10-Q/A 1 a10-qa.txt 10-Q/A -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 0-22804 ------------------------ ACTIVE VOICE CORPORATION (Exact name of registrant as specified in its charter) WASHINGTON 91-1235111 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2901 THIRD AVENUE, SUITE 500 98121-9800 SEATTLE, WASHINGTON (Zip Code) (Address of principal executive offices)

(206) 441-4700 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

-------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ACTIVE VOICE CORPORATION FORM 10-Q/A FOR THE QUARTER ENDED JUNE 30, 2000 INDEX

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ACTIVE VOICE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)

See notes to consolidated financial statements. 3 ACTIVE VOICE CORPORATION CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARES)

------------------------ Note: The consolidated balance sheet at March 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements. 4 ACTIVE VOICE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

See notes to consolidated financial statements. 5 ACTIVE VOICE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 1. INTERIM FINANCIAL STATEMENTS The accompanying consolidated financial statements of Active Voice Corporation and subsidiaries (the Company) are unaudited. In the opinion of the Company's management, the financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information set forth therein. Results of operations for the three month period ended June 30, 2000 are not necessarily indicative of future financial results. Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q/A. Accordingly, these financial statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended March 31, 2000. 2. INVENTORIES Inventories are comprised of the following (in thousands):

3. COMPREHENSIVE INCOME Total comprehensive income (loss) was ($4,258,000) and $9,947,000 for the three month periods ended June 30, 2000 and 1999, respectively. 6 ACTIVE VOICE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) JUNE 30, 2000 4. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except shares and per share data):

The calculation of diluted earnings per share for the three months ended June 30, 2000 did not include the effect of 415,877 weighted average shares from outstanding stock options as their inclusion would have been antidilutive. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Active Voice Corporation (the Company) is a leading manufacturer of call processing, including unified messaging systems and PC-based computer telephony integration (CTI) solutions. The Company's products are sold worldwide through a network of independent telecommunications dealers, telephone equipment manufacturers and computer resellers. The Company currently markets six principal products: Unity, Repartee, embedded systems, Lingo, Replay, and Replay Plus. Unity, the Company's most recent product introduction, offers fully unified messaging, including single point administration for e-mail, voice mail and fax mail user accounts, address and distribution lists, and single point of administration. Repartee, the Company's well established mid-market product comes in two versions, CTI and VP. Repartee serves as the base for TeLANophy, a suite of CTI application modules which provides complete call management and integrated messaging capabilities. Embedded systems, available only to the Company's strategic partners, combines Active Voice software with a board that incorporates directly into the phone switch, offering a less expensive alternative than a traditional PC-based voice mail system. Lingo offers all basic voice processing features in a single proprietary hardware unit, and is an affordable solution for small businesses as it does not utilize PC hardware and requires minimal dealer effort in its installation. The Company's Replay product provides basic voice processing features at a price point attractive to the small business market. Replay Plus, the Company's mid-priced product, offers most of the voice processing features found in Repartee with the exception of the CTI functionality. CERTAIN STATEMENTS IN THIS QUARTERLY REPORT (FOR EXAMPLE, STATEMENTS USING THE EXPRESSIONS, "THE COMPANY BELIEVES" OR "THE COMPANY ANTICIPATES" AND OTHER SIMILAR STATEMENTS) CONTAIN "FORWARD LOOKING" INFORMATION (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) INVOLVING RISKS AND UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, PROJECTIONS FOR SALES AND EXPENDITURES, TREND PROJECTIONS AND DEVELOPMENT SCHEDULES. ACTUAL FUTURE RESULTS AND TRENDS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE RISKS DISCUSSED IN THIS REPORT. INVESTORS ARE ENCOURAGED TO CONSULT ANY FURTHER DISCLOSURES MADE ON RELATED SUBJECTS IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY ASSUMES NO OBLIGATION TO RELEASE PUBLICLY ANY CHANGES TO THESE "FORWARD LOOKING STATEMENTS" THAT MAY ARISE FROM THE DEVELOPMENT OF UNANTICIPATED EVENTS OR CIRCUMSTANCES THAT OCCUR AFTER THE DATE OF THE ORIGINAL PROJECTION. (REFER TO THE SECTION ENTITLED "RISK FACTORS AFFECTING FUTURE OPERATING RESULTS" FOR A FURTHER DISCUSSION ON SOME OF THE INVOLVED RISKS AND UNCERTAINTIES.) RESULTS OF OPERATIONS NET SALES

