Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission file number 0-15578
DAVOX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 02-0364368
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6 Technology Park Drive
Westford, Massachusetts 01886
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 952-0200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Aggregate market value, as of February 29, 2000 of Common Stock held by non-
affiliates of the registrant: $363,205,514 based on the last reported sale price
on the National Market System as reported by Nasdaq on that date.
Number of shares of Common Stock outstanding at February 29, 2000: 13,452,946
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1999. Portions of such Proxy Statement are incorporated by reference in Part
III.
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 throughout this filing, however the Company goes into 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.
ITEM 1. BUSINESS
- ----------------
GENERAL
Davox Corporation ("Davox" or the "Company") and its subsidiaries develop,
market, support and service software solutions for the contact center
marketplace. Davox was founded in 1981 on a simple principal: provide solutions
that will enable call centers to optimize agent productivity and effectively
manage calling campaigns in order to provide superior customer service and
satisfaction. Since then, Davox has become a recognized leader in the customer
interaction management marketplace. Through its direct sales force and third-
party distribution channels, Davox provides a full range of customer interaction
management solutions to businesses involved in mission-critical customer contact
activities within such industries as financial services, media and
entertainment, retail, healthcare, telecommunications, transportation, utilities
and service bureaus. Davox(R) products and services are used by more than 1,000
organizations worldwide.
Davox was incorporated in Massachusetts in 1981 and reorganized in Delaware in
1982. The Company's common stock is listed on the NASDAQ National Market under
the symbol "DAVX". The Company is headquartered in Westford, Massachusetts.
The mailing address for the Company's headquarters is 6 Technology Park Drive,
Westford, Massachusetts, 01886 and its telephone number is (978)952-0200. Davox
can also be contacted through its web site at www.davox.com.
OVERVIEW
- --------
Over the past few years, call centers have transformed into contact centers that
are designed to handle a wide range of customer interactions across a variety of
media including telephony, e-mail and web-enabled communications. These diverse
communications are unified by a common goal: establishing direct links between
contact center agents and customer information
2
that deliver tangible improvements in sales and satisfaction.
In pursuit of this goal, Davox acquired AnswerSoft, Inc. in May 1998. As a
developer of inbound call routing, reporting and agent desktop automation
software specifically designed for the needs of the inbound-oriented contact
center, AnswerSoft's capabilities complemented Davox's leadership in outbound
and blended call center systems. After the acquisition, Davox integrated and
modularized AnswerSoft's technology into its product offerings, thereby
transforming the company into a full-service solution provider for contact
centers.
Subsequent to this integration effort, Davox introduced its Ensemble customer
interaction management suite in December 1999. Ensemble is a modular,
integrated solution that enables companies to optimize the value of their
customer interactions across a broad range of media. The system integrates
inbound call routing, outbound call management, seamless call blending, web
capabilities, desktop automation and comprehensive reporting capabilities. The
product's modular design makes these capabilities fully scalable, thereby
providing a framework for the continued growth and evolution of our customers'
technology investments.
Ensemble continues Davox's 20-year tradition of industry leadership. Designed to
address the strategic needs of world-class organizations, Ensemble(TM) reflects
Davox's long-standing commitment to provide solutions that are rapidly deployed,
highly automated and capable of delivering a rapid return on our customers'
technology investments.
The introduction of Ensemble supports the Company's efforts to achieve two key
strategic objectives: (i) to increase its market share in the customer contact
industry and (ii) to establish Ensemble as the standard for customer interaction
management.
As customer interaction management functions become increasingly critical to the
success of an enterprise, customer contact solutions must demonstrate a proven
ability to assist organizations in achieving their strategic goals. Ensemble(TM)
provides the opportunity to deliver key benefits to service-oriented customer
contact centers:
. ENHANCED REVENUES - The consolidation of mission-critical customer
interaction management functions enables senior managers to track complete
customer contact performance and identify potential cross-selling
opportunities.
. REDUCED OPERATING COSTS - Organizations can consolidate redundant or parallel
systems and agent pools by integrating both inbound and outbound customer
communications.
. INCREASED PRODUCTIVITY - Agents can perform a greater number of automated
tasks and reach more customers through multiple channels.
. IMPROVED CUSTOMER SERVICE - Customer loyalty is enhanced because customers
can communicate via the method that best suits their needs.
The Company believes that its Ensemble(TM) customer contact suite addresses the
needs of today's customer contact centers and is an optimal solution for
organizations looking to deliver world class service to their customers while
increasing revenues, agent productivity and gaining competitive advantage by
reducing operating costs.
3
PRINCIPAL PRODUCTS AND APPLICATIONS
- -----------------------------------
Davox's product strategy is focused on its three major product lines:
Ensemble(TM), Unison(R) and LYRICall(TM).
ENSEMBLE
Released in North America in December 1999, Ensemble is a modular, integrated
solution that combines inbound, outbound, and blended call management with
powerful desktop automation tools, web capabilities and sophisticated real-time
and historical reporting. Since its release in December, Ensemble has been
recognized with two industry awards: Call Center News' Hot Picks 2000 and 1999
Product of the Year by Call Center CRM Solutions magazine
Ensemble is comprised of the following modules that can be deployed as either
stand-alone applications or as part of a set of integrated capabilities tailored
to meet specific technological and operational requirements:
. ENSEMBLE INBOUND - Supports inbound call processing requirements, such as
routing calls to specific agents or Automatic Call Distributor (ACD) queues,
converts telephony-based information into automated screen pops at the agent
workstation; and facilitates voice/data transfers.
. ENSEMBLE OUTBOUND - Provides powerful predictive and preview dialing,
campaign and call list management, scheduled recalls, automated messaging,
real-time filtering, system alerts and voice/data transfers.
. ENSEMBLE BLEND - Utilizes computer telephony integration (CTI) and non-CTI
integration to provide a seamless, blended environment that can be used to
monitor ACD queues that reflect service thresholds.
. ENSEMBLE DESKTOP - Provides a link between front-line agents and back-office
customer information systems. Based on Davox's browser-based scripting and
agent application software, LYRICall(TM), Ensemble Desktop provides contact
center agents with the tools necessary to execute more successful customer
contacts.
. ENSEMBLE REPORTING - Provides real-time and historical reporting capabilities
that allows managers to effectively manage their contact center operations.
Key functional highlights of the Ensemble(TM) platform include:
. ENTERPRISE-WIDE VOICE/DATA TRANSFER - With Ensemble(TM), data gathered during
a particular contact moves with the call during transfers. The accumulated
information is automatically forwarded from one contact center agent to the
next. This capability reduces call handling times, and increases "first call"
resolution rates without compromising customer satisfaction.
. INTEGRATED MANAGEMENT CONSOLE - An integrated console enables supervisors to
manage both telephony (inbound, outbound, and blend) and email/web based
interactions through a single workstation. The console includes a number of
features that help improve operational effectiveness, such as an Alerts
feature, which notifies the supervisor when defined productivity benchmarks
run the risk of being compromised.
. SINGULAR CTI LINK - Ensemble(TM) transfers screen pop information from
various sources to the contact center agent desktop via a consolidated CTI
link. This feature leverages investments in existing resources by allowing
Davox customers to channel all CTI-related activities through a single
source, without relying on multiple vendors.
. LIFE CYCLE CALL TRACKING - Ensemble's call tracking features gather
transaction information that can be used to identify and address the contact
center's customer
4
activity trends. These records include specialized forms of information, such
as call segment length and enterprise-wide call movement patterns, that can
be used to fine-tune operations and enhance customer satisfaction.
Ensemble is scheduled to be available for international shipments in the second
quarter of 2000. Pricing for Ensemble starts at approximately $1,500 per agent.
The Company plans to increase and enhance the capabilities of the Ensemble
solution during 2000. The next major release of the product, version 2.0, is
scheduled for distribution during the second quarter of 2000. It is expected
that this release will incorporate a new module called Ensemble Online that will
integrate electronic mail contact management with telephone contact management.
In November 1999, Davox entered into a technology licensing agreement with Kana
Communications, a leading provider of online customer communications solutions
based in Palo Alto, California. Under the terms of the agreement, Davox will
incorporate e-business technologies from Kana for e-mail response into version
2.0 of its Ensemble customer contact suite.
The Company believes that this new online functionality will address one of the
fastest-growing requirements in customer interaction management: the need to
provide e-mail communications that are linked with telephony-based functions.
Ensemble's automated e-mail response capability is expected to enable companies
to begin the implementation of a convergent solution that accommodates both
telephony- and Internet-based interactivity.
UNISON(R)
Introduced in 1993, the Unison(R) call management system is designed to automate
the full range of outbound and blended calling activities within the customer
contact center. It integrates with existing voice and data systems, manages
outbound and call-blending applications and provides high-productivity tools to
increase the number of calls handled and the quality of each customer contact.
Unison technology is used primarily in customer contact centers with outbound
and blended calling requirements, such as credit/collections, telemarketing,
fundraising, and customer service. Unison is an award-winning, time-tested call
management solution that is used by companies throughout the world to meet their
mission-critical customer contact needs.
One of the key differentiating features of the Unison system is its Rules
Based(TM) Management technology. This technology enables customer contact
centers to define the parameters of calling campaigns based on specific business
objectives. The Unison system automatically implements the strategies, measures
calling effectiveness, and enables customer contact center managers to make
adjustments to calling campaigns in real-time without disrupting operations.
Unison is a fully scaleable architecture that lets contact centers modify and
extend the system without compromising system performance.
5
Unison is designed to provide key outbound call management functionality,
including predictive and preview dialing, campaign and call list management,
scheduled recalls, automated messaging, real-time filtering, system alerts, and
voice/data transfers. The Unison system also provides a graphical management
console that monitors critical functions and displays information about calling
campaigns.
The Company believes that sales of Unison will remain strong as organizations
continue to seek effective solutions for outbound-based calling campaigns. As
such, the Company plans to commit resources to enhancing the product as dictated
by the marketplace.
Unison system pricing starts at approximately $100,000.
LYRICALL(TM)
Released in 1998, the Company's LYRICall software is designed to provide a link
between front-line contact center agents and back-office customer information
systems.
Utilizing Internet standard technologies, LYRICall provides customer contact
center agents with the ability to access customer specific data that empower
them to execute more successful customer contacts. Designers can quickly create
and deploy intuitive screen and script pages that help reduce implementation
costs, maximize agent productivity and increase customer satisfaction.
LYRICall features wizard and template functions that guide designers through the
creation of customer contact scripts and applications. Designers can create
applications using browser, Java, and HTML technologies without requiring
programming skills. Designers can write an application once and then deploy it
across a range of industry-standard devices and operating systems, including
desktop appliances and network computers. This significantly reduces
development costs and deployment times. LYRICall also requires no additional
client software to be installed on agent workstations, making the LYRICall
solution a true web-enabled interface.
LYRICall has been recognized with a variety of industry awards such as Best of
Show at CT Expo and 1999 Product of the Year from CTI Magazine.
The Company believes that there will continue to be significant growth
opportunities for LYRICall in all major geographies during 2000 and beyond. As
such, the Company is committed to providing the resources required to continue
to enhance the functionality and capabilities of this innovative product.
Pricing for LYRICall starts at $700 per agent.
6
MARKETS AND DISTRIBUTION CHANNELS
Davox products and services are sold worldwide through multiple distribution
channels, including a direct sales force, distributors and resellers.
NORTH AMERICAN OPERATIONS
In North America, Davox sells its products primarily through a direct sales
force. Sales activities are organized and managed in three regions, each
consisting of territory representatives and solution consultants. Offices are
located throughout the United States and Canada.
Davox territory sales representatives and solution consultants take a solutions-
driven approach in working with prospective customers. Customer business goals
and integration requirements are clearly identified and defined before the sale
ensuring customer expectations are properly met on a timely basis. This
consultative selling approach, combined with Davox's own Enterprise Solutions
resources for application development and integration, ensure that the right
solution is quickly deployed to meet customer requirements.
In addition to direct sales in North America, Davox uses authorized resellers to
provide additional market coverage and revenue contribution. These resellers
include Siemens Information & Communication Networks, Inc. and Lucent
Technologies, Inc. The Company plans to expand its authorized reseller program
during 2000.
INTERNATIONAL OPERATIONS
During 1999, the Company expanded its sales presence in key geographic areas of
the world, establishing subsidiaries in Germany and Singapore. In addition, the
Company has a direct sales presence in the United Kingdom (London) and Latin
America (Mexico City). The Company plans to continue to expand its direct sales
presence in the international marketplace.
