented approach to marketing its Unison(R)
systems. The integration and management capabilities of the systems are
presented as tools to help customers meet their business goals and objectives
for customer service. This approach has two major benefits:
. First, as Davox's relationship with a customer grows, the Company is
able to increase sales by developing additional call center capabilities
for the customer.
. Second, Davox can identify additional applications in other areas of the
customer's business.
Additionally, by focusing on common applications and identifying industries
with similar organizational or functional structures, Davox can address new
markets with relatively small incremental development costs and a short training
period for its sales force.
The Company's sales force follows a disciplined selling program that
focuses on selling business solutions, rather than stressing the features of
individual products. Having identified departments in which Unison(R) systems
may provide significant productivity increases, Davox sales representatives and
technical consultants (system/application specialists) work with the customer to
analyze the business and production objectives for the calling operation. This
consultative "team" approach is best suited to establish a long-term
relationship with the customer.
The Company continues to expand market penetration through its Business
Partners Program. The Company licenses its products through a third-party
distribution channel through referral, joint marketing, distributor and reseller
relationships. Examples of third-party partners include telecommunication system
manufacturers, software vendors and systems integrators. The Company plans to
continue to expand its Business Partners Program, with particular emphasis on
customer contact software vendors and telecommunication system providers.
NORTH AMERICAN OPERATIONS -- In North America, the Company markets its products
primarily through a direct sales force with contributions from the Business
Partners Program. Direct sales
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personnel are supported by a team of marketing professionals based at the
Company's headquarters.
. In 1997, Davox signed distribution agreements with Lucent Technologies
Inc. and Siemens Business Communication Systems to resell the
Unison(R) system as the preferred call center management system each
will offer their customers in the United States and Canada.
INTERNATIONAL OPERATIONS -- Davox manages international activities for several
global regions. The Company's products are offered in Europe, Latin America,
South Africa, and the Pacific Rim primarily through a series of mostly
nonexclusive distribution agreements.
. In 1997, Davox significantly expanded the human and technical resources
located at its European subsidiary headquarters in the United Kingdom
that provides direct marketing, technical support, and service to its
United Kingdom and European customers.
. Also in 1997, Davox established a subsidiary in Mexico to bring direct
marketing and technical support to the Company's customers in that
country.
In connection with sales outside the United States, Davox products are
subject to regulation by foreign governments, which requires the Company to
follow certification procedures for some countries. Failure to obtain necessary
local country approvals or certifications will restrict Davox's ability to sell
into some countries. International product revenue was $13.9 million, $7.6
million and $4.5 million or 18%, 14% and 12% of total revenue in 1997, 1996, and
1995, respectively.
CUSTOMER SUPPORT AND SERVICE
Davox provides maintenance and systems integration services that include
not only call center system installation and training, but also:
. Call center network planning, design and implementation services
. Professional services that include call center consulting, custom
application design, and development services
Davox customer support is comprised of:
. Support teams responsible for ongoing account management and customer
satisfaction of the installed base
. On-site hardware support and either on-site or remote software support
as required
. A Worldwide Support Center located in the corporate offices in Westford,
Massachusetts, that provides centralized access to hardware and software
support as required on a worldwide basis to end-users and distributors
. Software services that enhance or modify current systems
. Professional services that deliver consulting and customized project
services as required
. Training for customers' and distributors' personnel, delivered both in
Davox's Acton, Massachusetts, training facility and at customer sites
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WORLD CLASS TRAINING CENTER -- Responding to increased demand for educational
services, Davox in 1997 opened a state-of-the-art training facility in Acton,
only minutes from the Company's Westford corporate headquarters. The opening of
the new facility caps a year that saw significant investments in sophisticated
technology and people aimed at expanding the instructional services Davox offers
its customers.
PROFESSIONAL SERVICES ADDS TO ITS OFFERINGS -- As call center technologies
continue to evolve, many customers are finding that they lack the internal
resources needed to implement these technologies effectively. In early 1997,
Davox introduced a new Professional Services program staffed by specialists with
the integration, networking, hardware and software skills required to support
the Company's customers' in-house resources. During the year, the Company
expanded those offerings and resources to include consulting in system
implementation, script and graphical interface development, call center
operations and call center management.
HARDWARE SUPPORT -- Under the terms of an agreement with Grumman Systems Support
Corporation (GSSC), a wholly-owned subsidiary of Northrop Grumman Corp., GSSC
delivers hardware support services for the Unison(R) system and older CAS(R) and
SMC(R) product lines within the continental United States and Canada while Davox
continues to deliver software support services. In addition, GSSC provides
network design and systems integration services allowing Davox to focus its
expertise on customizing advanced calling centers for its clients.
CUSTOMER SERVICE REVENUE -- Customer service revenue accounted for $23.8 million
or 31.0% of the Company's total revenue in 1997, an increase of $7.4 million
from $16.5 million or 30.7% of the Company's total revenue in 1996, and an
increase of $9.6 million from $14.2 million or 37.7% of the Company's total
revenue in 1995. Customer service revenue as a percentage of total revenue
decreased in 1996 as compared to 1995 due largely to a 59% increase in product
revenue in 1996.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company employs an open system, client/server, relational database
approach in developing its unified call center solutions. The platform selected
for this approach is the Sun ULTRA(TM)/2/ family of workstations from Sun
Microsystems Inc. The Company's development efforts are focused on enhancing and
expanding the functionality of the Unison(R) system. Davox currently anticipates
that areas of potential product development may include integration links to
additional call center telephony components and the development of additional
telephone management and reporting capabilities.
The Company's continued success depends on, among other factors,
maintaining close working relationships with its customers and resellers and
anticipating and responding to their evolving applications needs. The Company is
committed to the development of new products, the improvement of existing
products and the continuing evaluation of new technologies.
During 1997, 1996 and 1995, the Company's research, development and
engineering costs were approximately $8.5 million, $5.9 million and $4.0
million, respectively, representing approximately 11.0%, 10.9% and 10.7%,
respectively, of total revenue during these periods. In the future, the Company
expects to incur approximately the same level of research, development
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and engineering expenditures as a percentage of total revenue as it did during
1997. In addition, the Company did not capitalize any of its software
development costs in 1997 or 1996.
OPERATIONS
While the majority of the Company's hardware needs are met by readily
available off-the-shelf technology, a small portion remains proprietary. These
proprietary hardware components are manufactured by third-party contractors, and
the Company believes there are many qualified vendors for these services. The
Company's production process consists primarily of final test, quality assurance
and systems integration that occurs at its Westford facility.
The Company attempts to maintain multiple sources of supply for key items
and believes it has adequate sources of supply for its expected needs. While any
of these sources could be replaced if necessary, the Company might face
significant delays in establishing replacement sources or in modifying its
products to incorporate replacement components or software code. There can be no
assurance that the Company will not suffer delays resulting from non-performance
by its vendors or cost increases due to a variety of factors, including
component shortages or changes in laws or tariffs applicable to items imported
by the Company.
COMPETITION
Davox systems compete against various outbound, inbound and blend calling
systems. Companies such as Mosaix Inc. (formerly Digital Systems International,
Inc.), Melita International Corporation, EIS International, Inc. and Genesys
Telecommunication Laboratories, Inc. Each company offers products with varying
levels of functionality in terms of system management, integration and
workstation support.
Certain of the Company's current and potential competitors are larger
companies that have greater financial, technical and marketing resources. It is
possible that competitors could produce products that perform the same or
similar functions as those performed by the Company's products.
The Company believes that the principal factors affecting competition are
ease of use and range of functionality, reliability, performance, price and
customer service, and that the Company competes favorably as to these factors.
RELIANCE ON INTELLECTUAL PROPERTY
The Company relies on a combination of patent, copyright, trademark,
contract and trade secret laws to establish and protect its proprietary rights
in its technology. The Company owns and licenses a number of patents relating to
predictive dialing, real-time telecommunication management and user interfaces.