Net sales to the Company's Americas dealer network during the quarter ended June 30, 2000 decreased 49% from the comparable period in the prior fiscal year. Net sales to the Americas dealers represented 41% of total net sales for the three months ended June 30, 2000 compared to 50% of total net sales for the three months ended June 30, 1999. The decrease in net sales in the Americas dealer channel in the current fiscal period when compared to the prior year's quarter was primarily attributable to a decline in revenues associated with the Company's Year 2000 (Y2K) program. Repartee and Lingo sales declined as a result of the post-Y2K slowdown. Management believes the lower revenues also reflect an industry-wide trend of delayed purchases while customers considered their communications strategies, and the various equipment and technology options available. Sales of the Company's unified messaging product, Unity, continued to sequentially improve from quarter to quarter, representing approximately 20% of the channel's net revenues during the quarter ended June 30, 2000. 8 Net sales to the strategic partner sales channel decreased 23% for the three months ended June 30, 2000 over the comparable period in the prior fiscal year. Net sales to strategic partners represented 36% and 30% of total net sales for the three month periods ended June 30, 2000 and 1999, respectively. The majority of the decrease is attributable to a decline in switch sales by the Company's strategic partners caused by the aforementioned industry-wide trend of delayed purchases of telecom equipment, resulting in less units for the Company's voice mail systems to attach to. Revenues from Unity to strategic partners offset some of the decrease, contributing 9% of the channel's revenue. The Company's largest corporate customer accounted for approximately 67% of total net corporate sales and approximately 24% of total net sales during the three months ended June 30, 2000. Net sales to international customers decreased 34% during the three months ended June 30, 2000 in comparison to the prior year same quarter. International sales represented 17% of total net sales for the three month period ended June 30, 2000 and 16% of total net sales for the three month period ended June 30, 1999. The reasons for the decrease in net sales to the international channel mirror the America's channel, and revenues declined in each of the Company's international regions. Other revenue decreased 21% on a year over year basis and made up 6% of the Company's total net sales in the quarter ended June 30, 2000 and 4% for the quarter ended June 30, 1999. Other revenue primarily represents sales of Visual Basic-based voice application tools through the Company's majority-owned Pronexus subsidiary. GROSS MARGIN

The Company's gross margin varies in part depending upon the mix of higher-margin voiceboard-and-software kit sales (offered to all customers) and software-only sales (available only to strategic partner accounts) as opposed to turnkey system sales (which include the cost of a PC and other related hardware). The proportion of sales contributed by each distribution channel also affects the overall gross margin, as international sales have historically had higher gross margins than sales in the other distribution channels. The increase in the gross margin percentage in the three month period ended June 30, 2000 compared to the prior year's quarter is the result of higher revenue contributions from embedded systems and Unity, which both carry higher software components. Gross margin percentage in the quarter ended June 30, 1999 reflected a higher hardware sales mix when compared to the current quarter, as sales of PC hardware components associated with the Company's Y2K program accounted for a greater percentage of revenues than the Company's other business. RESEARCH AND DEVELOPMENT

The decrease in research and development expenses between the three month periods ended June 30, 2000 and 1999 was attributable to lower contractor costs associated with the prior year's release and subsequent enhancements of Unity. Although compensation-related expenses are slightly up from the prior year's quarter, the rate of increase has declined as the emphasis on dedicated Unity personnel has subsided with the product's release. Staffing levels in the research and development group have declined 9 when compared to the previous year, but the Company's effort to retain skilled employees has resulted in higher engineering salaries due to the competitive nature of the labor market. The Company believes that in order to remain competitive in a rapidly changing technological environment, it will continue to be necessary to allocate significant resources to the development of new products, globalization of products for international markets and customization of products for strategic partners. The Company expects the growth rate of research and development expenditures to slow in comparison to the last two years and that these expenses as a percentage of sales will vary from period to period. SALES AND MARKETING

The decrease in sales and marketing expenses during the three month period ended June 30, 2000 over the comparable period in the prior fiscal year was primarily attributable to lower commission expenses due to decreased sales levels. The lower commission expenses were offset by increased compensation-related expenses for the sales and marketing group, with the continued emphasis on channel and strategic department development. The Company also continues to devote resources to the development of training programs to improve its customers' technical and sales knowledge and better leverage sales of the Unity product. Sales and marketing expenses include both costs that are essentially fixed as well as costs that vary relative to sales volume and thus can be expected to fluctuate both in dollar amount and as a percentage of net sales from period to period. GENERAL AND ADMINISTRATIVE

