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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 0-22804
ACTIVE VOICE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1235111
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
2901 THIRD AVENUE, SUITE 500 98121-9800
SEATTLE, WASHINGTON (Zip Code)
(Address of principal
executive offices)
(206) 441-4700
(Registrant's
telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS NOVEMBER 6, 1998
Common Stock, No Par Value 4,638,565
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ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE PAGE 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- ------- -------
Net sales $14,301 $14,523 $27,705 $26,302
Cost of goods sold 6,619 6,516 12,549 11,337
------- ------- ------- -------
Gross profit 7,682 8,007 15,156 14,965
Operating expenses:
Research and development 3,271 2,148 6,601 4,414
Sales and marketing 4,210 3,897 8,196 7,171
General and administrative 2,235 1,572 4,092 2,552
------- ------- ------- -------
Total operating expenses 9,716 7,617 18,889 14,137
------- ------- ------- -------
Operating income (loss) (2,034) 390 (3,733) 828
Interest expense (13) (33)
Interest income 73 161 240 327
------- ------- ------- -------
Income (loss) before income taxes and
minority interest (1,974) 551 (3,526) 1,155
Income tax benefit (provision) 677 (173) 1,210 (351)
Minority interest in loss
of consolidated subsidiary 2 33 1 62
Net income (loss) $(1,295) $ 411 $(2,315) $ 866
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per share:
Basic $ (0.28) $ 0.09 $ (0.50) $ 0.19
------- ------- ------- -------
------- ------- ------- -------
Diluted $ (0.28) $ 0.09 $ (0.50) $ 0.19
------- ------- ------- -------
------- ------- ------- -------
See notes to consolidated financial statements.
3
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
September 30, March 31,
1998 1998
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 517 $ 1,550
Marketable securities 3,785 3,407
Accounts receivable, less allowances 11,427 11,331
Inventories 7,904 10,122
Income taxes receivable 1,497 652
Deferred tax asset 1,279 1,340
Prepaid expenses and other assets 2,928 3,103
------- -------
Total current assets 29,337 31,505
Marketable securities 2,585 3,680
Furniture and equipment, net 4,273 3,539
Other assets 4,833 2,420
------- -------
Total assets $41,028 $41,144
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,887 $ 3,931
Notes payable 2,076
Accrued compensation and benefits 1,666 1,256
Other accrued expenses 2,236 1,493
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Total current liabilities 8,865 6,680
Commitments
Minority interest (121) (131)
Stockholders' equity:
Preferred stock, no par value:
Authorized shares - 2,000,000 - none outstanding
Common stock, no par value:
Authorized shares - 10,000,000
Issued shares, including repurchased shares - 4,976,933 17,306 17,262
Retained earnings 16,632 18,996
Unrealized gain on marketable securities 35 33
Accumulated translation adjustments (65) 7
Less 298,368 repurchased shares (313,067 at
March 31, 1998), at cost (1,624) (1,703)
------- -------
Total stockholders' equity 32,284 34,595
Total liabilities and stockholders' equity $41,028 $41,144
------- -------
------- -------
Note: The consolidated balance sheet at March 31, 1998 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. See notes to consolidated financial
statements.
4
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Six Months Ended September 30,
------------------------------
1998 1997
------- -------
OPERATING ACTIVITIES
Net income (loss) $(2,315) $ 866
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 791 549
Provisions for accounts receivable 191 181
Deferred income taxes 62 (54)
Loss on disposal of equipment 14 12
Minority interest in loss of consolidated subsidiary (1) (62)
Changes in operating assets and liabilities:
Increase in accounts receivable (287) (673)
Decrease (increase) in inventories 2,218 (399)
Increase in prepaid expenses and
other assets (3,197) (1,816)
Increase (decrease) in accounts payable (1,044) 599
Increase in other liabilities 1,155 176
------- -------
Net cash used in operating activities (2,413) (621)
INVESTING ACTIVITIES
Purchases of marketable securities and investments (1,585)
Proceeds from sale and maturity of marketable securities 718 3,616
Acquisition of business (467)
Purchases of furniture and equipment (1,425) (1,023)
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Net cash provided by (used in) investing activities (707) 541
FINANCING ACTIVITIES
Repurchase of common stock (158) (416)
Net issuance of short term notes payable 2,076
Proceeds from employee stock option and stock
purchase plans 230 354
------- -------
Net cash provided by (used in) financing activities 2,148 (62)
Effect of exchange rate changes on cash and cash equivalents (61) (2)
Decrease in cash and cash equivalents (1,033) (144)
Cash and cash equivalents at beginning of period 1,550 1,542
------- -------
Cash and cash equivalents at end of period $ 517 $ 1,398
------- -------
------- -------
See notes to consolidated financial statements.