Software products are furnished under software license agreements that grant
customers licenses to use, rather than to own, the products. The license
agreements contain provisions protecting the Company's ownership of the
underlying technology. Upon commencement of employment, employees execute an
agreement under which inventions developed during the course of employment will,
at the election of the Company, be assigned to the Company, and which further
prohibits disclosure of confidential Company information. In addition, effective
protection of intellectual property rights may be limited or unavailable in
certain foreign countries. There can be no assurances that the steps
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taken by the Company in this regard will be adequate to prevent misappropriation
of its technology or that Davox's competitors will not independently develop
technologies that are substantially equivalent of superior to Davox's
technology.
EMPLOYEES
As of December 31, 1997, the Company had 315 full-time employees, of whom
27 were engaged in operations, 203 in sales, marketing and customer support, 56
in research, development and engineering and 29 in general and administrative
functions. The Company's ability to attract and retain qualified personnel is
essential to its continued success. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company ever
experienced any work stoppage. The Company believes that its employee relations
are good.
ITEM 2-PROPERTIES
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The Company's administrative offices and its operations and development
facilities are located at a 60,000 square foot, two-story building in Westford,
Massachusetts. The facility is occupied under a lease that expires in September
2000. In addition, the Company leases facilities for district and regional
sales and service offices in seven states as well as in the U.K. and Mexico. The
current aggregate annual rental payments for all of the Company's facilities are
approximately $1.0 million.
ITEM 3-LEGAL PROCEEDINGS
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The Company is from time to time subject to claims arising in the ordinary
course of business. While the outcome of the claims cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the results of operations and financial condition of the Company.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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ITEM 4A-EXECUTIVE OFFICERS OF THE REGISTRANT
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The executive officers of the Company, the age of each, and the period
during which each has served in his present office are as follows:
MR. ALPHONSE M. LUCCHESE (62) has served as Chairman and Chief Executive Officer
since July 1994, and also served as President from July 1994 until January of
1998. Mr. Lucchese joined Davox following seven years as President and Chief
Executive Officer at Iris Graphics, a manufacturer of high quality color
printers. Prior to joining Iris, Mr. Lucchese had served as Vice President of
Sales at Xyvision, Inc., a manufacturer of computer-integrated publishing
systems sold to Fortune 500 companies, commercial printers and typesetters, and
government agencies. Mr. Lucchese was Vice President of Sales for Davox
Corporation from 1983 until 1984. Earlier, he had spent six years at Raytheon
Data Systems, where he attained the position of Vice President and General
Manager of Northeastern Operations. Following service in the U.S. Army during
the mid-1950s, Mr. Lucchese began his professional career at IBM as a systems
engineer, later moving into the position of marketing representative.
MR. LOUIS MARIANACCI (43) was named President of Davox and officially joined the
company in January of 1998. Mr. Marianacci's primary focus is on defining and
executing Davox's international growth strategy, third-party relationship
program, and acquisition strategy. Prior to joining Davox, Mr. Marianacci was
Vice President of Customer Sales and Service at Lucent Technologies' Call Center
business unit from 1995 to 1997. Prior to joining Lucent, Mr. Marianacci was
Vice President, Worldwide Industry Marketing Transportation at AT&T Global
Information Systems from 1994 to 1995. He also held executive management
positions of increasing responsibility at Unisys Corporation from 1989 to 1993,
Control Data Corporation from 1981 to 1988, and Ultramar Canada, Inc. from 1976
to 1981.
MR. DOUGLAS W. SMITH (55) has served as Vice President, Sales and Marketing
since September 1, 1994. Mr. Smith is responsible for the Company's direct and
reseller sales in both the United States and Canada, as well as product and
industry marketing, sales support and marketing communications. Mr. Smith
joined Davox in 1994, following seven years at Iris Graphics where he
contributed to that company's extraordinary growth. Prior to joining Iris, Mr.
Smith worked for nearly 20 years in sales, managerial, and executive-level
capacities for General Electric Information Systems, Honeywell Information
Systems, Raytheon Data Systems, and Phoenix Data Systems.
MR. JOHN J. CONNOLLY (41) has served as Vice President, Finance and Chief
Financial Officer since August 1, 1994, and was elected Treasurer in January
1997. Mr. Connolly joined Davox from Iris Graphics where he had been Vice
President of Finance since 1989. Prior to joining Iris, Mr. Connolly held
finance and accounting positions of increasing responsibilities at
Instrumentation Laboratory, a manufacturer of medical equipment.
MR. JAMES F. MITCHELL (51) is a founder of the Company and has served as Senior
Vice President and Chief Technical Officer since 1983. From September 1993 to
August 1994, Mr. Mitchell managed the domestic sales operations of the Company.
From 1981 to 1983, he was Vice President, Engineering of the Company. Prior to
joining Davox in 1981, Mr. Mitchell served as Manager of Systems Development at
Applicon, Inc., a producer of CAD/CAM products.
13
MR. MARK DONOVAN (43) has served as Vice President, Operations since August
1994. Since joining Davox in 1983, Mr. Donovan has held management positions of
increasing responsibility, including Vice President, Customer Service. He has
also held various materials and manufacturing management positions within the
Company. Prior to joining Davox, Mr. Donovan held various management positions
with Applicon, Inc. and Raytheon Corporation.
MR. JOHN E. CAMBRAY (42) has served as Vice President, Product Development since
August 1993. Mr. Cambray has been with Davox since early 1982 and has held
various software development and engineering management positions during this
time. Prior to joining Davox, Mr. Cambray held various design and management
positions with FASFAX Corporation and Sanders Associates.
MR. DOUGLAS P. LANGENBERG (52) has served as Vice President, Customer Services
since May 1996. Mr. Langenberg joined Davox following four years at Stratus
Computer, Inc., where he held the position of Vice President, Customer Services.
Prior to joining Stratus, Mr. Langenberg held executive-level positions with
Apollo Computer, Inc. and Digital Equipment Corporation, as well as founding and
serving as principal in a service-oriented consulting firm.
RICHARD P. SANTOS (61) has served as Vice President of International Operations
since May 1996. In this position, Mr. Santos is responsible for Davox's
international sales and support activities. His duties also include management
and development of Davox's distribution channels into its key international
markets, including Europe, Latin America, Asia/Pacific Rim, Middle East, and
Africa. Mr. Santos brings to Davox nearly 35 years of domestic and international
experience in management, sales, marketing, and business development. Prior to
joining Davox, he held senior level business development and management
positions with several leading high-technology companies, including President
and Chief Executive Officer of Monet, Inc., President of Pako Corporation, and
co-founder and Senior Vice President of Iris Graphics.
Officers are elected by and serve at the discretion of the Board of Directors.
14
PART II
ITEM 5-MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
Davox's Common Stock has been traded on the Nasdaq stock market under the symbol
"DAVX" since its initial public offering on April 28, 1987. Prior to that date
there was no public market for Davox's Common Stock. The following table sets
forth the range of high and low sale prices per share of Common Stock on the
National Market System for each quarter of the years ended December 31, 1997 and
1996 as reported by the National Association of Securities Dealers Automated
Quotation System (NASDAQ). On April 24, 1997, the Company effected a three for
two stock split through the issuance of a 50% stock dividend payable on May 28,
1997 to shareholders of record on May 13, 1997. All share and per share
amounts affected by this split, that are contained in this annual report on Form
10-K have been retroactively adjusted for all periods presented.
Fiscal 1997
High Low
--------------
First Quarter 30-1/6 16-2/3
Second Quarter 35-7/8 20
Third Quarter 38-5/8 27-3/4
Fourth Quarter 39-3/4 25-1/8
Fiscal 1996
High Low
--------------
First Quarter 12-1/4 7-1/2
Second Quarter 21-2/3 11-1/2
Third Quarter 26-1/6 15-5/6
Fourth Quarter 30-1/6 20-1/2
As of February 27, 1998, there were approximately 320 holders of record of the
Company's Common Stock and approximately 3,150 beneficial shareholders of the
Company's Common Stock.
The Company has never paid cash dividends on its Common Stock and has no present
intentions to pay cash dividends in the future. The Company intends to retain
any future earnings to finance the growth of the Company.
The Company has not sold any equity securities during the period covered by this
report that were not registered under the Securities Act of 1933, as amended.
