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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, 2001
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 March 12, 2002 of Common Stock held by
non-affiliates of the registrant: $73,336,735 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 March 12, 2002: 12,250,756
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,
2001. 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 (the "Company") is a leading developer of customer
interaction management (CIM) solutions that help companies more effectively
manage customer interactions via the telephone, e-mail, and the Web. Our
solutions are used by more than 1,100 companies worldwide - including financial
institutions, telecommunications firms, utilities, and retailers - to improve
communication with customers, reduce operating costs and deliver superior
customer service.
The mission of the Company is to become the dominant global supplier of CIM
solutions that provide companies with a competitive advantage in attracting and
retaining valuable customers.
On January 10, 2002, the Company entered into an Agreement and Plan of Merger
by and among the Company, its wholly owned subsidiary, AP Acquisition
Corporation ("AP") and CellIt, Inc. ("CellIt"), whereby the parties agreed that
AP would be merged with and into CellIt, with CellIt becoming a wholly owned
subsidiary of the Company. The merger was subsequently closed on January 14,
2002. The Company is now doing business as Concerto Software, and upon
shareholder approval on May 2, 2002, will change its name to Concerto Software,
Inc.
The Company 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. The Company can also be contacted through its web site at
www.concerto.com.
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MARKET OVERVIEW
- ---------------
The CIM software market includes systems for inbound routing and queuing of
telephone calls, outbound call campaign management using automated dialing
technologies, interactive voice response, automated e-mail response, and
Web-based customer contact. According to the market research firm Ovum, the
global market for CIM solutions is projected to grow to $5.4 billion by 2006
from $979 million in 2001, a 33% compounded annual growth rate (CAGR).
Companies worldwide recognize the need to more effectively attract, retain and
grow their customer base. In responding to this challenge, these companies are
aggressively implementing customer relationship management (CRM) strategies.
CRM strategies, as defined by the market research firm AMR Research, are
designed to "attract and harvest a customer base by creating and supporting
profitable customer relationships."
The customer contact center is a vital element of a CRM strategy. It is in the
contact center where a representative of the company is actually communicating
- - through the telephone, e-mail or the web - with a customer. The quality of
these interactions is a key element in successfully attracting and retaining
customers.
To effectively manage communications with customers, a successful contact
center must perform a number of critical functions, including the following:
. Provide a company's customer service representatives with all the
information they need to quickly and accurately respond to customer
inquiries received via the telephone, the Web or through e-mail. This
information could include order status, account balances, shipping
information, previous purchase information, detailed product descriptions
or any other information from various sources that could be relevant to
serving customers.
. Maximize the productivity of the customer service representatives, ensuring
that their time is used effectively. The cost of customer service
representatives is typically the largest on-going expense of a contact
center.
. Provide customer service representatives with the ability to view a
complete history of communications with a customer, whether via telephone,
e-mail or the Web.
. Provide managers with historical and real time reporting data to make
effective decisions on how to allocate resources to maximize results.
. Intelligently route telephone calls and e-mails using business rules, to
the most appropriate customer service representative, in order to provide
faster, more accurate service and reduce the need to transfer calls.
. Smoothly transfer calls, along with the customer data, from one customer
service representative to another in order to save time and minimize the
customer's inconvenience.
. Conduct proactive customer contact campaigns efficiently and targeted to the
appropriate audience.
. Provide a mechanism to escalate customer contact from
the web to e-mail to voice as appropriate.
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In evaluating CIM solutions, prudent companies are looking for suppliers who
provide the following capabilities:
. Solutions that can manage customer contact over the telephone, e-mail and
the Web. o Solutions that can enhance agent productivity, management
control, and customer satisfaction.
. Solutions that can be integrated into the company's existing technology
infrastructure and can add value to these existing investments.
. Solutions that can be implemented rapidly and expanded to meet growing
needs.
. An ability to understand the needs of the contact center and reliably
service and support the solution.
The Company believes that it provides these capabilities to its prospects and
customers and that its solutions can have a significant positive impact for
those prospects and customers through increased revenues, reduced operating
costs, increased agent productivity and enhanced customer service. The Company
delivers these capabilities through the following technologies:
. Inbound call management - Manages inbound telephone calls by minimizing
hold times, routing calls to specific agents, and presenting relevant
customer information to those agents.
. Outbound campaign management - Provides tools for proactive customer
contact, including predictive and preview dialing, campaign and call
list management, scheduled recalls, and automated messaging. These
tools are designed to maximize agent productivity and effectively reach
targeted customers.
. Call blending - Monitors telephone traffic and shifts agents between
proactive customer contact activities and inbound call handling in
order to minimize hold times and maximize agent productivity.
. Desktop Automation - Provides customer service representatives with all
the information they need to quickly and accurately respond to
customers' inquiries coming in via the telephone and the web. This
information could include order status, account balances, shipping
information, previous purchase information, detailed product
descriptions or any other information from various sources that could
be relevant to serving customers. This functionality is marketed as
LYRICall/TM/, the Company's browser-based desktop automation software.
. Reporting - Provides real-time and historical reporting capabilities
that allow managers to make effective decisions on how to allocate
resources within the contact center and maximize results. This
reporting information covers all customer contact channels including
telephone, e-mail and the Internet.
. E-mail response - Allows companies to respond more quickly, accurately
and consistently to a high volume of e-mail inquiries from customers
and prospects. This feature automatically routes e-mail to the
appropriate agent, responds automatically or suggests response to
frequent inquiries, and generates reports on e-mail response service
levels and agent productivity.
. Web chat, collaboration and call-back - Provides companies with a means
to enhance their web sites to communicate more effectively with
customers and prospects. This feature allows a customer or prospect
reviewing a company's web site to click on an icon to initiate an
online discussion ("chat") or a telephone conversation with a live
agent.
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. Customer support - Provides contracted companies with 24x7 access to
telephone and Web based support and product maintenance updates to
improve system uptime and performance.
. Professional services - Provides companies with expert analysis,
recommendations and implementation services to optimize the
effectiveness of contact center systems and processes.
PRINCIPAL PRODUCTS AND APPLICATIONS
- -----------------------------------
The Company's product strategy is focused on its three major product lines:
Ensemble/TM/ Customer Contact Suite, Unison/R/ Call Management System and
ContractPro/TM/ customer interaction management software.
ENSEMBLE/TM/ CUSTOMER CONTACT SUITE
Introduced in 1999, Ensemble is a CTI enabled comprehensive CIM solution. The
system provides inbound call routing, outbound call management, seamless call
blending, e-mail response management, web-based communications, agent desktop
automation, and historical and real-time reporting capabilities. Ensemble is a
modular platform, making it possible for companies to deploy the product in
stages and to increase functionality as their needs expand. It is designed to
integrate with existing investments in ACDs, PBXs, IVRs, and other contact
center technologies.
UNISON/R/ CALL MANAGEMENT SYSTEM
Introduced in 1993, the Unison/R/ Call Management System is designed to
automate proactive customer contact activities. It 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 is
used primarily in customer contact centers handling credit/collections,
telemarketing, and fundraising campaigns.
Unison provides 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.
ContactPro/TM/ Customer Interaction Management Software
Introduced in 1997 by CellIt, ContactPro/TM/ is a single integrated platform
that routes, monitors, records, reports and administers all contact center
interactions. ContactPro incorporates inbound automatic call distribution with
skills- and rules-based routing, outbound predictive dialing, interactive voice
response, email management, web-based customer contract, including fax, voice
messaging, monitoring, recording and reporting. This integrated solution
eliminates much of the complexity and cost of integrating multiple point
solutions.
MARKETS AND DISTRIBUTION CHANNELS
The Company's products and services are sold worldwide through multiple
distribution channels, including a direct sales force, distributors and
resellers.
NORTH AMERICAN OPERATIONS
In North America, the Company sells its products primarily through a direct
sales force. The
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Company's headquarters is in Westford, Massachusetts with sales offices located
throughout the United States and Canada.
The Company's account executives and solution consultants take a
solutions-focused approach in working with prospective and existing customers.
A customer's business needs 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 the Company's
own Professional Services 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, the Company uses authorized
resellers to provide additional market coverage and revenue contribution. The
primary resellers include SBC Global Services Inc., Siemens and Verizon
Communications Inc.
The Company's products and their use are subject to a variety of laws. There is
no guarantee that such laws will not change in such a manner that could
prohibit certain uses of the Company's products. Such a change could
significantly delay, restrict or prohibit the Company's sale or licensing of
its technology. For instance, the banning of the use of automated dialers or
e-mail to solicit business would have a materially adverse impact on the
Company's operating and financial results.
INTERNATIONAL OPERATIONS
During 2001, the Company expanded its sales presence in key areas of the world,
establishing subsidiaries in India and the Netherlands. In addition, the
Company has subsidiaries in the United Kingdom, Germany, Australia, Singapore,
Canada, Brazil and Mexico, as well as a branch in Japan. The Company currently
plans to continue to expand its direct sales presence in the international
marketplace.
In addition to its direct sales presence in the international marketplace, the
Company licenses its products through indirect channels, utilizing distributors
and resellers. In 2001, the Company established new relationships with
distribution channels in Denmark and India. These indirect channel partners not
only have the ability to resell the Company's products, but also have
substantial skills in systems consulting, integration, and support to meet
customer requirements.
