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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NUMBER 0-22804
ACTIVE VOICE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1235111
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2901 THIRD AVENUE, SUITE 500 98121-9800
SEATTLE, WASHINGTON (Zip Code)
(Address of principal executive offices)
(206) 441-4700
(Registrant's telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS AUGUST 3, 1999
Common Stock, No Par Value 4,627,936
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ACTIVE VOICE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
PAGE
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).............................................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 7
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................................................... 15
Item 6. Exhibits and Reports on Form 8-K.............................................................. 15
SIGNATURE PAGE............................................................................................. 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
THREE MONTHS ENDED
JUNE 30,
----------------------
1999 1998
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Net sales............................................................................... $ 18,176 $ 13,404
Cost of goods sold...................................................................... 8,131 5,930
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Gross profit............................................................................ 10,045 7,474
Operating expenses:
Research and development.............................................................. 4,144 3,330
Sales and marketing................................................................... 5,108 3,986
General and administrative............................................................ 2,014 1,857
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Total operating expenses............................................................ 11,266 9,173
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Operating loss.......................................................................... (1,221) (1,699)
Interest expense........................................................................ (68) (20)
Interest income......................................................................... 59 167
Impairment of strategic investment...................................................... (1,169)
Gain on sale of technology assets....................................................... 16,504
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Income (loss) before income taxes and minority interest................................. 14,105 (1,552)
Income tax benefit (provision).......................................................... (4,163) 533
Minority interest in earnings of consolidated subsidiary................................ (88) (1)
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Net income (loss)....................................................................... $ 9,854 $ (1,020)
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Earnings (loss) per share:
Basic................................................................................. $ 2.15 $ (0.22)
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Diluted............................................................................... $ 2.09 $ (0.22)
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Shares used in earnings (loss) per share calculation:
Basic................................................................................. 4,585,246 4,664,492
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Diluted............................................................................... 4,716,558 4,664,492
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See notes to consolidated financial statements.
3
ACTIVE VOICE CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES)
JUNE 30, MARCH 31,
1999 1999
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ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 21,018 $ 1,650
Marketable securities.................................................................... 1,179 1,113
Accounts receivable, less allowances..................................................... 14,181 13,622
Inventories.............................................................................. 5,149 5,924
Income taxes receivable.................................................................. 741
Deferred tax asset....................................................................... 1,594 1,650
Prepaid expenses and other assets........................................................ 2,750 3,215
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Total current assets................................................................. 45,871 27,915
Marketable securities...................................................................... 1,442 1,701
Furniture and equipment, net............................................................... 4,514 4,589
Other assets............................................................................... 4,382 4,377
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Total assets......................................................................... $ 56,209 $ 38,582
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 2,562 $ 4,983
Notes payable............................................................................ 4,522
Accrued compensation and benefits........................................................ 3,313 2,500
Other accrued expenses................................................................... 2,407 2,186
Income taxes payable..................................................................... 3,378
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Total current liabilities............................................................ 16,182 9,669
Commitments
Minority interest.......................................................................... 31 (55)
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................................. 18,250 17,314
Retained earnings........................................................................ 23,756 13,907
Accumulated other comprehensive income................................................... 49 20
Less 368,242 repurchased shares (395,153 at March 31, 1999), at cost..................... (2,059) (2,273)
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Total stockholders' equity................................................................. 39,996 28,968
Total liabilities and stockholders' equity........................................... $ 56,209 $ 38,582
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Note: The consolidated balance sheet at March 31, 1999 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. See notes to consolidated financial
statements.