15
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth certain condensed consolidated financial data
with respect to the Company for each of the five years in the period ended
December 31, 1997:
Years Ended December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands, Except Share Amounts)
Condensed Consolidated Statement of Operations Data:
Total revenue................................... $76,815 $53,642 $37,556 $30,047 $33,756
Cost of revenue................................. 26,550 21,577 16,451 16,234 17,488
------------ --------- --------- --------- ---------
Gross profit............................... 50,265 32,065 21,105 13,813 16,268
Research, development and
engineering expenses........................ 8,479 5,861 4,020 3,540 3,391
Selling, general and
administrative expenses..................... 22,852 17,213 12,166 12,681 12,472
Restructuring costs ............................ - - - - - - - - - 3,379 - - -
------------ -------- -------- --------- ---------
Income (loss) from operations................... 18,934 8,991 4,919 (5,787) 405
Interest income, net............................ 1,952 1,137 421 37 20
------------ -------- -------- --------- ---------
Income (loss) before provision
for income taxes........................... 20,886 10,128 5,340 (5,750) 425
Provision for income taxes...................... 2,506 1,013 534 - - - 40
------------ -------- -------- --------- ---------
Net income (loss).......................... $18,380 $9,115 $4,806 ($5,750) $385
============ ======== ======== ========= =========
Earnings per share
Basic $1.60 $.85 $.48 ($.67) $.05
============ ======== ======== ========= =========
Diluted.................................... $1.45 $.74 $.42 ($.67) $.04
============ ======== ======== ========= =========
Weighted average shares outstanding
Basic...................................... 11,522,057 10,730,760 10,077,380 8,533,095 7,898,361
============ ========== ========== ========= =========
Diluted.................................... 12,663,245 12,285,244 11,565,830 8,533,095 8,663,963
============ ========== ========== ========= =========
December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------
(In Thousands)
Condensed Consolidated Balance Sheet Data:
Working capital........................... $48,804 $18,710 $8,589 $1,807 $3,627
Total assets.............................. 75,168 39,729 20,825 14,777 17,681
Long-term debt............................ - - - - - - 45 138 96
Stockholders' equity...................... 54,157 22,835 10,912 5,492 8,881
16
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated future capital requirements,
the Company's future development plans, the Company's ability to obtain debt,
equity or other financing, and the Company's ability to generate cash from
operations, are based on current expectations. These statements are forward
looking in nature and involve a number of risks and uncertainties, as more fully
described under "Factors Affecting Future Performance." Actual results may
differ materially.
The following table sets forth, for the periods indicated, the percentage of
revenue represented by items as shown in the Company's Consolidated Statements
of Operations. This table should be read in conjunction with the Selected
Financial Data, Consolidated Financial Statements and Notes to Consolidated
Financial Statements contained elsewhere herein.
PERCENTAGE OF TOTAL REVENUE FOR THE
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------
Product revenue 69.0% 69.3% 62.3%
Service revenue 31.0 30.7 37.7
- --------------------------------------------------------------------
Total revenue 100.0 100.0 100.0
Cost of revenue 34.6 40.2 43.8
- --------------------------------------------------------------------
Gross profit 65.4 59.8 56.2
Research, development
and engineering expenses 11.0 10.9 10.7
Selling, general and
administrative expenses 29.7 32.1 32.4
- --------------------------------------------------------------------
Income from operations 24.7 16.8 13.1
Interest income 2.5 2.1 1.1
- --------------------------------------------------------------------
Income before provision
for income taxes 27.2 18.9 14.2
Provision for income taxes 3.3 1.9 1.4
- --------------------------------------------------------------------
Net income 23.9% 17.0% 12.8%
- --------------------------------------------------------------------
17
Total revenue was approximately $76.8 million, $53.6 million and $37.6
million for the fiscal years ended December 31, 1997, 1996 and 1995,
respectively. Total revenue increased 43.2% for the year ended December 31,
1997 compared to the same period in 1996 and increased 42.8% in fiscal year 1996
compared to fiscal year 1995. Total cost of revenues as a percentage of total
revenue was 34.6% in fiscal year 1997, 40.2% in fiscal year 1996 and 43.8% in
fiscal year 1995.
Product revenue was approximately $53.0 million, $37.2 million and $23.4
million in fiscal years 1997, 1996 and 1995, respectively. Product revenue
increased by 42.5% from 1996 to 1997 and increased 59.0% from 1995 to 1996.
These increases were caused by increased demand for the Unison(R) call center
management system, especially the telemarketing and collections capabilities, as
well as the inbound/outbound call blending capabilities in 1997.
Cost of product revenue as a percentage of product revenue was 22.4%, 29.3%
and 30.6% in fiscal years 1997, 1996 and 1995, respectively. The continued
improvements in product margin in 1997 represent the increased volume of product
shipments relative to fixed costs, and a higher margin product mix.
Service revenue was approximately $23.8 million, $16.5 million, and $14.2
million in fiscal years 1997, 1996 and 1995, respectively. Service revenue
increased 44.7% from 1996 to 1997 and 16.2% from 1995 to 1996. The increases in
1997 and 1996 were due to an increase in maintenance revenue related to the
growth in the installed base of the Company's products in recent years and
increased installation and training revenue related to the increased volume of
product shipments.
Cost of service revenue as a percentage of service revenue was 61.6%, 64.9%
and 65.6% in 1997, 1996 and 1995, respectively. The decreases as a percentage
of service revenue were primarily attributable to the higher service revenue
relative to fixed costs.
Revenue from the Company's largest single customer in each of 1997, 1996
and 1995 was 11%, 4% and 12% of total revenue, respectively. Revenue from the
Company's three largest customers amounted to 20% of total revenue in 1997, 12%
of total revenue in 1996 and 20% of total revenue in 1995. The Company intends
to broaden its base of existing and new customers by penetrating new markets,
expanding its direct international sales force and using alternate channels of
distribution, thereby decreasing its dependence on its largest end user
customers.
Research, development and engineering expenses were approximately $8.5
million, $5.9 million and $4.0 million, representing 11.0%, 10.9% and 10.7% of
total revenue during 1997, 1996 and 1995, respectively. These increases were
primarily attributable to higher payroll and related expenses resulting from
personnel increases in 1996 and 1997.
Selling, general and administrative (SG&A) expenses were approximately
$22.9 million, $17.2 million and $12.2 million, representing 29.7%, 32.1% and
32.4% of total revenue during 1997, 1996 and 1995, respectively. The absolute
dollar increases were primarily attributable to increased payroll and related
expenses resulting from personnel increases, and direct and indirect selling
expenses related to the increased revenue. The decreases as a
18
percentage of revenue in 1997 and 1996 were mostly attributable to the
significant increase in revenues.
Interest income, derived primarily from money market instruments and
investments in bonds and commercial paper increased 70.4% from 1996 to 1997 and
159.9% from 1995 to 1996. These increases were due primarily to the
significantly higher average cash and cash equivalent and marketable securities
balances from year to year, and, to a lesser extent, due to higher interest
rates.
INCOME TAXES
The Company's effective income tax rate in 1997 was approximately 12%. This
is lower than the combined federal and statutory tax rates due primarily to
utilization and recognition of net operating loss carryforwards. The Company's
provision for income taxes in 1996 and 1995 was at the federal and state minimum
rates. The Company believes that the effective tax rate will increase
significantly in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal sources of liquidity were
its cash and cash equivalent balances of approximately $25.4 million, and its
marketable securities of approximately $23.8 million. As of the end of fiscal
1996, the Company's cash and cash equivalent balances were approximately $21.3
million, and its marketable securities were approximately $9.8 million. The
overall increase in cash and cash equivalents and marketable securities was due
primarily to the favorable operating results, collection of deferred annual
maintenance contracts, and proceeds from exercises of stock options. In
addition, the Company has an agreement for a working capital line of credit with
a bank for up to $2.0 million based on eligible receivables, as defined. There
were no outstanding balances as of December 31, 1997 or 1996 under this line of
credit.
The Company's primary investing activities were purchases and sales of
marketable securities and purchases of property and equipment. Property and
equipment investments were approximately $3.9 million in 1997 compared to
approximately $4.1 million in 1996. Purchases and sales of marketable
securities generated a net cash outflow approximately $14.0 million in 1997
compared to a net cash outflow of approximately $9.8 million in 1996.
