FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 0-15578
DAVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware No. 02-0364368
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
6 Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices) (Zip Code)
Telephone: (978) 952-0200
(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: Common Stock, par value $.10 per share, outstanding as of May
10, 2000: 12,785,713 shares.
DAVOX CORPORATION & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page No.
-------
Consolidated Balance Sheets as of
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 12
Item 3. Quantitative and Qualitative Disclosures About Market Risks 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security-Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
March 31, December 31,
2001 2000
-------- --------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 57,319 $ 61,758
Marketable securities 11,443 8,999
Accounts receivable, net of reserves of $1,759 and
$2,255 in 2001 and 2000, respectively 16,437 14,195
Prepaid expenses and other current assets 3,812 4,564
Deferred tax assets 3,511 3,511
-------- --------
Total current assets 92,522 93,027
Property and equipment, net 6,540 5,863
Other assets 3,488 3,290
-------- --------
$102,550 $102,180
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,021 $ 5,450
Accrued expenses 6,947 8,092
Customer deposits 5,473 5,914
Deferred revenue 7,674 6,986
-------- --------
Total current liabilities 26,115 26,442
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000 shares
Issued - 14,556 shares 1,456 1,456
Additional paid-in capital 81,944 82,676
Accumulated foreign currency translation adjustments (237) (299)
Retained earnings 11,320 10,988
-------- --------
94,483 94,821
Treasury stock, 1,778 and 1,927 shares, at cost, in
2001 and 2000, respectively (18,048) (19,083)
-------- --------
Total stockholders' equity 76,435 75,738
-------- --------
$102,550 $102,180
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Product revenue $11,903 $14,828
Service revenue 12,794 11,555
------- -------
Total revenue 24,697 26,383
------- -------
Cost of product revenue 1,970 2,197
Cost of service revenue 7,073 5,610
------- -------
Total cost of revenue 9,043 7,807
------- -------
Gross profit 15,654 18,576
------- -------
Operating expenses:
Research, development and engineering 4,746 3,842
Selling, general and administrative 11,365 10,170
------- -------
Total operating expenses 16,111 14,012
------- -------
Income (loss) from operations (457) 4,564
Other income (primarily interest income) 938 901
------- -------
Income before provision for income taxes 481 5,465
Provision for income taxes 149 1,858
------- -------
Net income $ 332 $ 3,607
======= =======
Earnings per share:
Basic $ 0.03 $ 0.27
======= =======
Diluted $ 0.03 $ 0.25
======= =======
Weighted average shares outstanding:
Basic 12,683 13,404
======= =======
Diluted 13,230 14,552
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
PART I. FINANCIAL INFORMATION (continued)
ITEM 1. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
---------
2001 2000
---- ----
Cash Flows from Operating Activities:
Net income $ 332 $ 3,607
Adjustments to reconcile net income to net cash
(used in) provided by operating activities -
Depreciation and amortization 983 985
Tax benefit from exercise of stock options 16 953
Changes in current assets and liabilities -
Accounts receivable (2,243) 2,776
Prepaid expenses and other current assets 752 374
Accounts payable 571 (160)
Accrued expenses (1,145) (1,440)
Customer deposits (441) (994)
Deferred revenue 690 3,022
-------- --------
Net cash (used in) provided by operating activities (485) 9,123
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (1,662) (1,260)
Increase in other assets (198) (44)
Purchases of marketable securities (11,390) (20,450)
Maturities of marketable securities 8,946 26,531
-------- --------
Net cash (used in) provided by investing activities (4,304) 4,777
-------- --------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 316 3,729
Proceeds from employee stock purchase plan 196 --
Purchases of treasury stock (225) --
-------- --------
Net cash provided by financing activities 287 3,729
-------- --------
Effect of exchange rate changes on cash and cash equivalents 63 (114)
-------- --------
Net (decrease) increase in cash and cash equivalents (4,439) 17,515
Cash and cash equivalents, beginning of period 61,758 34,433
-------- --------
Cash and cash equivalents, end of period $ 57,319 $ 51,948
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 55 $ 1,142
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
PART 1. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Preparation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and note disclosures required by generally accepted
accounting principles. The statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K, Commission File No. 000-15578, that was filed with the Securities and
Exchange Commission on March 15, 2001. In the opinion of management, the
accompanying consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
Company's financial position and results of operations. The results of
operations for the three-month period ended March 31, 2001 may not be indicative
of the results that may be expected for the next quarter or the full fiscal
year.