In addition to its direct sales presence in the international marketplace, Davox
licenses its products through indirect channels, utilizing distributors and
resellers. These indirect channel partners have the ability to not only resell
product licenses, but also have substantial skills in systems consulting and
integration to meet customer requirements. Currently, the Company's
international distributors include Wittel Comunicacoes LTDA (Brazil), GMA
Consulting S.A. (Argentina), OLTP Voice Systems, C.A. (Venezuela), Universal
Electronics & Computers, Inc. (Taiwan), IVRS International Ltd. (Hong Kong),
Marubeni Information Systems (Japan), Lake Corporation (Australia), Affinity
Communications (f.k.a. Data DPS(s) PTE LTD.), (Singapore), DataMetrix AB
(Scandinavia), Advanced Voice Applications BV (Netherlands), Teledynamics BV
(Belgium, the Netherlands and Luxembourg), DataPoint Corporation (Europe),
Sinclair Voicenet Limited (Scotland), and Multi-Connect (pty.) Ltd. (South
Africa).
In connection with sales outside the United States, some Davox products are
subject to regulation by foreign governments, which requires the Company to
follow certain telecommunications and safety certification procedures for some
countries. Failure to obtain necessary local country approvals or
certifications will restrict Davox's ability to sell into some countries. In
addition, other factors including, but not limited to currency rate fluctuation,
import/export restrictions, political instabilities and other unknown or
unforeseen eventualities, may affect international sales.
7
International product revenue was approximately $10.8 million, $9.7 million and
$14.7 million, or approximately 20%, 18% and 25% of product revenue in 1999,
1998, and 1997, respectively.
In 1999, the Company derived 80% of its product revenue from North America; 16%
from Europe, the Middle East, and Africa; 3% from Asia Pacific; and 1% from
Latin America.
SUPPORT SERVICES
The Company offers a full line of warranty, service and support options in all
of its geographic markets. Central to the Company's maintenance service
offerings is the Worldwide Support Center located at Davox headquarters in
Westford, Massachusetts. The Company also operates satellite support offices in
Slough, United Kingdom, and Mexico City. From these locations, Davox support
professionals accept and manage telephone, web and email requests from customers
for information and remedial support. Using state-of-the-art case management
and diagnostic tools, the support centers provide end-to-end problem resolution.
Davox's contract coverage includes access to Davox's support web site for case
logging, interactive problem resolution, periodic maintenance updates and 24
hour x 365 day priority phone support, problem escalation and on-site hardware
maintenance requests.
The Company offers a tiered support program for its distributor channel.
Included in the program are periodic maintenance updates to distributors'
enrolled end-user base, access to Davox's distributor web site, escalated
support for distributor personnel, recommended training curriculums and a spare
parts repair/exchange program.
Davox seeks out and contracts hardware support with independent third party
service providers who are recognized for quality support and customer care
practices. Currently, these services are provided by Grumman Systems Support
Corporation ("GSSC"), a wholly owned subsidiary of Northrop Grumman Corporation
in the United States and Canada.
In addition, GSSC provides network design and systems integration services
allowing Davox to focus its expertise on customizing advanced contact center
solutions for its customers. Similar services are provided in the United Kingdom
by G&A Business Solutions, Ltd., and in Mexico by TECOcibernetica. The Company
believes that it has adequate resources internally and externally in order to
provide services to its customers and partners in the event services from these
organizations should cease in any manner, however loss of any one of these
relationships could materially adversely affect the ability for Davox to provide
support to its customers and partners in the geographic region covered by such
organization.
In early 1994, Davox discontinued its Computerized Automated Dialing System
(CAS(R)) and Communications Resource Server(R)/controller workstation (CRS(R))
products from its product line. Each of these products has now matured to the
end of its "useful life." Accordingly, Davox notified its CAS and CRS customers
in writing that the Company will no longer offer maintenance and support
services for these products after December 31, 1999.
8
Davox's Educational Services offers a variety of courses designed to provide
customer contact centers with the skills and knowledge needed to enhance
productivity and raise the level of service they deliver to their customers.
Davox training facilities are located in Acton, Massachusetts; Richardson,
Texas; and Slough, United Kingdom. The Company also offers customized courses
at customer locations.
The Company's Professional Services group was established in 1997 and
reorganized in January 2000 as an Enterprise Solutions Services group. This
organization was established to expand the consulting and integration services
Davox offers to its customers. Drawing on the wealth of experience within
Davox, the organization offers consulting expertise on agent desktop automation,
database integration, call flow automation, project management and other
services to help customer contact centers enhance the productivity and value of
their Davox systems. These services focus on both the traditional customer
contact center as well as the emerging e-business markets.
Service revenue accounted for $38.6 million, or 42% of the Company's total
revenue in 1999. This is an increase of $3.5 million from $35.1 million or 39%
of the Company's total revenue in 1998. The Company's service revenue for 1998
increased $9.8 million from $25.3 million or 30% of the Company's total revenue
in 1997.
OPERATIONS
While the majority of the Company's hardware needs are met by readily available
off-the-shelf technology, a small portion remains proprietary. Third-party
contractors manufacture these proprietary hardware components and the Company
believes there are many qualified vendors for these services. The Company's
production process consists primarily of product staging, quality assurance,
final test and systems integration which occurs at its Westford facility.
The Company attempts to maintain multiple sources of supply for key items and
believes it has adequate sources of supply for its expected needs. While any of
these sources could be replaced if necessary, the Company might face significant
delays in establishing replacement sources or in modifying its products to
incorporate replacement components or software code. There can be no assurance
that the Company will not suffer delays resulting from non-performance by its
vendors or cost increases due to a variety of factors, including component
shortages or changes in laws or tariffs applicable to items imported by the
Company.
STRATEGIC PARTNERSHIPS
A complete customer relationship management system is extremely complex and
always entails integration with existing telecommunications systems, databases
and front office applications to fully meet customer requirements. Currently,
no vendor provides all the requisite elements for a fully integrated customer
relationship management system.
To meet this challenge and to increase its market opportunity, Davox has
undertaken strategic partnerships with various complementary technology and
platform vendors. These partners include Sun Microsystems, Kana Communications,
Siebel Systems, IEX Corporation, CenterForce Technologies, Witness Systems and
Microsoft.
9
Additionally in 1999, Davox and Kana Communications entered into a global
reseller and technology licensing agreement, whereby Davox secured rights to
resell Kana's industry-leading online customer communications products. In
addition, Davox expects to integrate selected Kana technology into the next
major release of its Ensemble customer contact suite scheduled for release in
the second quarter of 2000.
COMPETITION
Davox currently competes in two distinct markets: customer interaction
management and outbound call management.
In the customer interaction management market, Davox offers its Ensemble product
suite which includes inbound, outbound, and blended call management as well as
online customer contact functionality that is essential in implementing an
overall customer relationship management system.
According to industry market analysts Datamonitor, the customer interaction
management market segment is expected to grow to more than $3 billion worldwide
by 2003 and is considered the second fastest software growth segment (28% CAGR,
1998 to 2003).
In this market, the Company currently competes with, among others, Genesys
Telecommunications (being acquired by Alcatel), Cisco System's Intelligent
Contact Management product line (comprised of recent acquisitions of Geotel and
Webline), Aspect Communications and Quintus Corporation.
In the outbound call management marketplace, Davox offers its Unison system.
Unison is an industry leading outbound solution for managing outbound and
blended calling campaigns primarily within telemarketing and collections
organizations.
According to industry market analysts Datamonitor, this market is projected to
grow to $730 million worldwide by 2003 (13% CAGR, 1998-2003). Much of this
growth opportunity exists in markets outside of North America.
In this market, the Company currently competes with, among others, eShare
(formerly Melita), EIS International and Lucent Technologies' call center
solutions unit, which includes the recent acquisition of Mosaix.
The Company believes that it has a number of advantages over its competitors in
the areas of product functionality, integration, deployment time and customer
service.
Certain of the Company's current and potential competitors are larger companies
that have greater financial, technical and marketing resources. It is possible
that competitors could produce products that perform the same or similar
functions as those performed by the Company's products. In addition, current and
potential competitors have established and may in the future establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's current or
prospective customers. Accordingly, it is likely that new competitors or
alliances among such competitors will emerge and may rapidly acquire significant
market share, which would have a material adverse effect on the Company's
business, financial condition and results of operations. In order to be
successful in the future, the Company must respond promptly and effectively to
the challenges of technological change, changing customer requirements and
competitive pressures.
10
Increased competition could make it more difficult for the Company to maintain
its market presence.
SIGNIFICANT CUSTOMERS
Davox has more than 1,000 customers that are located worldwide and represent a
cross section of industries. For the year ended December 31, 1999, AT&T was the
Company's largest single customer, accounting for approximately 12% of total
revenue. In 1998, Lucent Technologies, Inc., a distributor of Davox products,
was the Company's single largest customer, accounting for approximately 13% of
total revenue. In 1997, Datapoint Corporation, a distributor of Davox products,
was the largest single customer, accounting for approximately 10% of total
revenue. Total revenue from the Company's top three customers amounted to
approximately 24%, 24% and 18% of total revenue in 1999, 1998 and 1997,
respectively. The Company believes that its dependence on any end user customer
or reseller is not likely to increase significantly as its products continue to
be accepted by both existing customers and new accounts in major industries
worldwide.
MARKETING AND PROMOTION
During 1999, Davox increased its investment in worldwide marketing and promotion
to increase awareness and demand for its products. Marketing activities include
targeted print advertising, web-based marketing, seminars, trade shows and
press/analyst relations. Davox also established joint marketing relationships
with a number of key technology alliance and distribution partners worldwide,
including Kana Communications and IEX Corporation.
Davox maintains a dynamic public web site containing a complete range of product
information, corporate news, customer profiles, investor information and general
company information. The Davox web site can be found at www.davox.com.
RESEARCH, DEVELOPMENT AND ENGINEERING
The Company's product development efforts are aimed at designing and developing
customer contact center software that meets software industry standards and
incorporates technologies and features that the Company believes its customers
require. Most of the Company's products are developed internally by research
and development teams located at the Company's headquarters in Westford,
Massachusetts, and at a satellite development facility located in Richardson,
Texas. The Company also licenses certain technology and intellectual property
rights from third parties. The Company believes that by establishing mutually
beneficial relationships with third party technology companies it can provide
its customers with emerging technologies in the most timely and cost-effective
manner.
The Company also believes that a critical success factor of a new product is
getting it to market quickly. During 1999, Davox undertook a variety of
initiatives to accelerate the delivery of products to the marketplace. A
program management function was added to the Company's product introduction
process. This group is responsible for managing the introduction of new and
enhanced products across various functions at Davox. The Company believes that
the establishment of this key group will help to ensure corporate readiness to
ship and support products at an accelerated pace. The Company's Quality
Assurance Group was also expanded to provide enhanced quality testing across all
products. Finally, the Company has entered into a key technology agreement with
Kana Communications in order to incorporate Internet-related technologies into
its product line.
The Company's continued success depends on, among other factors, maintaining
close working
11
relationships with its customers, business partners and resellers
and anticipating and responding to their evolving applications needs. The
Company is committed to the development of new products, the improvement of
existing products, and the continued evaluation of new technologies.
The Company spent $13.3 million on research and development in 1999, compared
with $12.1 million in 1998 and $10.4 million in 1997. This represented
approximately 14%, 14%, and 12%, respectively, of total revenue in each of those
years. The Company expects to incur approximately the same level of development
costs during 2000.
In addition, the Company did not capitalize any of its software development
costs in 1999, 1998 or 1997, as the additional development costs incurred to
bring the Company's products to a commercially acceptable level after
technological feasibility has been established are not significant.
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, copyright, trademark, contract
and trade secret laws to establish and protect its proprietary rights in its
technology. The Company owns and licenses a number of patents relating to
predictive dialing, real-time telecommunication management, client/server
computer telephony software, and user interfaces. Software products are
furnished under software license agreements that grant customers licenses to
use, rather than to own, the products. The license agreements contain provisions
protecting the Company's ownership of the underlying technology. Upon
commencement of employment, employees execute a non-disclosure and invention
agreement under which inventions developed during the course of employment will,
at the election of the Company, be assigned to the Company and which further
prohibits disclosure of confidential Company information. There can be no
assurances that the steps taken by the Company in this regard will be adequate
to prevent misappropriation or infringement of its technology or that Davox's
competitors will not independently develop technologies that are substantially
equivalent or superior to Davox's technology. See also "Item 3-Legal
Proceedings." Effective protection of intellectual property rights may be
limited or unavailable in certain foreign countries.