Cash provided by financing activities is generated primarily from proceeds
from exercises of stock options. Proceeds from exercises of stock options were
approximately $1.8 million in 1997 and 1996.
Working capital as of December 31, 1997 was approximately $48.8 million as
compared to approximately $18.7 million as of December 31, 1996. Total assets
as of December 31, 1997 were approximately $75.2 million compared to
approximately $39.7 million as of December 31, 1996. The increase from 1996 to
1997 was primarily attributable to increases in cash and cash equivalents,
marketable securities and accounts receivable due to the favorable operating
results for 1997, as well as the recognition of a deferred tax asset in 1997.
19
Management believes, based on the current operating plan, that the
Company's existing cash and cash equivalents, marketable securities, cash
generated from operations and amounts available under its working capital line
of credit will be sufficient to meet the Company's cash requirements for the
foreseeable future.
IMPACT OF INFLATION
The Company believes that inflation did not have a material effect on the
results of operations in 1997.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Management does not expect the
adoption of this standard to have a material impact on the Company and its
operations.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to restate prior period information upon adoption. Management does
not expect the adoption of this standard to have a material impact on the
Company and its operations.
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company is in the process of conducting an assessment of its computer
information systems and is beginning to take the necessary steps to determine
the nature and extent of the work required to make its systems Year 2000
compliant, where necessary. These steps will require the Company to modify,
upgrade or replace some of its internal financial and operational systems. The
Company continues to evaluate the estimated cost of bringing all internal
systems, equipment and operations into Year 2000 compliance, but has not yet
finished determining the total cost of these compliance efforts. While these
efforts will involve additional costs, the Company believes, based upon
currently available information, that these costs will not have a material
adverse effect on its business, financial condition or results of
20
operations. However, if these efforts are not completed on time, or if the cost
of updating or replacing the Company's information systems exceeds the Company's
current estimates, the Year 2000 issue could have a material adverse impact on
the Company's business, financial condition or results of operations.
The Company also intends to determine the extent to which the Company may
be vulnerable to any failures by its major suppliers, distributors and service
providers to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time the Company is
unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of third party suppliers, distributors and service
providers to achieve Year 2000 compliance, although the Company does not
currently anticipate that it will experience any material shipment delays from
its major product suppliers or any material sales delays from its major
distributors due to Year 2000 issues. However, there can be no assurance that
these third parties will not experience Year 2000 problems or that any problems
would not have a material effect on the Company's product supply and
distribution channels. Because the cost and timing of Year 2000 compliance by
third parties such as suppliers, distributors and service providers is not
within the Company's control, no assurance can be given with respect to the cost
or timing of such efforts or any potential adverse effects on the Company of any
failure by these third parties to achieve Year 2000 compliance.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by
its employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K) may contain statements which are
not historical facts, so-called "forward-looking statements," which involve
risks and uncertainties. In particular, but without limitation, statements in
"Item 1. Business" relating to expansion of the Business Partners Program, and
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" relating to the Company's intent to broaden its customer
base and decrease reliance on its largest customers and the sufficiency of
working capital, may be forward-looking statements. The Company's actual future
results may differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but are not
limited to, the factors discussed below. Each of these factors, and others, are
discussed from time to time in the Company's filings with the Securities and
Exchange Commission.
The Company's future results may be subject to substantial risks and
uncertainties. The Company purchases certain equipment for its products from
third-party suppliers and licenses certain components of its software code from
a number of third-party vendors. While the Company believes that third-party
equipment and software vendors could be replaced if necessary, the Company might
face significant delays in establishing replacement sources or in modifying its
products to incorporate replacement components or software code. There can be
no assurance that the Company will not suffer delays resulting from non-
performance by its vendors or cost increases due to a variety of factors,
including component shortages. Also, the Company relies on certain intellectual
property protections to preserve its intellectual property rights. Any
invalidation of the Company's intellectual property rights or lengthy and
21
expensive defense of those rights could have a material adverse affect on the
financial position and results of operations of the Company. The development of
new products, the improvement of existing products and the continuing evaluation
of new technologies is critical to the Company's success. Successful product
development and introduction depends upon a number of factors, including
anticipating and responding to the evolving applications needs of customers and
resellers, timely completion and introduction of new products, and market
acceptance of the Company's products. The telecommunications industry is
extremely competitive. Certain current and potential competitors of the Company
are more established, benefit from greater market recognition and have
substantially greater financial, development and marketing resources than the
Company.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially adversely affect revenue and
profitability, including the timing of customer orders; the Company's ability to
introduce new products on a timely basis; introduction of products and
technologies by the Company's competitors; and market acceptance of the
Company's and its competitors' products; the ability to hire and retain key
personnel. International sales are expected to continue to account for a
significant portion of Davox's net sales in future periods. International sales
are subject to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable and potentially adverse tax treatment. As a result of the foregoing
and other factors, the Company may experience material fluctuations in future
operating results on a quarterly or annual basis, which could materially and
adversely affect its business, financial condition, results of operations and
stock price.
Year 2000 Systems Modifications - We are continually in the process of
updating our information and network systems and, as part of that process, we
are evaluating the costs associated with modifying and testing our systems for
the Year 2000. We expect to make some of the necessary modifications through
our ongoing investment in systems upgrades. We are not yet able to estimate the
incremental cost of the Year 2000 conversion effort but such costs will be
expensed as incurred. The costs incurred to date have not been material. There
can be no assurance, however, that there will not be a delay in, or increased
costs associated with, the implementation of such changes, and the Corporation's
inability to implement such changes could have an adverse effect on future
results of operations.
22
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------------------
Index to Consolidated Financial Statements
- ------------------------------------------
Page
----
Report of Independent Public Accountants 24
Consolidated Balance Sheets as of December 31,
1997 and 1996 25
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995 26
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1997, 1996
and 1995 27
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements 29
Report of Independent Public Accountants on Financial
Statement Schedule 45
Financial Statement Schedule 46
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Davox Corporation:
We have audited the accompanying consolidated balance sheets of Davox
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Davox Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 1998
24
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
December 31, December 31,
1997 1996
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,366 $ 21,333
Marketable securities 23,802 9,780
Accounts receivable, net of reserves of
approximately $1,048 and $699
in 1997 and 1996, respectively 10,359 3,185
Deferred tax asset 9,319 - - - -
Prepaid expenses and other current assets 969 1,306
-------------- --------------
Total current assets 69,815 35,604
Property and equipment, net 4,585 4,051
Long-term deferred tax asset 669 - - - -
Other assets, net 99 74
-------------- --------------
$ 75,168 $ 39,729
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,987 $ 4,811
Accrued expenses 10,223 6,175
Customer deposits 2,018 3,414
Deferred revenue 3,783 2,494
-------------- --------------
Total current liabilities 21,011 16,894
-------------- --------------
Commitments and Contingencies (Note 6)
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000,000 shares
Issued - 11,864,216 and 11,080,749
shares in 1997 and 1996, respectively 1,186 1,108
Capital in excess of par value 57,758 44,894
Accumulated deficit (4,763) (23,143)
-------------- --------------
54,181 22,859
Less - Treasury Stock, 3,294 shares at (24) (24)
-------------- --------------
Total stockholders' equity 54,157 22,835
-------------- --------------
$ 75,168 $ 39,729
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
25
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Amounts)