5
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Active Voice Corporation
and subsidiaries (the Company) are unaudited. In the opinion of the Company's
management, the financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly the financial
information set forth therein. Results of operations for the three month and
six month periods ended September 30, 1998 are not necessarily indicative of
future financial results.
Certain notes and other information have been condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Accordingly, these financial statements should be read in conjunction with the
Company's annual report on Form 10-K for the year ended March 31, 1998.
2. INVENTORIES
Inventories are comprised of the following (in thousands):
September 30, March 31,
1998 1998
------------- ---------
Computer equipment $4,961 $5,494
Custom component parts 2,086 3,907
Supplies 857 721
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$7,904 $10,122
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3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except shares and per share data):
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Numerator:
Net income (loss) $(1,295) $411 $(2,315) $866
--------- --------- --------- ---------
--------- --------- --------- ---------
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares 4,672,419 4,621,423 4,668,456 4,615,625
Effect of dilutive securities:
Stock options ** 60,824 ** 44,412
--------- --------- --------- ---------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares
and assumed conversions 4,672,419 4,682,247 4,668,456 4,660,037
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings (loss) per share: $(0.28) $0.09 $(0.50) $0.19
Diluted earnings (loss) per share: $(0.28) $0.09 $(0.50) $0.19
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** Net effect of stock options not included in calculation of diluted EPS as
effect would be antidilutive.
6
4. NEW ACCOUNTING PRONOUNCEMENTS
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of Statement 130.
During the three month periods ended September 30, 1998 and September 30, 1997,
total comprehensive income (loss) amounted to $(1,365,000) and $423,000,
respectively. For the six month periods ended September 30, 1998 and September
30, 1997, total comprehensive income (loss) amounted to $(2,386,000) and
$898,000, respectively.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Active Voice Corporation (the Company) is a leading manufacturer of PC-based
voice processing systems and computer-telephone integration (CTI) products. The
Company's products are sold worldwide through a network of independent
telecommunications dealers, telephone equipment manufacturers and computer
resellers. The Company currently markets five principal products: Repartee,
Replay Plus, Replay, Lingo and in-switch. Repartee, the Company's flagship and
most feature-rich product, offers the largest call handling capacity and comes
in two models, VP and CTI. In addition, Repartee serves as the base for
TeLANophy, a suite of the Company's CTI modules which provides complete call
management and unified messaging capabilities. Replay Plus, the Company's
mid-priced product, offers most of the voice processing features found in
Repartee with the exception of the CTI functionality. The Company's Replay
product provides basic voice processing features at a price point attractive to
the small business market. Lingo offers all basic voice processing features in
a single proprietary hardware unit, and is an affordable solution for small
businesses as it does not utilize PC hardware and requires minimal dealer effort
in its installation. In-switch products, available only to the Company's
strategic partners, combine Active Voice software with a board that
incorporates directly into the phone switch, offering a less expensive
alternative than a traditional PC-based voice mail system.
FORWARD LOOKING INFORMATION
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT (FOR EXAMPLE, STATEMENTS USING THE
EXPRESSIONS, "THE COMPANY BELIEVES" OR "THE COMPANY ANTICIPATES" AND OTHER
SIMILAR STATEMENTS) CONTAIN "FORWARD LOOKING" INFORMATION (AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) INVOLVING RISKS AND
UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, PROJECTIONS FOR SALES AND
EXPENDITURES, TREND PROJECTIONS AND DEVELOPMENT SCHEDULES. ACTUAL FUTURE RESULTS
AND TRENDS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS, INCLUDING,
BUT NOT LIMITED TO, THE RISKS DISCUSSED IN DOCUMENTS FILED BY THE COMPANY WITH
THE SECURITIES AND EXCHANGE COMMISSION. INVESTORS ARE ENCOURAGED TO CONSIDER
THE RISKS DETAILED IN THOSE FILINGS. THE COMPANY ASSUMES NO OBLIGATION TO
RELEASE PUBLICLY ANY CHANGES TO THESE "FORWARD LOOKING STATEMENTS" THAT MAY
ARISE FROM THE DEVELOPMENT OF UNANTICIPATED EVENTS OR CIRCUMSTANCES THAT OCCUR
AFTER THE DATE OF THE ORIGINAL PROJECTION. (REFER TO THE SECTION ENTITLED
"FACTORS AFFECTING FUTURE OPERATING RESULTS" FOR A FURTHER DISCUSSION OF SOME OF
THE INVOLVED RISKS AND UNCERTAINTIES.)
