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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1999
OR
[_] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to _______________
Commission file number: 0-25186
AVT Corporation
(Exact name of registrant as specified in its charter)
Washington 91-1190085
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
11410 N.E. 122nd Way
Kirkland, WA. 98034
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (425) 820-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:)
Common Stock, $.01 par value per share
--------------------------------------
(Title of class)
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 preceeding 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 of voting stock held by non-affiliates of the registrant
as of March 20, 2000 was $404,536,020 (based upon the closing sale price of
$12.8125 per share on the Nasdaq National Market on such date).
Number of shares of Common Stock outstanding as of March 20, 2000 was
31,573,543.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders to be held May 9, 2000 are incorporated by reference in response to
Part III, Items 10-13 (Directors and Executive Officers of the Registrant)
TABLE OF CONTENTS
PART I
Item 1. BUSINESS......................................................................................... 3
Industry Background.............................................................................. 3
The AVT Solution................................................................................. 3
Strategy......................................................................................... 4
Products......................................................................................... 5
Distribution..................................................................................... 10
Product Support.................................................................................. 11
Product Development.............................................................................. 11
Proprietary Rights............................................................................... 12
Competition...................................................................................... 12
Manufacturing.................................................................................... 13
Employees........................................................................................ 13
Item 2. PROPERTIES....................................................................................... 13
Item 3. LEGAL PROCEEDINGS................................................................................ 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 13
PART II
Item 5. MARKET FOR REGISTRATION'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.............................................................................. 14
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................................. 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................................ 15
RISK FACTORS..................................................................................... 24
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................... 31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 34
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................................................. 49
PART III
Item 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 49
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................. 50
i
PART 1
Item 1. BUSINESS
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. The Company provides flexible, cost-
effective products that address the unified messaging, voice messaging, fax
server, production fax and document delivery markets, and distributes these
products primarily through independent distributors and value-added resellers.
The Company's products run on off-the-shelf hardware, support Windows NT (with
future support planned for Windows 2000), and interface with a wide variety of
telephony and computer equipment.
Industry Background
Businesses are increasingly using information technology to improve
customer service, increase employee productivity, decrease costs and more
efficiently disseminate information. As the amount of information exchanged
between organizations increases, and the diversity of the delivery formats and
combinations used by organizations to exchange this information becomes more
complex, there is a growing need for organizations to find new ways to manage
information in a more timely and cost-effective manner.
In response to the growth in overall message traffic, organizations are
increasingly using unified messaging and advanced fax and voice messaging
systems that allow employees to more effectively manage communications and allow
easy access by telephone to large amounts of information that resides on
computer databases.
The growth in data communications presents additional opportunities for
accessing and sending information. For example, organizations are utilizing
electronic document exchange system and services to store, forward and broadcast
their growing volume of e-document traffic in an efficient manner. Electronic
messaging over LANs, the Internet and corporate intranets has emerged as another
way to access data and disseminate information. This rapid increase in multiple
forms of voice and data communication has further accentuated the need for
organizations to optimize their information management capabilities and
integrate voice and data communications.
The AVT Solution
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. These solutions are designed to enhance
individual and work group productivity, improve customer service, reduce
business operating costs and simplify information access and dissemination. The
Company's products provide enhanced voice and data integration through
applications such as unified voice and data messaging, and document
distribution. The Company's products run on off-the-shelf server hardware,
support Windows NT, and interface with a wide variety of telephony and computer
equipment.
3
Strategy
The Company's mission is to deliver business to business communication
solutions by providing cost-effective, innovative computer-telephony software
products that operate on industry-standard computer platforms, marketing those
products throughout the world. Key components of the Company's strategy include:
Provide Complete Software-based Computer-telephony Solutions. The Company
is focused on providing a comprehensive and affordable set of software-based
computer-telephony solutions designed to enhance productivity, improve customer
service, reduce business operating costs and simplify access to data and
dissemination of information. The Company's products provide enhanced voice and
data integration through applications such as unified voice and data messaging,
IVR and document distribution.
Focus on the Enterprise Market. The Company currently targets enterprises
with 100 to 2,000 employees, including divisions and subsidiaries of Fortune
1000 companies. The Company's strategy is to continue to invest in new product
and service development and marketing initiatives to gain market share and
further meet the computer-telephony needs of the medium-sized enterprise.
Leverage Telephony and Data Expertise. The Company has established a
knowledge base in the development of call processing, voice processing and call
switching applications, as well as LAN, Internet and corporate intranet software
applications and services. The Company believes that its expertise in these
areas enables it to efficiently bring to market innovative software products and
services that unify and exchange information between businesses. While the
Company's product lines all provide computer-telephony functionality, the
Company tailors its products to take advantage of the distinct telephony-
oriented and computer-oriented distribution channels. The Company intends to
leverage its expertise to continue to develop channel-specific products and to
introduce new products that further integrate its telephony and computer
capabilities.
Capitalize on Installed Base. The Company intends to capitalize on its
installed base by offering add-on modules, software upgrades and new products,
all of which provide increased capacity and functionality.
Utilize Capabilities of Multiple Distribution Channels. The Company targets
enterprises primarily through telephony-oriented distributors and computer-
oriented value-added resellers as well as strategic partners and a major
accounts sales force. The Company believes that some enterprises will evaluate
business to business solutions from a telephony perspective while others will
focus on data-centric solutions. The use of multiple distribution channels that
target many of the same potential customers increases the likelihood that the
Company's products and services will be sold to a particular customer. The
Company continues to broaden its distribution channels by expanding its direct
sales efforts and by continuing to enter into distribution agreements with
private label OEMs and other strategic partners.
Grow Through Strategic Acquisitions. The Company believes that growth
through strategic acquisitions of complementary technologies, products and
distribution channels offers the potential for significant competitive
advantage. The Company's open-systems technology facilitates the rapid
integration of and linkage to other complementary open-systems technologies. The
Company believes it is therefore able to accelerate introduction of new
technologies to the market through acquisition, and to respond rapidly to
industry changes and opportunities.
Pursue International Opportunities. The Company believes that the markets
for business to business communication solutions outside the United States will
experience accelerated growth in the next few years. To pursue these
opportunities, the Company intends to continue to localize its products for
specific markets and to actively recruit new dealers, distributors and strategic
partners internationally.
4
Products
The Company's product lines include both telephony-oriented and computer-
oriented products, and outsource electronic document (e-document) delivery
services. The Company's telephony-oriented product lines serve the messaging
markets and focus on voice and call processing, unified messaging, IVR, and
personal and workgroup call management. The Company's computer-oriented product
lines target the fax server and production fax markets and focus on high-
performance fax processing and unified messaging, as well as Internet, corporate
intranet and phone-based information access. E-document delivery services target
the outsource mass fax and email markets for time-critical business-to-business
(B2B) communications. These services include high-volume, instantaneous IP fax
and email broadcast and merge offerings, fax reply and fax-on-demand
applications as well as industry-specific services and custom workflow solutions
for unique customer requirements. The following table provides an overview of
the Company's products in each of these markets.
- --------------------------------------------------------------------------------
Product Line Description
- --------------------------------------------------------------------------------
Messaging Products:
CallXpress Enterprise A multi-application unified messaging
platform for large, multi-site
enterprises that supports up to 128
ports and runs on Windows NT.
CallXpress A multi-application unified messaging
platform for small to medium-sized
organizations that supports 4 to 32
ports and runs on Windows NT.
PhoneXpress A call answering, routing and voice
messaging system for small to medium-
sized enterprises that supports 4 to 16
ports.
- --------------------------------------------------------------------------------
Enhanced Fax Products:
RightFAX A high-performance LAN-based fax server
that runs on Windows NT and supports up
to 32 fax channels.
RightFAX Enterprise Server 7.0 A single source for electronic document
(Introduced 1999) exchange, converging network,
production, and IP fax under one
umbrella to provide customers highly
scalable and adaptable electronic
document (e-document) delivery.
RightFAX Production System A high-volume, production-oriented
server that enables fax and other forms
of electronic transmission for
electronic commerce applications,
supports up to 48 ports and transmits or
receives up to 2,800 pages per hour.
- --------------------------------------------------------------------------------
E-Document Delivery Services:
DocumentBroadcast Fax & Email High-volume, simultaneous delivery of
fax and email documents to hundreds or
thousands. Broadcasts can be initiated
via the Web, from desktop software, a
fax machine or Assisted Services.
- --------------------------------------------------------------------------------
DocumentMerge High-volume delivery, by fax or email,
of documents individually personalized
from database information.
- --------------------------------------------------------------------------------
5
- --------------------------------------------------------------------------------
DocumentOnRequest Automated 24/7 access to frequently
requested documents via a toll-free
number.
- --------------------------------------------------------------------------------
DocumentReply Fully automated receipt of high-volume
fax responses, integrated with outbound
document distribution.
- --------------------------------------------------------------------------------
IndustryExpress Custom, high-volume document delivery
solutions for targeted vertical markets,
including mortgage, travel, publishing
and associations.
- --------------------------------------------------------------------------------
MediaLinqClient software Client software for Microsoft Windows
giving users full access to AVT
MediaLinq Services from the desktop.
Gives customers the ability to launch
fax and email broadcasts, manage lists,
and track the status of broadcasts.
- --------------------------------------------------------------------------------
WebLinq Anywhere access to AVT MediaLinq
services, providing the ability to
launch fax and email broadcasts, manage
lists and documents, and track broadcast
status from a standard Web browser.
- --------------------------------------------------------------------------------
Messaging Products
CallXpress Line
The CallXpress family of products consists of CallXpress and CallXpress
Enterprise. The Company's premier unified messaging product offering,
CallXpress, was introduced in early 1997. CallXpress is designed to take
advantage of the advanced capabilities of the Windows NT operating system, and
provide easy-to-use installation and administrative capabilities and enhanced
fax functionality with RightFAX Enterprise. CallXpress is designed to support
from 4 to 32 ports and can serve the needs of small to medium-sized
organizations.
CallXpress Enterprise is a high-capacity, fault-tolerant unified messaging
system designed specifically for the large multi-site enterprise. CallXpress
Enterprise supports up to 128 ports on a single Windows NT Server - allowing
support for up to 10,000 users. CallXpress Enterprise comes complete with both
analog and digital networking, allowing communication between geographically
dispersed offices.
The Company's CallXpress messaging products are either sold as software kits to
dealers who obtain their own hardware, or sold fully integrated on Company-
provided PC hardware platforms. Software kits consist of software,
documentation, a hardware security key, voice cards and fax cards. Fully
integrated systems include all the components supplied in the software kits,
plus fully integrated and tested PCs, disk drive storage devices of various
sizes and configurations, modems, monitors and keyboards. While CallXpress was
developed with a telephony orientation, it is designed to link with computer-
oriented solutions through its standard LAN-connection and software-modular
packaging.
CallXpress application modules consist of software programs that operate in an
integrated, multi-tasking environment and are not dependent on secondary
hardware processors. Modules may be purchased either at the time of initial
installation or as subsequent add-ons. CallXpress software modules are divided
into three application categories: advanced messaging, unified messaging, and
call management.
Advanced Messaging Applications
Automated Attendant/Voice Mail. The Automated Attendant/Voice Mail module
answers calls on the first ring and invites the caller to enter an extension
number, wait on the line for a receptionist or leave a voice mail message. The
Audiotext feature of the Automated Attendant/Voice Mail module acts as a "spoken
bulletin board."
Digital Networking. With the Digital Networking module, a company with multiple
locations can link its offices together, thereby allowing subscribers at each
location to send and receive voice and fax messages to and from any other office
in the network using the Internet or corporate Intranet.
6
Unified Messaging Applications
Desktop Message Manager. Desktop Message Manager provides a visual interface to
the subscriber's unified mailbox, letting the subscriber know who sent a
message, the type of message sent, when it arrived, whether it is urgent and its
length. The module will play back voice mail messages on the subscriber's
telephone or voice-enabled PC, as well as display fax messages on the computer
screen. A related module provides the subscriber with a visual interface to
manage his or her CallXpress unified mailbox from Microsoft Outlook/Exchange or
Lotus Notes/Domino.
E-Mail Access. E-Mail Access provides a subscriber with the option to hear
electronic mail text messages through text-to-speech capabilities or convert
them into faxes through text-to-fax capabilities. E-Mail Access integrates with
Lotus cc: Mail, Lotus Notes, Microsoft Mail and Microsoft Exchange.
Call Management Applications
Automated Agent. Automated Agent is an interactive voice response module that
enables complete application solutions to be designed for specific business
functions such as catalog ordering and college registration. Automated Agent can
be connected to the corporate database through a variety of host computer and
LAN-based interfaces.
Desktop Call Manager. Desktop Call Manager provides intelligent, real-time
management of incoming calls, allowing the subscriber or member of a workgroup
to take the call, take a message, or redirect the call. Incoming calls are
identified by Caller ID, prompting the system to display the caller's identity
on the subscriber's PC. Desktop Call Manager can be a very cost-effective
application for smaller, informal call centers where an ACD (automated call
distribution) system cannot be cost-justified.
PhoneXpress
PhoneXpress is designed to meet the requirements of small- to medium-sized
enterprises that require full-featured automated attendant and voice mail
functions. PhoneXpress is designed to support from 4 to 16 ports and can be
configured with networking capability to provide a cost-effective branch voice
processing system for enterprise-wide networks. PhoneXpress, like CallXpress
messaging products, is available as a software kit or as a completely integrated
system.
