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 September 30, 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
November 5, 2001: 12,330,757 shares.
DAVOX CORPORATION & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page(s)
-------
Consolidated Balance Sheets as of
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 2001 and 2000 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risks 16 - 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2001 2000
---- ----
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 17,172 $ 61,758
Marketable securities 50,437 8,999
Accounts receivable, net of reserves of $2,249 and
$2,255 in 2001 and 2000, respectively 15,531 14,195
Prepaid expenses and other current assets 4,416 4,564
Deferred tax assets 3,511 3,511
-------- --------
Total current assets 91,067 93,027
-------- --------
Property and equipment, net 6,900 5,863
Other assets 3,706 3,290
-------- --------
$101,673 $102,180
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,293 $ 5,450
Accrued expenses 8,752 8,092
Customer deposits 5,967 5,914
Deferred revenue 9,479 6,986
-------- --------
Total current liabilities 29,491 26,442
-------- --------
Stockholders' equity:
Common stock, $0.10 par value -
Authorized - 30,000 shares
Issued - 14,556 shares 1,456 1,456
Additional paid-in capital 81,856 82,676
Accumulated foreign currency translation adjustments (246) (299)
Retained earnings 9,241 10,988
-------- --------
92,307 94,821
Treasury stock, 1,994 and 1,927 shares, at cost, in
2001 and 2000, respectively (20,125) (19,083)
-------- --------
Total stockholders' equity 72,182 75,738
-------- --------
$101,673 $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 OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Product revenue $ 9,395 $11,081 $33,667 $35,609
Service revenue 12,747 11,398 38,755 34,826
------- ------- ------- -------
Total revenue 22,142 22,479 72,422 70,435
------- ------- ------- -------
Cost of product revenue 1,863 2,058 6,018 6,086
Cost of service revenue 6,555 6,461 20,422 17,977
------- ------- ------- -------
Total cost of revenue 8,418 8,519 26,440 24,063
------- ------- ------- -------
Gross profit 13,724 13,960 45,982 46,372
------- ------- ------- -------
Operating expenses:
Research, development and engineering 4,491 3,913 14,202 11,722
Selling, general and administrative 10,095 10,738 32,899 31,267
Non- recurring restructuring costs 2,767 - 2,767 -
------- ------- ------- -------
Total operating expenses 17,353 14,651 49,868 42,989
------- ------- ------- -------
Income (loss) from operations (3,629) (691) (3,886) 3,383
Other income (primarily interest income) 644 1,041 2,265 3,013
------- ------- ------- -------
Income (loss) before provision for
(benefit from) income taxes (2,985) 350 (1,621) 6,396
Provision for (benefit from) income taxes (297) 119 126 2,175
------- ------- ------- -------
Net income (loss) $(2,688) $ 231 $(1,747) $ 4,221
======= ======= ======= =======
Earnings (loss) per share:
Basic $ (0.21) $ 0.02 $ (0.14) $ 0.31
======= ======= ======= =======
Diluted $ (0.21) $ 0.02 $ (0.14) $ 0.30
======= ======= ======= =======
Weighted average shares outstanding:
Basic 12,705 13,247 12,727 13,407
======= ======= ======= =======
Diluted 12,705 13,631 12,727 14,158
======= ======= ======= =======
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)
Nine Months Ended
September 30,
-------------
2001 2000
---- ----
Cash Flows from Operating Activities:
Net income (loss) $ (1,747) $ 4,221
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Stock-based compensation 200 -
Depreciation and amortization 2,935 2,968
Tax benefit from exercise of stock options 177 315
Changes in current assets and liabilities -
Accounts receivable (1,341) 1,438
Prepaid expenses and other current assets 155 314
Accounts payable (158) (1,410)
Accrued expenses 663 (4,387)
Customer deposits 50 1,089
Deferred revenue 2,492 3,000
-------- --------
Net cash provided by operating activities 3,426 7,548
-------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (3,976) (3,153)
Increase in other assets (416) (626)
Purchases of marketable securities (81,590) (68,121)
Maturities of marketable securities 40,152 73,375
-------- --------
Net cash (used in) provided by investing activities (45,830) 1,475
-------- --------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 410 5,209
Proceeds from employee stock purchase plan 369 214
Purchases of treasury stock (3,019) (6,470)
-------- --------
Net cash used in financing activities (2,240) (1,047)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 58 (318)
-------- --------
Net (decrease) increase in cash and cash equivalents (44,586) 7,658
Cash and cash equivalents, beginning of period 61,758 34,433
-------- --------
Cash and cash equivalents, end of period $ 17,172 $ 42,091
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for income taxes $ 227 $ 2,495
======== ========
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 and nine month periods ended September 30, 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 from customers prior to satisfying the revenue recognition criteria
are reflected as deferred revenue in the accompanying balance sheet.