In connection with sales outside the United States, some of the Company's
products are subject to regulation by foreign governments, which requires the
Company to follow certain telecommunications and safety certification
procedures for these countries. Failure to obtain necessary local country
approvals or certifications will restrict the Company's ability to sell into
such countries. In addition, other factors including, but not limited to
currency rate fluctuation, import/export restrictions, political and economic
instabilities, war and other unknown or unforeseen eventualities, may affect
the Company's international sales.
International product revenue was approximately $15.3 million, $8.4 million and
$10.8 million, or approximately 35%, 18% and 20% of total product revenue in
2001, 2000, and 1999, respectively.
In 2001, the Company derived 66% of its product revenue from North America; 20%
from Europe, the Middle East, and Africa; 13% from Asia Pacific; and 1% from
Latin America.
6
SUPPORT SERVICES
The Company offers a full line of warranty, maintenance support service and
support options in all of its geographic markets. Central to the Company's
maintenance service offerings is its Worldwide Support Center located at
Company headquarters in Westford, Massachusetts. The Company also operates
Centers of Excellence in the United Kingdom, Singapore and Mexico. From these
locations, support professionals manage telephone, web and e-mail requests from
customers for information and support. Using state-of-the-art case management
and diagnostic tools, these support centers provide end-to-end problem
resolution.
The Company's maintenance contract coverage includes access to its support Web
site for customer self help through a knowlegebase, case logging, interactive
problem resolution, periodic product maintenance updates and various levels of
support, including 24 hour [times] 365 day priority phone support, problem
escalation and on-site hardware maintenance requests.
The Company offers a tiered support program for its distribution partners.
Included in this program are periodic maintenance updates to distributors'
enrolled end-user base, access to the Company's partner web site, escalated
support for trained distributor personnel, recommended training curriculums and
a spare parts repair/exchange program.
The Company contracts hardware support in various locations with independent
third-party service providers who are recognized for quality support and
customer care practices. By contracting with third party providers for hardware
support, Davox can more effectively focus on developing and supporting its
software applications.
The Company believes that it has adequate resources internally and externally
to provide services to its customers and partners in the event services from
these third party organizations should cease in any manner; however, loss of
any one of these relationships could materially adversely affect the Company's
ability to provide support to its customers and partners in the geographic
region covered by such organizations until a substitute source could be found.
The Company's Educational Services department 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. The Company's training facilities are located in Acton,
Massachusetts; Richardson, Texas; Miami , Florida; Singapore; and Slough,
United Kingdom. The Company also offers customized courses delivered on-site at
customer locations.
The Company's Professional Solutions Services group provides consulting and
integration services to Company customers. This organization offers consulting
expertise on agent desktop automation, database integration, call and work flow
automation, project management and other services to help customer contact
centers enhance the productivity and value of the Company's systems.
SUPPLIERS
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
7
staging, quality assurance, final test and systems integration, which typically
occurs at its Headquarters.
The Company attempts to maintain multiple sources of supply for key components
and believes it has adequate sources 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 CRM system is extremely complex and usually entails integration with
existing telecommunications systems, databases and front office applications to
adequately meet customer requirements. Currently, no single vendor provides all
the requisite elements for a fully integrated CRM system.
To meet this challenge and to increase its market opportunity, the Company has
undertaken strategic partnerships with various complementary technology and
platform vendors. These partners include Sun Microsystems, Siebel Systems,
People Soft, NICE Systems, Comverse Infosys, IEX Corporation, Witness Systems,
and Microsoft Corporation.
COMPETITION
The Company currently competes in the CIM market with, among others, Genesys
Telecommunications (a wholly-owned subsidiary of Alcatel), Cisco System's
Intelligent Contact Management product line, Aspect Communications, Divine
Inc., Interactive Intelligence Inc., and Avaya, Inc.
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 and support.
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. Increased competition could make it more difficult for
the Company to maintain its market presence.
SIGNIFICANT CUSTOMERS
The Company has more than 1,100 customers worldwide which represent a
cross-section of industries. For the year ended December 31, 2001 and 2000, no
single customer represented
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more than 10% of total revenue. For the year ended December 31, 1999, AT&T was
the Company's largest single customer, accounting for approximately 12% of
total revenue. Total revenue from the Company's top three customers amounted to
approximately 14%, 16% and 24% of total revenue in 2001, 2000, and 1999,
respectively. The Company believes that its dependence on any single 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 and markets worldwide.
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 satellite development facilities located in Richardson,
Texas and Miami, Florida. 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, the Company can provide its customers with emerging technologies in
the most timely and cost-effective manner.
The Company's continued success depends on, among other factors, maintaining
close working 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 $18.0 million on research and development in 2001, compared
with $16.0 million in 2000 and $13.3 million in 1999. This represented
approximately 19%, 17%, and 14%, respectively, of total revenue in each of
those years. The Company currently expects to maintain its expenditure level in
research and development during 2002 in an effort to continue to expand the
functionality of its products.
The Company did not capitalize any of its software development costs in 2001,
2000, or 1999, 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.
SELLING, GENERAL AND ADMINISTRATIVE
During 2001, the Company's selling, general and administrative expenses
increased as the expansion of international locations continued. During 2001,
new offices were opened in India and the Netherlands.
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
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commencement of employment, employees execute a non-disclosure and invention
assignment 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
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology, also see
"Item 3.Legal Proceedings." Effective protection of intellectual property
rights may be limited or unavailable in certain foreign countries.
EMPLOYEES
As of December 31, 2001, the Company had 439 employees worldwide, of whom 22
were engaged in operations; 280 in sales, marketing and customer support; 88 in
research, development and engineering; and 49 in administrative functions. In
connection with the acquisition of Cell[Ibreve]t, the Company added
approximately 30 employees, on a net basis. None of the Company's employees are
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". These
forward-looking statements may include, but are not limited to a discussion of
expected financial and operating results and expected results of the Company's
marketing efforts and product strategy. 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, using words such as "expects", "anticipates", "believes", "plans
to", "is planning" or "estimates" may be considered forward-looking. 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 and co-providers to fulfill its hardware support obligations and
professional services with its customers, therefore risks associated with
third-party service providers or co-providers availability or price increases
could cause results to be impacted. 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.
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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. In addition, third party claims of misappropriation or
infringement of their technology 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 are 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 CIM solutions market is 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 risk inherent with
integrating two businesses and products as a result of the acquisition of
CellIt; general political and economic conditions; effects of terrorist acts;
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; retention of key employees; market acceptance of the Company's and
its competitors' products; effects of litigation described in Item 3. Legal
Proceedings; the ability to hire and retain key personnel and fluctuations.
International revenues are expected to continue to account for a significant
portion of the Company's total revenues 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 this Form 10-K: unexpected
changes in regulatory requirements and tariffs; difficulties in staffing and
managing foreign operations; longer payment cycles and problems in collecting
accounts receivable; exchange rate fluctuations; 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 an 85,000 square foot, two-story
building in Westford, Massachusetts. The facility is occupied under a lease
that expires in September 2008. The Company leases a Richardson, Texas facility
of 9,297 square feet, which expires in March 2006. Also, the Company leases a
Miami, Florida facility of approximately 43,716 square feet, which was acquired
in the CellIt acquisition and expires December 2004. In addition, the Company
leases facilities for sales and service offices in ten states as well as in the
United Kingdom, Mexico, Singapore, the Netherlands, Germany, Australia, India
and Japan. The current aggregate annual rental payments for all of the
Company's facilities are approximately $3.1 million.
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ITEM 3. LEGAL PROCEEDINGS
- -------------------------
In 1998, a customer of the Company 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 the Company's contract with this customer, the Company is
obligated to defend and indemnify such customer against any such claims. In
1998, the Company 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, the Company is seeking a
declaratory judgment that its products do not infringe the MAMS patent or, in
the alternative, that the MAMS patent is invalid. The Company believes that
MAMS's assertions of patent infringement are without merit, and the Company
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.
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, 2001.
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. James D. Foy (54) serves as President, Chief Executive Officer and
Director. Mr. Foy joined the Company in September 2001. Prior to joining the
Company, Mr. Foy served as President of Informix Software Corporation, a global
enterprise software company, from July 2000 to August 2001 and Executive Vice
President of the Transaction Business Group of Informix Software from April
1999 through June 2000. Mr. Foy also served as Vice President of Engineering at
Ardent Software Inc. (formerly Vmark Software Inc.), an international
enterprise software company, from April 1995 through March 1999.
Mr. Ralph Breslauer (38) serves as Executive Vice President, Global Sales and
Marketing. Mr. Breslauer joined the Company in January 2002. Prior to joining
the Company, Mr. Breslauer served as Senior Vice President of Worldwide Field
Operations for eRoom Technology, Inc., a collaboration software company, from
July 2000 through December 2001. Mr. Breslauer has also served as Vice
President of Marketing and Business Development for Informix Software
Corporation's TransAct Business Group, a global enterprise software company,
between December 1999 and July 2000. Prior to being acquired by Informix
Software Corporation, Mr. Breslauer served as Vice President of Marketing for
Databases and Tools at Ardent Software Inc., (formed as a result of the merging
of Vmark Software Inc. and Unidata Inc.) an international enterprise software
company, from November 1995 through December 1999 and as Executive Vice
President at System Builder Corporation, an international software development
tool company, from
12
August 1990 through November 1995.
Mr. Mark Donovan (47) serves as Senior Vice President, Operations and Customer
Services. since May 1998. Mr. Donovan joined the Company in September 1983 and
has held various management positions including Vice President, Customer
Service from June 1992 through June 1994.