Enhanced Electronic Document Delivery Products
The RightFAX product line provides mid-size to Fortune 1000 organizations
advanced electronic document delivery solutions. The RightFAX product suite
converges network fax, production fax and IP fax under one umbrella to provide
customers highly scalable, reliable, and cost effective e-document delivery.
With the release of the RightFAX v7.0 product line in 1999, CommercePath
technology has been added to the product mix to provide customers with a high-
volume, low cost and unattended electronic delivery of mission critical
documents. In addition, RightFAX now also offers direct access to on-demand
document delivery through the AVT-MediaLinq advanced IP fax network.
Network Fax
Features such as Intelligent Least Cost Routing and load-balancing allow
organizations to leverage the Internet or Intranet to share resources with other
RightFAX servers.
Network administrators can centrally manage all RightFAX servers on the network
using the RightFAX Enterprise Fax Manager (EFM). With EFM, they can click a
button to view the status of every fax server; start and stop fax services
individually or globally; and configure least cost routing rules.
Production Fax
7
RightFAX production systems, powered by CommercePath technology, provide high-
volume, delivery and receipt of business critical documents such as purchase
orders, invoices, and sales orders in a variety of formats including fax, email,
EDI or delivery over the Internet.
RightFAX production solutions save companies time and money while improving
accuracy and reliability by eliminating manual processes and the expense of
mailing documents. They also improve cash flow by drastically reducing the time
necessary to exchange invoices, statements and other electronic commerce
documents with customers, vendors and partners.
The RightFAX production environment tightly integrates with ERP applications
such as SAP, Oracle, Baan and Peoplesoft as well as products from other leading
technology partners such as Cardiff, GEAC and Jetform.
RightFAX production fax architecture allows an organization to distribute
services such as forms processing, notification, communication and inbound
routing across multiple servers. This scalability gives organizations the
ability to customize their server environment.
RightFAX also provides tracking and management of document delivery status
through a fax utility, FaxUtil. Users and administrators can also implement
the RightFAX Web Client, a browser-based interface that provides, real-time
document delivery confirmation information and the ability to interact with the
RightFAX system.
E-mail Integration
RightFAX products integrate with a variety of e-mail applications that allow
users to manage both e-mail and fax messages directly from their e-mail client.
This integration between RightFAX and e-mail packages like Microsoft Exchange
and Lotus Notes helps network administrators to manage users' fax and e-mail
mailboxes from one interface. Additionally, the integration between RightFAX
and various e-mail packages holds benefits for mobile workers. A reliable
alternative for managing document communications is required by many businesses
that have many users out of the office. RightFAX's e-mail integration allows
mobile users to manage their fax communications by checking their e-mail
accounts while out of the office.
Internet Delivery/IP Messaging
Businesses today have realized that faxing is an integral part of their network
communications strategy. With that realization, there is a need for a solution
that provides unlimited fax capacity for scheduled high-volume deliveries, fail-
safe support for unexpected occurrences such as fax board and phone line
failures and overflow fax service for unplanned projects. When these situations
occur, businesses need to maintain their ability to communicate via fax.
Outsource E-Document Delivery Services
DocumentBroadcast Fax and Email Delivery
MediaLinq's fax and email DocumentBroadcast services provide high-volume,
simultaneous distribution of business documents, allowing companies to
communicate with customers, prospects, members, vendors and employees. Users
establish a distribution list of their recipients and send their documents to
this list using MediaLinqClient desktop software, from a standard Web browser
using WebLinq, from a fax machine using the Direct Access interactive voice
response system (IVR), or by contacting MediaLinq's Assisted Services group.
DocumentBroadcast provides for automatic retries and resends of documents, and
routinely flags incorrect fax numbers or email addresses, which are then
compiled and delivered to the sender. All successful and unsuccessful deliveries
are tracked by broadcast delivery reports, sent to the customer via fax or email
upon completion of the broadcast.
Documents are distributed over MediaLinq's advanced IP-based network, which
delivers over one million business-critical documents each business day. With
over 6000 ports, this IP network supports high-speed, high-volume delivery with
full redundancy.
8
DocumentMerge
DocumentMerge delivers large numbers of personalized documents by fax or email,
providing targeted communications for greater impact. Using a step-by-step Merge
Wizard in MediaLinqClient software, documents are customized with information
such as name, number, company, and region - any information contained in a
sender's database. Merge Tags automatically apply any font available in the
sender's document and allow for the insertion of dates and times and other
custom formatting.
DocumentReply
DocumentReply fully automates the receipt and collection of fax responses.
Combined with MediaLinq's outbound fax broadcast or merge services,
DocumentReply provides an end-to-end "send and reply" solution. Customers use
this service to distribute and collect documents that require a response, such
as survey and conference registration forms, removing the collection burden from
their on-premise fax system. A toll-free business-reply fax number is provided
for both document storage and for faxing responses. Responses are collected in a
secure mailbox attached to the number and are forwarded regularly to the
customer via email, fax, or postal mail.
DocumentOnRequest
Using DocumentOnRequest services, customers store frequently requested documents
on MediaLinq's server for automated retrieval via fax. Callers can access
documents 24 hours a day, seven days a week using dedicated toll-free numbers
for domestic callers or dedicated local numbers for international callers who
cannot access U.S. toll-free lines. Customizable voice prompts allow the caller
to select documents. A personal identification number (PIN) can be assigned for
confidential documents. In addition, MediaLinq allows customers to automatically
and simultaneously broadcast and store documents for retrieval in one step.
IndustryExpress Solutions
For specific vertical markets, MediaLinq has created targeted solutions to
simplify the e-document distribution process and to provide greater value for
industry-focused customers.
MortgageExpress is a service for mortgage bankers and lenders that
automates the complex rate sheet set up and distribution process using Windows
desktop software. Password-protected access provides selected access to regional
or custom-tailored pricing scenarios. In addition, the MortgageExpress customer
is supported by a mortgage-specific account and customer support team that
understands the needs of the mortgage industry.
TravelExpress is a specially designed database that allows targeted
marketing of promotions and travel industry news to selected travel agencies.
TravelExpress consists of over 35,000 U.S. listings that can be selected on over
50 different criteria to identify specific types of travel agencies, (e.g.,
destination specialty, annual sales volume, business or leisure focus). In
addition, the service includes over 60,000 international travel agencies
representing over 200 countries.
MediaLinqClient Software
Introduced in 1993, MediaLinqClient software gives customers desktop access to
the full range of MediaLinq services. Compatible with Microsoft(R) Windows 95,
98 and NT, MediaLinqClient provides fast, reliable Internet or modem connections
to launch fax and email broadcasts safely and securely. The software lets
customers import and manage broadcast lists, track the status of broadcasts, and
"live link" to external databases for automatic updates. Customers can also
schedule broadcasts for future delivery or to take advantage of off-peak
delivery rates.
WebLinq
Launched in 1999, WebLinq allows businesses to send fax and email broadcasts,
manage lists and documents and track broadcasts from any computing platform with
a standard Web browser. WebLinq requires no software installation or
maintenance. Secure Socket Layer (SSL) encryption ensures secure transactions.
9
Distribution
The Company sells its products primarily through an indirect channel of
resellers and distributors, as well as through direct sales and OEM and private
label agreements. The Company believes that some enterprises will evaluate
computer-telephony solutions from a telephony perspective while others will be
more data-focused. The use of multiple distribution channels that access many of
the same potential customers increases the likelihood that the Company's
products will be sold to a particular customer. The Company has built large
telephony-oriented and computer-oriented distribution channels in the United
States and is developing its international distribution channels. No single
customer represented 10% or more of the Company's net sales during 1997, 1998 or
1999.
Telephony-Oriented Distribution
The Company currently derives a substantial percentage of its U.S. telephony-
oriented sales revenues from over 400 wholesale dealers and distributors
comprised of customer premise telephone equipment dealers and voice processing
specialists. This channel consists primarily of national telephone equipment
dealers and regionally focused organizations and is serviced by 21 employees.
The Company continues to selectively recruit additional dealers, focusing on
those capable of marketing and servicing advanced computer-telephony application
products.
Dealers are required to attend Company-sponsored training sessions on system
usage, installation, maintenance and customer support. Advanced training is also
available from the Company on an ongoing basis. All dealers are subject to
agreements with the Company covering matters such as payment terms, protection
of proprietary rights and nonexclusivity of sales territories, but these
agreements generally do not restrict the dealer's ability to carry competitive
products.
Computer-Oriented Distribution
In the United States, the Company's computer-oriented sales force sells most
of the Company's computer-oriented products through an indirect channel of
value-added resellers, independent software vendors, and professional services
companies specializing in custom systems development. These computer-oriented
resellers are small- to medium-sized regionally-focused organizations. In
addition, the Company markets its computer-oriented products directly to end-
user customers through trade shows and journal advertisements. As of December
31, 1999, the computer-oriented sales force consisted of 76 employees.
OEM/Strategic Accounts
To broaden its access to certain markets, the Company has entered into
distribution and private label/OEM strategic distribution agreements with
Ericsson, NEC and Fujitsu Business Communications Systems Inc. to sell private
label versions of the Company's CallXpress and PhoneXpress products. The Company
expects to pursue additional OEM and private label agreements in the future. As
of December 31, 1999 the Company had 11 employees focused on OEM and strategic
accounts. During 1999, the Company signed significant agreements with Symantec
and Xerox for co-marketing and sales of RightFAX products in conjunction with
Symantec's WinFAX PRO and with Xerox's Document Centre devices. In October,
1999, the Company signed a Global Strategic Alliance Agreement with IBM's Lotus
Development Corporation. The agreement includes joint product development,
channel development and the creation of training and education focused on
delivering NT-based, Domino/Notes-based unified messaging solutions.
International Distribution
The international market for computer-telephony products is not as developed
as the market in the United States. The Company believes that over the next few
years the market for both telephony-oriented and computer-oriented computer-
telephony products will grow faster internationally than in the United States.
To address this opportunity, the Company is developing broad coverage of
international markets through a variety of dealer, distributor, and strategic
relationships. To date, the majority of the Company's international sales have
been in English-speaking countries: Canada, Australia, the United Kingdom, South
Africa and New Zealand. The Company expects its accelerated distribution
development and product localization efforts of the past few years will result
in a higher growth rate in non-English-speaking countries than in English-
speaking countries. The Company is actively recruiting new dealers and
distributors in international markets. The Company has sales offices in the
United Kingdom, Germany, Hong Kong and Dubai. Although the Company's sales to
date have generally been denominated in U.S. dollars, the Company expects that
in the future an increasing portion of its international sales will be made in
local currencies.
10
Product Support
The Company's dealers and distributors are primarily responsible for
supporting end-users of the Company's products. The Company provides telephone-
based technical support to its dealers and distributors. The Company also offers
technical training for both telephony-oriented and computer-oriented products to
its dealers. The majority of product support is provided by the Company within
three months of product shipment, and the estimated cost of such support is
recognized as product revenues are recorded. The Company generally charges its
customers separately for post-sale updates and upgrades.
Product Development
The Company has established a knowledge base in the development of call
processing, voice processing and call switching applications and services, as
well as in the development of LAN and Internet software applications and
services. The Company believes that its expertise in these areas enable it to
efficiently bring to market innovative software products that unify and exchange
information on and between the telephone and computer.
The Company maintains four product development centers: messaging products
are developed in Kirkland, Washington; enhanced electronic document delivery
products in Tucson, Arizona and Portland, Oregon; and e-document delivery
services in San Francisco, California. In total, the Company employed, as of
December 31, 1999, 132 engineers, technicians and quality assurance specialists
in its development centers. While development efforts in the past have been
separate, the convergence of technologies is allowing the Company to collaborate
and leverage development efforts among these groups. An example of such
collaborative efforts is the incorporation of the RightFAX fax server into the
CallXpress products and the utilization of the CommercePath technology in
RightFAX Enterprise 7.0, which was released in 1999. The Company expects these
cross-development efforts to increase in the future.
The Company internally develops its core technology, but believes that it is
more cost-effective to license from third parties certain components of its
products, such as database software, screen viewers, voice and fax cards and
network connectors. Whenever practical, the Company will license and integrate
such technology into its product offerings in order to decrease the cost of
development and shorten the time to market. In addition, the Company also
believes that the acquisition of new technology and new product offerings is
consistent with its strategic initiatives and will continue to pursue such
opportunities as they become available.
The Company believes that, for its product offerings to continue to achieve
acceptance, it will be necessary to continue to develop enhanced versions of its
computer-telephony applications. The Company expects to continue to expend
significant research and development efforts in developing new technology.
Additionally, with international markets expected to grow at a faster rate
than the North American market over the next several years, the Company intends
to continue to develop versions of its products that have been localized for
foreign markets. Localization includes converting client screens, documentation,
and voice-prompt sets into foreign languages. The Company anticipates expending
significant research and development resources to develop localized versions of
its products.
11
Proprietary Rights
AVT relies on a combination of patents, copyright, trademark and trade secret
laws, nondisclosure and other agreements and technical measures to protect its
proprietary technology. The Company has received a patent in the area of unified
messaging. There can be no assurance that the Company's efforts to protect its
proprietary rights will be successful. AVT has periodically received letters
from third parties asserting patent rights. Following analysis, the Company
generally has not believed it necessary to license any of the patent rights
referred to in such letters. In those cases in which the Company has determined
a license of patent rights was necessary, it has entered into a license
agreement. The Company believes that any necessary licenses or other rights
under patents to products or features could be obtained on conditions that would
not have a material adverse effect on its financial condition, although there
can be no assurance in this regard.