EMPLOYEES
As of December 31, 1999, the Company had 444 employees worldwide, of whom 28
were engaged in operations; 292 in sales, marketing and customer support; 78 in
research, development and engineering; and 46 in administrative functions. None
of the Company's employees is represented by a collective bargaining agreement,
nor has the Company ever experienced any work stoppage. The Company considers
its relations with its employees to be good.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Form 10-K) may contain statements which are
not historical facts, so-called "forward-looking statements". Such forward-
looking statements involve risks and uncertainties which may adversely impact
whether or not such forward-looking statements come true. In particular, but
without limitation, statements, implied or actual, in "Item 1. Business",
relating to: (i) the Company's objective to gain market share and make Ensemble
the standard for customer contact management and the fact that Ensemble
addresses the needs of today's customer contact center; (ii) the international
availability of Ensemble being in the second quarter of 2000; (iii)
12
releasing Ensemble Online in version 2 of Ensemble and its associated beneficial
synergies; (iv) the prediction that Unison sales will remain strong as
organizations continue to seek effective solutions for outbound-based calling
campaigns and that the Company will continue to commit resources to enhancing
Unison; (v) the plan to expand the Company's authorized reseller program; (vi)
the plan to expand the direct sales presence internationally; (vii) the
potential benefits as a result of the growth in the customer interaction
management market segment; (viii) the potential benefits as a result of the
growth in the outbound call management market; (ix) the prediction that the
Company's dependence on any one customer should not increase; (x) the fact that
the Company licenses (and plans to continue licensing) technology from other
parties, may be forward-looking statements. The Company's actual future results
may differ significantly from those stated in any forward-looking statements.
Factors that may cause such differences include, but are not limited to, the
factors discussed below. Each of these factors, and others, are discussed from
time to time in the Company's filings with the Securities and Exchange
Commission.
The Company's future results may be subject to substantial risks and
uncertainties. The Company purchases certain equipment for its products from
third-party suppliers and licenses certain components of its software code from
a number of third-party vendors. While the Company believes that third-party
equipment and software vendors could be replaced if necessary, the Company might
face significant delays in establishing replacement sources or in modifying its
products to incorporate replacement components or software code. There can be
no assurance that the Company will not suffer delays resulting from non-
performance by its vendors or cost increases due to a variety of factors,
including component shortages. The Company uses third party service providers
to fulfill its hardware support obligations with its customers. Additionally,
the Company relies on co-providers to assist its Professional Services
organization. While the Company believes that its currently contracted service
providers and co-providers are adequate at this time, the Company may face
significant delays in establishing replacement providers for such services.
The Company relies on certain intellectual property protections to preserve its
intellectual property rights. Any invalidation of the Company's intellectual
property rights or lengthy and expensive defense of those rights could have a
material adverse affect on the financial position and results of operations of
the Company.
The development of new products, the improvement of existing products and the
continuing evaluation of new technologies is critical to the Company's success.
Successful product development and introduction depends upon a number of
factors, including anticipating and responding to the evolving applications
needs of customers and resellers, timely completion and introduction of new
products, and market acceptance of the Company's products.
The customer interaction management and outbound call management industries are
extremely competitive. Certain current and potential competitors of the Company
are more established, benefit from greater market recognition and have
substantially greater financial, development and marketing resources than the
Company.
Additionally, the Company's quarterly and annual financial and operating results
are affected by a wide variety of factors that could materially adversely affect
revenue and profitability, including: the timing of customer orders; the
Company's ability to introduce new products on a timely basis; introduction of
products and technologies by the Company's competitors; and market acceptance of
the Company's and its competitors' products; effects of litigation
13
described in Item 3 Legal Proceedings; the ability to hire and retain key
personnel and difficulties of any nature as a result of the impact of the Year
2000 on Davox, its customers, its vendors or its distributors.
International sales are expected to continue to account for a significant
portion of the Company's net sales in future periods. International sales are
subject to certain inherent risks, including, but not limited to those risks
discussed in this section and elsewhere in the Form 10-K, unexpected changes in
regulatory requirements and tariffs, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, potentially adverse tax treatment, and the inability to expand
distribution channels. As a result of the foregoing and other factors, the
Company may experience material fluctuations in future financial and operating
results on a quarterly or annual basis, which could materially and adversely
affect its business, financial condition, results of operations and stock price.
ITEM 2. PROPERTIES
- ------------------
The Company's corporate offices are located at a 60,000 square foot, two-story
building in Westford, Massachusetts. The facility is occupied under a lease
that expires in September 2008. The Company also leases a Richardson, Texas
facility of approximately 26,000 square feet, which expires in January 2002. In
addition, the Company leases facilities for district and regional sales and
service offices in seven states as well as in Canada, the United Kingdom,
Mexico, Singapore and Germany. The current aggregate annual rental payments for
all of the Company's facilities are approximately $2.0 million.
In January 2000, the Company signed an amended lease under which it will add a
25,000 square foot addition to its Westford, Massachusetts facility. The
Company expects that the addition will be ready for occupancy by the end of
2000.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
In 1998, a customer of Davox was sued for patent infringement by Manufacturing
Administration and Management Systems, Inc. (MAMS) alleging that the customer's
use of a computer driven automated dialer infringes MAMS's patent. Under Davox's
contract with this customer, Davox is obligated to defend and indemnify such
customer against any such claims. In the third quarter of 1998, Davox sued MAMS
in federal court in the Eastern District of New York in an action entitled
"Davox Corporation v. Manufacturing Administration and Management Systems, Inc."
In the lawsuit, Davox is seeking a declaratory judgment that its products do not
infringe the MAMS patent or, in the alternative, that the MAMS patent is
invalid. Davox believes that MAMS's assertions of patent infringement are
without merit, and Davox will vigorously pursue this action against MAMS. While
the outcome of this litigation cannot be predicted with certainty at this time,
management does not believe that the outcome will have a material adverse effect
on the Company's business, financial condition or results of operations.
14
The Company is from time to time subject to claims arising in the ordinary
course of business. While the outcome of the claims cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the results of operations and financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
Item 4A. Executive Officers of the Registrant
- ----------------------------------------------
The executive officers of the Company, the age of each, and the period during
which each has served in his present office are as follows:
Mr. Alphonse M. Lucchese (64) has served as Chairman and Chief Executive Officer
since July 1994, and also served as President from July 1994 until January of
1998. Mr. Lucchese joined Davox following seven years as President and Chief
Executive Officer at Iris Graphics, a manufacturer of high quality color
printers. Prior to joining Iris, Mr. Lucchese had served as Vice President of
Sales at Xyvision, Inc., a manufacturer of computer-integrated publishing
systems sold to Fortune 500 companies, commercial printers and typesetters and
government agencies. Mr. Lucchese was Vice President of Sales for Davox
Corporation from 1983 until 1984. Earlier, he had spent six years at Raytheon
Data Systems, where he attained the position of Vice President and General
Manager of Northeastern Operations. Following service in the U.S. Army during
the mid-1950s, Mr. Lucchese began his professional career at IBM as a systems
engineer, later moving into the position of marketing representative.
Jeffrey E. Anderholm (43) serves as Senior Vice President of Marketing. He has
overall responsibility for product marketing, product management, and marketing
communications worldwide. Mr. Anderholm, who joined Davox in January 1999 as
Vice President of Marketing, was previously Vice President of Marketing for Art
Technology Group, a Boston-based Internet company delivering applications and
services for personalized content and e-commerce. Prior to joining Art
Technology Group, Mr. Anderholm was Vice President, Electronic Channel
Development at Fidelity Investments. While at Fidelity, he helped lead the
effort to develop online channels, focusing on the Internet. He was responsible
for strategic market planning and the direction of marketing programs across
many functional groups within Fidelity. Prior to Fidelity, Mr. Anderholm served
in a variety of marketing roles of increasing responsibility at Lotus
Development Corporation, where he managed development and execution of worldwide
marketing strategy, positioning and marketing programs for the Lotus 1-2-3 and
Freelance product lines.
Mr. John E. Cambray (44) has served as Vice President, Product Development since
August 1993. Mr. Cambray has been with Davox since 1982 and has held various
software development and engineering management positions during this time.
Prior to joining Davox, Mr. Cambray held various design and management positions
with FASFAX Corporation and Sanders Associates.
15
Mr. Joseph R. (Rusty) Coleman (44) serves as Senior Vice President of North
American Sales. In this position, Mr. Coleman oversees all direct Davox sales
activities in the United States and Canada, Davox's solutions consulting
services as well as Davox's channel relationships within North America. In
addition, he is responsible for technical sales support and sales
administration. Mr. Coleman joined Davox in 1994 and served as a Regional Vice
President of Sales before being appointed Vice President of North American Sales
in 1998. Mr. Coleman was promoted to Senior Vice President of North American
Sales in January 2000. Prior to joining Davox, Mr. Coleman held management
positions of increasing responsibility at such technology companies as XL
Datacomp, Picture Data, Inc., and TRACS, Inc.
Mr. John J. Connolly (43) is Senior Vice President, Finance, Chief Financial
Officer and Treasurer. He joined the Company in August 1994, and was elected
Treasurer in January 1997. Mr. Connolly joined Davox from Iris Graphics where
he had been Vice President of Finance since 1989. Prior to joining Iris, Mr.
Connolly held finance and accounting positions of increasing responsibilities at
Instrumentation Laboratory, a manufacturer of medical equipment.
Mr. Mark Donovan (45) serves as Senior Vice President, Operations and Customer
Services. Since joining Davox in 1983, Mr. Donovan has held management positions
of increasing responsibility, including Vice President, Customer Service. He
has also held various materials and manufacturing management positions within
the Company. Prior to joining Davox, Mr. Donovan held various management
positions with Applicon, Inc. and Raytheon Corporation.
Mr. James F. Mitchell (53) serves as Chief Technical Consultant. He is a
founder of the Company and has served as Senior Vice President and Chief
Technical Officer since 1983. From September 1993 to August 1994, Mr. Mitchell
managed the domestic sales operations of the Company and from 1981 to 1983, he
was Vice President, Engineering of the Company. Prior to joining Davox in 1981,
Mr. Mitchell served as Manager of Systems Development at Applicon, Inc., a
producer of CAD/CAM products.
Dr. James T. Pepe (55) serves as Senior Vice President of Research and
Development. He is responsible for leading Davox's research and development
efforts, with particular emphasis on the company's evolving suite of customer
contact solutions. Before joining Davox in September 1999, Dr. Pepe served as a
corporate officer and vice president of product development for Gensym
Corporation, a leading supplier of software products and services for
intelligent operations management. He was responsible for overseeing the
integration of intelligent system technologies with state-of-the-art software
technologies in distributed client/server environments. He also managed the
development of leading-edge Internet and intranet technologies, including
product sets with Java-based, intelligent agent capabilities. Prior to Gensym,
Dr. Pepe served as a group manager for the Corporate Information Systems Group
at Digital Equipment Corporation. Previously, Dr. Pepe was vice president of
software development for Prime Computer, Inc. He began his career working at the
Massachusetts Institute of Technology's Draper Lab, developing real-time
executive systems and flight software.
16
Mr. Douglas W. Smith (57) serves as Senior Vice President of International
Operations. In this position, he is responsible for the Company's international
sales and distribution channels worldwide. Mr. Smith joined the company as Vice
President of Sales and Marketing in September, 1994, following seven years at
Iris Graphics. Prior to joining Iris, Mr. Smith worked for nearly 20 years in
sales, managerial, and executive-level capacities for General Electric
Information Systems, Honeywell Information Systems, Raytheon Data Systems and
Phoenix Data Systems.
Officers are elected by and serve at the discretion of the Board of Directors.
17
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------ -----------------------------------------------------------------
MATTERS
-------
Davox's Common Stock has been traded on the Nasdaq stock market under the
symbol "DAVX" since its initial public offering on April 28, 1987. Prior to
that date there was no public market for Davox's Common Stock. The following
table sets forth the range of high and low sale prices per share of Common Stock
on the National Market System for each quarter of the years ended December 31,
1999 and 1998 as reported by the National Association of Securities Dealers
Automated Quotation System (NASDAQ). During 1997, the Company effected a three
for two stock split through the issuance of a 50% stock dividend. All share and
per share amounts affected by this split, that are contained in this report on
Form 10-K have been retroactively adjusted for all periods presented.