RESULTS OF OPERATIONS
NET SALES
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
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(Dollars in thousands)
Net sales $14,301 $14,523 (1.6%) $27,705 $26,302 5.3%
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Effective April 1, 1998, the Company's South and Central American customers,
which were previously under the umbrella of international sales, joined with the
North American dealer channel to create the "Americas" dealer channel.
Furthermore, in order to provide better information as to the Company's core
product revenue, the Company has also added a fourth revenue segment to the
following analysis, denoted "Other". This segment includes revenue from the
Company's majority-owned subsidiary, Pronexus, Inc. (Pronexus), as well as other
ancillary items not directly related to sales of the Company's primary products,
such as royalties on patents. For comparison purposes, the following discussion
assumes these adjustments were made on April 1, 1997.
8
THREE MONTHS ENDED SEPTEMBER 30, 1998
Net sales to the Company's Americas dealer network during the quarter ended
September 30, 1998 decreased by 16% from the comparable period in the prior
fiscal year. Net sales to the Americas dealers represented 50% of total net
sales for the three months ended September 30, 1998 compared to 59% of total net
sales in the three months ended September 30, 1997. The decrease in net sales in
the Americas dealer channel as a percentage of total net sales can be credited
to the continued success of the Company's strategic partner relationships as
some dealers now purchase the Company's products through these corporate sales
customers. The Company feels this transition is a more efficient method of
distributing its lower-end products, as the Company's dealers are more adept at
providing CTI-capable solutions, while the strategic partners' expertise is
selling basic voice processing systems. To address demand for unified messaging
in the dealer channel, the Company announced a limited release of Unity, the
Company's NT-based unified messaging product. However, sales of Unity were not
significant for the period and are not expected to be significant for the
remainder of the fiscal year. The introduction of Lingo in September 1997 has
mitigated some of the decline in overall dealer revenue, compensating for the
discontinuation of the Replay offering in the fourth quarter of fiscal 1998.
Net sales to the corporate sales channel increased by approximately 33% for the
three months ended September 30, 1998 over the comparable period in the prior
fiscal year. Net sales to corporate sales customers represented 31% and 23% of
total net sales for the three month periods ended September 30, 1998 and 1997,
respectively. The majority of this increase was attributable to the
introduction of Lingo in the channel when compared to the prior year's September
quarter, and a five-fold increase of in-switch units and revenue. Repartee
revenue more than doubled in the channel over the prior year, partially the
result of the Company's ongoing success in developing relationships with its
strategic partners. The Company's largest corporate customer, NEC Corporation
and its subsidiaries, accounted for approximately 67% of total corporate sales
and approximately 21% of total net sales during the three months ended September
30, 1998.
Net sales to international customers decreased by approximately 6% during the
three months ended September 30, 1998 in comparison to the prior year's same
quarter. International sales represented 15% of total net sales for both the
three month periods ended September 30, 1998 and 1997. The decline is primarily
attributable to the softness of the Asia/Pacific market, delivering less than
two-thirds of the sales volume of the prior year's comparable quarter. Sales in
the European market, however, have continued to increase, as the Company's
localization efforts have improved product acceptance and demand there.
Other revenue comprised approximately 4% and 3% of the Company's net sales for
the quarters ended September 30, 1998 and 1997, respectively. These revenues
primarily represent contributions from the Company's Pronexus subsidiary through
sales of Visual Basic-based voice application tools.