4
ACTIVE VOICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
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1999 1998
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OPERATING ACTIVITIES
Net income (loss)........................................................................... $ 9,854 $ (1,020)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization............................................................. 458 445
Provisions for accounts receivable........................................................ 77 (68)
Deferred income taxes..................................................................... 62 (175)
Loss on disposal of equipment............................................................. 6 11
Minority interest in earnings of consolidated subsidiary.................................. 88 1
Gain on sale of technology assets......................................................... (16,504)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.............................................. (636) 1,042
Decrease in inventories................................................................. 775 1,321
Decrease (increase) in prepaid expenses and other assets................................ 2,044 (1,549)
Decrease in accounts payable............................................................ (2,421) (1,687)
Increase in other liabilities........................................................... 2,923 555
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Net cash used in operating activities................................................. (3,274) (1,124)
INVESTING ACTIVITIES
Proceeds from sale of technology assets..................................................... 18,000
Proceeds from sale and maturity of marketable securities.................................... 176 548
Purchases of furniture and equipment........................................................ (332) (938)
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Net cash provided by (used in) investing activities................................... 17,844 (390)
FINANCING ACTIVITIES
Net issuance of short term notes payable.................................................... 4,522 759
Proceeds from employee stock option and stock purchase plans................................ 238 114
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Net cash provided by financing activities............................................. 4,760 873
Effect of exchange rate changes on cash and cash equivalents................................ 38 11
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Increase (decrease) in cash and cash equivalents............................................ 19,368 (630)
Cash and cash equivalents at beginning of period............................................ 1,650 1,550
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Cash and cash equivalents at end of period.................................................. $ 21,018 $ 920
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See notes to consolidated financial statements.
5
ACTIVE VOICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Active Voice
Corporation and subsidiaries (the Company) are unaudited. In the opinion of the
Company's management, the financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to state fairly the
financial information set forth therein. Results of operations for the three
month period ended June 30, 1999 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, 1999.
2. INVENTORIES
Inventories are comprised of the following (in thousands):
JUNE 30, MARCH 31,
1999 1999
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Computer equipment...................................................... $ 2,849 $ 3,049
Custom component parts.................................................. 1,458 1,918
Supplies................................................................ 842 957
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$ 5,149 $ 5,924
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3. COMPREHENSIVE INCOME
Total comprehensive income (loss) was $9,883,000 and $(1,021,000) for the
three month periods ended June 30, 1999 and 1998, respectively.
4. SALE OF TECHNOLOGY ASSETS
On June 30, 1999, the Company sold real-time Internet communications
technology and related assets for $18 million, net of $1,496,000 in related
costs. None of the Company's current or historical revenues were attributable to
the sold technology. In connection with the sale, six of the Company's employees
joined the staff of the acquiring company. The Company licensed back certain
rights to the technology from the acquirer for use in conjunction with
enterprise unified messaging, voice processing and real-time call handling.
5. IMPAIRMENT OF STRATEGIC INVESTMENT
During the quarter ended June 30, 1999, the Company recorded a $1.2 million
impairment loss on a strategic investment. The loss represented the Company's
entire investment in a small hardware vendor. The impairment was recorded due to
the uncertain financial viability of the vendor and the Company's decision to
evaluate alternate sources for the components supplied by the vendor.
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6. FINANCING AGREEMENT
On May 5, 1999, the Company entered into an Investment Agreement with a
significant customer which provided up to a $6.5 million borrowing commitment to
the Company in exchange for a stock purchase warrant for 500,000 shares of the
Company's common stock at a price of $13.00 per share. In connection with
signing the agreement, the Company took an initial advance of $4.0 million.
Borrowings under the note portion of the agreement bear interest at a rate of
7.8% and are due on May 5, 2002, but may be repaid at any time subsequent to May
5, 2000. The Company has classified the note balance as a current liability
based on its anticipated repayment schedule. The Company valued the warrant
portion of the agreement using the Black-Scholes option-pricing model. The
estimated warrant value of $0.9 million was recorded as debt issuance cost,
included in other long-term assets and is being amortized into interest expense
over the life of the agreement.
7. 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):
JUNE 30, JUNE 30,
1999 1998
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Numerator:
Net income (loss):...................................................................... $ 9,854 $ (1,020)
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Denominator:
Denominator for basic earnings (loss) per share--weighted average shares................ 4,585,246 4,664,492
Effect of dilutive securities:
Stock purchase warrant................................................................ 23,467
Stock options......................................................................... 107,845
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Denominator for diluted earnings (loss) per share--adjusted weighted average shares..... 4,716,558 4,664,492
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Basic earnings (loss) per share:........................................................ $ 2.15 $ (0.22)
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Diluted earnings (loss) per share:...................................................... $ 2.09 $ (0.22)
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The calculation of diluted earnings per share for the three months ended
June 30, 1998 did not include the effect of 35,368 weighted average shares from
outstanding stock options as their inclusion would have been antidilutive.