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 Nine Months Ended
September 30, September 30,
------------ -------------
2001 2000 2001 2000
---- ---- ---- ----
Basic weighted average shares outstanding 12,705 13,247 12,727 13,407
Effect of dilutive stock options - 384 - 751
------ ------ ------ ------
Diluted weighted average shares outstanding 12,705 13,631 12,727 14,158
====== ====== ====== ======
For the three months ended September 30, 2001 and 2000, 2,848,150 and
1,953,013 common equivalent shares, respectively, were not included in the
diluted weighted average shares outstanding, as their effect would be
antidilutive. For the nine months ended September 30, 2001 and 2000, 1,798,131
and 1,276,724 common equivalent shares, respectively, were not included in the
diluted weighted average shares outstanding, as their effect would be
antidilutive.
5. Non-Recurring Restructuring Costs
For the three and nine months ended September 30, 2001, the Company
incurred a restructuring charge of approximately $2.8 million, related to the
reduction in its workforce, costs associated with excess leased office space due
to the workforce reduction and the departure of its previous president and chief
executive officer.
7
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Non-Recurring Restructuring Costs (cont.)
For the three months ended September 30, 2001, the Company reduced its
workforce by 97 people, or 18% of its total employees. All functional areas
were affected by the reductions.
The components of the restructuring costs are as follows (in thousands):
Nine Months Ended
September 30,
-------------
2001
----
Severance and related costs $2,308
Excess leased office space 259
Stock-based compensation 200
------
$2,767
======
Cash payments totaled $0.9 million for the three and nine month periods
ended September 30, 2001 and $1.8 million in restructuring liabilities remain in
accrued expenses in the accompanying balance sheet at September 30, 2001.
6. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $(2,688) $ 231 $(1,747) $4,221
Foreign currency translation adjustments 142 (24) 53 (253)
------- ----- ------- ------
Comprehensive income (loss) $(2,546) $ 207 $(1,694) $3,968
======= ===== ======= ======
8
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. Segment and Geographic Information
The Company has two primary product lines: its Ensemble Customer Contact
Suite and Unison Call Management System. The following table represents the
Company's percentage of product revenue by product line for the three and nine
months ended September 30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Unison 72.4% 89.4% 81.1% 90.7%
Ensemble 22.5 9.3 14.7 3.6
Other 5.1 1.3 4.2 5.7
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Product revenue from international sources totaled approximately $2.6
million and $1.9 million for the three months ended September 30, 2001 and 2000
respectively and $12.0 million and $6.7 million for the first nine months of
2001 and 2000, respectively. The Company's revenue from international sources
was primarily generated from customers located in the United Kingdom, Europe and
Asia/Pacific. 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 and nine months ended
September 30, 2001 and 2000:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
United States 72.6% 83.0% 64.4% 81.3%
United Kingdom 10.4 5.6 18.5 9.2
Europe 2.8 4.2 4.0 4.2
Asia/Pacific 12.4 6.7 12.1 3.0
Other 1.8 0.5 1.0 2.3
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Substantially all of the Company's assets are located in the United
States.
9
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. The adoption of
SFAS No. 141 is not expected to have a material impact on the Company's
consolidated financial statements.
In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment by applying a fair-value-based test.
Also under SFAS No. 142, intangible assets acquired in conjunction with a
business combination should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. Intangible assets will continue to
be amortized over their respective useful lives under SFAS No. 142. The Company
must adopt SFAS No. 142 on January 1, 2001. The adoption of SFAS No. 142 is not
expected to have a material impact on the Company's consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to (a) all entities
and (b) legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees. SFAS
No. 143 amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, and is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company does not anticipate that the
adoption of SFAS No. 143 will have a material impact on its financial
statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes FASB SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but
retains SFAS No. 121's fundamental provisions for (a) recognition/measurement of
impairment of long-lived assets to be held and used and (b) measurement of long-
lived assets to be disposed of by sale. SFAS No. 144 also supersedes the
accounting/reporting provisions of Accounting Principles Board (APB) Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for segments of a business to be disposed of but
retains APB No. 30's requirement to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale. SFAS
10
PART I. FINANCIAL INFORMATION (continued)
DAVOX CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. New Accounting Standards (cont.)