SIX MONTHS ENDED SEPTEMBER 30, 1998
Net sales to the Company's Americas dealer network for the current period
declined approximately 8% when compared to the six month period ended September
30, 1997. Net sales to the Americas dealers represented approximately 53% of
total net sales for the six months ended September 30, 1998, compared to
approximately 61% of total net sales for the six months ended September 30,
1997. The reason for the decline mirrors the discussion of the decrease in the
three month period comparison, where certain dealers are now purchasing
products through the strategic partner channel, for the reasons outlined
above. Although this distribution model often comes at the expense of the
dealer channel, the Company believes that strategically this transition will
increase its voice mail attach rate, resulting in larger unit volumes of its
messaging products.
Net sales to the Company's corporate sales channel during the six months ended
September 30, 1998 increased by approximately 43% from the comparable period in
the prior fiscal year. Net sales to corporate
9
sales customers represented 29% and 21% of total net sales for the six month
periods ended September 30, 1998 and 1997, respectively. Lingo and in-switch
accounted for the majority of the revenue and unit increases, as customers in
this channel have responded to the simplicity and price point of Lingo, and
the integrated solution offered by in-switch. The largest corporate customer,
NEC Corporation and its subsidiaries, accounted for approximately 60% of total
corporate sales and approximately 17% of total net sales during the six months
ended September 30, 1998.
Net sales to international customers decreased slightly for the six months ended
September 30, 1998, representing 14% of total sales, when compared to the six
months ended September 30, 1997, which represented 15% of total sales. As
mentioned above, declines in the Asia/Pacific market have been offset by
strength in the Northern European market. The Company's sales in this market
have been enhanced by the acquisition of the Company's European distributor in
September 1997. Recent country-specific localization of the Company's products,
particularly for France and Germany, is anticipated to further extend the
Company's product acceptance in the European market.
For the six month periods ended September 30, 1998 and September 30, 1997, other
revenue contributed 4% and 3% of the Company's total net sales, respectively, as
the Company's Pronexus subsidiary posted a 50% revenue increase over the prior
year.
GROSS MARGIN
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
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(Dollars in thousands)
Gross profit $7,682 $8,007 (4.1%) $15,156 $14,965 1.3%
Percentage of net sales 53.7% 55.1% 54.7% 56.9%
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The Company's gross margin varies in part depending upon the mix of
higher-margin voiceboard-and-software kit sales (offered to all customers) and
software-only sales (available only to strategic partner accounts) as opposed to
turnkey system sales (which include the cost of a PC and other related
hardware). The proportion of sales contributed by each distribution channel
also affects the overall gross margin, as international sales have historically
had higher gross margins than sales in the other distribution channels.
The decrease in gross margin as a percentage of net sales between the comparable
three month periods is primarily attributable to the Company's Year 2000 (Y2K)
upgrade program, which carries a larger hardware component than traditional
dealer sales. This effect is somewhat mitigated by the margin contribution from
in-switch in the strategic partner channel, for which the Company combines its
software with third-party vendor hardware. For the six month period ended
September 30, 1998, margins were lower than the prior comparable period due to
the Company's Y2K upgrade program, as well as the overall shift of revenue from
the dealer to the strategic partner channel, which has traditionally carried
lower margins per unit. Gross margins have also been hampered by the impacts of
Asia/Pacific exchange rates on revenue, which are not correspondingly offset by
the predominantly U.S.-sourced cost of product.
10
RESEARCH AND DEVELOPMENT
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
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(Dollars in thousands)
Research and development $3,271 $2,148 52.3% $6,601 $4,414 49.5%
Percentage of net sales 22.9% 14.8% 23.8% 16.8%
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The increases in research and development expenses, both in dollar amount and as
a percentage of net sales between the three month and six month periods ended
September 30, 1998 and 1997, were primarily attributable to an increase in
compensation-related costs associated with additional engineering and
development personnel and project-based contract development staff. The increase
in engineering personnel is attributable to the Company's development of Unity,
the Company's Windows NT-based product, as well as to the addition of Quality
Assurance staff in preparation for Unity's release. To accommodate the
development staff expansion, the Company built out additional office space,
thereby increasing its rent expense. In addition, engineering salaries have
increased due to the competitive nature of the labor market and the Company's
effort to attract and retain skilled employees. The Company also continues to
allocate significant resources to the localization of products for international
markets and customization of products for strategic partner accounts.