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 six principal products: Unity,
Repartee, Replay Plus, Replay, Lingo and InSwitch. Unity, the Company's most
recent product introduction, offers fully unified messaging, including single
point administration for e-mail, voice mail and fax mail user accounts, address
and distribution lists, and network configuration for the Microsoft Exchange
Server. Repartee, the Company's well established mid-market product comes in two
versions, CTI and VP. In addition, Repartee serves as the base for TeLANophy, a
suite of the Company's CTI modules which provides complete call management and
integrated messaging capabilities. Replay Plus 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
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for small businesses as it does not utilize PC hardware and requires minimal
dealer effort in its installation. InSwitch, available only to the Company's
strategic partners, combines Active Voice software with a board that
incorporates directly into the phone switch, offering a less expensive
alternative than a traditional PC-based voice mail system.
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 JUNE 30, 1999 1998 CHANGE
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(DOLLARS IN THOUSANDS)
Net sales......................................................... $ 18,176 $ 13,404 35.6%
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Net sales to the Company's Americas dealer network during the quarter ended
June 30, 1999 increased by 20% 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 June 30, 1999 compared to 56% of total net sales for the
three months ended June 30, 1998. The increase in net sales in the Americas
dealer channel was primarily attributable to revenues associated with the
Company's Year 2000 (Y2K) program, which provides discounts to dealers who
upgrade their customers' non-Y2K compliant systems to current software versions
and hardware platforms. The release of the Company's Unity product in late March
1999 also contributed to the increase in net sales. Initial demand for Unity
within the Americas dealer channel has exceeded management's expectations;
however, Unity revenues were less than 5% of total net sales during the quarter
ended June 30, 1999.
Net sales to the corporate sales channel increased by 52% for the three
months ended June 30, 1999 over the comparable period in the prior fiscal year.
Net sales to corporate sales customers represented 30% and 26% of total net
sales for the three month periods ended June 30, 1999 and 1998, respectively.
The majority of the increase in corporate sales is attributable to increased
unit sales of the InSwitch products. The Company plans to release the Unity
product to the first two corporate sales customers during the quarter ended
September 30, 1999. The Company's largest corporate customer accounted for
approximately 71% of total corporate sales and approximately 21% of total net
sales during the three months ended June 30, 1999.
Net sales to international customers increased by 65% during the three
months ended June 30, 1999 in comparison to the prior year same quarter.
International sales represented 16% of total net sales for the three month
period ended June 30, 1999 and 14% of total net sales for the three month period
ended June 30, 1998. The increase in net sales to the international channel can
be primarily attributed to Europe, where unit sales of the Company's Replay and
Replay Plus products have increased with the introduction of localized versions
and the Lingo product has been successfully introduced to the UK market.
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Other revenue increased 43% on a year over year basis and made up 4% of the
Company's total net sales in each of the quarters ended June 30, 1999 and 1998.
Other revenue primarily represents sales of Visual Basic-based voice application
tools through the Company's majority-owned Pronexus subsidiary.
GROSS MARGIN
THREE MONTHS ENDED JUNE 30, 1999 1998 CHANGE
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(DOLLARS IN THOUSANDS)
Gross profit...................................................... $ 10,045 $ 7,474 34.4%
Percentage of net sales........................................... 55.3% 55.8%
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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 increase in revenue from the Company's Y2K upgrade program has reduced
the overall gross margin percentage in the three month period ended June 30,
1999 in comparison to the comparable period in the prior fiscal year. The PC
hardware components of the Company's products carry a lower gross margin
percentage, and the PC hardware components account for a greater percentage of
Y2K program sales than in the Company's other business. The higher gross margin
contribution from InSwitch sales in the strategic partner channel has mitigated
the overall decline in gross margin.