The Company licenses certain portions of its technology from third parties
under written agreements, some of which contain provisions for ongoing royalty
payments. As of December 31, 1999, the Company had license agreements with Octel
Corporation, Syntellect Inc., Intelligent Environments, Inc., International
Business Machines Corporation and Metasoft Systems, Inc.
Competition
The business to business communications market is highly competitive and the
Company believes that the competitive pressures it faces are likely to
intensify. System features, product pricing, ease of use and installation, sales
engineering and marketing support, and product reliability are the primary bases
of competition. The Company believes that it competes favorably with respect to
these factors in its target markets.
The Company's principal competitors in the telephony-oriented market for voice
messaging and unified messaging systems are independent suppliers, including the
Octel Messaging Division of Lucent Technologies, Inc., Active Voice Corporation,
and Callware Technologies, Inc. PBX and key telephone systems manufacturers such
as Lucent Technologies, Inc., Nortel Networks Corporation, Siemens Business
Communication Systems, Inc., Mitel Corporation and NEC America, Inc. also
compete with the Company by offering integrated voice messaging systems and
unified messaging systems of their own design or under various OEM agreements.
In the market for LAN-based facsimile systems, the Company's principal
competitors are Omtool, Ltd., Optus Software, Inc., Esker S.A. and Computer
Associates International, Inc. The Company's fax server products also compete
with vendors offering a range of alternative facsimile solutions, including
operating systems containing facsimile and document transmission features, low-
end fax modem products, desktop fax software, single-platform facsimile software
products and customized proprietary software solutions. In the market for
production facsimile systems, the Company's principal competitors are Biscom,
Inc., Esker S.A. and Topcall International AG. In the e-document delivery
services market the Company's principal competitors are the Xpedite division of
Premiere Technologies, AT&T, Cable and Wireless, and other telecommunications
companies who provide fax services.
12
Manufacturing
The Company's manufacturing operations consist primarily of diskette
duplication, documentation fulfillment, final assembly and quality control
testing of materials, subassemblies and systems. Some limited hardware
fabrication is performed by third parties for the Company on certain telephone
switch integration modules, for which the Company has designed a proprietary
device to emulate a particular manufacturer's telephone station set. The Company
is dependent on third-party manufacturers and vendors for certain critical
hardware components such as PC chassis, keyboards, disk drives, monitors, memory
modules and other miscellaneous components.
The Company's products incorporate a number of commercially available
application cards, fax cards, voice cards and circuit boards that enable
integration with certain telephone switches. The Company currently purchases
voice cards from Dialogic and Mitel Corp. The Company purchases fax cards from
Brooktrout and Dialogic.
Employees
As of December 31, 1999, the Company had 450 full-time employees, including 60
in administration, 23 in manufacturing, 87 in engineering and product
development, and 280 in sales, marketing and technical support. The Company's
employees enter into agreements containing confidentiality restrictions. The
Company has never had a work stoppage and no employees are represented by a
labor organization. The Company considers its employee relations to be good.
Item 2. PROPERTIES
The Company's headquarters and its telephony-oriented administrative,
engineering, manufacturing and marketing operations are located in approximately
60,000 square feet of space in Kirkland, Washington under a lease that expires
in January 2003. The Company's computer-oriented operations are primarily
located in approximately 31,200 square feet of leased space in Tucson, Arizona,
approximately 19,500 square feet of leased space in Portland, Oregon and 15,300
square fee of leased space in San Francisco, California.
The Company believes that these facilities are adequate to meet its current
needs and that suitable additional or alternative space will be available, as
needed, in the future on commercially reasonable terms.
Item 3. LEGAL PROCEEDINGS
In May 1998, CallWare brought suit against AVT in federal court in Salt Lake
City, Utah, alleging various claims relating to purported false advertising by
AVT. (CallWare Technologies, Inc. v. Applied Voice Technology, Inc., Case No.
2:98CV 0329K.) CallWare had claimed $20 million in monetary damages, and an
additional $60 million in punitive damages. The suit was dismissed in November
1999 as a result of a settlement payment of $150,000 made by the Company's
insurers to avoid the expense of further litigation. AVT continued to assert
that the lawsuit was without merit.
On March 21, 2000, a class-action lawsuit was filed in the United States
District Court for the Western District of Washington alleging that during the
period January 20, 2000 through March 17, 2000, the Company and several officers
and directors made or participated in misrepresentations about the Company's
business and future prospects. Since the March 21 lawsuit was filed,
additional lawsuits have been filed that are identical to the March 21
lawsuit, with the exception of the name of the plaintiff. Each lawsuit seeks
unspecified damages on behalf of a proposed class of purchasers of the Company's
stock during the specified period. The Company believes that the allegations of
the lawsuits are without merit and intends to vigorously defend the actions.
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 1999.
13
PART II
Item 5. MARKET FOR REGISTRATION'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this Item is incorporated by reference to
information contained in Note 9 to the Consolidated Financial Statements:
Quarterly Financial Data and Market Information (unaudited).
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
-----------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net sales................................................. $40,950 $58,693 $ 76,971 $102,977 $130,224
Cost of sales............................................. 18,516 23,749 29,233 37,282 44,958
------- ------- ------- -------- --------
Gross profit.............................................. 22,434 34,944 47,738 65,695 85,266
------- ------- ------- -------- --------
Operating expenses:
Research and development................................ 3,054 5,280 7,988 9,474 10,311
Selling, general and administrative..................... 12,178 19,996 26,040 35,035 44,282
Non-recurring charges(1)................................ -- 4,140 11,025 287 3,255
------- ------- ------- -------- --------
Total operating expenses................................ 15,232 29,416 45,053 44,796 57,848
------- ------- ------- -------- --------
Operating income.......................................... 7,202 5,528 2,685 20,899 27,418
Other income, net......................................... 1,038 942 1,104 1,258 1,993
------- ------- ------- -------- --------
Income before income tax expense.......................... 8,240 6,470 3,789 22,157 29,411
Income tax expense........................................ 2,676 3,860 1,470 8,078 11,556
------- ------- ------- -------- --------
Net income................................................ $ 5,564 $ 2,610 $2,319 $ 14,079 $ 17,855
======= ======= ======= ======== ========
Diluted earnings per common share(2)...................... $ 0.48 $ 0.19 $ 0.16 $ 0.94 $ 1.12
Net income excluding nonrecurring items(3)................ $ 5,564 $ 6,750 $ 9,375 $ 14,262 $ 20,798
Diluted earnings per common share excluding nonrecurring
Items(2)(3).............................................. $ 0.48 $ 0.50 $ 0.65 $ 0.95 $ 1.31
Weighted average common and common equivalent shares
outstanding(2)........................................... 11,685 13,557 14,410 15,008 15,928
December 31,
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $26,774 $30,208 $ 25,432 $ 42,691 $ 75,018
Working capital........................................... $31,815 $33,260 $ 31,743 $ 54,249 $ 86,225
Total assets.............................................. $42,929 $53,151 $ 62,686 $ 85,648 $121,709
Long-term debt, less current portion...................... $ 1,573 $ 830 $ 492 $ -- $ --
Total shareholders' equity................................ $35,960 $42,633 $ 48,371 $ 71,086 $102,205
_________________________
(1) Reflects nonrecurring charges of $2,388,000 of merger-related costs incurred
in the merger with MediaTel in April 1999 and $867,000 of costs incurred
in the fourth quarter 1999 consolidation of our RightFAX and CommercePath
divisions into the new Document Exchange Software Group. The 1998 non-
recurring charges of $287,000 are related to the withdrawal of the follow-
on stock offering in February 1998 as well as $4,140,000, $3,898,000 and
$7,127,000 for the write-off of purchased, in-process research and
development associated with the acquisition of RightFAX in January
1996, Telcom Technologies in January 1997 and CommercePath in October
1997, respectively.
(2) Computed on the basis described in Note 1 to the Consolidated Financial
Statements.
(3) Excludes the after-tax effect of the nonrecurring charges in 1996, 1997,
1998 and 1999 referred to above.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. These solutions are designed to enhance
individual and work group productivity, improve customer service, reduce
business-operating costs and simplify access to data and dissemination of
information. The Company's products provide enhanced voice and data integration
through applications such as unified voice and data messaging, interactive voice
response (IVR) and document distribution. The Company's key products are multi-
application computer-telephony platforms that run on off-the-shelf hardware,
support Windows NT, and interface with a wide variety of telephony and computer
equipment. The Company also offers add-on modules and software upgrades that
provide increased capacity and functionality.
The Company sells its products primarily through an indirect channel of
resellers and distributors, as well as through direct sales, OEM and private
label agreements. The Company offers Windows NT-based products in each of its
main product categories. The Company's product lines serve the needs of two
areas of the computer telephony market - the telephony oriented buyer and the
data oriented buyer of enterprise software and systems. The Company's telephony-
oriented products include: CallXpress, the Company's premier multi-application,
high capacity computer-telephony product lines and PhoneXpress, a full-featured
voice messaging system for small to medium-sized enterprises. The Company's
data-oriented products include RightFAX and RightFAX Enterprise, the Company's
LAN-based fax server lines for Windows NT, and CommercePath's line of production
document delivery systems for Windows NT and Unix. The Company's e-document
delivery services offer high-volume, simultaneous delivery of fax and email
documents via the web, from desktop software or a fax machine.
Since January 1996, the Company has made three strategic acquisitions, which
were accounted for as purchases and one which was accounted for as a pooling of
interests. The Company acquired RightFAX, a developer of LAN-based fax server
software, in January 1996. In January 1997, the Company acquired selected assets
and liabilities of Telcom Technologies, a developer of NT-based open-
architecture ACD systems. In October 1997, the Company acquired CommercePath, a
developer of high-volume production-oriented fax servers. In April, 1999 the
Company merged with MediaTel Corporation, a provider of e-document delivery
services, in a transaction which was accounted for as a pooling of interests. In
connection with the RightFAX, Telcom Technologies and CommercePath acquisitions,
the Company recorded nonrecurring charges of $4.1 million, $3.9 million and $7.1
million, respectively, in January 1996, January 1997 and October 1997 for the
write-off of purchased, in-process research and development, and recorded
additional amounts of goodwill that are being amortized over future years. See
"-- Liquidity and Capital Resources" and Note 8 to the Consolidated Financial
Statements.
15
On December 17, 1999, the Company announced that its Board of Directors
approved a two-for-one stock split of the Common Stock effected in the form of a
stock dividend. Shareholders received an additional share of common stock for
every share held on the record date of December 27, 1999. The additional shares
were payable on January 11, 2000. Accordingly, all share and earnings per share
amounts set forth in this report are shown on a pre-split basis and do not
reflect the two-for-one stock split.
Consolidated Results of Operations
The following table sets forth, for the periods indicated, the percentage of
net sales represented by certain items in the Company's consolidated statements
of income.
Year Ended December 31,
-----------------------
1997 1998 1999
------ ------ ------
Net sales................................... 100.0% 100.0% 100.0%
Cost of sales............................... 38.0 36.2 34.5
----- ----- -----
Gross profit................................ 62.0 63.8 65.5
Operating expenses:
Research and development............... 10.4 9.2 7.9
Selling, general and administrative.... 33.8 34.0 34.0
Non-recurring charges.................. 14.3 0.3 2.5
----- ----- -----
Total operating expenses............... 58.5 43.5 44.4
Operating income............................ 3.5 20.3 21.1
Other income, net........................... 1.4 1.2 1.5
----- ----- -----
Income before income tax expense............ 4.9 21.5 22.6
Income tax expense.......................... 1.9 7.8 8.9
----- ----- -----
Net income.................................. 3.0% 13.7% 13.7%
===== ===== =====
16
Net Sales
The Company derives net sales primarily from initial sales of software kits
and licenses and fully integrated systems, document delivery services as well as
follow-on sales of add-on software modules and product upgrades. Sales to
dealers and distributors are recognized when the products are shipped. The sales
mix among the Company's product categories and between software kits and fully
integrated systems affects both net sales and gross margin. Because of their
hardware components, fully integrated systems generate higher revenue per unit
and lower margins than comparable software kits. Advanced CTI application
systems generally are sold at a higher unit price and with a higher gross margin
than basic messaging systems due to the additional software modules purchased
and the higher mix of software kits and software licenses as compared to fully
integrated systems. Over the past three years, sales have shifted toward higher-
margin advanced CTI products and software kits from lower-margin CTI-ready
systems and basic messaging products. There can be no assurance that this
trend will continue.
Years ended December 31, 1999 and 1998. Net sales increased 26% to $130
million in 1999 from $103 million in 1998. This increase resulted from increased
sales across all product lines. Sales of exhanced fax products and services
increased 25% over 1998 and represented 64% of net sales. Sales of advanced
messaging increased 37% during 1999 and constituted 30% of total product sales.
Sales of the lower-margin basic messaging products were flat during 1999 and
represented 5% of net sales compared to 6% of net sales in 1998. International
sales for 1999 increased 45% from 1998, and represented 18% of net sales.