The Company believes that in order to remain competitive in a rapidly changing
technological environment, it will continue to be necessary to allocate
significant resources to the development of new products. The Company expects
the dollar amount of research and development expenditures to continue to
increase for the foreseeable future, and that these expenses as a percentage of
sales will vary from period to period.
SALES AND MARKETING
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
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(Dollars in thousands)
Sales and marketing $4,210 $3,897 8.0% $8,196 $7,171 14.3%
Percentage of net sales 29.4% 26.8% 29.6% 27.3%
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The increases in sales and marketing expenses during the three month and six
month periods ended September 30, 1998 over the comparable periods in the prior
fiscal year, both in dollar amount and as a percentage of net sales, were
primarily attributable to increased compensation-related expenses associated
with growth in sales and marketing personnel. Specifically, the Company added
technical support staff to meet the demand for network and desktop support
resources as a result of the product shift to Repartee and CTI offerings. The
increase in unit volume has also caused expenses to be higher when compared to
the prior year, as more resources have been devoted to supporting a larger
number of systems. Furthermore, the addition of the Company's European
distributor's employees beginning in September 1997 has also caused personnel
expenses to increase when compared to the prior three and six month periods.
Sales and marketing expenses include both costs that are essentially fixed as
well as costs that vary relative to sales volume and thus can be expected to
fluctuate both in dollar amount and as a percentage of net sales from period to
period.
11
GENERAL AND ADMINISTRATIVE
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
General and administrative $2,235 $1,572 42.2% $4,092 $2,552 60.3%
Percentage of net sales 15.6% 10.8% 14.8% 9.7%
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The increases in general and administrative expenses, both in dollar amount and
as a percentage of net sales, between comparable periods was primarily
attributable to increased compensation-related and consulting expenses
associated with the Company's continued investment in its management information
systems infrastructure. Such expenses include consultants and personnel
dedicated to deployment and maintenance of the Company's primary business
system applications. General and administrative expenses can be expected to
fluctuate as a percentage of net sales from period to period.
INTEREST EXPENSE AND INTEREST INCOME
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
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(Dollars in thousands)
Interest expense $(13) 100.0% $(33) 100.0%
Interest income $ 73 $161 (54.7%) $240 $327 (26.6%)
- ------------------------------------------------------------------------------------------------------------------
The Company incurred interest expense in the three and six month periods ended
September 30, 1998 as it began borrowing against its line of credit to fund
operations. The decreases in interest income during the three month and six
month periods ended September 30, 1998 in comparison to the corresponding
periods in the prior fiscal year were primarily attributable to lower average
invested cash and marketable security balances. Average cash and marketable
security balances decreased due primarily to the Company's net loss. See
"Liquidity and Capital Resources."
INCOME TAX PROVISION
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Income tax benefit (provision) $677 $(173) (491.3%) $1,210 $(351) (444.7%)
Effective tax rate 34.3% 31.4% 34.3% 30.4%
- ------------------------------------------------------------------------------------------------------------------
Variations in the customary relationship between the income tax benefit
(provision) and the statutory income tax rate of 34% result from tax investment
income, research and development tax credits, and the benefit provided by the
Company's foreign sales corporation (FSC) and certain nondeductible expenses.
The Company expects the effective tax rate to fluctuate in the future due to
possible future operating losses and to the impact of changing research and
development tax credits, tax exempt interest income, and foreign sales
corporation benefits as a percentage of taxable income. The Company had
approximately $1.3 million in deferred tax assets at September 30, 1998. The
Company is evaluating the necessity of a valuation allowance against these
assets due to current year losses and the limited availability of Net Operating
Loss (NOL) carrybacks. Future income tax benefits will also be limited by the
availability of NOL carrybacks. In addition, the Company anticipates that it may
fall under the jurisdiction of additional taxing authorities as its operations
expand into new geographical areas.