RESEARCH AND DEVELOPMENT
THREE MONTHS ENDED JUNE 30, 1999 1998 CHANGE
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(DOLLARS IN THOUSANDS)
Research and development.......................................... $ 4,144 $ 3,330 24.4%
Percentage of net sales........................................... 22.8% 24.8%
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The increase in research and development expenses between the three month
periods ended June 30, 1999 and 1998, were attributable to an increase in
compensation-related costs associated with additional engineering and
development personnel and higher engineering salaries due to the competitive
nature of the labor market and the Company's effort to attract and retain
skilled employees. The 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 leading up to the release of Unity
in March 1999. The Company also continues to allocate resources to the
localization of products for international markets and customization of products
for strategic partner accounts.
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The Company believes that in order to remain competitive in a rapidly
changing technological environment, it will continue to be necessary to allocate
significant resources to the development of new products, globalization of
products for international markets and customization of products for strategic
partners. With the general release of Unity accomplished in March 1999, the
Company expects the growth rate of research and development expenditures to slow
in comparison to the last two years and that these expenses as a percentage of
sales will vary from period to period.
SALES AND MARKETING
THREE MONTHS ENDED JUNE 30, 1999 1998 CHANGE
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(DOLLARS IN THOUSANDS)
Sales and marketing.................................................................. $ 5,108 $ 3,986 28.1%
Percentage of net sales.............................................................. 28.1% 29.7%
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The increase in sales and marketing expenses during the three month period
ended June 30, 1999 over the comparable period in the prior fiscal year was
primarily attributable to increased compensation-related expenses associated
with growth in sales and marketing personnel and higher commission expense due
to increased sales levels. The Company's annual sales meeting was held during
the first quarter of fiscal 2000 as compared to the second quarter of fiscal
1999, which also contributed to the year over year increase in sales and
marketing expenses. The increase in unit sales 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 operating in the field. Sales
and marketing expenses include both costs that are essentially fixed as well as
costs that vary relative to sales volume and thus can be expected to fluctuate
both in dollar amount and as a percentage of net sales from period to period.
GENERAL AND ADMINISTRATIVE
THREE MONTHS ENDED JUNE 30, 1999 1998 CHANGE
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(DOLLARS IN THOUSANDS)
General and administrative........................................................... $ 2,014 $ 1,857 8.5%
Percentage of net sales.............................................................. 11.1% 13.9%
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The increase in general and administrative expenses between comparable
periods was primarily attributable to increased compensation-related expenses
due to additional general and administrative personnel and higher salary levels.
Internal use software licenses and legal costs also contributed to the year over
year increase in expenses. Lower consulting expenses for recruiting and
information systems maintenance during the three months ended June 30, 1999 in
comparison to the prior year reduced the overall increase in expenses. General
and administrative expenses, being relatively fixed in nature, can be expected
to fluctuate as a percentage of net sales from period to period.
INTEREST EXPENSE AND INTEREST INCOME
THREE MONTHS ENDED JUNE 30, 1999 1998 CHANGE
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(DOLLARS IN THOUSANDS)
Interest expense...................................................................... $(68) $ (20) 240%
Interest income....................................................................... $59 $ 167 (64.7%)
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The increase in interest expense between the three month periods ended June
30, 1999 and 1998 is primarily attributable to $4.0 million advanced under a
borrowing agreement with a significant customer. The decrease in interest income
during the three month period ended June 30, 1999 in comparison to the
corresponding period in the prior fiscal year was primarily attributable to
lower average invested cash and marketable security balances. The $18.0 million
sale of technology assets described below occurred on
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June 30, 1999 and as such did not significantly impact interest income for the
quarter ended June 30, 1999. Refer to "Liquidity and Capital Resources."
GAIN ON SALE OF TECHNOLOGY ASSETS AND IMPAIRMENT OF STRATEGIC INVESTMENT
On June 30, 1999, the Company sold real-time Internet communications
technology and related assets for $18 million. Legal and compensation costs
associated with the transaction were approximately $1.5 million, resulting in a
$16.5 million gain. None of the Company's current or historical revenues were
attributable to the sold technology. In connection with the sale, six of the
Company's employees joined the staff of the acquiring company.