Ms. Kristina Lengyel (34) serves as Vice President, Professional Services. Ms.
Lengyel joined the Company in January 2002. Prior to joining the Company, Ms.
Lengyel served as Senior Vice President of Operations and Chief Technology
Officer from December 2000 through June 2001, Vice President for Engineering
from October 1999 through December 2000, and Vice President for Customer
Integration Services from August 1996 through October 1999 at INSCI Corp, a
provider of document management solutions.
Mr. James F. Mitchell (55) serves as the Company Fellow since January 2000. Mr.
Mitchell is a co-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. Prior to
co-founding the Company, Mr. Mitchell served as Manager of Systems form
September 1979 through June 1981 at Applicon, Inc., a producer of CAD/CAM
products.
Mr. Michael J. Provenzano III (32) has served as Vice President of Finance,
Chief Financial Officer and Treasurer since July 2000. Mr. Provenzano joined
the Company in November 1999 as corporate controller. Prior to joining the
Company, Mr. Provenzano held positions of increasing responsibility at Arthur
Andersen LLP from September 1992 through November 1999, including experienced
audit manager in the high technology practice.
Mr. Alexander Tellez (36) serves as Executive Vice President of Engineering.
Mr. Tellez joined the Company in January 2002. Prior to the Company, Mr. Tellez
was co-Founder, President and Chief Executive Officer of CellIt, Inc., a
contact center systems company, from June 1995 to January 2002. Prior to
founding CellIt, Mr. Tellez served as Director of Strategic Systems for Vitas
Healthcare, a nationwide healthcare company, from March 1991 through June 1995.
Prior to Joining Vitas Healthcare, Mr. Tellez was a senior consultant with
Arthur Andersen LLP, an accounting and consulting firm, from March 1989 through
March 1991.
Officers are elected by and serve at the discretion of the Board of Directors.
13
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 National 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 Nasdaq National Market for each quarter of the years ended
December 31, 2001 and 2000 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 2001
High Low
----------------------
First Quarter $14.88 $ 8.94
Second Quarter $13.00 $ 7.30
Third Quarter $10.50 $ 7.30
Fourth Quarter $10.00 $ 7.20
Fiscal 2000
High Low
----------------------
First Quarter $39.00 $19.00
Second Quarter $28.00 $ 9.63
Third Quarter $14.19 $ 7.75
Fourth Quarter $10.63 $ 6.13
As of March 12, 2002, there were approximately 470 holders of record
of the Company's common stock and approximately 3,677 beneficial shareholders
of the Company's common stock.
In January 1999, the Board of Directors authorized the purchase of up
to 3 million shares of the Company's common stock. In October 2000, the
Company's Board of Directors increased the total number of shares authorized to
be repurchased under the repurchase program to 6 million. Shares that are
repurchased may be used for various purposes including business acquisitions
and the issuance of shares pursuant to the Company's stock option and employee
stock purchase 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. As of December 31, 2001, the Company had repurchased
2,861,900 shares and 3,138,100 shares were available for repurchase under this
repurchase program.
14
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.
15
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following table sets forth certain condensed
consolidated financial data for each of the five
years in the period ended December 31, 2001:
Years Ended December 31,
----------------------------------------------------------------------------------
2001 2000 1999 1998 (a) 1997 (a)
---- ---- ---- -------- --------
(In Thousands, Except Per Share Amounts)
Condensed Consolidated Statement of Operations Data:
Total revenue $94,259 $94,256 $92,354 $88,948 $83,554
Cost of revenue 33,929 32,817 30,710 30,114 28,029
----------- ----------- ----------- ----------- ----------
Gross profit 60,330 61,439 61,644 58,834 55,525
Research, development and
engineering expenses 17,954 16,009 13,259 12,086 10,418
Selling, general and
administrative expenses 43,726 42,753 37,077 34,841 29,710
Non-recurring merger costs - - - 1,926 -
Non-recurring restructuring costs 2,623 - - - -
----------- ----------- ----------- ----------- ----------
Income (loss) from operations (3,973) 2,677 11,308 9,981 15,397
Other income, net 2,755 4,037 2,815 2,941 2,031
----------- ----------- ----------- ----------- ----------
Income (loss) before provision
for income taxes (1,218) 6,714 14,123 12,922 17,428
Provision for income taxes 126 2,081 2,118 4,393 2,507
----------- ----------- ----------- ----------- ----------
Net income (loss) $(1,344) $ 4,633 $12,005 $ 8,529 $14,921
========== =========== =========== =========== ==========
Earnings per share:
Basic ($0.11) $ 0.35 $ 0.89 $ 0.60 $ 1.15
=========== =========== =========== =========== ==========
Diluted ($0.11) $ 0.33 $ 0.85 $ 0.58 $ 1.05
=========== =========== =========== =========== ==========
Weighted average shares outstanding:
Basic 12,636 13,236 13,531 14,130 12,940
=========== =========== =========== =========== ==========
Diluted 12,636 13,945 14,165 14,822 14,270
=========== =========== =========== =========== ==========
December 31,
----------------------------------------------------------------------------------
2001 2000 1999 1998 (a) 1997 (a)
----------------------------------------------------------------------------------
(In Thousands)
Condensed Consolidated Balance Sheets Data:
Working capital $61,363 $66,585 $66,085 $62,756 $52,847
Total assets 97,156 102,180 99,043 89,423 81,560
Long-term obligations ---- ---- ---- ---- 297
Redeemable Preferred Stock ---- ---- ---- ---- 13,911
Stockholders' equity 70,468 75,738 72,514 69,327 44,464
(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 three-for-two stock split effected in the form of a stock
dividend payable to shareholders of record on May 13, 1997.
16
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.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The discussion and analysis of our financial condition and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including those related to customer programs and
incentives, product returns, bad debts, inventories, investments, income taxes,
warranty obligations, restructuring, and contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of the consolidated
financial statements.
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 and
implementation, education and consulting services. The Company recognizes
revenue in accordance with the provisions of the American Institute of
Certified Public Accountants Statement of Position (SOP) No. 97-2, Software
Revenue Recognition and SOP No. 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions. Revenue from
software license fees are generally recognized upon delivery provided that
there are no significant post delivery obligations, persuasive evidence of an
agreement exists, the fee is fixed or determinable and collection of the
related receivable is probable. If acceptance is required beyond the Company's
standard published specifications, software license revenue is recognized upon
customer acceptance.
SOP 98-9 requires use of the residual method for recognition of
revenues when vendor-specific objective evidence exists for undelivered
elements but does not exist for the delivered elements of a multiple-element
arrangement. In such circumstances, the Company defers the fair value of the
undelivered elements and recognizes, as revenue, the remaining value for the
delivered elements.
Revenues for consulting, implementation and educational services are
recognized over the period in which services are provided. Maintenance revenue
is deferred at the time of software license shipment and is recognized ratably
over the term of the support period, which is typically one year. Amounts
collected prior to satisfying the revenue recognition criteria are reflected as
deferred
17
revenue in the Company's Balance Sheet.
Accounting for 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, 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.
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 not be realized. As of December 31, 2001, the Company has provided a
valuation allowance against certain of the Company's tax credit carryforwards
due to the uncertainty of their reliazbility as a result of limitations on their
utilization in accordance with certain tax laws and regulations.
Allowance for Doubtful Accounts. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Research and Development and Software Development Costs. Research and
development costs have been charged to operations as incurred. Statement of
Financial Accounting Standards (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. 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.
Accordingly, all such software development costs have been expensed.
18
RESULTS OF OPERATIONS
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,
2001 2000 1999
--------------------------------------------------------
Product revenue 46.0 % 50.0 % 58.2 %
Service revenue 54.0 50.0 41.8
--------------------------------------------------------
Total revenue 100.0 100.0 100.0
Cost of revenue 36.0 34.8 33.3
--------------------------------------------------------
Gross profit 64.0 65.2 66.7
Research, development
and engineering expenses 19.0 17.0 14.4
Selling, general and
administrative expenses 46.4 45.4 40.1
Non-recurring restructuring costs 2.8 - -
--------------------------------------------------------
Income (loss) from operations (4.2) 2.8 12.2
Other income, net 2.9 4.3 3.1
--------------------------------------------------------
Income before provision
for income taxes (1.3) 7.1 15.3
Provision for income taxes 0.1 2.2 2.3
--------------------------------------------------------
Net income (loss) (1.4 %) 4.9 % 13.0 %
==== == === == ==== ==
Total revenue was approximately $94.3 million, $94.3 million and $92.4
million for the fiscal years ended December 31, 2001, 2000 and 1999,
respectively. Total revenue remained consistent for the year ended December 31,
2001 compared to the same period in 2000 and increased 2.1% in fiscal year 2000
compared to fiscal year 1999.
Product revenue was approximately $43.4 million, $47.1 million and
$53.8 million in fiscal years 2001, 2000 and 1999, respectively. Product
revenue decreased 7.9% in 2001 due to weak economic conditions, especially in
North America. Product revenue decreased 12.3% in 2000 from 1999 due to a
decrease in the number of product shipments as a result of a slowdown of Unison
system sales and a longer sales cycle for Ensemble.