Years ended December 31, 1998 and 1997. Net sales increased 34% to $103
million in 1998 from $77 million in 1997. This increase resulted primarily from
increased sales of enhanced fax products and services, and a full year of sales
from our CommercePath business unit, which on a combined basis increased 59% in
1998, and represented 66% of net sales, as compared to 56% of net sales in 1997.
Sales of advanced messaging and call center systems continued to strengthen
during 1998 and constituted 27% of total product sales in 1998. The lower-margin
basic messaging market continued to be affected by price pressures from
competitive offerings. Basic messaging sales declined 33% in 1998 from 1997, and
represented 6% of net sales in 1998 compared to 12% of net sales in 1997.
International sales for 1998 increased 23% from 1997, and represented 15% of net
sales.
For the first quarter of 2000, we expect net sales to be significantly lower
compared to the first quarter of 1999. We believe our net sales are down for
this quarter primarily as a result of the continuing impact of the Year 2000
problem on both our channel partners and customers. We believe that IT
departments are either recovering from fatigue of implementing Year 2000
upgrades during 1999, or continuing to fight problems that have spilled over
into 2000. In either event, our sales partners have reported that many potential
AVT customers have delayed new purchase
17
decisions until their schedules allow them to take on new products. As a result,
our channel partners have reported that their new sales pipelines were at
unusually low levels in January and February of 2000.
Gross Profit
Years ended December 31, 1999 and 1998. Gross profit as a percentage of net
sales increased to 65.5% in 1999, as compared to 63.8% in 1998, due primarily to
the continuing sales shift to the higher margin enterprise fax products and
advanced CTI applications.
Years ended December 31, 1998 and 1997. Gross profit as a percentage of net
sales increased to 63.8% in 1998, as compared to 62.0% in 1997, due primarily to
the favorable sales mix of enterprise fax products and advanced CTI applications
and the declining sales of basic messaging systems.
Research and Development
Years ended December 31, 1999 and 1998. Research and development expenses
increased 8.8% to $10.3 million in 1999 from $9.5 million in 1998, due to
increased personnel costs relating to continuing development projects. As a
percentage of net sales, research and development expenses represented 7.9% in
1999, as compared to 9.2% in 1998.
Years ended December 31, 1998 and 1997. Research and development expenses
increased 18.6% to $9.5 million in 1998 from $8.0 million in 1997, due primarily
to increased personnel costs relating to acceleration of certain development
projects, and a full year of research and development expenses associated with
CommercePath. As a percentage of net sales, research and development expenses
represented 9.2% in 1998, as compared to 10.4% in 1997.
Selling, General and Administrative
Years ended December 31, 1999 and 1998. Selling, general and administrative
expenses increased 26.4% to $44.0 million in 1999 from $35.0 million in 1998,
due primarily to increased personnel-related costs of domestic and international
development of both the telephony-oriented and computer-oriented distribution
channels. Selling, general and administrative expenses for 1999 included
amortization of $1.3 million of goodwill relating to acquisitions compared to
$1.1 million in 1998. Selling, general and administrative expenses represented
34.0% of net sales in both 1999 and 1998.
18
Years ended December 31, 1998 and 1997. Selling, general and administrative
expenses increased 34.5% to $35.0 million in 1998 from $26.0 million in 1997,
due primarily to the inclusion of CommercePath expenses for the entire year as
well as increased personnel-related costs of domestic and international
development of both the telephony-oriented and computer-oriented distribution
channels. Selling, general and administrative expenses for 1998 included
amortization of $1.1 million of goodwill relating to acquisitions compared to
$0.7 million in 1997. Selling, general and administrative expenses represented
34.0% of net sales in 1998, as compared to 33.8% in 1997.
Non-recurring Charges
In the fourth quarter of 1999 the Company consolidated its RightFAX and
CommercePath divisions into the Document Exchange Software group. As a result
of this consolidation the Company incurred expenses of $867,000 during the
quarter of which $460,000 was a non-cash charge related to stock compensation.
On April 14, 1999 the Company merged with MediaTel Corporation in a tax-free,
stock for stock transaction valued at approximately $48 million. The
combination was accounted for as a pooling of interests and all amounts have
been adjusted to reflect this transaction. Related to this merger, the Company
incurred merger-related expenses of $2.4 million during the second quarter of
1999.
In February, 1998 the Company withdrew a follow-on stock offering
originally filed in October 1997 and wrote-off the costs of $287,000 in
connection with the canceled offering. In connection with the acquisitions of
Telcom Technologies and CommercePath, the Company recognized nonrecurring
charges of $3.9 million and $7.1 million in the first and fourth quarters of
1997, respectively, for the write-off of purchased, in-process research and
development.
19
Other Income, Net
For the years ended December 31, 1997, 1998 and 1999, other income
increased from $1.1 million in 1997 to $1.3 million in 1998 and $2.0 million in
1999 due to increased interest income from increasing cash and investment
balances.
Income Tax Expense
The effective income tax rates excluding acquisition-related charges in
1999, 1998 and 1997 were 39.3%, 36.5% and 38.8% respectively. The acquisitions
of Telcom Technologies and CommercePath in 1997 were taxable transactions, and,
therefore, the resulting excess of purchase price over net tangible assets
acquired is deductible for income tax purposes. Primarily as a result of the tax
treatment of these acquisitions, the Company recognized an income tax expense of
$11.5 million in 1999, $8.1 million in 1998 and $1.5 million in 1997.
Net Income and Net Income Per Share
Net income was $17.9 million in 1999 as compared to $14.1 million in 1998.
Excluding the nonrecurring charges related to the merger with MediaTel in 1999
and the cancellation of the follow-on stock offering in 1998, net income would
have increased to $20.8 million compared to the 1998 net income excluding non-
recurring charges of $14.3 million. Diluted net income per share, excluding the
nonrecurring charges, increased to $1.31 per share in 1999 from $.95 per share
in 1998.
Years ended December 31, 1998 and 1997. The Company recognized net income
in 1998 of $14.1 million as compared to $2.3 million in 1997. Excluding the
nonrecurring charges related to the cancellation of the follow-on stock offering
in 1998, net income would have increased to $14.3 million compared to the 1997
net income excluding non-recurring charges of $9.4 million. Diluted net income
per share, excluding the nonrecurring charges, increased to $.95 per share in
1998 from $.65 per share in 1997.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased to $75.0
million at December 31, 1999 from $42.7 million at December 31, 1998 and from
$25.4 million at December 31, 1997, due primarily from operations. Cash flow
generated from operating activities was $29.1 million, $18.3 million and $12.1
million in the years ended December 31, 1999, 1998 and 1997, respectively. The
increases resulted primarily from increasingly profitable operations. Proceeds
from the sale of stock options also contributed $6.6 million.
20
In January 1996, the Company acquired RightFAX for $4.2 million in cash
plus 326,000 shares of Common Stock. The business combination was accounted for
as a purchase. Approximately $4.1 million of the purchase price was recognized
as a nonrecurring charge in the first quarter of 1996, representing the value of
purchased, in-process research and development. The remaining intangible assets
are being amortized over seven years from the date of acquisition. As a result
of the earn out and guaranteed value of the stock issued in the acquisition of
RightFAX, the Company made payments in January 1999, 1998 and 1997 of $250,000,
$668,000 and $1,408,000, respectively, and also issued 9,800, 52,000 and 190,000
additional shares of common stock, respectively. This earn out resulted in
additional goodwill being recorded in December 1998, 1997 and 1996 of $0.5
million, $1.3 million and $2.0 million, respectively. No further earn out
amounts are payable.
In January 1997, the Company acquired selected assets and liabilities of
Telcom Technologies. The purchase price for the acquisition was $3.5 million in
cash, plus warrants to purchase 200,000 shares of Common Stock exercisable at
$6.68 per share, which may be exercised any time prior to January 3, 2002. The
Company accounted for the business combination as a purchase and recognized a
nonrecurring charge of $3.9 million in the first quarter of 1997, representing
the value of the purchased, in-process research and development.
In October 1997, the Company acquired all the outstanding capital stock of
CommercePath from Forest City Trading Group, Inc. for $10.4 million in cash.
The Company accounted for the acquisition as a purchase and recorded a
nonrecurring charge of $7.1 million for the write-off of purchased, in-process
research and development. In addition, the Company recorded $1.8 million of
goodwill that will be amortized over seven years. See Note 8 to the
Consolidated Financial Statements.
On April 14, 1999, the Company merged with MediaTel Corporation. In
connection with the merger the shareholders of MediaTel received an aggregate of
approximately 1,609,596 shares of the Company's common stock, 10% of which were
deposited into an escrow account to compensate the Company for certain losses
that it may incur as a result of breaches of representation and warranties and
other agreements by MediaTel. In addition, the Company assumed all outstanding
options to purchase MediaTel shares, which became exercisable for approximately
291,700 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 5,025
shares that were returned to the Company for losses, were distributed to the
former MediaTel shareholders.
The MediaTel transaction was accounted for as a pooling of interests. The
consolidated financial statements and the notes thereto have been prepared to
reflect the restatement of all periods presented to include the accounts of
MediaTel. The historical results of the pooled entities reflect each of their
actual operating cost structures and, as a result, do not necessarily reflect
the cost structure of the newly combined entity. The historical results do not
purport to be indicative of future results.
21
At December 31, 1999, the Company had a $4.0 million unsecured revolving
line of credit, none of which was outstanding. The Company's line of credit
expires in August 2001, and contains certain financial covenants and
restrictions as to various matters. The Company is currently in compliance with
all such covenants and restrictions. Borrowings under the line of credit bear
interest at the bank's prime rate or its interbank offering rate plus 1.50%, at
the Company's option.
The Company invested $4.2 million, $3.5 million and $2.3 million in
equipment and leasehold improvements in the years ended December 31, 1999, 1998
and 1997, respectively. Equipment purchases in such years consisted primarily of
computer hardware and software.
The Company expects that its current cash, cash flow from operations and
available bank line of credit, will provide sufficient working capital for
operations for the foreseeable future.
Impact of Year 2000 Issues
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. In order to distinguish
21/st/ century dates from 20/th/ century dates, the date code field needed to be
expanded to 4 digits. As a result, many companies' software and computer systems
were upgraded or replaced in order to comply with these Year 2000 requirements.
The use of software and computer systems that are not Year 2000 compliant could
result in system failures or miscalculations resulting in disruptions of
operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities.
Since January 1, 2000, the Company has not experienced any material
disruptions as a result of the failure of computer systems or software products
to be Year 2000 compliant. The Company believes it has taken the necessary
steps regarding Year 2000 compliance with respect to matters within its control
to ensure that the failure of computer or software products to be Year 2000
compliant will not materially impact the Company in the future.
With respect to internal software and hardware systems, the Company
reviewed all its material systems to determine which systems were not Year 2000
compliant. The Company completed all necessary upgrades, modifications and
conversions to its programs and equipment to ensure they would be effective in
the year 2000. All of such upgrades were done as part of a normal upgrade cycle
and accordingly no additional costs were incurred as a result of Year 2000
issues.
The Company has tested and will continue to test computer components,
including fax and voice cards and software it purchases from third parties, for
Year 2000 compliance. The Company has verified that all such components and
software currently in use are Year 2000 complaint. The Company, however, has
identified alternate sources for critical components in the event that a
supplier's business is disrupted by Year 2000 problems that have not yet been
identified.
All of the Company's products currently available for sale to customers are
Year 2000 compliant. The Company has offered free or reduced cost upgrades to
certain purchasers of the Company's products that were not Year 2000 compliant
when sold. To date, the Company has incurred costs of developing and providing
such upgrades of approximately $100,000. The Company does not intend to offer
upgrades for certain of its older products. The
22
financial impact to the Company of the development and administration of its
upgrade programs has not been and is not anticipated to be material to its
financial position or results of operations in any given year. However, the
Company is dependent on its customers to take necessary steps, and if any
customers have not or do not make necessary modifications, conversions,
migrations, or upgrades, it could have a material adverse effect on the Company
in the form of legal costs or the loss of customers.
The Company contacted third parties with which it has material
relationships, including its vendors, distributors, banks, and transfer agent,
to attempt to determine their preparedness with respect to Year 2000 issues and
to analyze the risks to the Company in the event any such third parties
experience significant business interruptions as a result of Year 2000
noncompliance. The Company does not believe such third-parties have experienced
any materials disruptions as a result of Year 2000 compliance issues.
Notwithstanding the steps we have taken with respect to matters within our
control to ensure that our business would not be directly impacted in a material
way by the failure of computer systems and software products to be Year 2000
compliant, we believe that our sales for the first quarter of 2000 have been
indirectly affected by the Year 2000 issue. We believe that IT departments are
either recovering from fatigue of implementing Year 2000 upgrades during 1999,
or continuing to fight problems that have spilled over into 2000. In either
event, our sales partners have reported that many potential AVT customers have
delayed new purchase decisions until their schedules allow them to take on new
products. As a result, our channel partners have reported that their new sales
pipelines were at unusually low levels in January and February of 2000. We can
not be certain that this indirect impact of the Year 2000 problem will not
continue into future quarters.
The discussion of our efforts and ongoing expectations relating to year
2000 compliance include some forward-looking statements. Because the extent of
existing but undetected Year 2000 problems is unknown to us, we cannot be
certain that we will not incur additional, unanticipated costs, losses or
liabilities related to internal or third-party year 2000 problems. Such costs,
losses and liabilities could have a material adverse effect on our business,
financial condition and operating results.