12
As a result of the Company's pretax losses for the three and six month periods
ended September 30, 1998, the Company will receive a refund of income taxes
previously paid. The Company's effective tax rate increased to 34.3% (benefit
rate as a result of a pretax loss) in both the three and six month periods ended
September 30, 1998, compared to 31.4% and 30.4% income tax provisions for the
prior year's comparable periods, respectively.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 Change 1998 1997 Change
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per
share data)
Net income (loss) $(1,295) $411 (415.1%) $(2,315) $866 (367.3%)
Percentage of net sales (9.1%) 2.8% (8.4%) 3.3%
Earnings (loss) per share:
Basic $(0.28) $0.09 (411.1%) $(0.50) $0.19 (363.2%)
Diluted $(0.28) $0.09 (411.1%) $(0.50) $0.19 (363.2%)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) and earnings (loss) per share for the three month and six
month periods ended September 30, 1998 in comparison to the corresponding
periods in the prior fiscal year were primarily attributable to the increased
operating expenses, as discussed above under the individual income statement
captions. The Company believes these investments are essential to prepare for
new product direction and future growth. This investment in the development of
new offerings and distribution channels, and the individuals that support them,
is expected to continue throughout the year. Furthermore, the declines in gross
margin percentage have also contributed to the decreases in net income and
earnings per share. The number of common and common equivalent shares
outstanding was comparable in the three month and six month periods ended
September 30, 1998, and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities and investments
decreased to $6.9 million or 17% of total assets at September 30, 1998 from $8.6
million or 21% of total assets at March 31, 1998. The decrease is due primarily
to the net loss. Cash flow used in operations totaled $2.4 million during the
six months ended September 30, 1998. The Company had net working capital of
$20.5 million at September 30, 1998.
Accounts receivable, net of allowances, increased slightly to $11.4 million at
September 30, 1998 from $11.3 million at March 31, 1998. The increase in
accounts receivable balances was due to higher net sales in the three months
ended September 30, 1998 compared to net sales in the three months ended March
31, 1998. Days' sales outstanding at September 30, 1998 declined approximately
3% from March 31, 1998. Inventory levels decreased to $7.9 million at September
30, 1998 from $10.1 million at March 31, 1998, reflecting the Company's
simplification of its product structure.
During the quarter ended September 30, 1998, the Company repurchased 20,000
shares of its common stock for approximately $158,000 under its previously
announced share repurchase program. The Company made $1.4 million in capital
expenditures during the six months ended September 30, 1998, compared to $1.0
million during the comparable period of the prior fiscal year. The majority of
the capital expenditures during the six months ended September 30, 1998
consisted of computer hardware and software used to augment the Company's
management information systems infrastructure, as well as additions and upgrades
of computer equipment for development personnel. The Company currently has no
specific commitments with respect to additional capital expenditures during the
remainder of fiscal 1999, but expects to spend an aggregate of approximately
$3.5 million for the year.
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The Company has a $10,000,000 revolving credit line from a bank for financing
working capital. The agreement expires on November 30, 1998. The Company had
approximately $2.1 million of borrowings outstanding under the line of credit at
September 30, 1998. The Company is currently in the process of negotiating a
new financing agreement.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations, will provide sufficient
resources to finance operations for at least the next year.
YEAR 2000 UPDATE
An issue affecting the Company and others is the inability of many computer
systems and applications to correctly process date data in and between the
twentieth and twenty-first centuries. The Company formed task forces to
investigate the year 2000 readiness of its products and of its internal
systems. The Company has completed its initial assessment of the year 2000
readiness of its critical internal business process systems and applications
and continues to assess other applications and equipment. The assessment of
all systems will continue through the next year. The Company has received
assurances from the suppliers that the Company's most critical business
process systems and applications are currently or will be year 2000 ready by
December 31, 1999. The Company believes that other systems can be modified or
replaced prior to January 2000. The Company estimates that the total cost of
replacement or upgrade of internal systems replaced solely to achieve year
2000 readiness will be less than $100,000.
The Company has also implemented programs to assist customers with older
versions of its products in obtaining year 2000 readiness by making software
upgrades or replacement hardware available and offering programs for migrations
to current product versions. The Company estimates that the costs of creating
software patches and administering its upgrade programs for customers will be
approximately $400,000. The financial impact to the Company of the upgrade
programs has not been and is not anticipated to be material to its financial
position or results of operations in any given year. However, if any necessary
modifications, conversions, migrations or upgrades are not made, or not made in
a timely manner, the Company's customers may be unable to implement
appropriate year 2000 solutions, which could have a material adverse effect on
the Company as a result of the loss of a significant customer or number of
customers or legal costs.