Years Ended December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
Product revenue $52,993 $37,177 $23,382
Service revenue 23,822 16,465 14,174
------------- ------------ -------------
Total revenue 76,815 53,642 37,556
------------- ------------ -------------
Cost of product revenue 11,874 10,883 7,156
Cost of service revenue 14,676 10,694 9,295
------------- ------------ -------------
Total cost of revenue 26,550 21,577 16,451
------------- ------------ -------------
Gross profit 50,265 32,065 21,105
------------- ------------ -------------
Research, development and
engineering expenses 8,479 5,861 4,020
Selling, general and administrative
expenses 22,852 17,213 12,166
------------- ------------ -------------
Total operating expenses 31,331 23,074 16,186
------------- ------------ -------------
Income from operations 18,934 8,991 4,919
Interest income 1,952 1,137 421
------------- ------------ -------------
Income before provision
for income taxes 20,886 10,128 5,340
Provision for income taxes 2,506 1,013 534
------------- ------------ -------------
Net income $ 18,380 $ 9,115 $ 4,806
============ =========== ============
Earnings per share:
Basic $1.60 $0.85 $0.48
============ =========== ============
Diluted $1.45 $0.74 $0.42
============ =========== ============
Weighted average shares outstanding:
Basic 11,522,057 10,730,760 10,077,380
============ =========== ============
Diluted 12,663,245 12,285,244 11,565,830
============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
26
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
Capital in Total
Common Stock Excess of Accumulated Treasury Stock Stockholders'
Shares Par Value Par Value Deficit Shares Amount Equity
----------- ----------- ------------- ------------- -------- --------- -------------
BALANCE, December 31, 1994 9,869,494 $ 987 $ 41,593 $ (37,064) (3,294) $ (24) $ 5,492
Proceeds from exercise of stock
options, including related tax benefit 385,137 39 539 - - - - - - - - - - - - 578
Proceeds from employee stock
purchase plan 13,104 1 35 - - - - - - - - - - - - 36
Net income - - - - - - - - - - - - 4,806 - - - - - - - - 4,806
----------- ----------- ------------- ------------- -------- --------- -------------
BALANCE, December 31, 1995 10,267,735 1,027 42,167 (32,258) (3,294) (24) 10,912
Proceeds from exercise of stock
options, including related tax benefit 798,035 79 2,638 - - - - - - - - - - - - 2,717
Proceeds from employee stock
purchase plan 14,979 2 89 - - - - - - - - - - - - 91
Net income - - - - - - - - - - - - 9,115 - - - - - - - - 9,115
----------- ----------- ------------- ------------- -------- --------- -------------
BALANCE, December 31, 1996 11,080,749 1,108 44,894 (23,143) (3,294) (24) 22,835
Proceeds from exercise of stock
options, including related tax benefit 771,314 77 12,620 - - - - - - - - - - - - 12,697
Proceeds from employee stock
purchase plan 12,153 1 244 - - - - - - - - - - - - 245
Net income - - - - - - - - - - - - 18,380 - - - - - - - - 18,380
-------------- ----------- ------------- ------------- -------- --------- -------------
BALANCE, December 31, 1997 11,864,216 $ 1,186 $ 57,758 $ (4,763) (3,294) $ (24) $ 54,157
============== =========== ============= ============= ======== ========= =============
The accompanying notes are an integral part of these consolidated financial
statements.
27
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Years Ended December 31,
--------------------------------------
1997 1996 1995
------------- ----------- ----------
Cash flows from operating activities:
Net income $18,380 $ 9,115 $ 4,806
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 3,387 2,373 2,644
Deferred income taxes 0 - - - - - -
Changes in current assets and liabilities -
Accounts receivable (7,174) 1,275 240
Prepaid expenses and other current assets 337 (245) (84)
Accounts payable 176 1,844 397
Accrued expenses 4,947 3,039 71
Customer deposits (1,396) 2,121 462
Deferred revenue 1,289 865 (229)
------------- ----------- ----------
Net cash provided by operating activities 19,946 20,387 8,307
------------- ----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (3,921) (4,134) (1,230)
(Increase) decrease in other assets (25) 3 41
Purchases of marketable securities (39,025) (10,865) - - -
Sales/maturities of marketable securities 25,003 1,085 - - -
------------- ----------- ----------
Net cash used in investing activities (17,968) (13,911) (1,189)
------------- ----------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,810 1,830 504
Proceeds from exercise of employee stock purchase plan 245 91 36
------------- ----------- ----------
Net cash provided by financing activities 2,055 1,921 540
------------- ----------- ----------
Net increase in cash and cash equivalents 4,033 8,397 7,658
Cash and cash equivalents, beginning of year 21,333 12,936 5,278
------------- ----------- ----------
Cash and cash equivalents, end of year $25,366 $ 21,333 $12,936
============= =========== ==========
Supplemental disclosures of cash flow information:
Cash paid for-
Income taxes $ 265 $ 429 $ 185
============= =========== ==========
Supplemental disclosure of non-cash investing and financing activities:
Recognition of tax benefit relating to disqualifying
dispositions and exercise of non-qualified stock options $10,887 $ 888 $ 73
============= =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
28
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) Operations and Significant Accounting Policies
Davox Corporation (the Company) is a software and systems integration
company that develops, markets, implements, supports and services management
systems for call center operations located throughout the world. These systems
are marketed directly, through joint marketing relationships and distribution
agreements. The Company markets its systems to banks, consumer finance
organizations, retailers, entertainment companies, telemarketing organizations
and utilities.
These consolidated financial statements reflect the application of certain
significant accounting policies as described below and elsewhere in the
accompanying consolidated financial statements.
(a) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(b) Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 91-1 (SOP 91-1), Software Revenue Recognition. The
Company generates software revenue from licensing the rights to use its software
products. The Company also generates service revenues from the sale of product
maintenance contracts and consulting services.
Revenue from software license fees are recognized upon delivery, net of
estimated returns, provided there are no significant postdelivery obligations,
and payment is due within one year and is probable of collection. If acceptance
is required, software license revenue is recognized upon customer acceptance.
Fees for consulting services are recognized upon customer acceptances or over
the period in which services are provided if customer acceptance is not
required, and the revenue is fixed and determinable. Maintenance revenue is
deferred at the time of software license revenue recognition and is recognized
ratably over the term of the support period, which is typically one year.
In October 1997, the American Institute of Certified Public Accountants
issued SOP 97-2, Software Revenue Recognition. The Company believes that its
revenue recognition practices are consistent with those required by SOP 97-2.
29
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
(c) Warranty Costs
The Company warrants its products for 90 days and provides for estimated
warranty costs upon shipment of such products. Warranty costs have not been and
are not anticipated to be significant.
(d) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(e) Postretirement Benefits
The Company has no obligations for postretirement or general postemployment
benefits.
(f) Cash, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with original
maturities of three months or less at the time of acquisition to be cash
equivalents. Cash equivalents consist mainly of commercial paper.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Under SFAS No. 115, securities that the Company
has the positive intent and ability to hold to maturity are reported at
amortized cost and are classified as held-to-maturity. Held-to-maturity
securities consisted mainly of investments in Euro dollar bonds and high grade
commercial paper instruments at December 31, 1997 and high grade commercial
paper instruments at December 31, 1996. All of these investments are classified
as current as they mature within one year.
30
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(l) Operations and Significant Accounting Policies (Continued)
(f) Cash, Cash Equivalents and Marketable Securities (Continued)
At December 31, 1997 and 1996, marketable securities consisted of the
following (in thousands):
1997 1996
Total Total Total Total
Market Amortized Market Amortized
Value Cost Value Cost
--------------------------------------
Euro dollar bonds.......................................... $11,326 $11,334 $ ----- $ -----
(maturity 4-6 months)
Commercial paper obligations............................... 7,082 7,040 9,780 9,780
(maturity 3-6 months)
Corporate bonds............................................ 3,447 3,448 ----- -----
(maturity 4-5 months)
Federal agency issues...................................... 2,010 1,980 ----- -----
------- ------- ------- ---------
(maturity 6 months) $23,865 $23,802 $ 9,780 $ 9,780
======= ======= ======= =========
(g) Property and Equipment
The Company provides for depreciation and amortization of property and
equipment using the straight-line and declining-balance methods by charges to
operations in amounts to allocate the cost of the property and equipment over
their estimated useful lives. The cost of property and equipment and their
useful lives are summarized as follows (in thousands):
December 31,
---------------------------
Estimated
Asset Classification Useful Life 1997 1996
- -------------------- ----------- ---- ----
Office equipment and software.. 2-5 Years $ 9,996 $6,705
Rental and demonstration
equipment................... 2-3 Years 367 427
Service equipment.............. 1-5 Years 2,166 2,180
Leasehold improvements......... Life of Lease 199 184
------- ------
12,728 9,496
Less-Accumulated depreciation
and amortization............ 8,143 5,445
------- ------
$ 4,585 $4,051
======= ======
31
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
(h) Research and Development and Software Development Costs
Research and development costs have been charged to operations as incurred.