Certain Trends and Uncertainties
When used in this discussion, the words "believes," "anticipates" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Factors which could
affect the Company's financial results are described below under "Risk Factors"
and in Item 1 (Business) of this report on Form 10-K. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events.
23
RISK FACTORS
Our operating results fluctuate from quarter to quarter, which could cause our
operating results to fall below expectations of securities analysts and
investors.
We expect our operating results to fluctuate significantly from quarter to
quarter in the future. Because of these fluctuations, our operating results for
a particular quarter may fall below the expectations of securities analysts and
investors. If this occurs, the trading price of our stock may decline.
We believe period-to-period comparisons of our operating results are not
meaningful. Numerous factors contribute to the unpredictability of our operating
results, including
. the timing of customer orders;
. changes in our mix of products and distribution channels;
. the announcement or introduction of new products by us or our
competitors;
. pricing pressures; and
. general economic conditions.
The timing of customer orders can cause significant variations in quarterly
results of operations. Historically, we have operated with little or no backlog.
We earn almost all our revenues in each quarter from orders received in that
quarter. We base product development and other operating expenses on our
expected revenues. Because our expenses are relatively fixed in the short term,
we may be unable to adjust our spending in time to compensate for any unexpected
shortfall in quarterly revenues.
Changes in the mix of products we sell can also cause our operating results
to fluctuate from quarter to quarter. For example, shifts between fully
integrated systems and software kits result in fluctuations in gross margins
because fully integrated systems generate higher revenue per unit but have lower
margins due to their hardware component.
Our operating results may vary by season, which could cause our operating
results to fall below expectations of securities analysts and investors.
Our results of operations may fluctuate as a result of seasonal factors,
and this may cause our operating results to fall below expectations of
securities analysts and investors for a particular quarter. Specifically, due to
typical year-end dealer sales patterns and end-user buying patterns, net sales
in our first quarter, without taking into account the effect of acquisitions,
have in the past declined from the fourth quarter of the previous year.
We rely heavily on independent equipment dealers and value-added resellers.
24
A substantial majority of our net sales depends on a network of independent
telephone equipment dealers and computer-oriented value-added resellers. There
is intense competition for the attention of these independent dealers and
resellers from our competitors and from providers of other products distributed
through these channels. Many of these dealers and resellers do not have the
financial resources to withstand a downturn in their businesses. We may not be
able to maintain or expand our network of dealers and resellers in the future.
Moreover, our dealers and resellers may not maintain or expand their present
level of efforts to sell our products. If we lose a major dealer or reseller, or
if our dealers and resellers lose interest in selling our products, our
business, results of operations and financial condition may suffer.
The integration of recent and any future acquisitions may be difficult and
disruptive.
We frequently evaluate potential acquisitions of products, technologies and
businesses. Since January 1997, we have made three strategic acquisitions. Our
recent and any future acquisitions may direct management's attention away from
the day-to-day operations of our business and may pose numerous other risks. For
instance, we may not be able to successfully integrate any technologies,
products, personnel or operations of companies that we may acquire.
In making acquisitions, we may need to make dilutive issuances of our
equity securities, incur debt, write off purchased, in-process research and
development and amortize expenses related to goodwill and other intangible
assets.
25
Technology and customer needs change rapidly in our industry.
In our industry, technology and customer demands change rapidly, and we and
our competitors frequently introduce new products and features. To succeed, we
must identify, develop and market new products and features that satisfy those
changing customer needs and keep pace with those technological developments. To
do this, we must spend substantial funds on product development. We have already
devoted significant resources to technologies that we anticipate will be widely
adopted, such as Windows NT. However, we may not be able to develop new products
or product enhancements on a timely basis. Even if we do, the market may not
accept the new products or product enhancements that we develop.
Our market is highly competitive.
The computer-telephony market is highly competitive. Moreover, we believe
the competitive pressures we face are likely to intensify, particularly as our
competitors make new offerings based on the Windows NT operating system.
In the telephony-oriented market for messaging systems, our principal
competitors are independent suppliers such as the Octel Messaging Division of
Lucent Technologies, Inc., Mitel Corporation, Active Voice Corporation, Voysys
Corporation and Callware Technologies, Inc.
In addition to independent suppliers of computer-telephony solutions, we
also compete with private branch exchange and key telephone systems
manufacturers. Those manufacturers offer integrated voice messaging systems,
unified messaging systems and automatic call distribution systems of their own
design or under various OEM agreements. Competitors in this category include
Lucent Technologies, Inc., Nortel Networks Corporation, Siemens Business
Communication Systems, Inc., Mitel Corporation and NEC America, Inc.
In the market for LAN-based facsimile systems, our principal competitors
are Omtool, Ltd., Optus Software, Inc., Esker, S.A. and Computer Associates
International, Inc. Our fax server products also compete with vendors offering a
range of alternative facsimile solutions, including operating systems containing
facsimile and document transmission features, low-end fax modem products,
desktop fax software, single-platform facsimile software products and customized
proprietary software solutions. In the market for production facsimile systems,
our principal competitors are Biscom, Inc., Esker, S.A. and Topcall
International AG. In the market for document distribution products, our
principal competitors include the Xpedite division Premiere Technologies, Inc.
and other telecommunications providers such as AT&T Corp., MCI WorldCom, Inc.
and Cable & Wireless, Inc.
Further acceptance of open systems architectures and the development of
industry standards in the call processing market may eliminate some of the
technical barriers to entry, allowing additional competitors to enter the
26
market. Many of our existing competitors have larger customer and installed
bases and substantially greater technical, financial and marketing resources
than we do. In addition, some of our competitors have a marketing advantage
because they can sell their call processing equipment or facsimile solutions as
part of their broader product offerings. We expect our competitors will continue
to offer improved product technologies and capabilities. The availability of
these products could cause sales of our existing products to decline. For these
reasons, we may be unable to compete successfully against our current and future
competitors.
Our average sales prices have declined for some of our products.
The average sales prices in our basic voice messaging products have
declined due to competitive pressures. In the future, prices may decline in some
of our other product lines. If the average sales prices of our more significant
product lines fall, our overall gross margins will likely fall. To offset and
forestall declining average sales prices, we must continue to develop product
enhancements and new products with advanced features that are likely to generate
higher-margin incremental revenue. If we are unable to do so in a timely manner
or if our products do not achieve significant customer acceptance, our business,
results of operations and financial condition may suffer.
We may be unable to adequately protect our proprietary rights.
To succeed, we must adequately protect our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret laws,
nondisclosure and other agreements and technical measures to protect our
proprietary
27
technology, but those measures may be insufficient. We have one patent in the
area of unified messaging, but our competitors may challenge or circumvent the
claims in that patent. Our current patent, or any future patents, may never
provide us with any competitive advantages. Other measures that we take to
protect our proprietary technology may not prevent or deter misappropriation of
our technology or the development of technologies with similar characteristics.
Moreover, our use of open systems architecture in the design of our products may
make it easier for competitors to misappropriate or replicate our designs and
developments.
We may face liability for infringement of third-party proprietary rights.
Historically, competitors in the computer-telephony software industry have
filed numerous allegations of patent infringement, resulting in considerable
litigation. We have received claims of patent infringement from several parties
and will probably receive additional claims in the future. While none of those
claims has led to litigation, they may yet result in litigation. Any litigation,
regardless of our success, would probably be costly and require significant time
and attention of our key management and technical personnel. Litigation could
also force us to
. stop or delay selling, or using, products that use the challenged
intellectual property;
. pay damages for infringement;
. obtain licenses, which may be unavailable on acceptable terms; or
. redesign products or services that use the infringing technology.
We face risks from expansion of our international operations.
Our growth depends in part on continued expansion of our international
sales. International sales generated approximately 16%, 15% and 18% of our net
sales in the years ended December 31, 1997, 1998 and 1999, respectively. We have
spent significant management attention and financial resources on our
international operations. A significant portion of our revenues are subject to
the risks associated with international sales, which include
. difficulty adapting products to local languages and telephone system
technology;
. inability to respond to changes in regulatory requirements;
. inability to meet special standards requirements;
28
. exposure to exchange rate fluctuations;
. tariffs and other trade barriers;
. difficulties in staffing and managing international operations;
. potentially adverse tax consequences; and
. uncertainties arising from local business practices and cultural
considerations.
Currently, substantially all of our international sales are denominated in
U.S. dollars. Increases in the value of the dollar against local currency could
cause our products to become relatively more expensive to customers in a
particular country, leading to reduced sales or profitability in that country.
As we continue to expand our international operations, we expect our non-dollar-
denominated sales and our exposure to gains and losses on international currency
transactions to increase. We do not currently engage in transactions to hedge
against the risk of currency fluctuations, but we may do so in the future.
We depend on certain key employees.
To succeed, we must attract and retain key personnel in engineering,
research and development, marketing, sales, finance and administration. In
particular, we depend to a significant degree on the efforts of our senior
management team. Competition for skilled personnel is intense. The failure to
recruit such personnel or the loss of the services of existing key persons in
any functional area could adversely affect our current operations and new
product development efforts. We do not maintain material key person life
insurance.
29
We may experience difficulties in managing our growth.
Growth in our business has placed, and will continue to place, significant
demands on our management and operations. To succeed, our officers and key
employees must manage growth successfully. We must continue to implement and
improve our operational, financial and management information systems. In
addition, we must expand, train and manage our employee base. We may be unable
to timely and successfully accomplish these tasks.
We depend on third parties for certain key components of our products.
We use standard computer hardware for our products. Most of the components
we use are readily available. However, only three domestic suppliers can provide
voice processing circuit boards in the quantities we need. In addition, only two
domestic suppliers can provide our facsimile processing circuit boards in the
quantity we require. Historically, we have relied almost exclusively on Dialogic
Corporation for our voice cards, and on Dialogic and Brooktrout Technologies,
Inc. for our fax cards. We rely on those suppliers primarily because of volume
price discounts and the cost and effort required to develop software for an
alternate voice or fax card. Significant delays, interruptions or reductions in
our supply of voice or fax cards, or unfavorable changes to price and delivery
terms could adversely affect our business.
Our stock price may be highly volatile.
The market price of our common stock has been, and may continue to be,
highly volatile. The future price of the common stock will fluctuate in response
to factors such as
. new product announcements or changes in product pricing policies by us
or our competitors;
. quarterly fluctuations in our operating results;
. announcements of technical innovations;
. announcements relating to strategic relationships or acquisitions;
. changes in earnings estimates by securities analysts; and
. general conditions in the computer-telephony market.
In addition, the market prices of securities issued by many companies,
particularly in high-technology industries, are volatile for reasons unrelated
to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of our common stock.
30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, each of which could adversely affect the
value of the company's investments. The Company does not currently use
derivative financial instruments.
The Company maintains a short-term investment portfolio consisting of
interest bearing securities with an average maturity of less than one year.
These securities are classified as "available for sale" securities. The interest
bearing securities are subject to interest rate risk and will fall in value if
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels at December 31, 1999, the fair
value of the portfolio would decline by an immaterial amount. Because the
Company has the ability to hold its fixed income investments until maturity, it
does not expect its operating results or cash flows to be affected to any
significant degree by a sudden change in market interest rates on its securities
portfolio.
The Company has assets and liabilities denominated in certain foreign
currencies related to the Company's international sales operations. The Company
has not hedged its translation risk on these currencies as the company has the
ability to hold its foreign-currency denominated assets indefinitely and does
not expect that a sudden or significant change in foreign exchange rates would
have a material impact on future net income or cash flows.
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AVT Corporation:
We have audited the accompanying balance sheets of AVT Corporation (a Washington
corporation) as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Medialinq Services Group,(formerly MediaTel Corp.), a company acquired during
1999 in a transaction accounted for as a pooling of interests, as discussed in
Note 8. Such statements are included in the consolidated financial statements of
AVT Corporation and reflect total assets and total revenues of 11 percent and 21
percent in 1998, and 13 percent and 25 percent in 1997, respectively, of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for MediaLinq Services Group, is based solely on the report
of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of AVT Corporation as of December 31, 1999 and 1998, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington
March 28, 2000
______________
32
Report of Independent Accountants
To the Board of Directors and Stockholders of
MediaTel Corporation:
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of MediaTel Corporation
(the "Company") at December 31, 1997 and 1998, and results of their operations
and their cash flows for each of the three years ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 19, 1999
33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AVT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
1998 1999
---------- -----------
ASSETS (in thousands)
Current assets:
Cash and cash equivalents.................................................... $14,466 $ 23,923
Short-term investments....................................................... 28,225 51,095
Accounts receivable, less allowance of $929 and $1,104....................... 17,563 20,303
Inventories.................................................................. 5,560 5,319
Deferred and prepaid income taxes............................................ 1,461 3,000
Prepaid expenses and other................................................... 1,536 2,089
------- --------
Total current assets..................................................... 68,811 105,729
Equipment and leasehold improvements, net....................................... 5,417 6,630
Intangibles, net................................................................ 7,677 5,926
Deferred income taxes........................................................... 3,743 3,424
------- --------
$85,648 $121,709
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 4,793 $ 5,432
Other current liabilities....................................................... 9,191 12,748
Income taxes payable............................................................ 578 1,324
------- --------
Total current liabilities................................................ 14,562 19,504
------- --------
Commitments (Note 6)
Shareholders' equity:
Preferred stock, par value $.01 per share, 2,000,000 shares authorized; none
outstanding................................................................. -- --
Common stock, par value $.01 per share, 60,000,000 shares authorized;
14,230,575 and 15,318,527 outstanding....................................... 142 153
Additional paid-in capital................................................... 42,987 55,658
Retained earnings............................................................ 27,957 45,812
Accumulated other comprehensive income....................................... -- 582
------- --------
Total shareholders' equity............................................... 71,086 102,205
------- --------
$85,648 $121,709
======= ========
See the accompanying notes to these consolidated financial statements.