The Company has been served with a lawsuit in Massachusetts state court related
to the alleged inability of the Company's products prior to Repartee 7.44 to
function properly with respect to the year 2000. The Company believes that the
lawsuit is without merit and intends to defend itself vigorously. The final
resolution of this lawsuit is not expected to have a material adverse effect on
the Company's results of operations and financial condition; however, it is not
possible to estimate the possible loss or its ultimate impact.
The Company is in the process of contacting its primary third party suppliers to
assess and seek reasonable assurances concerning the year 2000 readiness of
their products. The Company is in the process of requesting information from
its primary suppliers concerning the year 2000 readiness of their internal
systems as well. The Company estimates that it will complete its inquiry
process no later than June 1999. Because the Company has no control over third
parties' products, services or internal operations, the Company cannot ensure
year 2000 readiness by its suppliers. The Company intends to develop contingency
plans by September 1999 for any third party suppliers that appear to be at risk.
The Company is developing a plan to request information from certain customers
concerning their internal year 2000 readiness. The Company estimates that it
will complete the plan and any inquiry process no later than September 1999.
Because the Company has no control over third parties' products, services or
internal operations, the Company cannot ensure year 2000 readiness by its
customers.
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The Company has not determined the most likely worst case scenario for the
Company with respect to the year 2000 problem as it is still assessing the year
2000 readiness of its important business partners.
Readers are cautioned that forward looking statements contained in the Year 2000
Update should be read in conjunction with the Company's disclosures under the
heading "Forward Looking Statements."
FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain statements contained herein are dependent upon numerous factors,
circumstances and contingencies. The following factors, while not all
inclusive, could cause actual results to differ materially from historical
results or those anticipated:
- - Competitive pressure from new entrants to the CTI market, including large
software companies and telephone switch manufacturers with greater resources,
could adversely affect the Company's business. Introduction of new products
by the Company or its competitors and the extent of their success or failure
could produce significant fluctuations in market demand for the Company's
products.
- - Increasing price competition in the Company's marketplace could influence the
amount and timing of changes in the Company's prices to its customers, and
therefore negatively impact the Company's gross margins. Gross margins may
also either increase or decrease as a result of further shifts in product mix
depending upon the percentage of net sales contributed by software only sales
in comparison to turnkey system sales.
- - There can be no assurance that new products will not be delayed, resulting in
lost customers or allowing competitors to gain market share, or that such
products will be successful in the marketplace.
- - The extent and timing of new product development and the need or desire to
modify existing products may cause notable increases in research and
development spending. Increasing international sales may require notable
increases in development spending associated with localization of products
for foreign markets.
- - If the Company experiences delays in shipments (whether it is due to delays
from customers or as a result of the timing of new product introductions by
the Company) in a given quarter, or if new order bookings do not meet
anticipated levels, substantial fluctuations in operating results will occur.
Frequently, these developments may not become apparent to the Company until
near or at the end of the quarter. In addition, changes in the product and
channel mix, and the timing of customer orders, will continue to affect the
variability of quarterly results of operations in future quarters.
- - Dependence on continued sales to significant customers could have a
significant impact on the Company's operations as there is no assurance that
any particular customer will continue to purchase similar volumes of the
Company's products.
- - Risks associated with the Company's movement into the larger end-user market,
such as product acceptance and demand and failure to attract sufficient
market share, could affect the Company's future performance.
- - Growth strategies involving acquisitions and strategic relationships may
encounter legal and/or unforeseeable delays beyond the Company's control.
- - Risks associated with foreign operations such as gains and losses on the
conversion of foreign currencies to U.S. dollars; export-import regulations;
customs matters; foreign collection problems; and military, political and
transportation risks may significantly affect the company's operating
results. In addition, the Company's international sales involve additional
risks associated with governmental regulation, product adaptation to local
languages and switching systems, and uncertainties arising from local
business practices and cultural considerations.
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PART II. OTHER INFORMATION
ITEM 2(d). CHANGES IN SECURITIES AND USE OF PROCEEDS
At March 31, 1998 the Company had remaining net proceeds from its
December 1993 initial public offering of $5,882,000. During the
period April 1, 1998 to September 30, 1998, the Company used
$2,315,000 to fund its operating loss, leaving remaining net
proceeds of $3,567,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Active Voice Corporation
(Registrant)
Date: November 12, 1998 By: /s/ Jose S. David
------------------------------
Jose S. David
Chief Financial Officer
Signing on behalf of registrant and
as principal financial officer
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