Fiscal 1999
High Low
-------------------
First Quarter 10-1/4 5-15/16
Second Quarter 13-1/2 6
Third Quarter 17-1/8 9-3/4
Fourth Quarter 25-1/2 12-3/8
Fiscal 1999
High Low
-------------------
First Quarter 34-7/8 24-1/2
Second Quarter 29-7/8 16-9/16
Third Quarter 22-1/4 9-3/16
Fourth Quarter 9-1/8 5-3/8
As of February 29, 2000, there were approximately 375 holders of record of
the Company's Common Stock and approximately 4,600 beneficial shareholders of
the Company's Common Stock.
In January 1999, the Board of Directors authorized, effective February 1,
1999, the purchase of up to 3,000,000 shares of the Company's common stock, at
such times when the Company deems such purchases to be an effective use of cash.
Shares that are repurchased may be used for various purposes including the
issuance of shares pursuant to the Company's stock option plans. Under the
stock repurchase program, shares may be repurchased, at management's discretion,
from time to time at prevailing prices in the open market. The repurchase
program of three million shares represented approximately 21% of the Company's
issued and outstanding shares at that time. As of February 29, 2000, the Company
had repurchased 1,326,400 shares under this repurchase program.
18
The Company has never paid cash dividends on its Common Stock and has no
present intentions to pay cash dividends in the future. The Company intends to
retain any future earnings to finance the growth of the Company.
The Company has not sold any equity securities during the period covered by
this report that were not registered under the Securities Act of 1933, as
amended.
19
ITEM 6 SELECTED FINANCIAL DATA
- ------ -----------------------
The following table sets forth certain condensed consolidated financial
data with respect to the Company for each of the five years in the period ended
December 31, 1999:
Years Ended December 31,
----------------------------------------------------------------------------------------
1999 1998 (a) 1997 (a) 1996 (a) 1995 (a)
------------- ------------- ------------- ------------- -----------
(In Thousands, Except Per Share Amounts)
Condensed Consolidated Statement
of Operations Data:
Total revenue $92,354 $88,948 $83,554 $57,098 $38,597
Cost of revenue 30,710 30,114 28,029 22,230 17,164
-------------- -------------- -------------- -------------- ------------
Gross profit 61,644 58,834 55,525 34,868 21,433
Research, development and
engineering expenses 13,259 12,086 10,418 6,734 4,901
Selling, general and
administrative 37,077 34,841 29,710 19,704 13,967
expenses
Non-recurring merger costs - - - - 1,926 - - - - - - - - - - - -
-------------- -------------- -------------- -------------- ------------
Income from operations 11,308 9,981 15,397 8,430 2,565
Other income, net 2,815 2,941 2,031 1,217 629
-------------- -------------- -------------- -------------- ------------
Income before provision
for income taxes 14,123 12,922 17,428 9,647 3,194
Provision for income 2,118 4,393 2,507 1,014 559
taxes
-------------- -------------- -------------- -------------- ------------
Net income $12,005 $ 8,529 $14,921 $ 8,633 $ 2,635
============== ============== ============== ============== ============
Earnings per share:
Basic $.89 $.60 $1.15 $.72 $.23
============== ============== ============== ============== ============
Diluted $.85 $.58 $1.05 $.64 $.21
============== ============== ============== ============== ============
Weighted average
shares outstanding:
Basic 13,531 14,130 12,940 11,947 11,280
============== ============== ============== ============== ============
Diluted 14,165 14,822 14,270 13,593 12,846
============== ============== ============== ============== ============
December 31,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------
(In Thousands)
Condensed Consolidated
Balance Sheet Data:
Working capital $66,085 $62,756 $52,847 $21,129 $11,299
Total assets 99,043 89,423 81,560 44,478 24,115
Long-term obligations - - - - - - - - 297 - - - - 50
Redeemable Preferred Stock - - - - - - - - 13,911 8,480 8,480
Stockholders' equity 72,514 69,327 44,464 16,890 5,445
(a) Historical financial information has been restated to reflect the
combination of Davox and AnswerSoft in 1998 accounted for as a pooling of
interests and the 3-for-2 stock split effected in the form of a stock dividend
payable to shareholders of record on May 13, 1997.
20
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS
- -------------
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated future capital requirements,
the Company's future development plans, the Company's ability to obtain debt,
equity or other financing, and the Company's ability to generate cash from
operations, are based on current expectations. These statements are forward
looking in nature and involve a number of risks and uncertainties, as more fully
described under "Certain Factors That May Affect Future Results." Actual results
may differ materially.
The following table sets forth, for the periods indicated, the percentage of
revenue represented by items as shown in the Company's Consolidated Statements
of Operations. This table should be read in conjunction with the Selected
Financial Data, Consolidated Financial Statements and Notes to Consolidated
Financial Statements contained elsewhere herein.
Percentage of Total Revenue For The
Years Ended December 31,
----------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------
Product revenue 58.2% 60.5% 69.8%
Service revenue 41.8 39.5 30.2
----------------------------------------------------------------
Total revenue 100.0 100.0 100.0
Cost of revenue 33.3 33.8 33.5
----------------------------------------------------------------
Gross profit 66.7 66.2 66.5
Research, development
and engineering expenses 14.4 13.6 12.5
Selling, general and
administrative expenses 40.1 39.2 35.6
Non-recurring merger costs ----- 2.2 -----
----------------------------------------------------------------
Income from operations 12.2 11.2 18.4
Other income, net 3.1 3.3 2.4
----------------------------------------------------------------
Income before provision
for income taxes 15.3 14.5 20.8
Provision for income taxes 2.3 4.9 3.0
----------------------------------------------------------------
Net income 13.0% 9.6% 17.8%
====== ===== ======
Total revenue was approximately $92.4 million, $88.9 million and $83.6
million for the fiscal years ended December 31, 1999, 1998 and 1997,
respectively. Total revenue increased
21
4.0% for the year ended December 31, 1999 compared to the same period in 1998
and increased 6.5% in fiscal year 1998 compared to fiscal year 1997. Total cost
of revenue as a percentage of total revenue was 33.3% in fiscal year 1999, 33.8%
in fiscal year 1998 and 33.5% in fiscal year 1997.
Product revenue was approximately $53.8 million, $53.8 million and $58.3
million in fiscal years 1999, 1998 and 1997, respectively. Product revenue was
consistent in 1999 and decreased by 7.7% in 1998 as compared to 1997. The
decrease in 1998 was due to lower product sales in the international market,
which was only partially offset by a slight increase in domestic sales.
Cost of product revenue as a percentage of product revenue was 18.2%, 19.5%,
and 20.7% in fiscal years 1999, 1998 and 1997, respectively. The decrease as a
percentage of product revenue in 1999 and 1998 was due to the continued decrease
in the hardware content of the Company's products.
Service revenue was approximately $38.6 million, $35.1 million, and $25.3
million in fiscal years 1999, 1998 and 1997, respectively. Service revenue
increased 9.9% and 39.1% in 1999 and 1998, respectively. The increase in 1999
was due to increased professional services revenue and an increase in
maintenance revenue related to the growth in the installed base of the Company's
products in recent years. The increase in 1998 was due to an increase in
maintenance revenue related to the growth in the installed base of the Company's
products and increased implementation and professional services revenue over
1997.
Cost of service revenue as a percentage of service revenue was 54.2%, 55.8%
and 63.3% in 1999, 1998 and 1997, respectively. These decreases as a percentage
of service revenue were attributable to the growth in service revenue in 1999
and 1998, which exceeded the associated increases in the costs of servicing a
larger installed base of products.
Revenue from the Company's largest single customer in each of 1999, 1998 and
1997 was approximately 12%, 13%, and 10% of total revenue, respectively.
Revenue from the Company's three largest customers amounted to 24%, 24% and 18%
of total revenue in 1999, 1998 and 1997, respectively. The Company intends to
continue to broaden its base of existing and new customers by penetrating new
markets, expanding its direct international sales force and using alternate
channels of distribution, thereby decreasing its dependence on its largest end-
user customers.
Research, development and engineering expenses were approximately $13.3
million, $12.1 million and $10.4 million, representing 14.4%, 13.6% and 12.5% of
total revenue during 1999, 1998 and 1997, respectively. The increase in 1999
was primarily attributable to higher payroll, depreciation and consulting
expenses compared to 1998. The increase in 1998 was due to higher payroll
expenses compared to 1997.
Selling, general and administrative expenses were approximately $37.1
million, $34.8 million and $29.7 million, representing 40.1%, 39.2% and 35.6% of
total revenue during 1999, 1998 and 1997, respectively. The increases in 1999
were mostly attributable to increased bonus and commission expense and increased
payroll and related expenses. The increases in 1998 were primarily attributable
to increased payroll and related expenses, increased travel and related sales
expenses, and increased consulting fees.
22
For the year ended December 31, 1998, in connection with the merger with
AnswerSoft, Inc., the Company incurred non-recurring merger transaction costs,
primarily professional fees, of $1.3 million. In addition, the Company incurred
non-recurring costs, primarily severance and lease termination costs, of
$597,000 related to the integration of the two businesses.
Other income, derived primarily from investments in commercial paper,
corporate bonds, Eurodollar bonds, and money market instruments decreased 4.3%
in 1999 and increased 44.8% in 1998. The decrease in 1999 was due to lower
average cash balances as the Company repurchased approximately 1.3 million
shares of its common stock at an aggregate cost of $10.2 million during 1999.
The increase in 1998 was due primarily to the significant increase in the
average cash and cash equivalent and marketable securities balances over the
prior fiscal year.
INCOME TAXES
The Company provided for income taxes at estimated annual effective tax rates
of 15.0%, 34.0% and 14.4% for 1999, 1998 and 1997, respectively. These rates
are lower than the combined federal and state statutory tax rates due primarily
to the utilization of net operating loss and tax credit carryforwards and
benefits derived from the Company's foreign sales corporation. The Company's
1999 effective tax rate reflects the utilization of net operating losses
resulting from the Company's acquisition of AnswerSoft, Inc. in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company's principal sources of liquidity were
its cash and cash equivalent balances of approximately $34.4 million, and its
marketable securities of approximately $30.8 million. As of December 31, 1998,
the Company's principal sources of liquidity were its cash and cash equivalent
balances of approximately $31.8 million, and its marketable securities of
approximately $27.7 million. The overall increase in cash and cash equivalents
and marketable securities was due primarily to favorable operating results and
proceeds from exercises of stock options. In addition, the Company has an
agreement for a working capital line of credit with a bank for up to $2.0
million based on eligible receivables, as defined. There were no outstanding
balances as of December 31, 1999 or 1998 under this line of credit.
The Company's primary investing activities were purchases of property and
equipment, and purchases and sales of marketable securities. Property and
equipment purchases were approximately $3.4 million in 1999 compared to
approximately $3.4 million and $4.6 million in 1998 and 1997, respectively.
Purchases and sales of marketable securities generated a net cash outflow of
approximately $3.1 million in 1999 compared to a net cash outflow of
approximately $3.9 million and $14.0 million in 1998 and 1997, respectively.
Cash used by financing activities in 1999 was $8.8 million and resulted from
the Company's repurchase of approximately 1.3 million shares of its common stock
at an aggregate cost of $10.2 million, partially offset by proceeds generated
from the exercise of stock options and shares purchased by employees under the
Company's employee stock purchase plan. Cash provided by financing activities
in 1998 was approximately $1.9 million, which was generated primarily from
proceeds from exercises of stock options and shares purchased by employees under
the Company's employee stock purchase plan. Cash provided by financing
activities in 1997 was approximately $7.7 million, and was generated primarily
from the issuance of $5.1
23
million of AnswerSoft preferred stock and from proceeds from the exercise of
stock options and shares purchased by employees under the Company's employee
stock purchase plan.
Working capital as of December 31, 1999 was approximately $66.1 million as
compared to approximately $62.8 million as of December 31, 1998. Total assets
as of December 31, 1999 were approximately $99.0 million compared to
approximately $89.4 million as of December 31, 1998. These increases were
primarily attributable to increases in cash and cash equivalents, marketable
securities and accounts receivable due to the Company's favorable operating
results.