2. 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.
3. 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, implementation, education and consulting
services. The Company recognizes revenue in accordance with the provisions of
the American Institute of Certified Public Accountants Statement of Position
(SOP) No. 97-2, Software Revenue Recognition, and SOP No. 98-9, Modification of
SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions.
Revenue from software license fees are generally recognized upon delivery
provided that there are no significant post delivery obligations, persuasive
evidence of an agreement exists, the fee is fixed or determinable and collection
of the related receivable is probable. If acceptance is required beyond the
Company's standard published specifications, software license revenue is
recognized upon customer acceptance.
SOP 98-9 requires use of the residual method for recognition of revenues
when vendor-specific objective evidence exists for undelivered elements but does
not exist for the delivered elements of a multiple-element arrangement. In such
circumstances, the Company defers the fair value of the undeliverable elements
and recognizes, as revenue, the remaining value for the delivered elements.
6
PART 1. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. Revenue Recognition (continued)
Revenues for consulting, implementation and educational services are
recognized over the period in which services are provided. Maintenance revenue
is deferred at the time of software license shipment and is recognized ratably
over the term of the support period, which is typically one year. Amounts
collected prior to satisfying the revenue recognition criteria are reflected as
deferred revenue.
4. Earnings Per Share
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed using the
weighted average number of common shares outstanding and the effect of dilutive
common stock options using the treasury stock method. A reconciliation of basic
and diluted weighted average shares outstanding is as follows (in thousands):
Three Months Ended
March 31,
---------
2001 2000
---- ----
Basic weighted average shares outstanding 12,683 13,404
Effect of dilutive stock options 547 1,148
------ ------
Diluted weighted average shares outstanding 13,230 14,552
====== ======
For the three months ended March 31, 2001 and 2000, 1,685,359 and 307,274
common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding, as their effect would be antidilutive.
7
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Comprehensive Income
The components of comprehensive income are as follows (in thousands):
Three Months Ended
March 31,
---------
2001 2000
---- ----
Net income $ 332 $3,607
Foreign currency translation adjustments 63 (114)
----- ------
Comprehensive income $ 395 $3,493
===== ======
6. Segment and Geographic Information
Product revenue from international sources totaled approximately $5.1
million and $3.0 million for the first quarter of 2001 and 2000, respectively.
The Company's revenue from international sources was primarily generated from
customers located in Europe, Canada, Asia/Pacific and Latin America.
Substantially all of the Company's product revenue for the periods presented was
shipped from its headquarters located in the United States.
The following table represents the Company's percentage of product revenue
by geographic region from customers for the three months ended March 31, 2001
and 2000:
Three Months Ended
March 31,
---------
2001 2000
---- ----
U.S. 56.7% 79.7%
U.K. 26.0 10.0
Asia/Pacific 13.5 1.7
Europe 2.2 5.0
Latin America 1.0 0.5
Canada 0.6 3.1
----- -----
Total 100.0% 100.0%
===== =====
Substantially all of the Company's assets are located in the United States.
8
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
CAUTIONARY STATEMENTS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. Statements set forth herein may
contain "forward-looking" information that involves risks and uncertainties.
Actual future financial or operating results may differ materially from such
forward-looking statements. Statements indicating that the Company "expects,"
"estimates," "believes," "is planning," or "plans to" are forward-looking, as
are other statements concerning future financial or operating results, product
offerings or other events that have not yet occurred. There are several
important factors that could cause actual results or events to differ materially
from those anticipated by the forward-looking statements. Such factors are
described in greater detail under Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Future Results. Although the Company has sought to identify the most significant
risks to its business, the Company cannot predict whether, or to what extent,
any of such risks may be realized nor can there be any assurance that the
Company has identified all possible issues that the Company may face.