During the quarter ended June 30, 1999, the Company recorded a $1.2 million
impairment loss on a strategic investment. The loss represented the Company's
entire investment in a small hardware vendor. The impairment was recorded due to
the uncertain financial viability of the vendor and the Company's decision to
evaluate alternate sources for the components supplied by the vendor.
INCOME TAX PROVISION
THREE MONTHS ENDED JUNE 30, 1999 1998 CHANGE
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(DOLLARS IN THOUSANDS)
Income tax benefit (provision).................................................. $ (4,163) $533 (881.1%)
Effective tax rate.............................................................. 29.5% 34.3%
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Variations in the customary relationship between the income tax benefit
(provision) and the statutory income tax rate of 34% result from certain
non-deductible expenses, tax exempt investment income, research and development
tax credits, and the benefit provided by the Company's foreign sales
corporation. The Company expects the effective tax rate to fluctuate in the
future due to varying operating results and the impact of changing research and
development tax credits, tax exempt investment income, and foreign sales
corporation benefits as a percentage of taxable income. In addition, the Company
anticipates that it may fall under the jurisdiction of additional taxing
authorities as its operations expand into new geographical areas.
The Company's effective tax rate for the quarter ended June 30, 1999 was
29.5% compared to a benefit rate (as a result of the pretax loss) of 34.3% for
the quarter ended June 30, 1998. During the quarter ended June 30, 1999, the
Company utilized its net operating loss (NOL) carryforward from the prior year,
resulting in a reduced effective tax rate. Due to the taxable income generated
by the sale of technology assets described above, the Company reversed the
valuation allowance of $885,000 on deferred tax assets that was recorded during
the prior year which reduced the effective tax rate for the quarter by 3.6%.
NET INCOME AND EARNINGS PER SHARE
THREE MONTHS ENDED JUNE 30, 1999 1998 CHANGE
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss).............................................................. $ 9,854 $ (1,020) (1,066.1%)
Percentage of net sales........................................................ 54.2% (7.6%)
Earnings (loss) per share:
Basic........................................................................ $ 2.15 $ (0.22) (1,077.3%)
Diluted...................................................................... $ 2.09 $ (0.22) (1,050.0%)
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The net income and earnings per share for the three month period ended June
30, 1999 in comparison to the net loss and loss per share for the corresponding
period in the prior fiscal year were primarily attributable to the gain
associated with the sale of technology assets described above. In addition,
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operating results before one-time items improved as revenue growth exceeded
growth in operating expenses. The number of common and common equivalent shares
outstanding was comparable in the three month periods ended June 30, 1999 and
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents, and marketable securities increased to
$23.6 million or 42% of total assets at June 30, 1999 from $4.5 million or 12%
of total assets at March 31, 1999. The increase is due primarily to the $18
million proceeds from the sale of technology assets described above and to a
lesser extent, a $4 million advance received under a borrowing agreement between
the Company and a significant customer (see below). Cash flow used in operations
totaled $3.3 million during the three months ended June 30, 1999. The Company
had net working capital of $29.7 million at June 30, 1999.
Accounts receivable, net of allowances, increased to $14.2 million at June
30, 1999 from $13.6 million at March 31, 1999. The increase in accounts
receivable balances was due to higher net sales in the three months ended June
30, 1999 compared to net sales in the three months ended March 31, 1999. Days'
sales outstanding at June 30, 1999 declined approximately 3% from March 31, 1999
to 72 days. Inventory decreased to $5.1 million at June 30, 1999 from $5.9
million at March 31, 1999, reflecting the Company's continued efforts to
efficiently manage component stocking levels.
The Company made $300,000 in capital expenditures during the three months
ended June 30, 1999, compared to $900,000 during the comparable period of the
prior fiscal year. The majority of the capital expenditures during the nine
months ended December 31, 1998 consisted of computer hardware and software used
to augment the Company's information systems infrastructure, as well as
additions and upgrades of computer equipment for employees. 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.
The Company has a $10,000,000 revolving credit line from a bank for
financing working capital. The line of credit is secured by the Company's
investment portfolio and expires on June 30, 2000. The Company had approximately
$500,000 of borrowings outstanding under the line of credit at June 30, 1999. In
addition, the Company has a $6.5 million borrowing commitment from a significant
customer. Borrowings under the agreement are due on May 5, 2002 and may be
repaid any time beginning May 5, 2000. At June 30, 1999, $4.0 million was
outstanding under this agreement. In connection with this agreement, the Company
issued warrants to purchase 500,000 shares of common stock at $13.00 per share.