SFAS No. 86, Accounting for the Costs of Computer Software To Be Leased, Sold,
or Otherwise Marketed, requires the capitalization of certain computer software
development costs incurred after technological feasibility is established. The
Company believes that once technological feasibility of a software product has
been established, the additional development costs incurred to bring the product
to a commercially acceptable level are not significant.
(i) Earnings Per Share
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Earnings per Share. This statement established standards for computing
and presenting earnings per share and applies to entities with publicly traded
common stock or potential common stock. This statement is effective for fiscal
years ending after December 15, 1997. The prior years' earnings per share have
been retroactively restated in accordance with this statement. Basic earnings
per share was determined by dividing net income by the weighted average shares
of common stock outstanding during the year. Diluted earnings per share
reflects the dilution of the potentially dilutive securities, primarily stock
options based on the treasury stock method.
The calculations of basic and diluted earnings per share are as follows (in
thousands, except per share data):
1997 1996 1995
------- ------- -------
Net Income $18,380 $ 9,115 $ 4,806
======= ======= =======
Basic weighted average shares outstanding 11,522 10,731 10,077
Weighted average common equivalent shares 1,141 1,554 1,489
------- ------- -------
Diluted weighted average shares outstanding 12,663 12,285 11,566
======= ======= =======
Basic earnings per share $ 1.60 $ 0.85 $ 0.48
Diluted earnings per share $ 1.45 $ 0.74 $ 0.42
32
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
Earnings Per Share (Continued)
In 1997, 55,042 weighted average common equivalent shares were not included
in the diluted weighted average shares outstanding as they were antidilutive.
There were no antidilutive shares in 1996 and 1995.
(j) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company places its
temporary cash investments in financial institutions. The Company has not
experienced significant losses related to receivables from individual customers
or groups of customers in any specific industry or by geographic area. Due to
these factors, no additional credit risk beyond amounts provided for collection
losses is believed by management to be inherent in the Company's accounts
receivable. The Company had one customer and no customers with amounts due to
the Company of greater than 10% of accounts receivable as of December 31, 1997
and 1996, respectively.
(k) Derivative Financial Instruments and Fair Value of Financial Instruments
The Company does not have any derivative or other financial instruments as
defined by SFAS No. 119, Disclosures About Derivative Financial Instruments and
Fair Value of Financial Instruments.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
short term investments, accounts receivable and accounts payable. The estimated
fair value of these financial instruments approximates their carrying value at
December 31, 1997 and 1996 due to the short-term nature of these instruments.
33
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(1) Operations and Significant Accounting Policies (Continued)
(l) Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Management does not expect the
adoption of this standard to have a material impact on the Company and its
operations.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to restate prior period information upon adoption. Management does
not expect the adoption of this standard to have a material impact on the
Company and its operations.
(2) Line of Credit
The Company has a working capital line of credit (line of credit) with a
bank that expires in June 1998, if not renewed, pursuant to which the Company
may borrow up to the lesser of $2.0 million or a percentage of accounts
receivable, as defined. Borrowings under the line of credit will bear interest
at the bank's prime rate (8.5% at December 31, 1997). There were no borrowings
under the line of credit during 1997 and 1996.
(3) Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31,
-----------------
1997 1996
-------- -------
Income taxes..................... $ 2,230 $ ---
Payroll and payroll related...... 3,217 2,064
Other............................ 4,776 4,111
------- ------
$10,223 $6,175
======= ======
34
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(4) 401(k) Plan
The Company maintains The Davox Corporation 401(k) Retirement Plan (the
Plan), which is a deferred contribution plan that covers all full-time employees
over 21 years of age who have completed at least six months of service with the
Company. The participants may make pretax deferred contributions to the plan of
up to 15% of the annual compensation, as defined. Contributions by the Company
are discretionary and are determined by the Board of Directors. The Company made
discretionary contributions of approximately $214,000 and $161,000 in 1997 and
1996, respectively. There were no Company contributions to the Plan in 1995.
(5) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes (FAS 109). Under the liability method specified by
FAS 109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when these differences
are expected to reverse.
The components of the provision for income taxes consist of the following
(in thousands):
Fiscal Years Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
Current:
Federal.......................... $ 5,700 $ 203 $ 107
State............................ 1,606 810 427
----- --- ---
Total current.................. 7,306 1,013 534
----- ----- ---
Deferred:
Federal.......................... (4,300) ---- ----
State............................ (500) ---- ----
----- ---- ----
Total deferred................. (4,800) ---- ----
------- ----- -----
Provision for Income Taxes................ $ 2,506 $ 1,013 $ 534
===== ======= ======
35
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(5) Income Taxes (Continued)
The provision for income taxes that is currently payable for the years
ended December 31, 1997 and 1996 does not reflect $10,887,000 and $888,000,
respectively, of tax benefits included in additional paid in capital related to
disqualifying dispositions and the exercise of non-qualified stock options.
The approximate income tax effect of each type of temporary difference
comprising the deferred tax asset is approximately as follows (in thousands):
1997 1996
-------- ---------
Net operating loss carryforwards.. $ 5,190 $ 8,153
Depreciation...................... 762 571
Inventory reserves................ 1,442 561
Tax credit carryforwards.......... 800 577
Other temporary differences....... 2,594 1,940
------- --------
10,788 11,802
Valuation allowance............... (800) (11,802)
------- --------
$ 9,988 $ ------
======== ========
At December 31, 1997, the Company has available net operating loss
carryforwards and tax credit carryforwards of approximately $13,097,000 and
$800,000, respectively, expiring through 2009. These carryforwards may be used
to offset future income taxes payable, if any, and are subject to review by the
Internal Revenue Service. All of the net operating loss carryforwards as of
December 31, 1997 relate to the excess tax benefit of disqualifying dispositions
and the exercise of non-qualified stock options, which is included in additional
paid in capital as discussed below.
In accordance with FAS 109, the Company records a valuation allowance
against its deferred tax asset to the extent management believes it is more
likely than not that the asset will be realized. As of December 31, 1997, the
Company believes that its deferred tax asset will be realizable except to the
extent of certain tax credit carryforwards which may expire. Accordingly, the
reduction in the valuation allowance during 1997 was recorded as a $4.8 million
reduction of the provision for income taxes for the net operating losses, not
attributed to stock options, and a $10.9 million credit to additional paid in
capital relating to the tax benefit of certain stock option exercises.
36
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(5) Income Taxes (Continued)
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
Years Ended December 31,
---------------------------
1997 1996 1995
-------- -------- -------
Federal statutory tax rate............................. 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit.. 5.0 6.3 6.3
Reduction in valuation allowance/utilization of
net operating loss carryforwards....................... (28.0) (29.0) (27.7)
Foreign sales corporation benefit...................... (1.0) --- ---
Other.................................................. 2.0 (1.3) (2.6)
----- ----- -----
Effective tax rate..................................... 12.0% 10.0% 10.0%
===== ===== =====
(6) Commitments and Contingencies
(a) Operating Lease Commitments
The Company leases its facilities and sales offices under operating leases
that expire at various dates through October 2001. The Company's lease for its
corporate headquarters expires in September 2000. Pursuant to the lease
agreements, the Company is responsible for maintenance costs and real estate
taxes. Total rental expense for all operating leases for the years ended
December 31, 1997, 1996 and 1995 amounted to approximately $803,000, $507,000
and $551,000, respectively.
37
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(6) Commitments and Contingencies (Continued)
(a) Operating Lease Commitments (Continued)
Future minimum lease payments are approximately as follows at December 31,
1997 (in thousands):
Years Ending December 31, Amount
--------------------------- -------
1998.................... $ 977
1999.................... 816
2000.................... 579
2001.................... 85
------
$2,457
======
(b) Employment and Severance Agreements
The Company has entered into employment and severance agreements with
certain officers and key employees whereby the Company may be required to pay
the officers and employees a total of approximately $1,537,000 upon termination
of employment by the Company under certain circumstances, as defined.