9
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000
Total revenue for the first quarter of 2001 decreased approximately $1.7
million, or 6.4%, to $24.7 million compared to the same period in 2000.
Product revenue for the first quarter of 2001 decreased approximately $2.9
million, or 19.7%, to $11.9 million compared to the same period in 2000. This
decrease was principally due to the fact that the first quarter of 2000 was a
record quarter for the Company driven by pent up demand from Y2K. There was an
increase in the number of customers placing orders for new systems during the
first quarter of 2000, after the successful passing of Y2K
Cost of product revenue for the first quarter of 2001 decreased
approximately $226,000, or 10%, to $2.0 million compared to the same period in
2000. As a percentage of product revenue, the cost of product revenue increased
by 1.7% to 16.5% in the first quarter of 2001 compared to the same period in
2000. The decrease in the cost of product revenue and product gross margin was
due primarily to the lower product revenue.
Service revenue for the first quarter of 2001 increased approximately $1.2
million, or 10.7%, to $12.8 million compared to the same period in 2000. The
increase in service revenue was due primarily to increased professional services
revenue in the first quarter of 2001 compared to the same period in 2000 and an
increase in maintenance revenue resulting from continued growth of the global
customer base.
Cost of service revenue for the first quarter of 2001 increased
approximately $1.5 million, or 26.0%, to $7.1 million compared to the same
period in 2000. As a percentage of service revenue, the cost of service revenue
increased by 6.0% in the first quarter of 2001 compared to the same period in
2000. The increase during the first quarter of 2001 was due primarily to
increased headcount and payroll and related expenses required to support the
increased revenue compared to the same period in 2000.
Research, development and engineering expenses increased approximately
$904,000, or 23.5%, to $4.7 million for the first quarter of 2001 compared to
the same period in 2000. The increase was primarily due to increased headcount
and payroll related expenses and consulting costs compared to the same period in
2000.
10
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Selling, general and administrative expenses increased by approximately
$1.2 million, or 11.7%, to $11.4 million for the first quarter of 2001 compared
to the same period in 2000. The increase in the first quarter of 2001 compared
to the same period in 2000 was principally due to increased headcount and
payroll related expenses and continuing investment in the international
operations as the Company continues to expand its global presence.
Other income in 2001 was derived primarily from interest income from
investments in commercial paper, corporate bonds, Eurodollar bonds, and similar
financial instruments, net of investment fees. Other income increased 8% for the
first quarter of 2001 compared to the same period in 2000. This increase
reflects the higher average investment balances in 2001 compared to 2000.
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis using its estimated annual
effective income tax rate. The Company is providing for income taxes in 2001 at
an effective tax rate of 31%, which is lower than the combined federal and state
statutory tax rates due primarily to net operating loss carryforwards,
utilization of tax credits and benefits derived from the Company's foreign sales
corporation.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2001, the Company's principal sources of liquidity were its
cash and cash equivalent balances of approximately $57.3 million, as well as its
marketable securities of approximately $11.4 million. At December 31, 2000, the
Company's cash and cash equivalent balances were approximately $61.8 million and
its marketable securities were approximately $9.0 million. The overall decrease
of approximately $2.0 million in the total cash and marketable securities
balances was due primarily to increased operating expense and increased
investment in property and equipment in the first quarter of 2001.
Net cash used in operating activities for the first three months of 2001
was approximately $501,000 compared to cash provided by operating activities of
approximately $8.2 million for the same period in 2000. The decrease in cash
provided by operating activities for the first three months of 2001 was due
primarily to less favorable operating results, a decrease in accrued expenses of
approximately $1.1 million and an increase in accounts receivable of
approximately $2.2 million for the period.
11
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company's primary investing activities were purchases and maturities of
marketable securities and purchases of property and equipment. Purchases and
maturities of marketable securities generated a net cash outflow of
approximately $2.4 million during the first three months of 2001, compared to a
net cash inflow of approximately $6.1 million during the same period in 2000.