The Company believes that ongoing maturity of securities in its investment
portfolio, together with cash flow from operations, and the financing
arrangements described above will provide sufficient resources to finance
operations for at least the next year.
YEAR 2000 (Y2K)
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 assessment of the year 2000 readiness of its
internal business process systems and applications. 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 internal systems are also year 2000
ready. The Company intends to continue monitoring its systems through the year
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 majority of which has already been incurred.
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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 majority of which has already been incurred. The
financial impact to the Company of the development and administration 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
customers do not make necessary modifications, conversions, migrations, or
upgrades, it could have a material adverse effect on the Company in the form of
legal costs or the loss of customers.
The Company has been served with three class action lawsuits, one each in
Alabama, Indiana and Massachusetts state courts, 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 plaintiffs in the suits seek to require the
Company to remedy the alleged defect in these products and also seek damages.
The Company has filed its answer in the suits in Alabama and Massachusetts. The
Company believes that the claims stated in the cases are without merit, that the
cases are not appropriate for class action, and the Company intends to defend
itself vigorously. However, due to the preliminary status of the proceedings, it
is not possible to predict the ultimate outcome of the cases or their financial
impact on the Company.
The Company has contacted its third-party suppliers to assess and seek
reasonable assurances concerning the year 2000 readiness of their products and
has contacted its primary suppliers concerning the year 2000 readiness of their
internal systems as well. The Company has received assurances from many of its
suppliers that their products and services are year 2000 ready, but has concerns
that some suppliers may be unable to control their supply chain and may
experience year 2000 interruptions. 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 is developing
contingency plans for third-party suppliers it believes may be at risk,
including qualifying alternative suppliers or increasing inventory levels prior
to January 2000. Because some products and services are highly proprietary, the
Company cannot ensure that acceptable substitutes will be available.
The Company has also requested and will assess any available information
from major customers concerning their internal year 2000 readiness. Because the
Company has no control over third parties' products, services or internal
operations, the Company cannot ensure year 2000 readiness by its customers.
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.
RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain statements contained herein are dependent upon numerous factors,
circumstances and contingencies. The following factors, while not all inclusive,
could cause actual results to differ materially from historical results or those
anticipated:
- Competitive pressure from new entrants to the 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.
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- 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.
- Additional operating losses in excess of management expectations may cause
the Company's existing cash and marketable security balances to be
insufficient to fund its operations. As a result, the Company may be
required to seek alternate sources of financing or may be required to
abate current expense levels. There can be no assurance that alternate
financing will be available on acceptable terms, or at all.
- Risks that the Company, its suppliers, or its customers do not address any
year 2000 readiness issues in a timely or effective manner. See "Year 2000
(Y2K)" above.
- 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, strategic relationships, and
vendor relationships may encounter legal and/or unforeseeable business
risks beyond the Company's control.
- Risks associated with foreign operations such as gains and losses on the
conversion of foreign currencies to U.S. dollars; export-import
regulations; customs matters; foreign collection problems; and military,
political and transportation risks may significantly affect the company's
operating results. In addition, the Company's international sales involve
additional risks associated with governmental regulation, product
adaptation to local languages and switching systems, and uncertainties
arising from local business practices and cultural considerations.
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PART II. OTHER INFORMATION
ITEM 2(D). CHANGES IN SECURITIES AND USE OF PROCEEDS
At March 31, 1999 the Company had remaining net proceeds from its December
1993 initial public offering of $913,000. During the quarter ended June 30,
1999, the Company used $913,000 to fund its operating loss, leaving no remaining
net proceeds.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment to Line of Credit Agreement dated June 21, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K regarding an investment agreement and master
purchase agreement with a significant customer on May 14, 1999.
The Company filed a Form 8-K regarding the sale of technology assets on July
7, 1999 and amended this filing with a Form 8-K/A filed on August 16, 1999.
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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: August 13, 1999 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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