(c) Litigation
The Company is presently engaged in various legal actions and its ultimate
liability, if any, cannot be determined at the present time. However,
management has consulted with legal counsel, and management believes that any
such liability will not have a material adverse effect on the Company's
financial position or its results of operations.
(7) Stockholders' Equity
(a) Stock Split
On April 24, 1997, the Company effected a three-for-two stock split through
the issuance of a 50% stock dividend payable on May 28, 1997 to shareholders of
record on May 13, 1997. All share and per share amounts have been
retroactively adjusted for all periods presented.
38
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(7) Stockholders' Equity (Continued)
(b) 1986 Stock Plan
The Company's 1986 Stock Plan (the "1986 Plan"), administered by the Board
of Directors authorizes the issuance of a maximum of 3,696,429 shares of common
stock for the exercise of options in connection with awards or direct purchases
of stock. Options granted under the 1986 Plan may be either nonstatutory stock
options or options intended to constitute "incentive stock options" under the
Internal Revenue Code. Stock options may be granted to employees, officers,
employee-directors or consultants of the Company and are exercisable in such
installments as the Board of Directors may specify. The options granted
currently vest over a four-year period and expire ten years from the date of
grant. The 1986 Plan terminated pursuant to its terms in September 1996.
(c) 1996 Stock Plan
The Company's 1996 Stock Plan (the "1996 Plan") administered by the Board
of Directors authorizes the issuance of a maximum of 1,350,000 shares of common
stock for the exercise of options in connection with awards or direct purchases
of stock. Options granted under the 1996 Plan may be either nonstatutory stock
options or options intended to constitute "incentive stock options" under the
Internal Revenue Code. Stock options may be granted to employees, officers,
employee-directors or consultants of the Company and are exercisable in such
installments as the Board of Directors may specify. The shares currently vest to
the individual over a four-year period. There were 300,461 shares available for
future grants under the 1996 Plan at December 31, 1997.
(d) Stock Options to Directors
The Company's 1988 Non-employee Director Stock Option Plan (the "1988
Plan"), as amended, is administered by the Board of Directors and authorizes the
issuance of a maximum of 600,000 shares of common stock for the exercise of
options. The 1988 Plan provides for the automatic grant of options for 60,000
shares to each newly elected non-employee director and additional grants of
15,000 options per biennial anniversary of election to the Board of Directors.
Options granted under the 1988 Plan vest 25% per year beginning one year from
the date of grant and expire five years from the date of grant. There are
326,250 shares available for future grants under the 1988 Plan at December 31,
1997.
39
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(7) Stockholders' Equity (Continued)
(e) Stock Plan Summary
The following is a summary of the stock option activity for all plans for
the years ended December 31, 1997, 1996 and 1995:
Weighted
Number of Exercise Average
Options Price Range Exercise Price
---------- ----------------- --------------
Outstanding, December 31, 1994 2,555,740 $ 1.17 - $ 3.67 $ 2.07
Granted......................... 169,312 4.50 - 8.17 6.12
Exercised....................... (306,917) 1.17 - 4.75 1.64
Canceled........................ (66,788) 1.17 - 8.17 3.23
--------- ----------------- ------
Outstanding, December 31, 1995 2,351,347 1.17 - 8.17 2.38
Granted......................... 431,325 8.09 - 26.33 19.26
Exercised....................... (797,950) 1.17 - 16.17 2.29
Canceled........................ (76,201) 1.17 - 8.17 3.11
--------- ----------------- ------
Outstanding, December 31, 1996 1,908,521 1.33 - 26.33 6.21
Granted......................... 978,643 24.33 - 34.13 26.33
Exercised....................... (771,313) 1.33 - 26.33 3.50
Canceled........................ (42,357) 1.33 - 31.00 20.86
--------- ----------------- ------
Outstanding, December 31, 1997 2,073,494 $ 1.33 - $34.13 $16.41
========= ================= ======
Exercisable, December 31, 1997 545,419 $ 1.33 - $26.33 $ 8.21
========= ================= ======
The range of exercise prices for options outstanding and options exercisable at
December 31, 1997 are as follows:
Weighted Average Options Outstanding Options Exercisable
------------------------- -----------------------
Range of Remaining Contractual Weighted Average Weighted Average
Exercise Prices Life (in years) Number Exercise Price Number Exercise Price
- ------------------ ---------------------- ------- ---------------- ------- --------------
$1.33 - $1.67 5.90 375,179 $ 1.62 179,130 $ 1.62
1.92 - 3.25 6.38 242,382 2.54 160,822 2.48
3.50 - 16.17 6.80 209,602 7.58 55,357 6.32
16.75 - 24.33 9.02 822,433 22.88 117,419 21.96
26.25 - 34.13 9.32 423,898 29.26 32,691 26.30
--------- -------
2,073,494 545,419
========= =======
40
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(7) Stockholders' Equity (Continued)
(f) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the "Purchase Plan") under
which a maximum of 150,000 shares of Common Stock may be purchased by eligible
employees. Substantially all full-time employees of the Company are eligible to
participate in the Purchase Plan.
The Purchase Plan provides for two "purchase periods" within each of the
Company's fiscal years, the first commencing on January 1 of each calendar year
and continuing through June 30 of such calendar year, and the second commencing
on July 1 of each year and continuing through December 31 of such calendar year.
Eligible employees may elect to become participants in the Purchase Plan for a
purchase period by completing a stock purchase agreement prior to the first day
of the purchase period for which the election is made. Shares are purchased
through accumulation of payroll deductions (of not less than 0.5% nor more than
10% of compensation, as defined) for the number of whole shares, determined by
dividing the balance in the employee's account on the last day of the purchase
period by the purchase price per share for the stock determined under the
Purchase Plan. The purchase price for the shares will be the lower of 85% of
the fair market value of the Common Stock at the beginning of the purchase
period or 85% of such value at the end of the purchase period (rounded to the
nearest quarter). During 1997, 1996 and 1995, 12,153, 14,979 and 13,104 shares,
respectively, were purchased under the Purchase Plan.
(g) Accounting for Stock-Based Compensation
The Company accounts for its stock-based compensation under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which established a fair-value-based
method of accounting for stock-based compensation plans. The Company has
adopted the disclosure-only alternative under SFAS No. 123, which requires the
disclosure of the pro forma effects on earnings and earnings per share as if
SFAS No. 123 had been adopted, as well as certain other information.
The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options granted (including the employee stock purchase plan)
as of December 31, 1997 and 1996 using the Black-Scholes option pricing model
prescribed by SFAS No. 123.
41
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(7) Stockholders' Equity (Continued)
(g) Accounting for Stock-Based Compensation (Continued)
The assumptions used and the weighted average information for the years ended
December 31, 1997 and 1996 are as follows:
Years ended December 31,
------------------------
1997 1996
---- ----
Risk-free interest rates.................................. 5.71% - 6.83% 5.36% - 6.64%
Expected dividend yield................................... ----- -----
Expected lives............................................ 4.78 years 5.50 years
Expected volatility....................................... 66% 71%
Weighted average grant-date fair value of
options granted during the period........................ $16.00 $12.80
Weighted-average exercise price........................... $16.41 $6.21
Weighted-average remaining contractual life
of options outstanding.................................. 7.98 years 7.45 years
The effect of applying SFAS No. 123 would be as follows (in thousands except
per share data):
Years ended December 31,
------------------------
1997 1996
---- ----
Net income as reported.................................... $ 18,380 $ 9,115
======== =======
Pro forma net income...................................... $ 14,584 $ 8,290
======== =======
Net income per share as reported
Basic.................................................. $1.60 $0.85
===== =====
Diluted................................................ $1.45 $0.74
===== =====
Pro forma net income per share............................
Basic.................................................. $1.24 $0.75
===== =====
Diluted................................................ $1.13 $0.66
===== =====
42
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(8) Significant Customers
Revenue from the Company's largest single customer was 11%, 4% and 12% of
total revenue in 1997, 1996 and 1995, respectively. Revenue from the Company's
three largest customers amounted to 20%, 12% and 20% of total revenue in 1997,
1996 and 1995, respectively.