19
Cost of product revenue as a percentage of product revenue was 17.4%,
17.0%, and 18.2% in fiscal years 2001, 2000 and 1999, respectively. The
increase as a percentage of product revenue in 2001 was due to an increase in
costs of materials for production and a higher hardware component mix during
2001 as compared to the same period in 2000. The decrease as a percentage of
product revenue in 2000 as compared to 1999 was due to the decrease in the
number of product shipments that included the Company's Digital Communications
Server hardware as well as a continued decrease in the hardware content of the
Company's products.
Service revenue was approximately $50.9 million, $47.1 million, and
$38.6 million in fiscal years 2001, 2000 and 1999, respectively. Service
revenue increased 8.0%, 22.1% and 9.9% in 2001, 2000 and 1999, respectively.
The increase in 2001 and 2000 was due primarily to the growth in the Company's
installed customer base, resulting in new and renewed contract maintenance
revenue as compared to prior years.
Cost of service revenue as a percentage of service revenue was 51.9%,
52.6% and 54.2% in 2001, 2000 and 1999, respectively. The decreases as a
percentage of service revenue were attributable to the growth in service
revenue in 2001 and 2000, which exceeded the associated increases in the cost
of servicing a larger customer installed base. Also contributing to the
decrease is the continued focus to decrease discretionary expenses, such as the
use of outside contractors and travel.
In 2001 and 2000, no single customer represented more than 10% of the
Company's total revenue. Revenue from the Company's largest single customer in
1999 was approximately 12% of total revenue. Total revenue from the Company's
three largest customers amounted to 14%, 16% and 24% of total revenue in 2001,
2000 and 1999, 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
$18.0 million, $16.0 million and $13.3 million, representing 19.0%, 17.0% and
14.4% of total revenue during 2001, 2000 and 1999, respectively. The increase
in 2001 was primarily attributable to an increase in employees and higher
payroll and related expenses for most of the year compared to 2000. The
increase in 2000 was primarily attributable to an increase in employees and
higher payroll and related expenses compared to 1999.
Selling, general and administrative expenses were approximately $43.7
million, $42.8 million and $37.1 million, representing 46.4%, 45.4% and 40.1%
of total revenue during 2001, 2000 and 1999, respectively. The increases in
2001 were primarily attributable to continued investment in international
operations as the Company continues to expand its global presence.
Additionally, higher payroll and related expenses were partially offset by a
decrease in travel expenses. The increase in 2000 was mostly attributable to
increased headcount, payroll and related expenses and the costs associated with
the setup and expansion of the Company's international subsidiaries.
During 2001, in response to the weak economic environment in North
America, the Company recorded a non-recurring restructuring charge totaling
approximately $2.6 million.
20
The components of the restructuring charge included a reduction in workforce of
approximately 97 people or 18% of the Company's then total workforce, which
effected all functional areas, costs associated with excess leased office space
due to the reduction in headcount and the departure of the Company's previous
president and chief executive officer.
Other income, derived primarily from investments in commercial paper,
corporate bonds, Eurodollar bonds, and money market instruments decreased 31.8%
in 2001 and increased 43.4% in 2000. The decrease in 2001 was due to lower
average cash balances as the Company repurchased 600,200 shares of its common
stock at an aggregate cost of $5.4 million during the year combined with lower
interest rates and investment yields compared to the same periods in 2000. The
increase in 2000 was due primarily to the significant increase in the average
cash and cash equivalent and marketable securities balances compared to the
previous fiscal year.
INCOME TAXES
The Company provided for income taxes at estimated annual effective
tax rates of 10.0%, 31.0% and 15.0% for 2001, 2000 and 1999, respectively. The
rate for 2001 is lower than the combined federal and state statutory tax rates
primarily due to the Company reporting a loss for its consolidated operations.
The Company's provision recorded for 2001 relates primarily to foreign income
taxes relating to its foreign subsidiaries. For 2000 and 1999, these effective
tax 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, the Company's principal sources of liquidity
were its cash and cash equivalent balances of approximately $20.1 million, and
its marketable securities of approximately $47.8 million. As of December 31,
2000, the Company's principal sources of liquidity were its cash and cash
equivalent balances of approximately $61.8 million, and its marketable
securities of approximately $9.0 million. The overall decrease in cash and cash
equivalents and marketable securities in 2001 was due primarily to the cash
used to buy equipment and utilization of $5.4 million in cash to repurchase
600,200 shares of its common stock.
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 $4.4 million in 2001 compared to
approximately $4.8 million and $3.4 million in 2000 and 1999, respectively.
Purchases and sales of marketable securities generated a net cash outflow of
approximately $38.8 million compared to an inflow of approximately $21.8
million in 2000 and a net cash outflow of approximately $3.1 million 1999.
Cash used in financing activities in 2001 was approximately $4.4
million which resulted from the Company's repurchase of its common stock,
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 used in financing activities in 2000 was approximately $2.7 million and
resulted from the Company's repurchase of approximately 935,300 shares of its
common stock at an aggregate cost of approximately $8.6 million,
21
partially offset by proceeds generated 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, 2001 was approximately $61.4
million as compared to approximately $66.6 million as of December 31, 2000.
Total assets as of December 31, 2001 were approximately $97.2 million compared
to approximately $102.2 million as of December 31, 2000. The $5.2 million
decrease in working capital is primarily attributable to the previously
mentioned $2.8 million decrease in total cash and marketable securities
balances combined with a $1.1 million increase in deferred revenue, as the
Company's global installed customer base continues to grow.
Subsequent to December 31, 2001, the Company announced that it had
entered into an Agreement and Plan of Merger by and among the Company, AP
Acquisition Corporation (AP), a wholly owned subsidiary of the Company, and
CellIt, Inc. (CellIt), whereby the parties agreed that AP would be merged with
and into CellIt, with CellIt becoming a wholly owned subsidiary of the Company
on January 14, 2002 and in exchange for all of CellIt's outstanding preferred
and common stock, the Company paid approximately $10.2 million in cash and
issued approximately 544,000 shares of its common stock.
The Company's contractual obligations for future payments as of December 31,
2001 were composed of operating leases for the various office spaces leased by
the Company including, including the space acquired as a result of the merger
with CellIt. A summary of the amounts due under these operating leases is as
follows:
(Amounts Are In Thousands)
- -------------------------------------------------------------------------------
Payments Due by Period
- -------------------------------------------------------------------------------
Contractual Less than 1 1-3 4-5 After 5
Obligation Total year years years years
- -------------------------------------------------------------------------------
Operating
Leases $14,157 $3,142 $5,664 $1,590 $3,761
- -------------------------------------------------------------------------------
Subsequent to December 31, 2001, in connection with the acquisition of CellIt,
Inc., the Company assumed the obligations outstanding under CellIt's capital
and operating leases. The capital lease obligation is approximately $1.6
million, of which approximately $1.0 million will become due within the next
twelve months. The operating lease obligation is approximately $2.9 million,
of which approximately $0.9 million of this amount is due and payable in the
next twelve months.
Management believes, based on its current operating plan, that the
Company's existing cash and cash equivalents, marketable securities and cash
generated from operations 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 2001, 2000 and 1999.
22
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
- -----------------------------------------------------------------------------
COMMODITY INSTRUMENTS.
- --------------------
As of December 31, 2001 and 2000, 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. The Company's investments are primarily 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.
As of December 31, 2001 and 2000, 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.
133.
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 intercompany transactions was
immaterial for the years ending December 31, 2001, 2000, and 1999. Currently,
the Company does not engage in foreign currency hedging activities.
23
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------------
Index to Consolidated Financial Statements and Financial Statement Schedule
- ---------------------------------------------------------------------------
Page
-----
Report of Independent Public Accountants 25
Consolidated Balance Sheets as of December 31,
2001 and 2000 26
Consolidated Statements of Operations for the Years
Ended December 31, 2001, 2000 and 1999 27
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years Ended
December 31, 2001, 2000 and 1999 28
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2001, 2000 and 1999 29
Notes to Consolidated Financial Statements 30
Report of Independent Public Accountants on Financial
Statement Schedule 52
Schedule II - Valuation and Qualifying Accounts 53
24
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, 2001
and 2000 and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss) and cash flows for each of the three
years in the period ended December 31, 2001. 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 conducted our audits in accordance with auditing standards
generally accepted in the United States. 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 provide a reasonable basis for our opinion.
In our opinion, 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, 2001 and 2000 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States.