Management believes, based on its current operating plan, that the Company's
existing cash and cash equivalents, marketable securities, cash generated from
operations and amounts available under its working capital line of credit will
be sufficient to meet the Company's cash requirements for the next twelve
months.
IMPACT OF INFLATION
The Company believes that inflation did not have a material effect on the
results of operations in 1999, 1998 and 1997.
NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137, Accounting for Derivative
Financial Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133, which defers the effective date of SFAS No. 133 to all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires entities to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company does not anticipate the adoption of these Statements
to have a material impact on its financial position or results of operations.
YEAR 2000 READINESS DISCLOSURE - made pursuant to the Year 2000 Information and
Readiness Disclosure Act, Pub. L. No. 105-271 (1998)
The Year 2000 presented potential concerns and issues for the Company as
well as other companies in the information technology industry. In general, Year
2000 readiness issues typically arose in computer software and hardware systems
that use two digit date formats, instead of four digit dates, to represent a
particular year. Users had to test their unique combination of hardware, system
software (including databases, transaction processors, and operating systems)
and application software in order to achieve Year 2000 readiness.
YEAR 2000 COMMITTEE
The Company established a Year 2000 steering committee under the auspices
of the Company's senior technical executive to evaluate, plan and implement
policies and practices, including contingency planning, and to address the
impact of the Year 2000 on the Company
24
and its products. The Company's Year 2000 readiness preparations fell into three
categories: (1) product readiness, addressing product functionality; (2)
internal readiness, addressing the Year 2000 operability of internal information
technology ("IT") systems and mission critical non-IT systems; and (3) third
party readiness, addressing the preparedness of relevant third parties and the
Year 2000 operability of products furnished for internal use and resale. After
reviewing these areas, the committee reported to the Board of Directors specific
areas of concern and a plan for resolving and further testing of any remaining
Year 2000 issues. The committee also formulated a contingency plan in the event
that the committee reasonably determined that certain Year 2000 issues may not
be resolved by the end of 1999 or if unforeseen problems arose. As of the date
of this filing, the Company has not encountered any material problems. Despite
this fact, the Company and the steering committee remain focused on addressing
any problems that may arise. The Company does not anticipate any material
problems. Should any problems arise, the Company believes it has adequate
resources to address them properly.
PRODUCT READINESS
The Company established Year 2000 date operability standards against which
the most current versions of its software products were tested. The Company
completed testing of its current line of Unison(R) software products and
determined that the most current versions conform to these standards and were
Year 2000 ready. In connection with the acquisition of AnswerSoft, Inc. in May
1998, the Company acquired the Concerto(TM) line of software tool products. The
Company completed testing of the current releases of Concerto(TM) software
products and determined that they were Year 2000 ready, except IIR. All versions
of IIR were not believed to be Year 2000 ready. All customers were notified to
upgrade to SmartRouteO, which was Year 2000 ready. Despite the Company's testing
and despite the pausing of December 31, 1999, there can be no assurance that the
Company's products do not contain undetected errors or defects related to Year
2000 operability that may result in material costs to the Company or that the
Company's products contain all features and functionality considered necessary
by customers, end users and distributors to be Year 2000 ready.
In early 1994, the Company discontinued its Computerized Automated Dialing
System ("CAS") and Communications Resource Server ("CRS") product lines and
introduced the Unison brand line of software products. Support of the CAS and
CRS products were discontinued as of December 31, 1999. The Company did not
test the CAS and CRS product lines and believes that they do not conform to its
test standards and were not Year 2000 ready. The Company notified known users
of these products that support was being discontinued and that users may
experience Year 2000 related operability issues. Users of these discontinued or
"legacy" products were encouraged to migrate to the Unison product line. The
Company's exposure arising from its legacy products is not known. The Company
does expect to incur additional costs associated with migrating users of legacy
products, but does not believe these costs will be material.
While the Company believes that most of its current releases of products
are Year 2000 ready, other factors may result in an application created using
the Company's products not being Year 2000 ready. Some of these factors include
improper programming techniques used by third parties in creating the
application, customization, or non-compliance of hardware, software or firmware
not provided by the Company with which the products operate. The Company does
not believe that it would be liable in such an event. However, due to the
unprecedented nature of the potential litigation related to Year 2000 readiness
as discussed in
25
the industry and popular press, the most likely worst case scenario is that the
Company would be subject to litigation. It is uncertain whether or to what
extent the Company may be affected by such litigation.
The Company tested only the current versions of its products and did not
test earlier versions of its products. The Company believes some of its
customers may be running product versions which have not been tested and may
experience Year 2000 date related operability issues. The Company identified
these customers and encouraged them to migrate to current versions of the
products. Further, the Company cautioned users of such products to conduct their
own Year 2000 operability testing to determine if continued use of the products
allowed them to meet their own Year 2000 readiness objectives. While many
customers were upgraded to Year 2000 ready versions of products under
maintenance coverage, if eligible, in the normal course the Company expects to
incur some increased expenses associated with the furnishing of upgrades and
modifications. At this time, the Company does not believe that the cost of
potential upgrades or modifications will have a material effect on the Company's
business, financial condition and operating results. To date, the Company has
not experienced any material adverse effects due to the Year 2000 readiness of
the most recent version of its products.
INTERNAL READINESS
The Company conducted a Year 2000 readiness audit of its internal IT
systems (including telecommunication, facilities management, safety and security
systems). The Company did not encounter any material operational issues or
incurring material costs associated with preparing its internal IT and non-IT
systems for the Year 2000, the Company will continue to monitor its systems and
there can be no assurance that the Company will not experience unanticipated
negative consequences or material costs caused by undetected errors or defects
in the technology used in its internal systems, which include third party
hardware, firmware, and software. To date, the Company has not experienced any
material adverse effects on its internal systems due to Year 2000 readiness.
THIRD PARTY READINESS
The Company assessed the Year 2000 readiness of its material third parties,
such as public utilities and key clients and suppliers, who provide external
services to the Company. The Company has certain key relationships with
suppliers which furnish components and software used by the Company in its
products. If these suppliers fail to adequately address the Year 2000 issue for
the products they supply the Company, this could have a material adverse effect
on the Company's operations, reputation, and financial results. Certain of the
Company's products contain third party components and software that is integral
to its operation for which the cost and time to integrate alternative components
or software into these products would be material. To date, the Company has not
experienced any material adverse effects on its business due the Year 2000
readiness of its material third parties.
CONTINGENCY PLANS AND WORST CASE SCENARIO
The Company developed contingency plans to operate in the event that its
products, systems, or business partners were not Year 2000 ready. The Company
did not experience any material adverse effects on its business due to the Year
2000 readiness of its products, systems or business partners.
26
COSTS, SOURCE OF FUNDS AND ACCOUNTING TREATMENT
The Company expensed all costs related to its Year 2000 compliance program
unless the useful life of the technological asset was extended or increased.
The expenses incurred to date have not had a material impact on the Company's
results of operations or financial condition. The Company funded its Year 2000
expenses through cash flows from operations. The impact of the Year 2000 was and
remains difficult to discern, but it is not considered to be a material risk
when evaluating future growth and performance of the Company.
27
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------- ----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
As of December 31, 1999 and 1998, 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 SFAS No. 107. All of
the Company's investments are short-term, Euro dollar bonds, investment-grade
commercial paper, and money market accounts 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 equivalent and short-term investments 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 inter-company transactions was immaterial
for the years ended December 31, 1999, 1998 and 1997. Currently the Company
does not engage in foreign currency hedging activities.
28
ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- --------------------------------------------------------
Index to Consolidated Financial Statements and Financial Statement Schedule
- ---------------------------------------------------------------------------
Page
----
Report of Independent Public Accountants 30
Report of Independent Public Accountants 31
Consolidated Balance Sheets as of December 31,
1999 and 1998 32
Consolidated Statements of Income for the Years
Ended December 31, 1999, 1998 and 1997 33
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999, 1998
and 1997 34
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997 35
Notes to Consolidated Financial Statements 36
Report of Independent Public Accountants on Financial
Statement Schedule 56
Schedule II - Valuation and Qualifying Accounts 57
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Davox Corporation:
We have audited the accompanying consolidated balance sheets of Davox
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
AnswerSoft, Inc., a company acquired during 1998 in a transaction accounted for
as a pooling of interests, as discussed in Note 2. Such statements are included
in the consolidated financial statements of Davox Corporation and reflect total
revenues of $6,738,000 for the year ended December 31, 1997 of the related
consolidated totals. These statements were audited by other auditors whose
report has been furnished to us. Our opinion expressed herein, insofar as it
relates to amounts included for AnswerSoft, Inc., is based solely upon the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Davox Corporation and subsidiaries
as of December 31, 1999 and 1998 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 24, 2000
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Board of Directors and Stockholders of AnswerSoft, Inc.:
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of AnswerSoft, Inc. for the year ended December 31, 1997
(not presented herein). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
AnswerSoft, Inc. for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 28, 1998
31
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)
December 31,
ASSETS 1999 1998
---------------- ----------------
Current assets:
Cash and cash equivalents $34,433 $31,759
Marketable securities, at amortized cost 30,770 27,711
Accounts receivable, net of reserves of
$1,631 and $1,175 in 1999 and 1998, respectively 20,320 15,959
Prepaid expenses and other current assets 2,280 2,515
Deferred tax assets 4,811 4,887
---------------- ----------------
Total current assets 92,614 82,831
Property and equipment, net 5,050 5,298
Other assets 1,379 1,294
---------------- ----------------
$99,043 $89,423
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,733 $ 4,965
Accrued expenses 11,815 9,461
Customer deposits 3,515 1,892
Deferred revenue 5,466 3,778
---------------- ----------------
Total current liabilities 26,529 20,096
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $.10 par value -
Authorized - 30,000 shares
Issued - 14,556 and 14,349
shares in 1999 and 1998, respectively 1,456 1,435
Additional paid-in capital 74,691 73,555
Accumulated foreign currency translation adjustment (17) 11
Retained earnings (deficit) 6,355 (5,650)
---------------- ----------------
82,485 69,351
Less - Treasury stock, 1,298 and 3 shares, at
cost, in 1999 and 1998, respectively (9,971) (24)
---------------- ----------------
Total stockholders' equity 72,514 69,327
---------------- ----------------
$99,043 $89,423
================ ================
The accompanying notes are an integral
part of these consolidated financial statements.
32
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
For the Years Ended December 31,
1999 1998 1997
------------ ----------- -----------
Product revenue $53,757 $53,818 $58,300
Service revenue 38,597 35,130 25,254
-------------- ------------- -------------
Total revenue 92,354 88,948 83,554
-------------- ------------- -------------
Cost of product revenue 9,809 10,510 12,045
Cost of service revenue 20,901 19,604 15,984
-------------- ------------- -------------
Total cost of revenue 30,710 30,114 28,029
-------------- ------------- -------------
Gross profit 61,644 58,834 55,525
-------------- ------------- -------------
Operating expenses:
Research, development and engineering 13,259 12,086 10,418
Selling, general and administrative 37,077 34,841 29,710
Non-recurring merger related transaction costs ----- 1,329 ----
Non-recurring merger related integration costs ----- 597 ----
-------------- ------------- -------------
Total operating expenses 50,336 48,853 40,128
-------------- ------------- -------------
Income from operations 11,308 9,981 15,397
Other income (primarily interest), net 2,815 2,941 2,031
-------------- ------------- -------------
Income before provision for income taxes 14,123 12,922 17,428
Provision for income taxes 2,118 4,393 2,507
-------------- ------------- -------------
Net income $12,005 $ 8,529 $14,921
============== ============= =============
Earnings per share:
Basic $0.89 $0.60 $1.15
============== ============= =============
Diluted $0.85 $0.58 $1.05
============== ============= =============
Weighted average shares outstanding:
Basic 13,531 14,130 12,940
============== ============= =============
Diluted 14,165 14,822 14,270
============== ============= =============
The accompanying notes are an integral
part of these consolidated financial statements.