34
AVT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
(in thousands, except per share data)
Net sales......................................................... $76,971 $102,977 $130,224
Cost of sales..................................................... 29,233 37,282 44,958
------- -------- --------
Gross profit..................................................... 47,738 65,695 85,266
------- -------- --------
Operating expenses:
Research and development......................................... 7,988 9,474 10,311
Selling, general and administrative.............................. 26,040 35,035 44,282
Non-recurring charges............................................ 11,025 287 3,255
------- -------- --------
Total operating expenses........................................ 45,053 44,796 57,848
------- -------- --------
Operating income.................................................. 2,685 20,899 27,418
------- -------- --------
Other income:
Interest income.................................................. 842 1,169 2,133
Other............................................................ 262 89 (140)
------- -------- --------
Other income.................................................... 1,104 1,258 1,993
------- -------- --------
Income before income tax expense.................................. 3,789 22,157 29,411
Income tax expense................................................ 1,470 8,078 11,556
------- -------- --------
Net income........................................................ $ 2,319 $ 14,079 $ 17,855
======= ======== ========
Basic earnings per common share................................... $ 0.18 $ 1.03 $ 1.20
Weighted average common shares outstanding........................ 12,944 13,722 14,826
Diluted earnings per common share................................. $ 0.16 $ 0.94 $ 1.12
Weighted average common and common equivalent shares outstanding.. 14,410 15,008 15,928
See the accompanying notes to these consolidated financial statements.
35
AVT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1998 and 1999
Accumulated
Common Stock Additional Other Total
------------------------ paid-in Comprehensive Retained shareholders'
Shares Amount capital Income earnings equity
------------ ---------- ---------- ------------- -------- -------------
(in thousands, except share data)
Balance at December 31, 1996........................... 12,418,663 124 $30,776 -- $11,733 $ 42,633
Stock issued in acquisition............................ 191,032 2 666 -- -- 668
Warrants issued in acquisition......................... -- -- 700 -- -- 700
Exercise of stock options.............................. 506,091 5 1,484 -- -- 1,489
Tax benefit of stock options
exercised........................................... -- -- 562 -- -- 562
Net income............................................. -- -- -- -- 2,319 2,319
---------- ------- -------- ------ -------- --------
Balance at December 31, 1997........................... 13,115,786 131 34,188 -- 14,052 48,371
Stock issued in acquisition............................ 52,200 1 249 -- -- 250
Exercise of stock options.............................. 1,062,589 10 3,901 -- -- 3,911
Tax benefit of stock options
exercised........................................... -- -- 4,649 -- -- 4,649
Dividend declared -- -- -- -- (174) (174)
Net income............................................. -- -- -- -- 14,079 14,079
---------- ------- -------- ------ -------- --------
Balance at December 31, 1998........................... 14,230,575 142 42,987 -- 27,957 71,086
Exercise of stock options.............................. 1,087,952 11 6,608 -- -- 6,619
Tax benefit of stock options
exercised........................................... -- -- 6,063 -- -- 6,063
Unrealized gain on marketable securities -- -- -- 582 -- 582
Net income............................................. -- -- -- -- 17,855 17,855
---------- ------- -------- ------ -------- --------
Balance at December 31, 1999........................... 15,318,527 $ 153 $55,658 $ 582 $45,812 $102,205
========== ======= ======== ====== ======== ========
See the accompanying notes to these consolidated financial statements.
36
AVT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net income............................................................ $ 2,319 $ 14,079 $ 17,855
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 3,186 4,064 4,882
Non-recurring charges................................................. 11,025 287 460
Stock compensation expense............................................ -- 5 --
Deferred income taxes................................................. (3,410) 215 (1,220)
Changes in current assets and liabilities:
Accounts receivable.................................................. (2,321) (4,655) (2,740)
Inventories.......................................................... (1,239) (652) 241
Prepaid expenses and other assets.................................... (453) (700) (553)
Accounts payable..................................................... (251) 865 639
Accrued compensation and benefits.................................... 21 2,316 1,072
Income taxes payable................................................. 2,038 2,171 6,481
Other accrued liabilities............................................ 1,221 268 2,025
-------- -------- --------
Net cash provided by operating activities.............................. 12,136 18,263 29,142
-------- -------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements...................... (2,302) (3,550) (4,276)
Cash paid in acquisition, net of cash acquired........................ (15,426) -- --
Purchase of short-term investments.................................... -- (13,957) (21,960)
Net proceeds from the sale of investments............................. 1,216 37 --
Other intangibles and long-term assets................................ (64) (280) (68)
-------- -------- --------
Net cash used in investing activities................................ (16,576) (17,750) (26,304)
-------- -------- --------
Cash flows from financing activities:
Long-term borrowings.................................................. 664 -- --
Repayment of long-term debt........................................... (1,273) (991) --
Proceeds from exercise of common stock options........................ 1,489 3,906 6,619
Dividends paid on stock............................................... -- (126) --
-------- -------- --------
Net cash provided by financing activities............................ 880 2,789 6,619
-------- -------- --------
Net (decrease) increase in cash..................................... (3,560) 3,302 9,457
Cash and cash equivalents at beginning of period....................... 14,724 11,164 14,466
-------- -------- --------
Cash and cash equivalents at end of period............................. $ 11,164 $ 14,466 $ 23,923
======== ======== ========
Cash paid for interest................................................. $ 118 $ 51 $ 191
======== ======== ========
See the accompanying notes to these consolidated financial statements.
37
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
AVT Corporation (the Company), a Washington corporation, provides software-
based computer-telephony products for medium-sized enterprises. The Company's
products address the voice messaging, call center, fax server and production fax
markets and are distributed primarily through independent distributors and
value-added resellers. The consolidated financial statements include the
accounts of all subsidiaries, all of which are wholly owned, from the date of
acquisition, including RightFAX, Inc., CommercePath, Inc. and MediaTel
Corporation. All intercompany accounts have been eliminated.
On April 14, 1999, the Company merged with MediaTel Corporation. In
connection with the merger the shareholders of MediaTel received an aggregate of
approximately 1,609,596 shares of the Company's common stock, 10% of which were
deposited into an escrow account to compensate the Company for certain losses
that it may incur as a result of breaches of representation and warranties and
other agreements by MediaTel. In addition, the Company assumed all outstanding
options to purchase MediaTel shares, which became exercisable for approximately
291,700 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 5,025
shares that were returned to the Company for losses, were distributed to the
former MediaTel shareholders.
This transaction was accounted for as a pooling of interests. These
consolidated financial statements have been prepared to reflect the restatement
of all periods presented to include the accounts of MediaTel. The historical
results do not purport to be indicative of future results.
Cash and Cash Equivalents
The Company's policy is to invest cash in excess of operating requirements
in income-producing investments. For purposes of the consolidated statements of
cash flows, the Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Cash and cash
equivalents include all cash balances and highly liquid investments in a money
market fund. Investments are recorded at cost, which approximates market prices.
Inventories
Inventories consist primarily of computer assemblies, components and
related equipment, and are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost and are depreciated
on the straight-line method over the estimated useful lives of the assets, which
range from three to five years. Equipment and leasehold improvements consist of
the following:
December 31,
--------------------
1998 1999
--------- ---------
(in thousands)
Computers and other equipment.............. $ 13,533 $ 17,376
Leasehold improvements..................... 950 1,176
Furniture and fixtures..................... 1,150 1,241
-------- --------
15,633 19,793
Less accumulated depreciation.............. (10,216) (13,163)
-------- --------
Equipment and leasehold improvements, net.. $ 5,417 $ 6,630
======== ========
38
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
Intangibles
Goodwill is being amortized using the straight-line method over its
estimated useful life of seven years. License agreements are amortized using the
straight-line method over the remaining lives of the related patents, which
range from approximately 6 to 12 years. Amortization expense for the years ended
December 31, 1997, 1998 and 1999 was $1,609,000, $1,674,000, and $1,818,000,
respectively.
December 31,
-----------------
1998 1999
------- -------
(in thousands)
Goodwill on CommercePath acquisition.. $ 1,829 $ 1,829
Goodwill on RightFAX acquisition...... 5,906 5,906
License agreements.................... 4,516 4,583
------- -------
12,251 12,318
Less accumulated amortization......... (4,574) (6,392)
------- -------
Intangibles, net...................... $ 7,677 $ 5,926
======= =======
Other Current Liabilities
December 31,
-----------------
1998 1999
------ -------
(in thousands)
Accrued compensation and benefits..... $ 4,097 $ 5,169
Deferred maintenance revenue.......... 2,210 4,310
Other................................. 2,884 3,269
------- -------
Other current liabilities............. $ 9,191 $12,748
======= =======
Use of Estimates
The preparation of the Company's consolidated financial statements, in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain prior period balances have been reclassified to conform with the current
period presentation.
Revenue Recognition
Revenues from sales to dealers are recognized when the products are
shipped. When the Company has an installation obligation, revenues are
recognized when product installation is complete. Revenues from document
delivery services are recognized when services are provided. Revenues from
software maintenance contracts are recognized over the maintenance periods,
generally one year. Revenues from extended warranty agreements are recognized
over the lives of the related service contracts on the straight-line method. The
Company accrues estimated costs of technical support to customers as related
revenues are recognized.
Research and Development Costs
Research and development costs are expensed as incurred. The Company has
not capitalized any software development costs, as technological feasibility is
not generally established until substantially all development is complete.
39
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share were computed by dividing net income by the
sum of the weighted average number of shares of common stock outstanding during
the year plus the net additional shares that would have been issued had all
dilutive options been exercised less shares that would be repurchased with the
proceeds from such exercise. Dilutive options are those that have an exercise
price which is less than the average stock price during the year.
The computation of diluted earnings per common share is as follows:
Year Ended December 31,
---------------------------------------
1997 1998 1999
-------- -------- -------
(in thousands, except per share amounts)
Diluted earnings per common share:
Net income........................................................ $ 2,319 $14,079 $17,855
------- ------- -------
Weighted average common shares outstanding........................ 12,944 13,722 14,826
Plus: dilutive options assumed exercised.......................... 3,073 2,652 3,199
Less: shares assumed repurchased with proceeds from exercise...... (1,675) (1,366) (2,097)
Plus: other common stock equivalents.............................. 68 - -
------- ------- -------
Weighted average common and common equivalent shares outstanding.. 14,410 15,008 15,928
------- ------- -------
Diluted earnings per common share................................. $0.16 $0.94 $ 1.12
======= ======= =======
Concentration of Credit Risk; Export Sales
The Company achieves broad U.S. market coverage for its products primarily
through a nationwide network of telephony-oriented dealers and computer-oriented
value-added resellers. For the years ended December 31, 1997, 1998 and 1999, no
customer represented 10% or greater of the Company's net sales. The Company
performs ongoing credit evaluations of its customers' financial conditions and,
generally, no collateral is required.
The Company's sales by country were as follows:
Year Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
(in thousands)
United States............ $64,819 $ 88,019 $106,340
Canada................... 3,395 3,914 3,965
United Kingdom........... 1,451 3,307 4,650
Other.................... 7,306 7,737 15,269
------- -------- --------
$76,971 $102,977 $130,224
======= ======== ========
40
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Reporting
The Company adopted Statement of Accounting Standard No. 131 "Disclosures
about Segments of an Enterprise and Related Information "(SFAS No. 131) during
1998. SFAS No. 131 requires companies to disclose certain information about
operating segments. Based on the criteria within SFAS No. 131, the Company has
determined that it has one reportable segment, computer telephony products.
Sales of the Company's product by categories and amount are as follows:
Year Ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
(in thousands)
Enhanced fax products and services........... $43,133 $ 68,383 $ 85,295
Advanced messaging and call center products.. 24,276 28,159 38,494
Basic messaging products..................... 9,562 6,435 6,435
------- -------- --------
$76,971 $102,977 $130,224
======= ======== ========
2. Income Taxes
Income taxes are provided for in the consolidated statements of income
using the asset and liability method. The difference between the provision for
income taxes and the statutory tax rate applied to income before income tax
expense is due to certain expenses not being deductible for tax purposes and
research and experimentation credits.