/s/ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 18, 2002
25
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value)
December 31,
ASSETS 2001 2000
------------------ ------------------
Current assets:
Cash and cash equivalents $ 20,105 $ 61,758
Marketable securities, at amortized cost 47,838 8,999
Accounts receivable, net of reserves of
$2,324 and $2,255 in 2001 and
2000, respectively 11,007 14,195
Prepaid expenses and other current assets 5,310 4,564
Deferred tax assets 3,791 3,511
------------------ ------------------
Total current assets 88,051 93,027
Property and equipment, net 6,447 5,863
Other assets 2,658 3,290
------------------ ------------------
$ 97,156 $ 102,180
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,307 $ 5,450
Accrued expenses 8,643 8,092
Customer deposits 4,664 5,914
Deferred revenue 8,074 6,986
------------------ ------------------
Total current liabilities 26,688 26,442
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $0.10 par value -
Authorized - 30,000 shares
Issued - 14,556 shares 1,456 1,456
Additional paid-in capital 82,136 82,676
Cumulative translation adjustments (345) (299)
Retained earnings 9,644 10,988
------------------ ------------------
92,891 94,821
Less - Treasury stock, 2,247 and 1,927 shares, at cost,
in 2001 and 2000, respectively (22,423) (19,083)
------------------ ------------------
Total stockholders' equity 70,468 75,738
------------------ ------------------
$ 97,156 $ 102,180
================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
26
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
For the Years Ended December 31,
2001 2000 1999
---- ---- ----
Product revenue $ 43,366 $ 47,135 $ 53,757
Service revenue 50,893 47,121 38,597
-------------- -------------- ----------
Total revenue 94,259 94,256 92,354
-------------- -------------- ----------
Cost of product revenue 7,528 8,012 9,809
Cost of service revenue 26,401 24,805 20,901
-------------- -------------- ----------
Total cost of revenue 33,929 32,817 30,710
-------------- -------------- ----------
Gross profit 60,330 61,439 61,644
-------------- -------------- ----------
Operating expenses:
Research, development and engineering 17,954 16,009 13,259
Selling, general and administrative 43,726 42,753 37,077
Restructuring costs 2,623 - -
-------------- ------------- ----------
Total operating expenses 64,303 58,762 50,336
-------------- -------------- ----------
Income (loss) from operations (3,973) 2,677 11,308
Other income (primarily interest), net 2,755 4,037 2,815
-------------- -------------- ----------
Income (loss) before provision for income taxes (1,218) 6,714 14,123
Provision for income taxes 126 2,081 2,118
-------------- -------------- ----------
Net income (loss) $ (1,344) $ 4,633 $ 12,005
============== ============== ==========
Earnings (loss) per share:
Basic $ (0.11) $ 0.35 $ 0.89
============== ============== ==========
Diluted $ (0.11) $ 0.33 $ 0.85
============== ============== ==========
Weighted average shares outstanding:
Basic 12,636 13,236 3,531
============== ============== ==========
Diluted 12,636 13,945 14,165
============== ============== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
27
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In Thousands)
Cumulative Retained
Common Stock Additional Translation (Deficit)/ Treasury Stock
Shares $.10 Par Value Paid-in Capital Adjustments Earnings Shares Amount
------ -------------- --------------- ----------- ---------- ------ ------
BALANCE, December 31, 1998 $14,349 $ 1,435 $73,555 $ 11 ($5,650) 3 ($24)
Proceeds from exercise of stock
options, including related tax benefit 161 16 830 -- -- (11) 100
Proceeds from purchases under
employee stock purchase plan 46 5 306 -- -- (20) 170
Purchase of treasury stock -- -- -- -- -- 1,326 (10,217)
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 1,298 (9,971)
Proceeds from exercise of stock
options, including related tax benefit -- -- 4,207 -- -- (405) 3,028
Proceeds from purchases under
employee stock purchase plan -- -- 71 -- -- (20) 143
Settlement of escrow shares (Note 7a) -- -- 3,707 -- -- 119 (3,707)
Purchase of treasury stock -- -- -- -- -- 935 (8,576)
Translation adjustment -- -- -- (282) -- -- --
Net income -- -- -- -- 4,633 -- --
Comprehensive income for the year
ended December 31, 2000 -- -- -- -- -- -- --
------- ------- ------- ----- ------- ----- --------
BALANCE, December 31, 2000 14,556 $ 1,456 $82,676 $(299) $10,988 1,927 $(19,083)
Proceeds from exercise of stock
options, including related tax benefit -- -- (776) -- -- (236) 1,737
Proceeds from purchases under
employee stock purchase plan -- -- 36 -- -- (45) 334
Stock-based compensation -- -- 200 -- -- -- --
Purchase of treasury stock -- -- -- -- -- 601 (5,411)
Translation adjustment -- -- -- (46) -- -- --
Net loss -- -- -- -- (1,344) -- --
Comprehensive loss for the year
ended December 31, 2001 -- -- -- -- -- -- --
------- ------- ------- ----- ------- ----- --------
BALANCE, December 31, 2001 14,556 $ 1,456 $82,136 $(345) $ 9,644 2,247 $(22,423)
======= ======= ======= ===== ======= ===== ========
Total
Stockholders' Comprehensive
Equity Income (loss)
BALANCE, December 31, 1998 $ 69,327
Proceeds from exercise of stock
options, including related tax benefit 946
Proceeds from purchases under
employee stock purchase plan 481
Purchase of treasury stock (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 72,514
Proceeds from exercise of stock
options, including related tax benefit 7,235
Proceeds from purchases under
employee stock purchase plan 214
Settlement of escrow shares (Note 7a) --
Purchase of treasury stock (8,576)
Translation adjustment (282) (282)
Net income 4,633 4,633
-------
Comprehensive income for the year
ended December 31, 2000 -- $ 4,351
=======
--------
BALANCE, December 31, 2000 $ 75,738
Proceeds from exercise of stock
options, including related tax benefit 961
Proceeds from purchases under
employee stock purchase plan 370
Stock-based compensation 200
Purchase of treasury stock (5,411)
Translation adjustment (46) (46)
Net loss (1,344) (1,344)
-------
Comprehensive loss for the year
ended December 31, 2001 -- ($1,390)
=======
--------
BALANCE, December 31, 2001 $ 70,468
========
The accompanying notes are an integral part of these consolidated financial
statements.
28
DAVOX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Years Ended December 31,
2001 2000 1999
---- ---- ----
Cash Flows From Operating Activities:
Net (loss) income $ (1,344) $ 4,633 $ 12,005
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 3,824 3,968 3,606
Deferred tax assets (280) 1,300 876
Tax benefit from the exercise of stock options 274 1,649 438
Stock-based compensation 200 - -
Changes in current assets and liabilities -
Accounts receivable 3,191 6,158 (4,361)
Prepaid expenses and other current assets (746) (2,320) (565)
Accounts payable (143) (283) 768
Accrued expenses 564 (3,661) 2,354
Customer deposits (1,250) 2,392 1,623
Deferred revenue 1,088 1,527 1,688
----- ------ ------
Net cash provided by operating activities 5,378 15,363 18,432
----- ------- ------
Cash Flows From Investing Activities:
Purchases of property and equipment (4,404) (4,761) (3,358)
Decrease (increase) in other assets 632 (1,911) (85)
Purchases of marketable securities (90,377) (68,121) (84,073)
Sales and maturities of marketable securities 51,538 89,893 81,014
------- ------- -------
Net cash (used in) provided by investing activities (42,611) 15,100 (6,502)
------- ------ -------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 687 5,586 508
Proceeds from employee stock purchase plan 370 214 481
Purchases of treasury stock (5,411) (8,576) (10,217)
------- ------- ------
Net cash used in financing activities (4,354) (2,776) (9,228)
--------- ------- ------
Effect of exchange rate differences on cash (66) (362) (28)
---- ----- ----
Net (decrease) increase in cash and cash equivalents (41,653) 27,325 2,674
Cash and cash equivalents, beginning of year 61,758 34,433 31,759
--------- ------- ------
Cash and cash equivalents, end of year $ 20,105 $ 61,758 $ 34,433
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for income taxes $ 234 $ 2,508 $ 1,363
======== ========= ========
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
Recoupment of acquisition escrow shares (Note 7a) $ ------ $ 3,707 -------
========= ========= ========
The accompanying notes are an integral part of these
consolidated financial statements
29
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Amounts In Thousands)
(1) Operations and Significant Accounting Policies
Davox Corporation (the Company) is a leading developer of customer
interaction management solutions that help companies more effectively manage
customer interactions via telephone, e-mail and the Internet. These systems are
marketed directly, through joint marketing relationships and distribution
agreements. The Company markets its systems to financial institutions,
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 accounting
principles generally accepted in the United States 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, implementation, education and consulting
services. The Company recognizes revenue in accordance with the provisions of
the American Institute of Certified Public Accountants Statement of Position
(SOP) No. 97-2, Software Revenue Recognition and SOP No. 98-9, Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.
Revenue from software license fees are generally recognized upon delivery
provided that there are no significant post delivery obligations, persuasive
evidence of an agreement exists, the fee is fixed or determinable and collection
of the related receivable is probable. If acceptance is required beyond the
Company's standard published specifications, software license revenue is
recognized upon customer acceptance.
30
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(1) Operations and Significant Accounting Policies (continued)
(c) Revenue Recognition (continued)
SOP 98-9 requires use of the residual method for recognition of
revenues when vendor-specific objective evidence exists for undelivered elements
but does not exist for the delivered elements of a multiple-element arrangement.
In such circumstances, the Company defers the fair value of the undelivered
elements and recognizes, as revenue, the remaining value for the delivered
elements.
Revenues for consulting, implementation and educational services are
recognized over the period in which services are provided. Maintenance revenue
is deferred at the time of software license shipment and is recognized ratably
over the term of the support period, which is typically one year. Amounts
collected prior to satisfying the revenue recognition criteria are reflected as
deferred revenue.
(d) Cash, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with original
maturities of ninety days or less to be cash equivalents. Cash equivalents
consist primarily of commercial paper. Marketable 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,
high-grade commercial paper instruments, certificates of deposit, corporate
bonds and notes at December 31, 2001 and 2000. All of these investments are
classified as current as they mature within one year.