33
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands, Except Per Share Amounts)
Accumulated
Common Stock Foreign Currency Retained
$.10 Additional Translation Earnings/
Shares Par Value Paid In Capital Adjustment (Deficit)
------ --------- --------------- ---------------- ----------
BALANCE, December 31, 1996 11,162 $1,116 $44,898 $ ---- $(29,100)
Proceeds from exercise of
stock options, including
related tax benefit 848 85 12,694 ---- ----
Proceeds from purchases
under employee stock
purchase plan 12 1 244 ---- ----
Common stock issued for
services rendered 18 2 34 ---- ----
Issuance of note receivable
for preferred stock ---- ---- ---- ---- ----
Translation adjustment ---- ---- ---- 7 ----
Net income ---- ---- ---- ---- 14,921
Comprehensive income for the
year ended December 31, 1997 ---- ---- ---- ---- ----
------ ------ ------ ------ -------
BALANCE, December 31, 1997 12,040 1,204 57,870 7 (14,179)
Proceeds from exercise of stock
options, including related
tax benefit 452 45 1,507 ---- ----
Proceeds from purchase under
employee stock purchase plan 21 2 451 ---- ----
Conversion of preferred stock
into common stock 1,836 184 13,727 ---- ----
Repayment of note receivable ---- ---- ----- ---- ----
Translation adjustment ---- ---- ----- 4 ----
Net income ---- ---- ----- ---- 8,529
Comprehensive income
for the year ended
December 31, 1998 ---- ---- ----- ---- ----
------ ------ ------ ------ -------
BALANCE, December 31, 1998 14,349 1,435 73,555 11 (5,650)
Proceeds from exercise of
stock options, including
related tax benefit 161 16 830 ---- ----
Proceeds from purchases under
employee stock purchase plan 46 5 306 ---- ----
Purchase of treasury stock ---- ---- ----- ---- ----
Translation adjustment ---- ---- ----- (28) ----
Net income ---- ---- ----- ---- 12,005
Comprehensive income for the
year ended December 31, 1999 ---- ---- ----- ---- ----
------ ------ ------- ------ --------
BALANCE, December 31, 1999 14,556 $1,456 $74,691 $ (17) $ 6,355
====== ====== ======= ====== ========
Note
Receivable Total
Due From Treasury Stock Stockholders' Comprehensive
Officer Shares Amount Equity Income
------------ --------- ---------- -------------- -------------
BALANCE, December 31, 1996 $ ---- 3 $ (24) $ 16,890
Proceeds from exercise of
stock options, including
related tax benefit (58) ---- ---- 12,721
Proceeds from purchases
under employee stock
purchase plan ---- ---- ---- 245
Common stock issued for
services rendered ---- ---- ---- 36
Issuance of note receivable
for preferred stock (356) ---- ---- (356)
Translation adjustment ---- ---- ---- 7 $ 7
Net income ---- ---- ---- 14,921 14,921
-------
Comprehensive income for the
year ended December 31, 1997 ---- ---- ---- ---- $14,928
=======
------- ------ ------ -------
BALANCE, December 31, 1997 (414) 3 (24) 44,464
Proceeds from exercise of stock
options, including related
tax benefit ---- ---- ---- 1,552
Proceeds from purchase under
employee stock purchase plan ---- ---- ---- 453
Conversion of preferred stock
into common stock ---- ---- ---- 13,911
Repayment of note receivable 414 ---- ---- 414
Translation adjustment ---- ---- ---- 4 $ 4
Net income ---- ---- ---- 8,529 8,529
-------
Comprehensive income
for the year ended
December 31, 1998 ---- ---- ---- ---- $ 8,533
=======
------- ------ ------ -------
BALANCE, December 31, 1998 ---- 3 (24) 69,327
Proceeds from exercise of
stock options, including
related tax benefit ---- (11) 100 946
Proceeds from purchases under
employee stock purchase plan ---- (20) 170 481
Purchase of treasury stock ---- 1,326 (10,217) (10,217)
Translation adjustment ---- ---- ---- (28) $ (28)
Net income ---- ---- ---- 12,005 12,005
-------
Comprehensive income for the
year ended December 31, 1999 ---- ---- ---- ---- $11,977
=======
------- ------ ------ -------
BALANCE, December 31, 1999 $ ---- 1,298 $(9,971) $72,514
======= ===== ====== =======
The accompanying notes are an integral
part of these consolidated financial statements.
34
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, Except Per Share Amounts)
For the Years Ended December 31,
1999 1998 1997
--------------- --------------- -------------
Cash Flows From Operating Activities:
Net income $ 12,005 $ 8,529 $ 14,921
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 3,606 3,356 3,677
Changes in current assets and liabilities -
Accounts receivable (4,361) (3,360) (8,235)
Prepaid expenses, other current assets and deferred tax 311 3,040 381
assets
Accounts payable 768 (282) 119
Accrued expenses 2,354 (1,376) 5,156
Customer deposits 1,623 (126) (1,396)
Deferred revenue 1,688 (830) 622
-------- -------- --------
Net cash provided by operating activities 17,994 8,951 15,245
-------- -------- --------
Cash Flows From Investing Activities:
Purchases of property and equipment (3,358) (3,406) (4,602)
(Increase) decrease in other assets (85) (464) 77
Purchases of marketable securities (84,073) (82,400) (39,025)
Sales and maturities of marketable securities 81,014 78,491 25,003
-------- -------- --------
Net cash used in investing activities (6,502) (7,779) (18,547)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 946 1,552 1,869
Proceeds from employee stock purchase plan 481 453 245
Purchases of treasury stock (10,217) ----- -----
Proceeds from issuance of preferred stock ----- ----- 5,075
Principal borrowings of long-term obligations ----- ----- 475
Principal payments under long-term obligations ----- (475) (5)
Payment of note receivable from officer ----- 414 -----
-------- -------- --------
Net cash (used in) provided by financing activities (8,790) 1,944 7,659
-------- -------- --------
Effect of exchange rate differences on cash (28) 4 7
-------- -------- --------
Net increase in cash and cash equivalents 2,674 3,120 4,364
Cash and cash equivalents, beginning of year $ 31,759 $ 28,639 $ 24,275
-------- -------- --------
Cash and cash equivalents, end of year $ 34,433 $ 31,759 $ 28,639
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for income taxes $ 1,363 $ 1,487 $ 265
======== ======== ========
Cash paid during the year for interest $------- $ 21 $ 23
======== ======== ========
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
Conversion of redeemable preferred stock into common stock $------- $ 13,911 $ ------
======== ======== ========
Preferred stock issued in exchange for note receivable due from
officer $------- $------- $ 414
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Amounts In Thousands, Except Per Share Information)
(1) Operations and Significant Accounting Policies
Davox Corporation (the Company) is a software and systems integration company
that develops, markets, implements, supports and services intelligent management
systems for customer contact centers located throughout the world. These
systems are marketed directly, through joint marketing relationships and
distribution agreements. The Company markets its systems to banks, consumer
finance organizations, retailers, entertainment companies, telemarketing
organizations, telecommunications and transportation companies and utilities.
These consolidated financial statements reflect the application of certain
significant accounting policies as described below and elsewhere in the
accompanying consolidated financial statements.
(a) 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.
(b) Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
(c) 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, installation services 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. Revenue from software license fees are generally
recognized upon delivery, net of estimated returns, provided that there are no
significant post delivery obligations, payment is due within one year and
collection is probable. If acceptance is required beyond the Company's standard
published specifications, software license revenue is recognized upon customer
acceptance. SOP No. 97-2 generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements.
36
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(1) Operations and Significant Accounting Policies (continued)
(c) Revenue Recognition (continued)
The fair value of an element must be based on evidence that is specific to the
vendor. If a vendor does not have evidence of the fair value for all the
elements in a multiple-element arrangement, all revenue from the arrangement is
deferred until such evidence exists or until all elements are delivered.
Revenues for consulting services are recognized over the period in which
services are provided, the revenue is fixed and determinable and collection is
probable. 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.
(d) Warranty Costs
The Company warrants its products for 90 days and defers a portion of its
revenue related to the free-warranty period, in accordance with SOP No. 97-2.
(e) Post-retirement Benefits
The Company has no pension plan or other obligations for post retirement
benefits.
(f) Cash, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. Cash equivalents consist mainly of commercial paper.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Under SFAS No. 115, securities that the Company
has the positive intent and ability to hold to maturity are reported at
amortized cost and are classified as held-to-maturity. The Company's investments
consist of held-to-maturity securities that are investments in Euro dollar bonds
and high-grade commercial paper instruments at December 31, 1999 and 1998. All
of these investments are classified as current as they mature within one year.
37
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(1) Operations and Significant Accounting Policies (continued)
(f) Cash, Cash Equivalents and Marketable Securities (continued)
At December 31, 1999 and 1998, held-to-maturity marketable securities
consisted of the following:
1999 1998
---------------------------------- ---------------------------
Market Amortized Market Amortized
Value Cost Value Cost
-------------------------------------------------------------
Euro dollar bond $ 4,204 $ 4,212 $11,479 $11,484
(maturity 3-7 months)
Commerical paper obligations 13,825 13,824 12,353 12,352
(maturity 3-6 months)
Corporate bonds 11,023 11,032 2,685 2,675
(maturity 3-7 months)
Medium & Short-term notes 1,702 1,702 1,201 1,200
------- ------- ------- -------
(maturity 5 months)
$30,754 $30,770 $27,718 $27,711
======= ======= ======= =======
(g) Property and Equipment
The Company provides for depreciation and amortization of property and
equipment using the straight-line method by charges to operations in amounts to
allocate the cost of the property and equipment over their estimated useful
lives. The cost of property and equipment and their useful lives are summarized
as follows:
December 31,
-------------
Estimated
Asset Classification Useful Life 1999 1998
- -------------------- --------------- --------------- -------------
Office equipment and software 2-3 Years $16,894 $13,789
Rental and demonstration equipment 2-3 Years 316 311
Furniture and fixtures 5 Years 943 698
Leasehold improvements Life of Lease 289 286
------- -------
18,442 15,084
Less-Accumulated depreciation and 13,392 9,786
amortization ------- -------
$ 5,050 $ 5,298
======= =======
38
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(1) Operations and Significant Accounting Policies (continued)
(h) Research and Development and Software Development Costs
Research and development costs have been charged to operations as incurred.
SFAS No. 86, Accounting for the Costs of Computer Software To Be Leased, Sold,
or Otherwise Marketed, requires the capitalization of certain computer software
development costs incurred after technological feasibility is established. The
Company believes that once technological feasibility of a software product has
been established, the additional development costs incurred to bring the product
to a commercially acceptable level are not significant.
(i) Foreign Currency Translation
The Company considers the functional currency of its foreign subsidiaries
to be the local currency and, accordingly their financial information is
translated into U.S. dollars using exchange rates in effect at period end for
assets and liabilities and average exchange rates during each reporting period
for the results of operations. Adjustments resulting from translation of
foreign subsidiary financial statements are included in stockholders' equity.
(j) Earnings Per Share
Basic earnings per share was determined by dividing net income by the
weighted average shares of common stock outstanding during the year. Diluted
earnings per share reflects the potential dilution of stock options, based on
the treasury stock method.
A reconciliation of basic and diluted weighted averages shares
outstanding is as follows:
For the year ended December 31,
-------------------------------
1999 1998 1997
------------- ------------- ------------
Basic weighted average shares outstanding 13,531 14,130 12,940
Dilutive stock options 634 692 1,330
------ ------ ------
Diluted weighted average shares outstanding 14,165 14,822 14,270
====== ====== ======
39
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(1) Operations and Significant Accounting Policies (continued)
(j) Earnings Per Share (continued)
In 1999, 1998 and 1997, 1,657, 1,484 and 55 options to purchase common
shares, respectively, were not included in the diluted weighted average shares
outstanding, as they were antidilutive.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company places its
temporary cash investments in several financial institutions. The Company has
not experienced significant losses related to receivables from any individual
customers or groups of customers in any specific industry or by geographic area.
Due to these factors, no additional credit risk beyond amounts provided for
collection losses is believed by management to be inherent in the Company's
accounts receivable. The Company had one customer with amounts due to the
Company of approximately 19% and 12% of total accounts receivable as of December
31, 1999 and 1998, respectively.
(l) Derivative Financial Instruments and Fair Value of Financial
Instruments
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, Accounting for Derivative Financial Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133, which defers the
effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires entities
to recognize all derivatives as either assets or liabilities in the statement of
financial position and to measure those instruments at fair value. The Company
does not anticipate the adoption of these
40
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(1) Operations and Significant Accounting Policies (continued)
(l) Derivative Financial Instruments and Fair Value of Financial
Instruments (continued)
statements to have a material impact on its financial position or results of
operations. As of December 31, 1999, the Company did not have any derivatives
or other financial instruments as defined by SFAS No. 119, Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments.