The following is a reconciliation from the U.S. statutory rate to the
effective tax rate:
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Amount % Amount % Amount %
------ ------ ------ ------ ------ ------
(dollars in thousands)
Tax at statutory rate.............................. $1,288 34.0% $7,533 34.0 $10,294 35.0%
Research and experimentation credit................ (105) (2.8) (150) (0.7) (26) --
Nondeductible merger costs......................... -- -- -- -- 894 3.0
Nondeductible goodwill amortization................ 230 6.1 319 1.5 379 1.3
Nontaxable interest income......................... (235) (6.2) (227) (1.0) (515) (1.8)
State taxes and other.............................. 292 7.7 603 2.7 1,158 3.9
FSC Benefit........................................ -- -- -- -- (628) (2.1)
------ ---- ------ ---- ------- -----
Income tax expense................................. $1,470 38.8% $8,078 36.5% $11,556 39.3%
====== ==== ====== ==== ====== =====
41
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax expense and cash paid for income taxes are as follows:
Year Ended December 31,
--------------------------
1997 1998 1999
---- ---- ----
(in thousands)
Current......................................................................... $ 5,427 $7,863 $12,776
Deferred........................................................................ (3,957) 215 (1,220)
------- ------ -------
Total income tax expense...................................................... $ 1,470 $8,078 $11,556
======= ====== =======
Cash paid for income taxes...................................................... $ 2,839 $5,672 $ 5,237
======= ====== =======
Deferred taxes result from temporary differences relating to items that are
expensed for financial reporting, but are not currently deductible for income
tax purposes.
Significant components of the Company's deferred tax asset as of December 31,
1998 and 1999 are as follows:
December 31,
------------
1998 1999
---- ----
(in thousands)
Deferred tax assets:
Accounts receivable allowances............................................... $ 409 $ 404
Inventories.................................................................. 85 461
Depreciation and amortization................................................ 161 -
Accrued compensation and benefits............................................ 192 349
Purchased in-process research and development................................ 3,549 3,397
Deferred maintenance revenue................................................. 468 1,529
Other........................................................................ 340 284
------- ------
Deferred tax assets and prepaid income taxes................................... $ 5,204 $6,424
======= ======
3. Shareholders' Equity
The Company has stock option plans under which employees, directors, officers
and other agents may be granted options to purchase common stock. The Company
has reserved approximately 5,700,000 shares of common stock for issuance
pursuant to these plans upon exercise of outstanding options and upon exercise
of options to be granted in the future. Options generally vest over three to
four years and expire 10 years from the date of grant. The options are
exercisable at prices determined at the discretion of the Board of Directors.
The Company accounts for these plans under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," under which no compensation
cost has been recognized and is based on the difference between the exercise
price and fair market value at the date of grant, if any. Had compensation cost
for stock option grants made in 1997, 1998 and 1999 been determined using the
fair value method consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
42
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31,
---------------------------
1997 1998 1999
------ ------- -------
(in thousands expect per share data)
Net Income: As Reported......................... $2,319 $14,079 $17,855
Pro Forma........................... $1,114 $11,830 $15,622
Basic EPS: As Reported......................... $ 0.18 $ 1.03 $ 1.20
Pro Forma........................... $ 0.09 $ 0.86 $ 1.05
Diluted EPS: As Reported......................... $ 0.16 $ 0.94 $ 1.12
Pro Forma........................... $ 0.08 $ 0.79 $ 1.12
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1999: risk-free
interest rates of 6.85%; expected lives of five years; expected volatility of
43%; and $0 dividends. For 1998 the assumptions were: risk-free interest rates
of 6.25%; expected lives of five years; expected volatility of 44%; and $0
dividends. For 1997 the following assumptions were used: risk-free interest
rates of 6.85%; expected lives of five years; expected volatility of 49%; and $0
dividends.
Stock Option Plans
A summary of the status of the Company's stock option plans at December 31,
1997, 1998 and 1999, and the changes during the years then ended, is presented
in the table and narrative below:
1997 1998 1999
---------- ---------- ---------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------- --------- ------------ --------- ----------- ---------
Outstanding at beginning of period................. 3,189,547 $ 4.12 3,125,760 $ 5.33 2,898,987 $ 9.88
Granted............................................ 548,317 $10.07 903,850 $18.50 1,650,795 $27.94
Exercised.......................................... (506,093) $ 2.94 (1,031,959) $ 3.53 (978,770) $ 6.26
Canceled........................................... (106,011) $ 4.54 (98,664) $11.05 (154,621) $21.21
--------- ------ ----------- ------ ---------- ------
Outstanding at end of period....................... 3,125,760 $ 5.33 2,898,987 $ 9.88 3,416,391 $19.25
========= ====== =========== ====== ========== ======
Exercisable at end of period....................... 1,564,231 $ 3.32 1,504,658 $ 5.68 1,209,609 $ 9.16
========= ====== =========== ====== ========== ======
Weighted average fair value of options granted..... $ 5.26 $ 9.12 $ 11.77
Options outstanding have exercise prices ranging from $0.50 to $43.75 per
share, with weighted average remaining contractual lives of 7.1, 7.4 and 8.0
years at December 31, 1997, 1998 and 1999, respectively. At December 31, 1999,
521,571 shares of the Company's common stock were available for future grant
under the Company's stock option plans. Information relating to stock options
outstanding and stock options exercisable at December 31, 1999 is as follows:
43
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options Outstanding Options Exercisable
------------------------------------------------- -------------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Exercise Prices Shares Contractual Life Ex. Price Shares Ex. Price
------------------------ ------ ---------------- --------- ------ ---------
$0.80 - $8.75...................... 939,969 6 $ 6.36 883,040 $ 6.44
$8.76 - $17.50..................... 502,325 8 $ 14.21 218,090 $14.01
$17.51 - $26.25..................... 1,512,977 9 $ 24.51 108,479 $21.54
$26.26 - $43.75..................... 461,120 10 $ 33.77 -- --
--------- -- --------- --------- --------
3,416,391 8 $ 9.25 1,209,609 $ 9.16
========= == ========= ========= ========
Warrants
At December 31, 1999, there were outstanding warrants to purchase 77,312
shares of the Company's common stock at $6.68 per share. The warrants were
issued in connection with the Telcom Technologies Inc. acquisition discussed in
Note 8 below.
4. Line of Credit
At December 31, 1999, the Company had a $4.0 million unsecured revolving
line of credit, none of which was used during the years ended December 31, 1998
and 1999. The Company's line of credit expires in August 2001, and contains
certain financial covenants and restrictions as to various matters, including
the Company's ability to pay cash dividends without the bank's prior approval.
The Company is currently in compliance with such financial covenants and
restrictions. Borrowings under the line of credit bear interest at the bank's
prime rate or, at the Company's option, its interbank offering rate plus 1.50%.
At December 31, 1999, the bank's prime rate was 8.5%, and its interbank offering
rate was 5.8%.
5. Short-Term Investments
The Company has classified its investments as "available-for-sale" and
recorded these investments at estimated fair value, with unrealized gains and
losses, when material, reported in other comprehensive income.
Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income over the term of the
investment. The cost of securities sold is based upon the specific
identification method. Available-for-sale securities as of December 31, 1998 and
1999 consisted primarily of municipal notes and bonds whose amortized cost
approximates estimated fair value. As of December 31, 1998 and 1999 average
maturity for these investments was eight and ten months respectively.
44
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Commitments and Contingencies
Leases
The Company leases its office space under noncancelable operating leases.
Rent expense under the noncancelable leases amounted to $1,048,000 in 1997,
$1,290,000 in 1998 and $2,154,000 in 1999. Future minimum lease payments under
noncancelable operating leases are as follows (in thousands):
2000..................................................... $2,164
2001..................................................... 1,849
2002..................................................... 837
2003..................................................... 67
------
$4,917
======
Retirement Savings Plan
The Company offers a 401(k) profit-sharing plan to substantially all of its
employees. Company contributions are determined annually and are at the
discretion of the Board of Directors. Contributions made to the plan were
$165,000 in 1997, $235,000 in 1998 and $416,000 in 1999.
License Agreements
In connection with the acquisition of a business in 1989, the Company
agreed to make royalty payments from future sales of the Company's products, up
to a maximum of $2,800,000 in total, payable up to $70,000 per quarter, before
adjustment for increases in the consumer price index. In February 1995, the
Company made a prepayment of $1,808,000 to satisfy this royalty commitment. This
intangible is being amortized over the remainder of the original agreement's
term (67 months). Amounts charged to expense under this agreement were $324,000
in each of 1997, 1998 and 1999.
In addition to the agreement mentioned above, the Company has two
nonexclusive licenses to sell products using patented technology. In exchange
for the licenses, the Company has made quarterly payments equal to 6% of net
revenues from sales of components utilized in the Company's products that use
the licensed technology.
In September 1995, the Company renegotiated its royalty obligation for one
of these licenses by issuing a note in the amount of $1,937,000, payable in 12
equal quarterly installments of $161,417 each, with the first installment paid
upon the signing of the agreement. The Company accrued interest expense at an
imputed rate of 8.75% per annum. This note was satisfied at December 31, 1998.
The Company recorded an intangible for this prepayment in the amount of
$1,725,000. The intangible is being amortized on a straight-line basis over the
remaining average lives of the related patents (approximately 12 years).
In July 1996, the Company renegotiated its royalty obligation for the
second license by issuing a note in the amount of $450,000, payable over two
quarters, with the first installment paid upon the signing of the agreement. The
Company accrued interest expense at an imputed rate of 8.5% per annum. This note
was satisfied at December 31, 1996. The Company recorded an intangible for this
prepayment in the amount of $446,000. The intangible is being amortized on a
straight-line basis over the remaining average lives of the related patents
(approximately seven years). Amounts charged to expense for the two nonexclusive
licenses were $212,000 in each of 1997, 1998 and 1999.
45
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal Proceedings
In May 1998, CallWare brought suit against AVT in federal court in Salt
Lake City, Utah, alleging various claims relating to purported false advertising
by AVT. (CallWare Technologies, Inc. v. Applied Voice Technology, Inc., Case No.
2:98CV 0329K.) CallWare had claimed $20 million in monetary damages, and an
additional $60 million in punitive damages. The suit was dismissed in November,
1999 as a result of a settlement payment of $150,000 made by the Company's
insurers to avoid the expense of further litigation. AVT continued to assert
that the lawsuit was without merit.
On March 21, 2000, a class-action lawsuit was filed in the United States
District Court for the Western District of Washington alleging that during the
period January 20, 2000 through March 17, 2000, the Company and several officers
and directors made or participated in misrepresentations about the Company's
business and future prospects. Since the March 21 lawsuit was filed,
additional lawsuits have been filed that are identical to the March 21 lawsuit,
with the exception of the name of the plaintiff. Each lawsuit seeks unspecified
damages on behalf of a proposed class of purchasers of the Company's stock
during the specified period. The Company believes that the allegations of the
lawsuits are without merit and intends to vigorously defend the actions.
7. Valuation and Qualifying Accounts
Balance at Charged to Charged Balance
beginning costs and to other at end
Description of period expenses accounts Deductions(1) of period
----------- ---------- --------- -------- ------------- ---------
(in thousands)
Allowance for doubtful accounts:
December 31, 1997............. $788 489 97 465 $ 909
December 31, 1998............. $909 309 -- 289 $ 929
December 31, 1999............. $929 727 -- 552 $1,104
(1) Amounts include write-offs of accounts receivable deemed uncollectable.
8. Businesses Acquired
On January 3, 1997, the Company acquired selected assets and liabilities of
Telcom Technologies Inc., a developer of NT-based open-architecture automatic
call distribution systems. The purchase price for the acquisition was $3.5
million in cash, plus warrants to purchase 200,000 shares of the Company's
common stock at $6.68 per share, which may be exercised at any time prior to
January 3, 2002. The Company accounted for the business combination as a
purchase and recognized a nonrecurring charge of $3.9 million in the first
quarter of 1997, representing the value of the purchased, in-process research
and development.
On October 22, 1997, the Company acquired all the outstanding capital stock
of CommercePath, Inc. (CommercePath) from Forest City Trading Group, Inc. for
$10.4 million in cash. The Company accounted for the business combination as a
purchase and recorded a nonrecurring charge of $7.1 million in the fourth
quarter of 1997, representing the value of the purchased, in-process research
and development, and recorded $1.8 million of goodwill that it will amortize
over seven years.
The pro forma unaudited consolidated operating results of the Company for
the year ended December 31, 1997, assuming the acquisition of CommercePath had
been made as of January 1, 1997, are summarized below:
1997
------------------------
Pro Forma
Actual (unaudited)
------ -----------
(in thousands, except per share data)
Net sales................................ $76,971 $82,348
Net income.............................. $ 2,319 $ 1,816
Diluted earnings per share.............. $ 0.16 $ 0.13
46
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization resulting from
allocating a portion of the purchase price to goodwill. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combination been in effect on January 1, 1997, as the case may be, or
future results of operations of the consolidated entity.
On April 14, 1999, the Company merged with MediaTel Corporation. In
connection with the merger the shareholders of MediaTel received an aggregate of
approximately 1,609,596 shares of the Company's common stock, 10% of which were
deposited into an escrow account to compensate the Company for certain losses
that it may incur as a result of breaches of representation and warranties and
other agreements by MediaTel. In addition, the Company assumed all outstanding
options to purchase MediaTel shares, which became exercisable for approximately
291,700 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 5,025
shares that were returned to the Company for losses, were distributed to the
former MediaTel shareholders. This transaction was accounted for as a pooling of
interests.
The following summarizes amounts reported by the Company and MediaTel prior
to the merger for the years ended December 31, 1997, 1998 and the quarter ended
March 31, 1999.