The increase in general and administrative expenses between comparable periods was primarily attributable to legal costs related to intellectual property, litigation and contract matters. Compensation-related expenses also increased as the result of additional general and administrative personnel and higher salary levels when compared to the prior year. General and administrative expenses, being relatively fixed in nature, can be expected to fluctuate as a percentage of net sales from period to period. INTEREST EXPENSE AND INTEREST INCOME

The decrease in interest expense between the three month periods ended June 30, 2000 and 1999 is primarily attributable to $4.0 million advanced under a borrowing agreement with a significant customer in the prior year's comparable quarter. In November 1999, the customer subsequently converted the loan into common stock in connection with the exercise of a stock purchase warrant. The increase in interest income during the three month period ended June 30, 2000 in comparison to the corresponding period in the prior 10 fiscal year was primarily attributable to higher average invested cash and marketable security balances, primarily as the result of the $18.0 million sale of technology assets described below. This transaction occurred on June 30, 1999 and as such did not significantly impact interest income for the quarter ended June 30, 1999 in comparison to the current year. Refer to "Liquidity and Capital Resources." GAIN ON SALE OF TECHNOLOGY ASSETS AND IMPAIRMENT OF STRATEGIC INVESTMENT On June 30, 1999, the Company sold real-time Internet communications technology and related intangible assets (the Technology) for $18.0 million. Legal and compensation costs associated with the transaction were approximately $1.5 million, resulting in a $16.5 million gain. The Technology provides desktop-to-desktop instant messaging similar to the offerings by numerous internet portal companies such as Yahoo Messenger, MSN Hotmail and AOL Instant Messenger, including permission-based instant text, voice and video messaging, instant file transfer and URL sharing, multi-party chat, Internet voice and video call support, find-me/follow-me message routing, access to schedule and availability information, and personal communications Web pages. At the time of sale the Company was using the Technology for internal communications and allowing company contacts and acquaintances to test the software. No current or historical revenues were attributable to the Technology at the time of the sale. In connection with the sale, the Company's instant messaging group, consisting of four software developers, a software tester and a market researcher, joined the staff of the acquiring company. It was the intention of the Company to integrate some of the Technology into its core product offerings. However, it became apparent in the quarter prior to the sale that the Company needed working capital. Consequently, the agreement allows for a license back of certain rights to the Technology, but it is limited to use in conjunction with traditional or Internet Protocol (IP) switching in the areas of enterprise unified messaging, voice processing, and real-time call handling. During the quarter ended June 30, 1999, the Company recorded a $1.2 million impairment loss on a strategic investment. The loss represented the Company's $1 million investment for an 8% ownership interest in a small hardware vendor, plus an additional $169,000 temporarily advanced for working capital. Greater than one-half of the vendor's total sales were made to the Company. The impairment was recorded due to the uncertain financial viability of the vendor due to the Company's selection of an alternate source for the components supplied by the vendor. INCOME TAX PROVISION

Variations in the customary relationship between the income tax benefit (provision) and the statutory income tax rate of 34% result from certain non-deductible expenses, tax exempt investment income, research and development tax credits, and the benefit provided by the Company's foreign sales corporation. The Company expects the effective tax rate to fluctuate in the future due to varying operating results and the impact of changing research and development tax credits, tax exempt investment income, and foreign sales corporation benefits as a percentage of taxable income. In addition, the Company anticipates that it may fall under the jurisdiction of additional taxing authorities as its operations expand into new geographical areas. The Company did not record a benefit for federal taxes in the quarter ended June 30, 2000 as the result of the establishment of a valuation allowance against its deferred tax assets for the year ended March 31, 2000. As a result, the Company will not record financial tax expense or benefit until such time it 11 is determined that its deferred tax assets are realizable, and that a valuation allowance is no longer necessary. There can be no assurance that the Company will generate taxable income or that all of its deferred tax assets will be realized. The effective tax rate for the quarter ended June 30, 1999 was 29.4%, as the Company utilized its net operating loss (NOL) carryforward from the prior year, resulting in an effective tax rate below the statutory rate. NET INCOME AND EARNINGS PER SHARE