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of an estimate of the fair value of certain financial
instruments. The Company's financial instruments consist of cash equivalents,
marketable securities, accounts receivable and accounts payable. The estimated
fair value of these financial instruments approximates their carrying value at
December 31, 1999 and 1998 due to the short-term nature of these instruments.
(m) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income on an annual and interim basis. The Company
adopted SFAS No. 130 and has disclosed comprehensive income for all periods
presented in the accompanying consolidated statements of stockholders' equity.
(2) Acquisition of AnswerSoft, Inc.
In May 1998, the Company acquired AnswerSoft, Inc. (AnswerSoft), a
Richardson, Texas, developer of inbound call center software solutions, in
exchange for the issuance of an aggregate of 2,384 shares of Davox common stock,
including shares which were subject to outstanding AnswerSoft, Inc. stock
options and warrants. The acquisition was accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16. Accordingly, the
historical consolidated financial statements for the periods prior to the merger
have been restated in the accompanying consolidated financial statements to
include the financial position, results of operations and cash flows of
AnswerSoft. In connection with the merger with AnswerSoft, the Company incurred
non-recurring merger transaction costs (primarily professional fees) of $1,329.
In addition, the Company incurred non-recurring costs
41
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(2) Acquisition of AnswerSoft, Inc. (continued)
(primarily severance and lease termination costs) of $597 related to the
integration of the two businesses.
Separate and combined results of Davox and AnswerSoft during the periods
preceding the merger were as follows:
Davox AnswerSoft Combined
-------------- --------------- --------------
Three months ended March 31, 1998 (unaudited):
Total revenue $23,160 $ 1,260 $24,420
======= ======= =======
Net income (loss) $ 4,433 $(1,173) $ 3,260
======= ======= =======
Year ended December 31, 1997:
Total revenue $76,816 $ 6,738 $83,554
======= ======= =======
Net income (loss) $18,380 $(3,459) $14,921
======= ======= =======
(3) Line of Credit
The Company has a working capital line of credit with a bank that expires
August 31, 2000, if not renewed, pursuant to which the Company may borrow up to
the lesser of $2,000 or a percentage of accounts receivable, as defined.
Borrowings under the line of credit bear interest at the bank's prime rate (8.5%
at December 31, 1999). There were no borrowings outstanding under the line of
credit at December 31, 1999 and 1998.
42
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(4) Accrued Expenses
Accrued expenses consist of the following:
December 31
-----------
1999 1998
---- ---
Payroll and payroll related $ 4,654 $3,926
Income taxes 1,654 515
Sales and property taxes 1,419 986
Other 4,088 4,034
------- ------
$11,815 $9,461
======= ======
(5) 401(k) Plan
The Company maintains the Davox Corporation 401(k) Retirement Plan (the
Plan), which is a deferred contribution plan that covers all full-time employees
over 21 years of age. Employees may join the plan in the next quarterly
enrollment period following their date of hire. The participants may make
pretax deferred contributions to the Plan of up to 15% of the annual
compensation, as defined. Contributions to the Plan by the Company are
discretionary and are determined by the Board of Directors. The Company made
discretionary contributions to the Plan of approximately $777, $315 and $235 for
the years 1999, 1998 and 1997, respectively.
(6) Income Taxes
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability
method specified by SFAS No. 109, a deferred tax asset or liability is
determined based on the difference between the financial statement and tax bases
of assets and liabilities, as measured by the enacted tax rates assumed to be in
effect when these differences are expected to reverse.
43
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(6) Income Taxes (continued)
The components of the provision for income taxes consist of the following:
Year Ended December 31,
------------------------
1999 1998 1997
---- ----- ----
Current:
Federal $1,270 $3,199 $ 5,701
State 1,108 994 1,606
------ ------ -------
Total current 2,378 4,193 7,307
------ ------ -------
Deferred:
Federal (230) 153 (4,300)
State (30) 47 (500)
------ ------ -------
Total deferred (260) 200 (4,800)
------ ------ -------
$2,118 $4,393 $ 2,507
====== ====== =======
The provision for income taxes that is currently payable for the years
ended December 31, 1999, 1998 and 1997 does not reflect approximately $438, $394
and $10,887, respectively, of tax benefits included in additional paid-in
capital related to disqualifying dispositions and the exercise of non-qualified
stock options.
The approximate income tax effect of each type of temporary difference
comprising the deferred tax asset is approximately as follows:
December 31,
--------------------------------------------
1999 1998
--------------------- ---------------------
Net operating loss carryforwards $ 332 $2,687
Depreciation 1,215 1,029
Inventory reserves 1,699 1,702
Tax credit carryforwards 1,762 1,701
Other temporary differences 2,268 2,517
------ ------
7,276 9,636
Less-valuation allowance 1,267 3,892
------ ------
$6,009 $5,744
====== ======
44
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(6) Income Taxes (continued)
Approximately $4,811 and $4,887 of the deferred tax assets are classified
as current at December 31, 1999 and 1998, respectively. Approximately $1,198 and
$857 of the deferred tax assets are classified as long-term as of December 31,
1999 and 1998, respectively.
At December 31, 1999, the Company has available net operating loss
carryforwards and tax credit carryforwards of approximately $962 and $1,762,
respectively. The operating loss carryforwards and tax credit carryforwards
begin to expire in the years 2008 and 2000, respectively.
In accordance with SFAS No. 109, the Company records a valuation allowance
against its deferred tax asset to the extent management believes it is more
likely than not that the asset will be realized. As of December 31, 1999, the
Company has provided a full valuation allowance against certain of the Company's
tax credit carryforwards due to the uncertainty of their realizability as a
result of limitations on their utilization in accordance with certain tax laws
and regulations. In 1998, a significan portion of the valuation allowance
related to the utilization of AnswerSoft's net operating loss carryforwards
(NOLs) due to limitations associated with these acquired NOLs. In 1999, the
Company implemented certain tax planning strategies that will result in the
Company being able to utilize substantially all of these acquired NOLs.
Accordingly, the Company reduced its valuation allowance in 1999 related to
these NOLs.
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit 5.1 3.3 5.0
AnswerSoft, Inc. merger expenses not
deductible for tax purposes --- 2.6 ---
Change in valuation
allowance/utilization of net
operating loss and tax credit carryforwards (24.9) (3.8) (25.6)
Foreign sales corporation benefit (1.7) (1.0) (1.0)
Other 2.5 (1.1) 2.0
----- ---- -----
15.0% 34.0% 14.4%
===== ==== =====
45
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(7) Commitments and Contingencies
(a) Operating Lease Commitments
The Company leases its facilities and sales offices under operating
leases that expire at various dates through September 2008. Pursuant to the
lease agreements, the Company is responsible for maintenance costs and real
estate taxes. Total rental expense for all operating leases for the years ended
December 31, 1999, 1998 and 1997 amounted to approximately $1,720, $1,771 and
$1,306, respectively.
Future minimum lease payments at December 31, 1999 are approximately as
follows:
Year Ending December 31, Amount
-------------------------- -----------
2000 $ 2,028
2001 2,227
2002 1,737
2003 1,549
2004 1,318
Thereafter 4,307
-------
$13,166
=======
(b) Employment and Severance Agreements
The Company has entered into employment and severance agreements with
certain officers and key employees whereby the Company may be required to pay
the officers and employees a total of approximately $1,591 upon termination of
employment by the Company under certain circumstances, as defined.
(c) Litigation
The Company is, from time to time, subject to claims arising in the
ordinary course of business. While the outcome of the claims cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the consolidated results of operations and financial
condition of the Company.
46
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(8) Preferred Stock
Prior to the merger, AnswerSoft had two issues of preferred stock
outstanding, Series A Preferred Stock and Series B Preferred Stock or
collectively referred to as Preferred Stock. All shares of outstanding Preferred
Stock were converted to shares of Davox Common Stock upon approval of the merger
between the two companies in 1998.
(9) Stockholders' Equity
(a) Stock Split
During 1997, the Company effected a three-for-two stock split through the
issuance of a 50% stock dividend. All share and per share amounts have been
retroactively adjusted for the stock split.
(b) Note Receivable Due from Officer
During 1997, AnswerSoft granted options to purchase 223 common shares with
an exercise price of $0.26 and 137 Series B preferred shares with an exercise
price of $2.60 to an officer of AnswerSoft as part of his employment with
AnswerSoft. The options were exercised in 1997 in exchange for a promissory
note from the officer. This note was repaid in full by the officer during 1998.
(c) 1986 Stock Plan
The Company's 1986 Stock Plan (the 1986 Plan), administered by the Board of
Directors authorizes the issuance of a maximum of 3,696 shares of common stock
for the exercise of options in connection with awards or direct purchases of
stock. Options granted under the 1986 Plan may be either non statutory stock
options or options intended to constitute incentive stock options under the
Internal Revenue Code. Stock options may be granted to employees, officers,
employee-directors or consultants of the Company and are exercisable in such
installments as the Board of Directors may specify. The options granted
currently vest over a four-year period and expire ten years from the date of
grant. As of December 31, 1999, there were options to purchase 616 shares
outstanding under this plan. The 1986 Plan terminated pursuant to its terms in
September 1996.
47
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(9) Stockholders' Equity (continued)
(d) 1994 Stock Plan
In 1994, AnswerSoft's Board of Directors approved the adoption of an
employee stock option plan (the AnswerSoft Plan), as amended, which authorized
the grant of options to purchase up to 4,200 shares of AnswerSoft's common
stock. The AnswerSoft Plan provided for the granting of options to eligible
employees to purchase AnswerSoft's common stock at an exercise price of not less
than 100% of the fair market value per share on the date of grant as determined
by AnswerSoft's Board of Directors. The AnswerSoft Plan was administered by its
Board of Directors who determined the number of shares for which options will be
granted, the effective dates of the grants, the option price and vesting
schedules. All options under the AnswerSoft Plan have a ten year term and
typically vested over four years from the effective date of the grant. All
outstanding options became immediately and fully vested upon completion of the
merger with Davox. The Company no longer grants options under the AnswerSoft
Plan. As of December 31, 1999, there were eight options outstanding under the
AnswerSoft Plan.
(e) 1996 Stock Plan
The Company's 1996 Stock Plan (the 1996 Plan) administered by the Board of
Directors authorizes the issuance of a maximum of 2,700 shares of common stock
for the exercise of options in connection with awards or direct purchases of
stock. Options granted under the 1996 Plan may be either nonstatutory stock
options or options intended to constitute incentive stock options under the
Internal Revenue Code. Stock options may be granted to employees, officers,
employee-directors or consultants of the Company and are exercisable in such
installments as the Board of Directors may specify. The options currently vest
over a four-year period. As of December 31, 1999, there were options to purchase
2,320 shares of common stock outstanding and 346 shares available for future
grants under the 1996 Plan.
48
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(9) Stockholders' Equity (continued)
(f) Directors Stock Option Plan
The Company's 1988 Non-employee Director Stock Option Plan (the 1988 Plan),
as amended, is administered by the Board of Directors and authorizes the
issuance of a maximum of 600 shares of common stock for the exercise of options.
The 1988 Plan provides for the automatic grant of options to purchase 60 shares
of common stock to each newly elected non-employee director and additional
option grants of 15 shares of common stock per biennial anniversary of election
to the Board of Directors. Options granted under the 1988 Plan vest 25% per
year beginning one year from the date of grant and expire five years from the
date of grant. As of December 31, 1999 there were 105 shares outstanding and
281 shares available for future grants under the 1988 Plan.