Year Ended December 31, Quarter Ended March 31,
------------------------- -----------------------
1997 1998 1999
---- ---- ----
(in thousands)
Net Sales
AVT..................... $58,091 $ 81,126 $22,621
MediaTel................ 18,880 21,851 6,222
------- -------- -------
Combined $76,971 $102,977 $28,843
======= ======== =======
Net Income
AVT..................... $ 729 $ 11,610 $ 3,313
MediaTel................ 1,590 2,469 629
------- -------- -------
Combined $ 2,319 $ 14,079 $ 3,942
======= ======== =======
47
9. Consolidated Quarterly Financial Data and Market Information
(unaudited)
Quarter Ended
----------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- --------- -------- -------- --------- --------- -------- --------
(in thousands except per share data)
Net sales.......................... $22,313 $24,809 $26,448 $29,407 $28,843 $31,864 $33,247 $36,270
Cost of sales...................... 8,523 9,442 9,295 10,021 10,174 11,322 11,558 11,904
------- ------- ------- ------- ------- ------- ------- -------
Gross profit....................... 13,790 15,367 17,153 19,386 18,669 20,542 21,689 24,366
Operating expenses:
Research and development.......... 2,339 2,334 2,452 2,350 2,621 2,357 2,565 2,768
Selling, general and
administrative................... 7,612 8,397 9,178 9,847 10,277 11,073 11,151 11,782
Non-recurring charges............. 287 -- -- -- -- 2,388 -- 867
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.......... 10,238 10,731 11,630 12,197 12,898 15,818 13,716 15,417
------- ------- ------- ------- ------- ------- ------- -------
Operating income................... 3,552 4,636 5,523 7,189 5,771 4,724 7,973 8,949
Other income, net.................. 254 346 270 386 427 384 512 670
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax
expense............................ 3,806 4,982 5,793 7,575 6,198 5,108 8,485 9,619
Income tax expense................. 1,401 1,823 2,129 2,725 2,256 2,710 3,100 3,489
------- ------- ------- ------- ------- ------- ------- -------
Net income......................... $ 2,405 $ 3,159 $ 3,664 $ 4,850 $ 3,942 $ 2,398 $ 5,385 $ 6,130
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per common
share (1).......................... $ 0.16 $ 0.21 $ 0.24 $ 0.31 $ 0.25 $ 0.15 $ 0.33 $ 0.37
Net income excluding nonrecurring
Items.............................. $ 2,589 $ 3,159 $ 3,664 $ 4,850 $ 3,942 $ 4,786 $ 5,385 $ 6,685
Diluted earnings per common share
excluding nonrecurring items(1).... $ 0.17 $ 0.21 $ 0.24 $ 0.31 $ 0.25 $ 0.30 $ 0.33 $ 0.40
Weighted average common and
common equivalent shares
outstanding........................ 14,949 15,245 15,489 15,460 15,666 15,967 16,363 16,578
Stock price range (2)
High.............................. $ 20.31 $ 23.50 $ 25.75 $ 29.69 $ 30.94 $ 38.13 $ 40.50 $ 47.50
Low............................... $ 13.38 $ 17.13 $ 19.63 $ 12.19 $ 20.13 $ 18.25 $ 25.88 $ 26.13
(1) Earnings per common share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly net income per
share amounts will not necessarily equal the total for the year.
(2) The Company's common stock is traded on the Nasdaq National Market under
the symbol "AVTC." As of December 31, 1999, there were approximately 179
shareholders of record of the Company's common stock. The Company has not
paid any cash dividends on its common stock.
48
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Part III (Item 10-13) is incorporated by
reference to information in the Company's definitive proxy statements which will
be filed pursuant to Regulation 14a within 120 days of December 31, 1999.
49
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT
1. Index financial statements
. Consolidated Balance Sheets--December 31, 1999 and 1998
. Consolidated Statements of Income--Years ended December 31, 1999,
1998 and 1997
. Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1999, 1998 and 1997
. Consolidated Statements of Cash Flows--Years ended December 31,
1999, 1998 and 1997
. Notes to Consolidated Financial Statements
. Report of Independent Public Accountants
2. Index to Financial Statement Schedules
None
3. Index to Exhibits
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation of AVT Corporation (A) (Exhibit
3.1)
3.2 Amended and Restated Bylaws of AVT Corporation (A)(Exhibit 3.2)
4.1 Form of Warrant, dated January 3, 1997, issued by Applied Voice
Technology, Inc. to shareholders of Telcom Technologies, Inc. (E)
(Exhibit 4.1)
+10.1 1994 Nonemployee Directors Stock Option Plan (A) (Exhibit 10.1)
+10.2 Restated 1989 Stock Option Plan (F)
+10.3 1986 Incentive Stock Option Plan (A) (Exhibits 10.3)
+10.4 Management Incentive Compensation Plan (A) (Exhibit 10.4)
+10.5 Employment Agreement dated May 1, 1993 between Applied Voice
Technology, Inc. and Richard J. LaPorte (A) (Exhibit 10.5)
+10.6 Form of Indemnification Agreement between Applied Voice Technology
and each of its directors and officers (A) (Exhibit 10.6)
10.8 Lease Agreement dated June 30, 1989 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. as amended (A)
(Exhibit 10.11)
10.9 Second Amendment to Lease Agreement dated February 1, 1995 between
Riggs National Bank of Washington D.C. and Applied Voice
Technology, Inc. (D) (Exhibit 10.11)
10.10 Third Amendment to Lease Agreement dated May 28, 1997 between
Riggs National Bank of Washington D.C. and Applied Voice
Technology, Inc. (G) ( Exhibit 10.10)
10.11 Lease Agreement dated May 28, 1997 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. (G) Exhibit
10.11)
#10.12 Amended Patent License Agreement dated September 29, 1995 between
Syntellect Technology Corp. and Applied Voice, Technology Inc. (B)
(Exhibit 10.1)
10.13 Master Software Manufacturing License Agreemented dated June 11,
1992 between Intelligent Environments Inc. and Applied Voice
Technology, Inc. as amended (A) (Exhibit 10.16)
50
10.14 Agreement and Plan of Merger among Applied Voice Technology, Inc.,
Cracchiolo & Feder, Inc., the shareholders of Cracchiolo & Feder,
Inc. and CFI Acquisition Corp., dated as of January 2, 1996. (C)
(Exhibit 10.1)
10.15 Registration Rights Agreement among Applied Voice Technology,
Inc., Joseph J. Cracchiolo and Bradley H. Feder, dated as of
January 2, 1996 (C) (Exhibit 10.2)
10.16 Agreement and Plan of Merger among AVT Corporation, MediaTel
Corporation and Goldengate Acquisition Corp., dated as of April
13, 1999. (H) (Exhibit 10.1)
10.17 Registration Rights Agreement among AVT Corporation and the
shareholders of MediaTel Corporation, dated as of April 14,
1999.(H) (Exhibit 10.2)
10.18 Escrow Agreement and Indemnification Agreement among AVT
Corporation, Sanjeev Malaney, as Securityholder Agent, and
ChaseMellon Shareholder Services, LLC, as escrow agent, dated as
of April 14, 1999.(H) (Exhibit 10.3)
10.19 Employment Agreement dated April 14, 1999 between AVT Corporation
and David Sohm.
10.20 Loan Agreement and Promissory Note dated August 15, 1999 between
U.S. Bank of Washington and AVT Corporation
21.1 Subsidiaries of AVT Corporation
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of PriceWaterhouseCoopers LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for Year ended December 31, 1998.
27.3 Restated Financial Data Schedule for Year ended December 31, 1997.
27.4 Restated Financial Data Schedule for the three months ended March
31, 1999.
27.5 Restated Financial Data Schedule for the three months ended March
31, 1998.
_________________
(A) Previously filed with, and incorporated herein by reference to, designated
exhibits to Registration Statement on Form S-1 of Applied Voice Technology,
Inc. File No. 333-85452.
(B) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(C) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 2, 1996.
(D) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1995 Annual Report on Form 10-K.
(E) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 3, 1997.
(F) Previously filed with, and incorporated by reference to, appendix A to the
Company's definitive Proxy Statement dated April 16, 1996.
(G) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1997 Annual Report on Form 10-K.
(H) Previously filed with, and incorporated by reference to, designated exhibit
to the Company Current Report on Form 8-K/A dated April 14, 1999.
+ Management contract or compensatory plan or arrangement.
# Confidential treatment requested for a portion of this agreement.
B. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1999.
51
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 the undersigned, thereunto duly authorized, in the City of Kirkland,
State of Washington, on the 28th day of March, 2000.
AVT CORPORATION
By: /s/ Richard J. LaPorte
--------------------------
Richard J. LaPorte
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacities indicated below on the
28th day of March, 2000.
Signature Title
/s/ Richard J. LaPorte President, Chief Executive Officer and Chairman of the Board
----------------------------------- (Principal Executive Officer)
Richard J. LaPorte
/s/ Roger A. Fukai Executive Vice President and Chief Financial Officer (Principal
----------------------------------- Financial and Accounting Officer)
Roger A. Fukai
/s/ James S. Campbell Director
-----------------------------------
James S. Campbell
/s/ Robert L. Lovely Director
-----------------------------------
Robert L. Lovely
/s/ William L. True Director
-----------------------------------
William L. True
/s/ Robert F. Gilb Director
-----------------------------------
Robert F. Gilb
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation of AVT Corporation (A) (Exhibit
3.1)
3.2 Amended and Restated Bylaws of AVT Corporation (A)(Exhibit 3.2)
4.1 Form of Warrant, dated January 3, 1997, issued by Applied Voice
Technology, Inc. to shareholders of Telcom Technologies, Inc. (E)
(Exhibit 4.1)
+10.1 1994 Nonemployee Directors Stock Option Plan (A) (Exhibit 10.1)
+10.2 Restated 1989 Stock Option Plan (F)
+10.3 1986 Incentive Stock Option Plan (A) (Exhibits 10.3)
+10.4 Management Incentive Compensation Plan (A) (Exhibit 10.4)
+10.5 Employment Agreement dated May 1, 1993 between Applied Voice
Technology, Inc. and Richard J. LaPorte (A) (Exhibit 10.5)
+10.6 Form of Indemnification Agreement between Applied Voice Technology
and each of its directors and officers (A) (Exhibit 10.6)
10.8 Lease Agreement dated June 30, 1989 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. as
amended (A) (Exhibit 10.11)
10.9 Second Amendment to Lease Agreement dated February 1, 1995
between Riggs National Bank of Washington D.C. and Applied Voice
Technology, Inc. (D) (Exhibit 10.11)
10.10 Third Amendment to Lease Agreement dated May 28, 1997 between
Riggs National Bank of Washington D.C. and Applied Voice
Technology, Inc. (G) (Exhibit 10.10)
10.11 Lease Agreement dated May 28, 1997 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. (G) Exhibit
10.11)
#10.12 Amended Patent License Agreement dated September 29, 1995 between
Syntellect Technology Corp. and Applied Voice, Technology Inc. (B)
(Exhibit 10.1)
10.13 Master Software Manufacturing License Agreemented dated June 11,
1992 between Intelligent Environments Inc. and Applied Voice
Technology, Inc. as amended (A) (Exhibit 10.16)
10.14 Agreement and Plan of Merger among Applied Voice Technology, Inc.,
Cracchiolo & Feder, Inc., the shareholders of Cracchiolo & Feder,
Inc. and CFI Acquisition Corp., dated as of January 2, 1996. (C)
(Exhibit 10.1)
10.15 Registration Rights Agreement among Applied Voice Technology,
Inc., Joseph J. Cracchiolo and Bradley H. Feder, dated as of
January 2, 1996 (C) (Exhibit 10.2)
10.16 Agreement and Plan of Merger among AVT Corporation, MediaTel
Corporation and Goldengate Acquisition Corp., dated as of April
13, 1999. (H) (Exhibit 10.1)
10.17 Registration Rights Agreement among AVT Corporation and the
shareholders of MediaTel Corporation, dated as of April 14,
1999.(H) (Exhibit 10.2)
10.18 Escrow Agreement and Indemnification Agreement among AVT
Corporation, Sanjeev Malaney, as Securityholder Agent, and
ChaseMellon Shareholder Services, LLC, as escrow agent, dated as
of April 14, 1999.(H) (Exhibit 10.3)
10.19 Employment Agreement dated April 14, 1999 between AVT Corporation
and David Sohm.
10.20 Loan Agreement and Promissory Note dated August 15, 1999 between
U.S. Bank of Washington and AVT Corporation
21.1 Subsidiaries of AVT Corporation
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of PriceWaterhouseCoopers LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule for Year ended December 31, 1998.
27.3 Restated Financial Data Schedule for Year ended December 31, 1997.
27.4 Restated Financial Data Schedule for the three months ended March
31, 1999.
27.5 Restated Financial Data Schedule for the three months ended March
31, 1998.
_________________
(A) Previously filed with, and incorporated herein by reference to, designated
exhibits to Registration Statement on Form S-1 of Applied Voice Technology,
Inc. File No. 333-85452.
(B) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(C) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 2, 1996.
(D) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1995 Annual Report on Form 10-K.
(E) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 3, 1997.
(F) Previously filed with, and incorporated by reference to, appendix A to the
Company's definitive Proxy Statement dated April 16, 1996.
(G) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1997 Annual Report on Form 10-K.
(H) Previously filed with, and incorporated by reference to, designated exhibit
to the Company Current Report on Form 8-K/A dated April 14, 1999.
+ Management contract or compensatory plan or arrangement.
# Confidential treatment requested for a portion of this agreement.
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