No. 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company does not anticipate that
the adoption of SFAS No. 144 will have a material impact on its financial
statements.
11
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
12
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2001 and 2000
During the third quarter of 2001, in response to the weak economic
environment, the Company recorded a non-recurring restructuring charge totaling
approximately $2.8 million. The components of the restructuring charge included
a reduction in workforce of approximately 97 people or 18% of the Company's
total workforce, which effected all functional areas, costs associated with
excess leased office space due to the reduction in headcount and the departure
of the Company's previous president and chief executive officer.
Total revenue for the third quarter of 2001 decreased approximately
$337,000, or 1.5%, to $22.1 million compared to $22.5 million for the same
period in 2000. Total revenue for the first nine months of 2001 increased
approximately $2.0 million, or 2.8%, to $72.4 million compared to $70.4 million
for the same period in 2000.
Product revenue for the third quarter of 2001 decreased approximately $1.7
million, or 15.2%, to $9.4 million compared to the same period in 2000. Product
revenue for the first nine months of 2001 decreased approximately $1.9 million,
or 5.5%, to $33.7 million compared to the same period in 2000. These decreases
in product revenue for the third quarter and first nine months of 2001 is due to
the weakening economic conditions experienced in 2001.
Cost of product revenue for the third quarter of 2001 decreased
approximately $194,000, or 9.4%, to $1.9 million compared to the same period in
2000. Cost of product revenue for the first nine months of 2001 decreased
approximately $68,000, or 1.1%, to $6.0 million compared to the same period in
2000. The cost of product revenue decreases for the three and nine month periods
in 2001 is principally related to the decrease in revenue noted above and to a
decrease in the hardware content of the systems shipped in 2001 compared to the
same periods in 2000.
Service revenue for the third quarter of 2001 increased approximately $1.3
million, or 11.9%, to $12.7 million compared to the same period in 2000. Service
revenue for the first nine months of 2001 increased approximately $3.9 million,
or 11.3%, to $38.8 million compared to the same period in 2000. The increase in
service revenue for the three and nine months ended September 30, 2001 was
primarily due to the growth in the Company's installed customer base, resulting
in increased new and renewed contract maintenance revenue as compared to the
same periods in 2000.
Cost of service revenue for the third quarter of 2001 increased
approximately $94,000, or 1.5%, to $6.6 million compared to the same period in
2000. Cost of service revenue for the first nine months of 2001 increased
approximately $2.4 million, or 13.6%, to $20.4 million compared to the same
period in 2000. The increases during the third quarter and first nine months of
2001 were due primarily to increased headcount, payroll and related expenses,
13
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
and increased costs related to the international expansion of the Company's
support and services organizations to better serve our international customers
as compared to the same periods in 2000.
Research, development and engineering expenses increased approximately $0.6
million, or 14.8%, to $4.5 million for the third quarter of 2001 as compared to
the same period in 2000. Research, development and engineering expenses
increased approximately $2.5 million, or 21.2%, to $14.2 million for the first
nine months of 2001 compared to the same period in 2000. The three and nine
month period increases for research, development and engineering expenses were
primarily due to increased headcount and payroll and related expenses in 2001
compared to the same periods in 2000.
Selling, general and administrative (SG&A) expenses decreased by
approximately $0.6 million, or 6.0%, to $10.1 million for the third quarter of
2001 compared to the same period in 2000. The decrease in SG&A expenses for the
third quarter of 2001 was principally due to lower discretionary spending
combined with the cost savings experienced as a result of the restructuring
actions completed during the third quarter of 2001. SG&A expenses increased by
approximately $1.6 million, or 5.2%, to $32.9 million for the first nine months
of 2001 compared to the same period in 2000. The increase in SG&A for the first
nine months of 2001 compared to the same period in 2000 was principally due to
continued investment in international operations as the Company continues to
expand its global presence and higher payroll and related expenses which was
partially offset by a decrease in travel expenses.
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 decreased 38.2% for
the third quarter of 2001 compared to the same period in 2000 and decreased
24.8% for the first nine months of 2001 compared to the same period in 2000.
The decreases for the third quarter of 2001 and first nine months of 2001 were
due to lower interest rates and investment yields compared to the same periods
in 2000 as well as lower average investment balances for the first nine months
of 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 provided for income taxes in the first
six months of 2001 at an effective tax rate of 31%, which is lower than the
combined federal and state statutory tax rates due primarily to anticipated
utilization of net operating loss carryforwards, tax credits and benefits
derived from the Company's foreign sales corporation. For the three month
period ended September 30, 2001, the Company recorded a net loss of $2.7 million
and for the nine months ended September 30, 2001, the Company recorded a net
loss totaling $1.7 million. As a result, during the third quarter of 2001, the
Company recorded a $0.3 million benefit from income taxes from amounts provided
for in the first six months of 2001. The Company's tax provision of $0.1
million for the nine months ended September 30, 2001 relates primarily to
anticipated foreign income taxes.