49
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(9) Stockholders' Equity (Continued)
(g) Stock Option Plans Summary
The following is a summary of the stock option activity for all plans for the
years ended December 31, 1999, 1998 and 1997:
Weighted
Average
Number of Exercise Exercise
Options Price Range Price
------------ ----------- ---------
Outstanding, December 31, 1996 2,022 $0.08 - $26.33 $ 5.90
Granted 1,389 0.77 - 34.13 19.29
Exercised (865) 0.08 - 26.33 3.62
Canceled (89) 0.77 - 31.00 10.44
----- -------------- ------
Outstanding, December 31, 1997 2,457 0.77 - 34.13 14.11
Granted 1,124 2.01 - 34.12 18.48
Exercised (452) 0.77 - 26.33 2.56
Canceled (593) 0.77 - 34.13 21.72
----- -------------- ------
Outstanding, December 31, 1998 2,536 0.77 - 34.13 16.33
Granted 931 8.50 - 21.75 11.87
Exercised (172) 0.77 - 20.75 2.95
Canceled (246) 0.77 - 34.13 16.23
----- -------------- ------
Outstanding, December 31, 1999 3,049 $0.77 - $34.13 $15.73
===== ============== ======
Exercisable, December 31, 1999 1,410 $0.77 - $34.13 $14.88
===== ============== ======
Exercisable, December 31, 1998 1,124 $0.77 - $34.13 $11.09
===== ============== ======
Exercisable, December 31, 1997 593 $0.77 - $34.13 $ 8.21
===== ============== ======
The range of exercise prices for options outstanding and options exercisable at
December 31, 1999 are as follows:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
REMAINING NUMBER NUMBER WEIGHTED
RANGE OF CONTRACTUAL LIFE OF WEIGHTED AVERAGE OF AVERAGE
EXERCISE PRICES (IN YEARS) OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------------------------------------------------------------------------------------
$ 0.77 6.87 1 $ 0.77 1 $ 0.77
1.33 - 1.92 4.37 252 1.64 252 1.64
2.00 - 2.33 4.80 164 2.32 164 2.32
3.25 - 4.75 4.44 70 3.49 70 3.49
6.17 - 8.94 8.62 605 8.04 140 7.75
10.75 - 14.63 9.55 466 14.15 4 10.75
16.17 - 21.75 7.50 512 19.01 202 18.73
24.33 - 34.13 7.32 979 26.27 577 26.04
----- -----
3,049 1,410
===== =====
50
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(9) Stockholders' Equity (Continued)
(h) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the Purchase Plan) under
which a maximum of 150 shares of common stock may be purchased by eligible
employees. Substantially all full-time employees of the Company are eligible to
participate in the Purchase Plan. Shares are purchased through accumulation of
payroll deductions (of not less than 0.5% nor more than 10% of compensation, as
defined) for the number of whole shares, determined by dividing the balance in
the employee's account by the purchase price per share which is equal to 85% of
the fair market value of the common stock, as defined. During 1999, 1998 and
1997, approximately 66, 21 and 12 shares, respectively, were purchased under the
Purchase Plan.
(i) Accounting for Stock-Based Compensation
The Company accounts for its stock-based compensation under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which established a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the disclosure-only
alternative under SFAS No. 123, which requires the disclosure of the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted,
as well as certain other information.
The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options granted (including shares issued under the employee
stock purchase plan) as of December 31, 1999, 1998 and 1997 using the Black-
Scholes option pricing model prescribed by SFAS No. 123.
51
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(9) Stockholders' Equity (Continued)
(i) Accounting for Stock-Based Compensation (continued)
The assumptions used and the weighted average information for the years
ended December 31, 1999, 1998 and 1997 are as follows:
Year ended December 31,
-----------------------
1999 1998 1997
-------------------- -------------------- --------------------
Risk-free interest rates 4.60%-6.19% 4.18%-5.61% 5.71%-6.83%
Expected dividend yield ----- ----- -----
Expected lives 5.28 years 4.85 years 4.78 years
Expected volatility 68% 69% 66%
Weighted average grant-date fair value of
options granted during the period $ 7.35 $ 11.45 $ 16.00
Weighted-average remaining contractual
life of options outstanding 7.51 years 7.75 years 7.98 years
The effect of applying SFAS No. 123 would be as follows:
Year ended December 31,
-----------------------
1999 1998 1997
-------------- -------------- --------------
Net income as reported $12,005 $8,529 $14,921
======= ====== =======
Pro forma net income $ 5,994 $3,674 $11,080
======= ====== =======
Earnings per share as reported:
Basic $ 0.89 $ 0.60 $ 1.15
======= ====== =======
Diluted $ 0.85 $ 0.58 $ 1.05
======= ====== =======
Pro forma earnings per share:
Basic $ 0.44 $ 0.23 $ 0.84
======= ====== =======
Diluted $ 0.42 $ 0.22 $ 0.76
======= ====== =======
52
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(10) Segment and Geographic Information
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision making group, in making decisions how to allocate
resources and assess performance. The Company's chief decision-making group, as
defined under SFAS No. 131, is its executive management team. To date, the
Company has viewed its operations and manages its business as principally one
segment, software sales and associated services. As a result, the financial
information disclosed herein represents all of the material financial
information related to the Company's principal operating segment.
Product revenues from international sources were approximately $10,800,
$9,700 and $14,700 in 1999, 1998 and 1997, respectively. The Company's revenues
from international sources were primarily generated from customers located in
Europe, Canada, Asia/Pacific and Latin America. All of the Company's product
sales for the years ended December 31, 1999, 1998 and 1997 were shipped from its
headquarters located in the United States.
The following table represents the percentage of product revenue by
geographic region from customers for 1999, 1998 and 1997:
1999 1998 1997
------ ------ ------
U.S. 80.0% 82.0% 74.9%
Europe 16.4 8.1 17.1
Asia/Pacific 2.7 3.5 2.3
Latin America 0.6 1.5 2.2
Canada 0.3 4.9 3.5
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
53
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(Amounts In Thousands, Except Per Share Information)
(11) Significant Customers
Revenue from the Company's largest single customer was 12%, 13% and 10% of
total revenue in 1999, 1998 and 1997, respectively. Revenue from the Company's
three largest customers amounted to 24%, 24% and 18% of total revenue in 1999,
1998 and 1997, respectively.
54
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Continued)
(12) Quarterly Results of Operations (Unaudited)
The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 1999 and 1998:
Year Ended December 31, 1999
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------- ----------- -----------
Total revenue $20,249 $22,008 $24,046 $26,051
Gross profit 12,778 14,500 16,205 18,161
Net income $ 1,699 $ 2,408 $ 3,476 $ 4,422
======= ======= ======= =======
Earnings per share:
Basic $ 0.12 $ 0.18 $ 0.26 $ 0.33
======= ======= ======= =======
Diluted $ 0.11 $ 0.17 $ 0.25 $ 0.32
======= ======= ======= =======
Year Ended December 31, 1998
-----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------- ----------- -----------
Total revenue $24,420 $24,190 $20,939 $19,399
Gross profit 16,502 16,597 13,343 12,393
Net income $ 3,260 $ 2,341 $ 1,883 $ 1,045
======= ======= ======= =======
Earnings per share:
Basic $ 0.25 $ 0.17 $ 0.13 $ 0.07
======= ======= ======= =======
Diluted $ 0.22 $ 0.16 $ 0.13 $ 0.07
======= ======= ======= =======
55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Davox Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Davox Corporation and subsidiaries
included in this Form 10-K and have issued our report thereon dated January 24,
2000. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and regulations
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 24, 2000
56
DAVOX CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Balance at Charged to Deductions Balance at
Beginning Costs and from End of
of Year Expenses Reserves Year
------------- ----------- ---------- -----------
ACCOUNTS RECEIVABLE RESERVES:
December 31, 1999 $1,175 $958 $502 $1,631
December 31, 1998 1,134 315 274 1,175
December 31, 1997 711 554 131 1,134
57
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
Directors
The information concerning directors of the Company required under this item
is incorporated herein by reference to the Company's definitive proxy statement
pursuant to Regulation 14A, to be filed with the Commission not later than 120
days after the close of the Company's 1999 fiscal year ended December 31, 1999
under the heading "Election of Directors."
Executive Officers
See Item 4A.
ITEM 11 EXECUTIVE COMPENSATION
- ------- ----------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's 1999 fiscal year ended December 31, 1999, under the heading
"Compensation and Other Information Concerning Directors and Officers."
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's 1999 fiscal year ended December 31, 1999, under the headings
"Principal Holders of Voting Securities" and "Election of Directors."
ITEM 13 CERTAIN RELATIONSHIPS AND TRANSACTIONS
- ------- --------------------------------------
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, to be
filed with the Commission within 120 days after the close of the Company's 1999
fiscal year ended December 31, 1999, under the headings "Principal Holders of
Voting Securities" and "Election of Directors."
58
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
- ------- ---------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements
The following financial information is incorporated in Item 8 above:
Report of Independent Public Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following financial information is incorporated in Item 8 above:
Report of Independent Public Accountants on Financial Statement
Schedule II - Valuation and Qualifying Accounts.
All other schedules are not submitted because they are not applicable, not
required or because the information is included in the Consolidated
Financial Statements or Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
The Company did not file any Current Report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1999.
59
(c) List of Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
3.01(2) Restated Certificate of Incorporation of the Registrant, as
amended.
- -
3.02(2) By-laws of the Registrant, as amended.
4.01(2) Description of Capital Stock contained in the Registrant's
Restated Certificate of Incorporation, as amended, filed as
Exhibit 3.01.
10.02(2) Amended and Restated 1988 Non-Employee Director Stock Option Plan
of the Registrant.
10.03(2) Form of Option Agreement under the Registrant's 1988
Non-Employee Director Stock Option Plan.
10.04(2)(4) Special support services agreement between Registrant and
Datapoint (UK) Ltd., dated August 1, 1997.
10.05(2) 1991 Employee Stock Purchase Plan, as amended.
10.08(5) Third party service provider agreement between the Registrant and
Grumman Systems Support Corporation.
10.09(1) 1996 Stock Plan of the Registrant, as amended by amendment No. 1.
10.10(1) Form of Incentive Stock Option Agreement under the Registrant's
1996 Stock Plan.
10.11(1) Form of Non-Qualified Stock Option Agreement under the
Registrant's 1996 Stock Plan.
10.12 Executive Compensation Plan.
10.13(2) Lease agreement between Registrant and Michelson Farm
Westford Technology Park VI Limited Partnership for Westford
Technology Park Building Six.
60
(c) List of Exhibits (Continued)
10.14(2)(4) Distribution agreement between Lucent Technologies Inc.
(by and through its Business Communications Systems Division)
and the Registrant, dated May 2, 1997.
10.15(5) OEM Agreement by and between the Registrant and Kana
Communications, Inc. dated as of November 16, 1999.
10.16 First Amendment to Lease by and between the Registrant and
Michaelson Farm - Westford Technology Park Trust VI Limited
Partnership for Westford Technology Park Building Six.
10.17 Severance Agreement for Alphonse M. Lucchese, Chairman and Chief
Executive Officer.
10.18 Severance Agreement for John J. Connolly, Senior Vice President
Finance and Chief Financial Officer.
10.19 Severance Agreement for Joseph R. Coleman, Senior Vice President
North American Sales Operations.
10.20 Severance Agreement for Mark Donovan, Senior Vice President
Operations & Customer Service.
10.21 Severance Agreement for Douglas W. Smith, Senior Vice President
International Operations.
21. Subsidiaries of the Registrant.
24.1 Consent of Arthur Andersen LLP.
24.3 Consent of Ernst & Young LLP.
27. Financial Data Schedule.
(1) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1996.
(2) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1997.
(3) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31,
1998.
(4) Confidential treatment granted. Redacted version previously filed.
(5) Confidential treatment has been requested as to omitted portions pursuant
to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the Town of Westford,
Commonwealth of Massachusetts, on the 6th day of March 2000.
Davox Corporation
By: /s/ Alphonse M. Lucchese
----------------------------
Alphonse M. Lucchese
Chief Executive Officer
and Chairman
POWER OF ATTORNEY
Each person whose signature appears below this Annual Report on Form 10-K hereby
constitutes and appoints Alphonse M. Lucchese and Timothy C. Maguire and each of
them, with full power to act without the other, his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution, for him or
her and in his or her name, place and stead in any and all capacities (until
revoked in writing) to sign all amendments (including post-effective amendments)
to this Annual Report on Form 10-K of Davox Corporation, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary fully to all intents and purposes as
he might or could do in person thereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute,
may lawfully do or cause to be done by virtue hereof.
62
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
/s/ Alphonse M. Lucchese Chief Executive
- ------------------------ Officer and Chairman
Alphonse M. Lucchese (Principal Executive
Officer) March 6, 2000
/s/ John J. Connolly Senior Vice President of
- -------------------- Finance and Chief
John J. Connolly Financial Officer
(Principal Financial
Officer) March 6, 2000
/s/ Michael D. Kaufman Director March 6, 2000
- ----------------------
Michael D. Kaufman
/s/ R. Scott Asen Director March 6, 2000
- -----------------
R. Scott Asen
63