Property and equipment purchases were approximately $1.7 million during the
first three months of 2001, compared to approximately $1.3 million during the
same period in 2000.
Cash provided by financing activities during the first three months of 2001
totaled approximately $303,000 and was generated from proceeds from exercises of
stock options and from purchases of stock through the Company's employee stock
purchase plan, which was partially offset by the repurchase of 20,000 shares of
the Company's common stock for approximately $225,000. Cash provided by
financing activities during the first three months of 2000 totaled approximately
$4.7 million and was generated from proceeds from exercises of stock options.
At March 31, 2001, the working capital of the Company decreased to
approximately $66.4 million from approximately $66.6 million as of December 31,
2000.
Management believes, based on its current operating plan, that the
Company's existing cash and marketable securities balances and cash generated
from operations are sufficient to meet the Company's cash requirements for the
next twelve months.
12
PART I. FINANCIAL INFORMATION (continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
As of March 31, 2001, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under Statement of Financial Standards
(SFAS) No. 107. Substantially all, of the Company's investments are short-term;
commercial paper, corporate bonds, Eurodollar bonds, and similar financial
instruments that are carried on the Company's books at amortized cost, which
approximates fair market value. Accordingly, the Company has no quantitative
information concerning the market risk of participating in such investments.
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalents and marketable securities is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments.
The Company's exposure to currency exchange rate fluctuations has been and
is expected to continue to be modest due to the fact that the operations of its
international subsidiaries are almost exclusively conducted in their respective
local currencies. International subsidiary operating results are translated into
U.S. dollars and consolidated for reporting purposes. The impact of currency
exchange rate movements on intercompany transactions was immaterial for the
three months ended March 31, 2001. Currently, the Company does not engage in
foreign currency hedging activities.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to historical information contained herein, this report
contains forward-looking statements concerning future expected financial and
operating results. The Company's future actual results could differ materially
from the forward-looking statements discussed or implied in this report because
of risks or uncertainties including, but not limited to, competition and
competitive pricing pressures, technological change, new product introduction
and market acceptance, the ability of Davox to attract and retain key personnel
and general economic conditions in the United States and worldwide markets
served by Davox; and those other factors discussed from time to time in Davox's
public reports filed with the Securities and Exchange Commission, such as those
discussed under "Certain Factors That May Affect Future Results" in Davox's
quarterly reports on Form 10-Q and annual report on Form 10-K.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material changes since the Company's Annual Report on
Form 10-K for the period ended December 31, 2000.
Item 4. Submission of Matters to a Vote of Security-Holders
The annual meeting of security-holders of the Company was held on
May 2, 2001. The number of directors was fixed at five and the
following persons were elected as directors:
Nominee Total Votes for Nominee Total Votes Against Nominee
Alphonse M. Lucchese 11,837,190 70,398
Michael D. Kaufman 11,843,133 64,455
Walter J. Levison 11,751,633 155,955
R. Scott Asen 11,566,093 341,495
David M. Sample 11,453,779 453,809
Item 5. Other Information
Proposal of stockholders intended for inclusion in the proxy statement
to be furnished to all stockholders entitled to vote at the next annual
meeting of stockholders of the Company must be received at the
Company's principal executive offices not later than December 6, 2001.
The deadline for providing timely notice to the Company of matters that
stockholders otherwise desire to introduce at the next annual meeting
of stockholders of the Company is February 20, 2001. In order to
curtail any controversy as to the date, on which a proposal was
received by the Company, it is suggested that proponents submit their
proposal by Certified Mail, Return Receipt Requested.
Item 6. Exhibits and Reports on Form 8-K
(a) No current reports on Form 8-K were filed during the quarter ended March
31, 2001.
14
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.
DAVOX CORPORATION
Date: May 5, 2001 By: /s/ David M. Sample
-------------------
David M. Sample
Chief Executive Officer
and President (Principal
Executive Officer)
Date: May 5, 2001 By: /s/ Michael J. Provenzano III
-----------------------------
Michael J. Provenzano III
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
15