31
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(1) Operations and Significant Accounting Policies (continued)
(d) Cash, Cash Equivalents and Marketable Securities (continued)
At December 31, 2001 and 2000, marketable securities consisted of the
following:
2001 2000
---- ----
Market Amortized Market Amortized
Value Cost Value Cost
------------------------------------------------
Euro dollar bond
(maturity 6-12 months) $ 5,697 $ 5,699 $------ $------
Commercial paper obligations
(maturity 4-9 months) 15,476 15,474 ------ ------
Certificates of deposit
(maturity 3-11 months) 1,911 1,903 ------ ------
Corporate bonds
(maturity 4-12 months) 25,421 25,336 35,466 35,482
Medium & short-term notes
(maturity 12 months) 414 414 1,000 1,000
--- --- ----- -----
48,919 48,826 36,466 36,482
Less: cash equivalents (988) (988) (27,467) (27,483)
----- ----- -------- --------
Marketable securities $47,931 $47,838 $ 8,999 $ 8,999
======= ======= ======= =======
32
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(1) Operations and Significant Accounting Policies (continued)
(e) 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 2001 2000
- -------------------- ----------- ---- ----
Office equipment and software 2-5 Years $24,018 $20,965
Rental and demonstration equipment 2-3 Years 316 316
Furniture and fixtures 5 Years 1,566 1,210
Leasehold improvements Life of Lease 1,707 711
----- ---
27,607 23,202
Less: Accumulated depreciation and amortization 21,160 17,339
------ ------
$ 6,447 $ 5,863
======= =======
(f) Long-lived assets
The Company assesses the realizability of its long-lived assets in
accordance with SFAS No. 121, Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of. To date, the Company has not
identified any impairments requiring adjustment.
(g) Research and Development and Software Development Costs
Research and development costs have been charged to operations as
incurred. Statement of Financial Accounting Standards (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. 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. Accordingly, all such software development costs have
been expensed.
33
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(1) Operations and Significant Accounting Policies (continued)
(h) 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 subsidiaries' financial statements are included as a
separate component of stockholders' equity. Translation gains and losses in
2001, 2000 and 1999 were not material.
(i) Earnings Per Share
Basic earnings per share is computed using the weighted average number
of common shares outstanding. Diluted earnings per share is computed using the
weighted average number of common shares outstanding and the effect of dilutive
common stock equivalents using the treasury stock method.
A reconciliation of basic and diluted weighted average shares
outstanding is as follows:
For the years ended December 31,
2001 2000 1999
---- ---- ----
Basic weighted average shares outstanding 12,636 13,236 13,531
Effect of dilutive common stock equivalents - 709 634
- --- ---
Diluted weighted average shares outstanding 12,636 13,945 14,165
====== ====== ======
In 2001, 2000 and 1999, 2,386, 1,509 and 1,657 common stock equivalent
shares, respectively, were not included in the diluted weighted average shares
outstanding, as their effect would be antidilutive.
(j) Off-Balance Sheet and Concentration of Credit Risk
The Company had no significant off-balance-sheet concentrations such as
foreign exchange contracts, options contracts of other foreign hedging
arrangements. Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities and trade accounts receivable. The Company places its cash
investments in several financial institutions. The Company has
34
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(1) Operations and Significant Accounting Policies (continued)
(j) Off-Balance Sheet and Concentration of Credit Risk (continued)
not experienced significant losses related to receivables from any individual
customers or groups of customers in any specific industry or by geographic area.
The Company had two customers as of December 31, 2001 with amounts due of
approximately 14% and 10% of total accounts receivable and one customer as of
December 31, 2000 with an amount due of approximately 11% of total accounts
receivable.
(k) Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents,
marketable securities, accounts receivable and accounts payable. The estimated
fair values of these financial instruments approximate their carrying value at
December 31, 2001 and 2000 due to the short-term nature of these instruments.
(l) Comprehensive Income (Loss)
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
all components of comprehensive income (loss) on an annual and interim basis.
The Company has disclosed comprehensive income (loss) for all periods presented
in the accompanying consolidated statements of stockholders' equity.
(m) New Accounting Standards
SFAS No. 141, Business Combinations, issued in July 2001, requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. The adoption of SFAS No. 141 did not have any impact on the
Company's consolidated financial statements.
SFAS No. 142, Goodwill and Other Intangible Assets, was
issued in July 2001. Under SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather,
goodwill is subject to at least an annual assessment for impairment
by applying a
35
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(1) Operations and Significant Accounting Policies (continued)
(m) New Accounting Standards (continued)
fair-value-based test. Also under SFAS No. 142, intangible assets acquired in
conjunction with a business combination should be separately recognized if the
benefit of the intangible asset is obtained through contractual or other legal
rights, or if the intangible asset can be sold, transferred, licensed, rented or
exchanged, regardless of the acquirer's intent to do so. Intangible assets will
continue to be amortized over their respective useful lives under SFAS No. 142.
SFAS No. 142 became effective on January 1, 2001 and the adoption of SFAS No.
142 did not have a material impact on the Company's consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to (a) all entities
and (b) legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees. SFAS
No. 143 amends SFAS No. 19, Financial Accounting and Reporting by Oil and Gas
Producing Companies, and is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company does not anticipate that the
adoption of SFAS No. 143 will have a material impact on its financial
statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses the
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 144 supersedes FASB SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but retains
SFAS No. 121's fundamental provisions for (a) recognition/measurement of
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the
accounting/reporting provisions of Accounting Principles Board (APB) Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for segments of a business to be disposed of but
retains APB No. 30's requirement to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company does not anticipate that
the adoption of SFAS No. 144 will have a material impact on its financial
statements.
36
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
In November 2001, the Emerging Issues Task Force issued Topic No. D-103
relating to the accounting for reimbursement received for out-of-pocket expense.
In accordance with Topic D-103, reimbursements received for out-of-pocket
expenses incurred should be characterized as revenue in the statement of
operations. The Company has historically accounted for reimbursements received
for out-of-pocket expenses as a reduction to cost of service revenues in the
statement of operations to offset the costs incurred. The Company will adopt
Topic D-103 in financial reporting periods beginning after December 31, 2001 and
comparative financial statements for prior periods will be classified to comply
with the guidance in Topic D-103. During years ended December 31, 2001, 2000 and
1999, reimbursed out-of-pocket expenses totaled $688,000, $937,000 and $612,000
respectively. Accordingly, if the provision of Topic No. D-103 had been adopted
during these years ended, service revenues and cost of service revenues would
have been higher by the amounts noted.
(2) Accrued Expenses
Accrued expenses consist of the following:
December 31
-----------
2001 2000
---- ----
Payroll and payroll related $4,410 $3,951
Income taxes 1,346 1,288
Sales and property taxes 489 829
Restructuring costs 750 -----
Other 1,648 2,024
----- -----
$8,643 $8,092
====== ======
(3) Restructuring Costs
During 2001 in response to weak economic conditions in North America,
the Company incurred a restructuring charge of approximately $2.6 million,
related to reductions in its workforce, costs associated with excess leased
office space as a result of the workforce reductions and the departure of its
previous president and chief executive officer.
The components of the restructuring costs are as follows (in
thousands):
Severance and related costs $2,164
Excess leased office space 259
Stock-based compensation 200
------
$2,623
======
37
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(3) Restructuring Costs (continued)
The severance and related costs were due to reductions in headcount and
departure of the previous President and Chief Executive Officer. The Company
terminated 97 employees or 18% of its then workforce. These reductions affected
all departments within the organization.
The excess leased office space component of the restructuring charge
consisted of idle lease space as a result of the headcount reduction. This
amount was determined using current market value and taking into account, if
applicable, the ability to sublease any of the idle space.
The stock-based compensation charge related to an extension of the
period to exercise certain options granted to the Company's previous president
and chief executive officer.
A summary of the restructuring accrual activity is as follows:
Twelve Months Ended
December 31,
2001
Restructuring reserve:
Balance, beginning of period $ -
Provision 2,767
Revision of estimate (144)
Severance payments 1,774)
Facilities related payments (83)
Other payments (16)
------
Balance, end of period $ 750
=====
It is expected that the accrued restructuring costs will be completely
paid by September 2002.
(4) 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
38
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(4) 401(k) Plan (continued)
discretionary contributions to the Plan of approximately $925, $917 and $777 for
the years ended December 31, 2001, 2000 and 1999, respectively.
(5) 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, 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.
The components of the provision for income taxes consist of the
following:
For the Years Ended December 31,
2001 2000 1999
---- ---- ----
Current:
Federal $200 $1,281 $1,270
State 59 337 1,108
Foreign 210 - -
--- - -
Total current 469 1,618 2,378
--- ----- -----
Deferred:
Federal (290) 379 (230)
State (53) 84 (30)
Foreign - - -
- - -
Total deferred (343) 463 (260)
----- --- -----
$126 $2,081 $2,118
==== ====== ======
The provision for income taxes for the years ended December 31, 2001,
2000 and 1999 does not reflect approximately $274, $1,649 and $438 respectively,
of tax benefits included in additional paid-in capital related to disqualifying
dispositions and the exercise of non-qualified stock options.
39
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(5) Income Taxes (continued)
The approximate income tax effect of each type of temporary difference
comprising the deferred tax asset is approximately as follows:
December 31,
2001 2000
---- ----
Net operating loss carryforwards $ - $ 152
Depreciation 1,447 1,472
Tax credit carryforwards 2,980 2,445
Other temporary differences 4,096 3,511
------- ------
8,523 7,580
Less: Valuation allowance (2,350) (1,750)
------- ------
$ 6,173 $5,830
======= ======
Approximately $3,791 and $3,511 of the deferred tax assets are
classified as current at December 31, 2001 and 2000, respectively. Approximately
$2,382 and $2,319 of the deferred tax assets are classified as long-term and
included in other assets as of December 31, 2001 and 2000, respectively.