14
PART I. FINANCIAL INFORMATION (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company's principal sources of liquidity were
its cash and cash equivalent balances of approximately $17.2 million, as well as
its marketable securities of approximately $50.4 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 $3.1 million in the total cash and marketable
securities balances was due primarily to the utilization of approximately $3.0
million during 2001 to fund the repurchase of shares of the Company's stock and
the payment of approximately $0.7 million related to the restructuring
activities during the first nine months of 2001.
Net cash provided by operating activities for the first nine months of
2001, was approximately $3.2 million compared to cash provided by operating
activities of approximately $7.5 million for the same period in 2000. The
decrease in cash provided by operating activities for the first nine months of
2001 was due primarily to less favorable operating results and an increase in
accounts receivable of approximately $1.3 million for the nine month period
ended September 30, 2001.
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 $41.4 million during the first nine months of 2001, compared to a
net cash inflow of approximately $5.3 million during the same period in 2000.
Property and equipment purchases were approximately $4.0 million during the
first nine months of 2001, compared to approximately $3.2 million during the
same period in 2000.
Cash used in financing activities during the first nine months of 2001
totaled approximately $2.0 million compared to approximately $1.0 million
utilized for the same period in 2000. The utilization of cash was the result of
the repurchase of 333,100 shares of the Company's common stock, for
approximately $3.0 million during the first nine months of 2001, and was
partially offset by the proceeds received from exercises of stock options and
from purchases of stock through the Company's employee stock purchase plan.
At September 30, 2001, the working capital of the Company decreased to
approximately $61.6 million from approximately $66.6 million as of December 31,
2000. The $5.0 million decrease in working capital is primarily attributable to
the previously mentioned $3.1 million decrease in total cash and marketable
securities balances combined with a $2.5 million increase in deferred revenue,
as the Company's global installed customer base continues to grow.
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.
15
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 September 30, 2001, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments.
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 minimized 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 nine
months ended September 30, 2001. Currently, the Company does not engage in
foreign currency hedging activities.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. The adoption of
SFAS No. 141 is not expected to have a material impact on the Company's
consolidated financial statements.
In July 2001, the FASB also issued SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment by applying a fair-value-based test.
Also under SFAS No. 142, intangible assets acquired in conjunction with a
business combination should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so.
16
PART I. FINANCIAL INFORMATION (continued)
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS (continued)
Intangible assets will continue to be amortized over their respective useful
lives under SFAS No. 142. The Company must adopt SFAS No. 142 on January 1,
2001. The adoption of SFAS No. 142 is not expected to have a material impact on
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to (a) all
entities and (b) legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset, except for certain obligations of
lessees. SFAS No. 143 amends SFAS No. 19, Financial Accounting and Reporting by
Oil and Gas Producing Companies, and is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company does not
anticipate that the adoption of SFAS No. 143 will have a material impact on its
financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes FASB SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but
retains SFAS No. 121's fundamental provisions for (a) recognition/measurement of
impairment of long-lived assets to be held and used and (b) measurement of long-
lived assets to be disposed of by sale. SFAS No. 144 also supersedes the
accounting/reporting provisions of Accounting Principles Board (APB) Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for segments of a business to be disposed of but
retains APB No. 30's requirement to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company does not anticipate that
the adoption of SFAS No. 144 will have a material impact on its financial
statements.
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 and political 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.
17
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 6. Exhibits and Reports on Form 8-K
(a) No current reports on Form 8-K were filed during the quarter ended
September 30, 2001.
10.19 Severance agreement for James D. Foy, President and Chief Executive
Officer
10.20 Severance agreement and release for David M. Sample, former President
and Chief Executive Officer
10.21 2001 Stock Option Plan of the Registrant
10.22 2001 Form of Non-Qualified Stock Option Agreement under the
Registrant's 2001 Stock Option Plan
18
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: November 6, 2001 By: /s/ James D. Foy
----------------
James D. Foy
Chief Executive Officer
and President (Principal
Executive Officer)
Date: November 6, 2001 By: /s/ Michael J. Provenzano III
-----------------------------
Michael J. Provenzano III
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
19