(9) Export Sales
Export product sales, primarily to Canada, Europe, Mexico, Australia and
Japan, accounted for 18%, 14% and 12% of total revenue in 1997, 1996 and 1995,
respectively. All of the Company's sales for the years ended December 31, 1997,
1996 and 1995 were originated from its headquarters located in the United
States.
43
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Continued)
(10) Quarterly Results of Operations (Unaudited)
The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 1997 and 1996 (in thousands):
Year Ended December 31, 1997
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $17,269 $18,170 $19,805 $21,571
Gross profit 10,960 11,498 13,162 14,645
Net income 3,886 4,075 4,953 5,466
Net income
per share- Basic $0.35 $0.36 $0.43 $0.46
Diluted $0.31 $0.32 $0.39 $0.43
Year Ended December 31, 1996
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $11,410 $12,665 $14,079 $15,488
Gross profit 6,732 7,527 8,451 9,356
Net income 1,758 2,048 2,477 2,831
Net income
per share- Basic $0.17 $0.19 $0.23 $0.26
Diluted $0.15 $0.17 $0.20 $0.23
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Davox Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Davox Corporation and subsidiaries
included in this Form 10-K, and have issued our report thereon dated January 26,
1998. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and regulations
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 1998
45
DAVOX CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Balance at Charged to Deductions Balance at
Beginning Costs and from End of
of Year Expenses Reserves Year
------- -------- -------- ----
ACCOUNTS RECEIVABLE
RESERVES:
December 31, 1997 $699 $463 $114 $1,048
December 31, 1996 665 98 64 699
December 31, 1995 638 242 215 665
46
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
- ------------------------------------------------------------
Directors
The information concerning directors of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's 1997 fiscal year ended December 31, 1997
under the heading "Election of Directors."
Executive Officers
See Item 4A.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's 1997 fiscal year ended December 31, 1997, under the heading
"Compensation and Other Information Concerning Directors and Officers."
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's 1997 fiscal year ended December 31, 1997, under the headings
"Principal Holders of Voting Securities" and "Election of Directors."
ITEM 13 - CERTAIN RELATIONSHIPS AND TRANSACTIONS
- ------------------------------------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission within 120 days after the close of the Company's 1997
fiscal year ended December 31, 1997, under the headings "Principal Holders of
Voting Securities" and "Election of Directors."
47
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements.
The following financial information is incorporated in Item 8 above.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule.
The following financial information is incorporated in Item 8 above.
Report of Independent Public Accountants on Schedule II - Valuation and
Qualifying Accounts.
All other schedules are not submitted because they are not applicable, not
required or because the information is included in the Financial Statements
or Notes to Financial Statements.
(b) Reports on Form 8-K
The Company did not file any Current Report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1997.
(c) List of Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
3.01 Restated Certificate of Incorporation of the Registrant,
as amended.
48
(c) List of Exhibits (Continued)
3.02 By-laws of the Registrant, as amended.
4.01 Description of Capital Stock contained in the Registrant's
Restated Certificate of Incorporation, as amended, filed
as Exhibit 3.01.
10.01(1) 1986 Stock Plan of the Registrant, as amended.
10.02 Amended and Restated 1988 Non-Employee Director Stock
Option Plan of the Registrant.
10.03 Form of Option Agreement under the Registrant's 1988
Non-Employee Director Stock Option Plan.
10.04(4) Special support services agreement between Registrant and
Datapoint (UK) Ltd., dated August 1, 1997.
10.05 1991 Employee Stock Purchase Plan, as amended.
10.06(1) Common Stock Purchase Agreement dated September 23, 1994
between the Registrant and the purchasers named therein.
10.07(1) Letter agreement dated December 30, 1994 between the
Registrant and Fleet Bank of Massachusetts, N.A.
10.08(2)(4) Third party service provider agreement between the
Registrant and Grumman Systems Support Corporation.
10.09(3) 1996 Stock Plan of the Registrant, as amended by amendment
No. 1, attached hereto as exhibit 10.09.
10.10(3) Form of Incentive Stock Option Agreement under the
Registrant's 1996 Stock Plan.
10.11(3) Form of Non-Qualified Stock Option Agreement under the
Registrant's 1996 Stock Plan.
49
(c) List of Exhibits (Continued)
10.12(3) Executive Compensation Plan.
10.13 Lease agreement between Registrant and Michelson Farm
Westford Technology Park VI Limited Partnership
for Westford Technology Park Building Six.
10.14(4) Distribution agreement between Lucent Technologies
Inc. (by and through its Business Communications
Systems Division) and the Registrant, dated May 2, 1997.
21. Subsidiaries of the Registrant.
24. Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
(1) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1994.
(2) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1995.
(3) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1996.
(4) Confidential treatment requested. Redacted version filed herewith.
50
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, in the Town of Westford,
Commonwealth of Massachusetts, on the 3rd day of March 1998.
Davox Corporation
By: /s/ Alphonse M. Lucchese
----------------------------
Alphonse M. Lucchese
Chief Executive Officer
and Chairman
POWER OF ATTORNEY
Each person whose signature appears below this Annual Report on Form 10-K hereby
constitutes and appoints Alphonse M. Lucchese and Timothy C. Maguire and each of
them, with full power to act without the other, his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution, for him or
her and in his or her name, place and stead in any and all capacities (until
revoked in writing) to sign all amendments (including post-effective amendments)
to this Annual Report on Form 10-K of Davox Corporation, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary fully to all intents and purposes as
he might or could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute,
may lawfully do or cause to be done by virtue hereof.
51
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
/s/ Alphonse M. Lucchese Chief Executive
- ------------------------
Alphonse M. Lucchese Officer and Chairman
(Principal Executive
Officer) March 3, 1998
/s/ John J. Connolly Vice President of
- --------------------
John J. Connolly Finance and Chief
Financial Officer
(Principal Financial
Officer) March 3, 1998
/s/ Michael D. Kaufman Director March 3, 1998
- ----------------------
Michael D. Kaufman
/s/ R. Scott Asen Director March 3, 1998
- -----------------
R. Scott Asen
/s/ Walter J. Levison Director March 3, 1998
- ---------------------
Walter J. Levison
52
Exhibit Index
------- -----
Exhibit
Number Description of Exhibit
------ ----------------------
3.01 Restated Certificate of Incorporation of the Registrant,
as amended.
3.02 By-laws of the Registrant, as amended.
4.01 Description of Capital Stock contained in the Registrant's
Restated Certificate of Incorporation, as amended, filed
as Exhibit 3.01.
10.01(1) 1986 Stock Plan of the Registrant, as amended.
10.02 Amended and Restated 1988 Non-Employee Director Stock
Option Plan of the Registrant.
10.03 Form of Option Agreement under the Registrant's 1988
Non-Employee Director Stock Option Plan.
10.04(4) Special support services agreement between Registrant and
Datapoint (UK) Ltd., dated August 1, 1997.
10.05 1991 Employee Stock Purchase Plan, as amended.
10.06(1) Common Stock Purchase Agreement dated September 23, 1994
between the Registrant and the purchasers named therein.
10.07(1) Letter agreement dated December 30, 1994 between the
Registrant and Fleet Bank of Massachusetts, N.A.
10.08(2)(4) Third party service provider agreement between the
Registrant and Grumman Systems Support Corporation.
10.09(3) 1996 Stock Plan of the Registrant, as amended by amendment
No. 1, attached hereto as exhibit 10.09.
10.10(3) Form of Incentive Stock Option Agreement under the
Registrant's 1996 Stock Plan.
10.11(3) Form of Non-Qualified Stock Option Agreement under the
Registrant's 1996 Stock Plan.
10.12(3) Executive Compensation Plan.
10.13 Lease agreement between Registrant and Michelson Farm
Westford Technology Park VI Limited Partnership
for Westford Technology Park Building Six.
10.14(4) Distribution agreement between Lucent Technologies
Inc. (by and through its Business Communications
Systems Division) and the Registrant, dated May 2, 1997.
21. Subsidiaries of the Registrant.
24. Consent of Arthur Andersen LLP.
27. Financial Data Schedule.
(1) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1994.
(2) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1995.
(3) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1996.
(4) Confidential treatment requested. Redacted version filed herewith.