At December 31, 2001, the Company has available tax credit
carryforwards of approximately $2,980, which begin to expire in fiscal year
2005.
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 not be realized. As of December 31, 2001, the Company has provided a
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.
40
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(5) Income Taxes (continued)
A reconciliation of the federal statutory tax rate to the Company's
effective tax rate is as follows:
Years Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Federal statutory tax rate (34.0%) 34.0% 34.0%
State income taxes, net of federal
income tax benefit 3.2 2.5 5.1
Change in valuation
allowance/utilization of net
operating loss and tax credit carryforwards 40.8 (3.7) (24.9)
Foreign sales corporation benefit - (2.8) (1.7)
Other - 1.0 2.5
- --- ---
10.0% 31.0% 15.0%
===== ===== =====
(6) 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 associated maintenance costs
and real estate taxes. Total rental expense for all operating leases for the
years ended December 31, 2001, 2000 and 1999 amounted to approximately $2,703,
$2,203 and $1,720, respectively.
Future minimum lease payments, including those related to the CellIt
acquisition (See Note 11), at December 31, 2001 are approximately as follows:
Years Ending December 31, Amount
- ------------------------- ---------
2002 $ 3,142
2003 3,041
2004 2,623
2005 1,590
2006 1,471
Thereafter 2,290
-----
$14,157
=======
41
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(6) Commitments and Contingencies (continued)
(b) Litigation
In 1998, a customer of the Company 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 the Company's contract with this customer, the Company is
obligated to defend and indemnify such customer against any such claims. In the
third quarter of 1998, the Company 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, the Company is
seeking a declaratory judgment that its products do not infringe the MAMS patent
or, in the alternative, that the MAMS patent is invalid. The Company believes
that MAMS's assertions of patent infringement are without merit, and the Company
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.
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.
(7) Stockholders' Equity
(a) Recoupment of Acquisition Escrow Shares
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 that were subject to outstanding AnswerSoft stock options and
warrants. In December 2000, 119 shares of the Company's common stock held in
escrow in connection with the acquisition were returned to the Company in
settlement of a claim against AnswerSoft. The returned escrow shares were
recorded in the accompanying consolidated statement of stockholders' equity at
the same price per share used to account for the acquisition.
42
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(7) Stockholders' Equity (continued)
(b) 1986 Stock Plan
The Company's Amended and Restated 1986 Stock Plan (the 1986 Plan),
administered by the Board of Directors, authorized 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. The options granted vested over a four-year
period and expire ten years from the date of grant. As of December 31, 2001,
there were options to purchase 263 shares of common stock outstanding and fully
vested under this 1986 Plan. The 1986 Plan terminated pursuant to its terms in
September 1996
(c) 1988 Non-employee Director Stock Option Plan
The Company's Amended and Restated 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 40 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, 2001, there were options
to purchase 130 shares of common stock outstanding and 246 options available for
future grants under the 1988 Plan.
(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. 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, 2001, there were options to purchase 0.6
shares of common stock outstanding under the AnswerSoft Plan.
(e) 1996 Stock Plan
The Company's 1996 Stock Plan as amended (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 grantedunder the 1996 Plan may be either
nonstatutory stock options or options intended to
43
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(7) Stockholders' Equity (continued)
(e) 1996 Stock Plan (continued)
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, 2001, there were options to purchase 2,671 shares of common
stock outstanding and 389 options available for future grants under the 1996
Plan.
(f) 2000 Stock Option Plan
exercise of non-statutory stock options in connection with awards or direct
purchases of stock. Stock options may be granted to employees 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, 2001, there were options to purchase 1,110 shares of common stock
outstanding and 382 options available for future grants under the 2000 Plan.
(g) 2001 Stock Option Plan
In November of 2001, the Board of Directors approved the 2001
Stock Option Plan (the 2001 Plan) which authorized the maximum issuance of
20,000 shares of common stock for exercise of option. Options granted under the
2001 plan vest 25% per year beginning one year from the date of grant and expire
five years from date of grant. As of December 31, 2001 there were options to
purchase 20 shares of common stock outstanding and no options available for
future grants under the 2001 plan.
44
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(7) Stockholders' Equity (continued)
(h) Stock Option Plans Summary
The following is a summary of the stock option activity for all plans
for the years ended December 31, 2001, 2000 and 1999:
Weighted
Number of Exercise Average
Options Price Range Exercise Price
--------- ----------- --------------
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
Granted 1,814 6.50 - 29.50 13.24
Exercised (405) 1.33 - 34.13 13.81
Canceled (805) 6.50 - 34.13 18.30
----- ------------- ------
Outstanding, December 31, 2000 3,653 0.77 - 34.13 14.14
Granted 1,617 7.67 - 10.30 9.67
Exercised (236) 1.38 - 9.56 2.91
Canceled (860) 0.77 - 34.13 13.72
----- ------------- -------
Outstanding, December 31, 2001 4,174 $1.33 - $34.13 $13.13
===== ============== =======
Exercisable, December 31, 2001 1,855 $1.33 - $34.13 $15.79
===== ============== =======
Exercisable, December 31, 2000 1,518 $0.77 - $34.13 $15.94
===== ============== =======
Exercisable, December 31, 1999 1,410 $0.77 - $34.13 $14.88
===== ============== =======
The range of exercise prices for options outstanding and options exercisable at
December 31, 2001 are as follows:
Options Outstanding Options Exercisable
Remaining Number Weighted Number Weighted Average
Range of Contractual Life Of Average Exercise of Exercise Price
xercise Prices (in years) Options Price Options
- -------------------------------------------------------------------------------------------------------
$ 1.33 - $ 1.67 2.34 30 $ 1.65 30 $ 1.65
2.01 - 2.33 2.74 153 2.33 153 2.33
3.25 - 4.75 2.42 31 3.63 31 3.63
6.17 - 9.10 7.10 1,014 7.69 456 7.87
9.26 - 13.06 9.18 1,633 9.85 170 10.40
14.63 - 21.75 6.72 466 17.05 352 17.22
24.33 - 34.13 5.93 847 26.44 663 26.19
--- ----- --- -----
4,174 $13.13 1,855 $15.79
===== ====== ===== ======
45
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(7) Stockholders' Equity (continued)
(i) Employee Stock Purchase Plan
The Company has the 1991 Employee Stock Purchase Plan (the Purchase
Plan) under which a maximum of 0.8 shares of common stock may be purchased by
eligible employees on an annual basis. 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 2001, 2000 and 1999, approximately 45, 20 and 66
shares, respectively, were purchased under the Purchase Plan.
(j) Accounting for Stock-Based Compensation
The Company accounts for its employee stock-based compensation under
APB Opinion No. 25, Accounting for Stock Issued to Employees, and FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB Opinion No. 25. In accordance with SFAS
No. 123, Accounting for Stock-Based Compensation, 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 the
fair-value based method 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 and shares issued under the Purchase Plan
as of December 31, 2001, 2000 and 1999 using the Black-Scholes option pricing
model prescribed by SFAS No. 123.
46
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(7) Stockholders' Equity (continued)
(j) Accounting for Stock-Based Compensation (continued)
The assumptions used and the weighted average information for the years
ended December 31, 2001, 2000 and 1999 are as follows:
Years ended December 31,
2001 2000 1999
---- ---- ----
Risk-free interest rates 3.91%-4.93% 5.17%-6.69% 4.60%-6.19%
Expected dividend yield --- --- ---
Expected lives 5.71 years 5.27 years 5.28 years
Expected volatility 73% 69% 68%
Weighted average grant date fair value of
options granted during the period $6.46 $8.49 $7.35
Weighted average remaining contractual
life of options outstanding 7.41 years 7.78 years 7.51 years
The effect of applying SFAS No. 123 would be as follows (per share amounts not
in thousands):
Years ended December 31,
2001 2000 1999
---- ---- ----
Net income (loss) as reported $ (1,344) $ 4,633 $ 12,005
======== ======== ========
Pro forma net income (loss) $ (7,797) $(4,412) $ 5,994
======== ======== ========
Earnings (loss) per share as reported:
Basic $ (0.11) $ 0.35 $ 0.89
======== ======= ========
Diluted $ (0.11) $ 0.33 $ 0.85
======== ======= ========
Pro forma earnings (loss) per share:
Basic $ (0.62) $ (0.33) $ 0.44
======== ======= ========
Diluted $ (0.62) $ (0.33) $ 0.42
======== ======= ========
47
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(7) Stockholders' Equity (continued)
(k) Treasury Stock
The treasury balance reflects shares of the Company's common stock that
were repurchased by the Company and recorded at cost in Stockholders' Equity,
the majority of which were purchased as part of the repurchase program that was
approved by the Board of Directors in January 1999 and amended in October 2000.
Shares of common stock issued in conjunction with stock option
exercises are issued out of the Company's treasury account. The treasury balance
and associated cost is relieved using the FIFO method, with the difference
between the treasury cost of the shares issued and the price paid to the Company
for the value of the options charged to additional paid in capital.
(8) Segment and Geographic Information
In accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, the Company views 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.