The decrease in net income and earnings per share for the three month period ended June 30, 2000 in comparison to the corresponding period in the prior fiscal year were primarily attributable to the gain associated with the sale of technology assets described above. In addition, operating results before one- time items declined as a result of the decrease in sales, also described above. Exercises of employee stock options and stock warrants by the Company's largest customer resulted in an increase in the number of common and common equivalent shares outstanding when compared to the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company's cash, cash equivalents, and marketable securities decreased to $19.1 million or 40% of total assets at June 30, 2000 from $23.2 million or 44% of total assets at March 31, 2000. The decrease is due to the net loss. Cash flow used in operations totaled $4.4 million during the three months ended June 30, 2000. The Company had net working capital of $29.2 million at June 30, 2000. Accounts receivable, net of allowances, decreased to $7.9 million at June 30, 2000 from $8.1 million at March 31, 2000. The decrease in accounts receivable balances was due to the decline in sales volumes. Days' sales outstanding at June 30, 2000 increased approximately 2% from March 31, 2000 to 73 days. Inventory decreased to $7.7 million at June 30, 2000 from $8.5 million at March 31, 2000, as the Company continues to work its way through a large PC-stocking purchase. The Company made $191,000 in capital expenditures during the three months ended June 30, 2000, compared to $332,000 during the comparable period of the prior fiscal year. The majority of the capital expenditures during the three months ended June 30, 2000 consisted of routine upgrades of computer equipment for employees and the redesign of the Company's decision support system. The Company currently has no specific commitments with respect to additional capital expenditures during the remainder of fiscal 2001, but expects to spend an aggregate of approximately $2 million for the year. The Company's $10,000,000 revolving credit line from a bank expired on June 30, 2000. The Company is currently negotiating terms to a new line of credit, but anticipates similar terms as the prior agreement. The new agreement will be secured by the Company's investment portfolio. The Company believes that ongoing maturity of securities in its investment portfolio, together with cash flow from operations, and the financing arrangements described above will provide sufficient resources to finance operations for at least the next year. 12 RISK FACTORS AFFECTING FUTURE OPERATING RESULTS Certain statements contained herein are dependent upon numerous factors, circumstances and contingencies. The following factors, while not all inclusive, could cause actual results to differ materially from historical results or those anticipated: - Competitive pressure from new entrants to the marketplace, including large software companies and telephone switch manufacturers with greater resources, could adversely affect the Company's business. Introduction of new products by the Company or its competitors and the extent of their success or failure could produce significant fluctuations in market demand for the Company's products. New product introductions by the Company may be delayed, resulting in lost customers or allowing competitors to gain market share. - Increasing price competition in the Company's marketplace could influence the amount and timing of changes in the Company's prices to its customers, and therefore negatively impact the Company's gross margins. Gross margins may also either increase or decrease as a result of further shifts in product mix depending upon the percentage of net sales contributed by software only sales in comparison to turnkey system sales. - The extent and timing of new product development and the need or desire to modify existing products may cause notable increases in research and development spending. - If the Company experiences delays in shipments (whether due to delays from customers or as a result of the timing of new product introductions by the Company) in a given quarter, or if new order bookings do not meet anticipated levels, substantial fluctuations in operating results will occur. Frequently, these developments may not become apparent to the Company until near or at the end of the quarter. In addition, changes in the product and channel mix, and the timing of customer orders, will continue to affect the variability of quarterly results of operations in future quarters. - Dependence on continued sales to significant customers could have a significant impact on the Company's operations as there is no assurance that any particular customer will continue to purchase similar volumes of the Company's products. - Risks associated with the Company's effort to move into the larger end user market, such as product acceptance, long sales cycles and failure to have the adequate infrastructure to support large enterprises, could affect the Company's future performance. - Growth strategies involving acquisitions, strategic relationships, and vendor relationships may encounter legal and/or unforeseeable business risks beyond the Company's control. - Risks associated with foreign operations such as gains and losses on the conversion of foreign currencies to U.S. dollars; export-import regulations; customs matters; foreign collection problems; and military, political and transportation risks may significantly affect the Company's operating results. In addition, the Company's international sales involve additional risks associated with governmental regulation, product adaptation to local languages and switching systems, and uncertainties arising from local business practices and cultural considerations. 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Third Amendment to Active Voice Corporation 1998 Stock Option Plan 27.1 Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended June 30, 2000. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACTIVE VOICE CORPORATION (Registrant) By: /s/ JOSE S. DAVID ----------------------------------------- Jose S. David Date: August 28, 2000 CHIEF FINANCIAL OFFICER Signing on behalf of registrant and as principal financial officer

ACTIVE VOICE CORP 10-Q/A