The Company has two primary product lines: its Ensemble Customer
Contact Suite and Unison Call Management System. The following table represents
the Company's percentage of product revenue by product line for fiscal years
2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Unison 79.9% 89.5% 88.3%
Ensemble 15.3 4.7 -
Other 4.8 5.8 11.7
----- ----- ------
Total 100.0% 100.0% 100.0%
====== ====== ======
Product revenue from international sources was approximately $15,300,
$8,400 and $10,800 in 2001, 2000 and 1999, respectively. The Company's revenue
from international sources was primarily generated from customers located in
Europe, and Asia/Pacific. Substantially all of the Company's product sales for
the years ended December 31, 2001, 2000 and 1999 were shipped from its
headquarters located in the United States.
48
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(8) Segment and Geographic Information (continued)
The following table represents the percentage of product revenue by
customer's geographic region for fiscal years 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
United States 64.8% 82.2% 80.0%
UK 17.4 3.5 16.4%
Other Europe 3.1 9.1 -
Asia/Pacific 13.1 3.1 2.7
Other 1.6 2.1 0.9
--- ---- ----
Total 100.0% 100.0% 100.0%
====== ====== ======
Substantially all of the Company's assets are located in the United
States.
(9) Significant Customers
No single customer represented more than 10% of total revenue in 2001
and 2000. Revenue from the Company's largest single customer in 1999 was 12% of
total revenue.
49
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(10) Quarterly Results of Operations (Unaudited)
The following table presents a condensed summary of quarterly results of
operations for the years ended December 31, 2001 and 2000 (per share amounts not
in thousands):
Year Ended December 31, 2001
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $24,697 $25,583 $22,142 $21,837
======= ======= ======= =======
Gross profit $15,654 $16,604 $13,724 $14,348
======= ======= ======= =======
Net income (loss) $ 332 $ 610 ($2,688) $ 403
======= ======= ======= =======
Earnings (loss) per share:
Basic $ 0.03 $ 0.05 ($0.21) $ 0.03
======= ======= ======= =======
Diluted $ 0.03 $ 0.05 ($0.21) $ 0.03
======= ======= ======= =======
Year Ended December 31, 2000
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $26,383 $21,573 $22,479 $23,821
======= ======= ======= =======
Gross profit $18,576 $13,835 $13,960 $15,068
======= ======= ======= =======
Net income $ 3,607 $ 383 $ 231 $ 412
======= ======= ======= =======
Earnings per share:
Basic $ 0.27 $ 0.03 $ 0.02 $ 0.03
======= ======= ======= =======
Diluted $ 0.25 $ 0.03 $ 0.02 $ 0.03
======= ======= ======= =======
50
DAVOX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(Continued)
(Amounts In Thousands)
(11) Other items (Unaudited)
Subsequent to December 31, 2001, the Company announced that it had
entered into an Agreement and Plan of Merger by and among the Company, AP
Acquisition Corporation (AP), a wholly owned subsidiary of the Company, and
CellIt, Inc. (CellIt), whereby the parties agreed that AP would be merged with
and into CellIt, with CellIt becoming a wholly owned subsidiary of the Company
on January 14, 2002 and in exchange for all of CellIt's outstanding preferred
and common stock, the Company paid approximately $10.2 million in cash and
issued 544 shares of its common stock. The Company is now doing business as
Concerto Software and, upon shareholder approval, will become Concerto Software,
Inc.
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Davox Corporation:
We have audited, in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of Davox
Corporation and subsidiaries included in this Form 10-K and have issued our
report thereon dated January 18, 2002. 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.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 18, 2002
52
DAVOX CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts In Thousands)
Balance at Charged to Deductions Balance at
Beginning Costs and From End of
of Year Expenses Reserves Year
------- -------- -------- ----
Accounts Receivable Reserves:
Fiscal 2001 $2,255 $1,387 $1,318 $2,324
Fiscal 2000 $1,631 $1,018 $394 $2,255
Fiscal 1999 $1,175 $958 $502 $1,631
53
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 2001 fiscal year ended December
31, 2001 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 2001 fiscal year ended December 31, 2001, 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 2001 fiscal year ended December 31, 2001, under the headings
"Management and Principal Stock Holders of Davox" 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 2001 fiscal year ended December 31, 2001, under the headings
"Management and Principal Holders of Davox" and "Election of Directors."
54
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
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999
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, 2001.
55
(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.
10.01(2) Amended and Restated 1988 Non-Employee Director Stock Option
Plan of the Registrant.
10.02(2) Form of Option Agreement under the Registrant's 1988
Non-Employee Director Stock Option Plan.
10.03(2) 1991 Employee Stock Purchase Plan, as amended.
10.04(1) 1996 Stock Plan of the Registrant, as amended.
10.05(1) Form of Incentive Stock Option Agreement under the
Registrant's 1996 Stock Plan.
10.06(1) Form of Non-Qualified Stock Option Agreement under the
Registrant's 1996 Stock Plan.
10.07(7) 2000 Stock Option Plan of the Registrant.
10.08(7) Form of Non-Qualified Stock Option Agreement under the
Registrant's 2000 Stock Option Plan.
10.09(8) 2001 Stock Option Plan of the Registrant.
10.10(8) Form of Non-Qualified Stock Option Agreement under the
Registrant's 2001 Stock Option Plan.
10.11(7) Executive Compensation Plan.
10.12(2) Lease agreement between Registrant and Michelson Farm Westford
Technology Park VI Limited Partnership for Westford
Technology Park Building Six.
10.13(4) First Amendment to Lease by and between the Registrant and
Michaelson Farm - Westford Technology Park Trust VI
Limited
56
Partnership for Westford Technology Park Building Six.
10.14 Lease agreement between CellIt, Inc., a wholly owned
subsidiary of Registrant and Codina West Dade Development
Corp. No. 4 for Westside Plaza II, 8300 Northwest 33/rd/
Street, Miami, FL 33122.
10.15 Second Amendment to Lease by and between CellIt, Inc., a
wholly owned subsidiary of the Registrant and Prudential
Insurance Company of America for Westside Plaza II, 8300
Northwest 33/rd/ Street, Miami, FL 33122.
10.16 Third Amendment to Lease by and between CellIt, Inc., a wholly
owned subsidiary of the Registrant and Prudential
Insurance Company of America for Westside Plaza II, 8300
Northwest 33/rd/ Street, Miami, FL 33122.
10.17 Sublease Agreement by and between CellIt, Inc., a wholly owned
subsidiary of Registrant and Velocitel, Inc. for 8200
square feet of Westside Plaza II, 8300 Northwest 33/rd/
Street, Miami, FL 33122.
10.18(4)(5) Third-party service provider agreement between the Registrant
and Grumman Systems Support Corporation.
10.19(4)(5) OEM Agreement by and between the Registrant and Kana
Communications, Inc. dated as of November 16, 1999.
10.20(7) Severance Agreement for David M. Sample, President and Chief
Executive Officer.
10.21(7) Severance Agreement for Jeffrey E. Anderholm, Executive Vice
President, Product Group.
10.22(7) Severance Agreement for Anthony A. Colangelo, Executive Vice
President, Worldwide Sales and International Operations.
10.23(4) Severance Agreement for Mark Donovan, Senior Vice President,
Operations & Customer Service.
10.24(8) Severance Agreement for James D. Foy, President and Chief
Executive Officer.
10.25(8) Severance Agreement and Release for David M. Sample, former
President and Chief Executive Officer.
10.26 Employment Agreement for Alexander Tellez, Executive Vice
President, Research and Development.
10.27 Secured Promissory Note and Assignment Agreement for Alexander
Tellez, Executive Vice President, Research and Development.
57
10.28 Severance Agreement for Ralph S. Breslauer, Executive Vice
President, Sales and Marketing.
10.29 Severance Agreement for Kristina Lengyel, Vice President,
Professional Services.
10.30 Severance Agreement for Michael J. Provenzano III, Vice
President, Finance and Chief Financial Officer.
10.31(6) Transition and Retention Agreement for Alphonse M. Lucchese,
Chairman.
10.32 Amended to Transition and Retention Agreement for Alphonse M.
Lucchese, Chairman.
21. Subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP.
(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) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 1999.
(5) Confidential treatment granted. Redacted version previously filed.
(6) Previously filed as an exhibit to Form 10-Q for the quarter ended September
30, 2000.
(7) Previously filed as an exhibit to Form 10-K for the fiscal year ended
December 31, 2000.
(8) Previously filed as an exhibit to Form 10-Q for the quarter ended September
30, 2001.
58
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 12 day of March 2002.
Davox Corporation
By: /s/ James D. Foy
-------------------
James D. Foy
Chief Executive Officer
and President
POWER OF ATTORNEY
Each person whose signature appears below this Annual Report on Form 10-K
hereby constitutes and appoints James D. Foy and Mike J. Provenzano, III 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.
59
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/ James D. Foy Chief Executive
- ------------------ Officer and President
James D. Foy (Principal Executive
Officer) March 12, 2002
/s/ Michael J. Provenzano III Vice President of
- ----------------------------- Finance and Chief
Michael J. Provenzano III Financial Officer
(Principal Financial
Officer) March 12, 2002
/s/ Alphonse M. Lucchese Director March 12, 2002
- ------------------------
Alphonse M. Lucchese
/s/ Michael D. Kaufman Director March 12, 2002
- ----------------------
Michael D. Kaufman
/s/ R. Scott Asen Director March 12, 2002
- -----------------
R. Scott Asen
/s/ Peter Gyenes Director March 12, 2002
- ----------------
Peter Gyenes
60