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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, 2000
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
Common Stock, $.01 par value per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
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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 9, 2001 was $ 161,838,205 (based upon the closing sale price of
$5.00 per share on the Nasdaq National Market on such date).
Number of shares of Common Stock outstanding as of March 9, 2001 was 32,367,641.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of AVT Corporation's Proxy Statement for its 2001 Annual Meeting of
Shareholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after December 31, 2000 is incorporated by reference in Part
III hereof.
TABLE OF CONTENTS
PART I
Item 1. BUSINESS................................................................................................ 2
Industry Background..................................................................................... 2
The AVT Solution........................................................................................ 2
Strategy................................................................................................ 3
Products................................................................................................ 3
Distribution............................................................................................ 7
Product Support......................................................................................... 8
Product Development..................................................................................... 9
Proprietary Rights...................................................................................... 9
Competition............................................................................................. 9
Manufacturing........................................................................................... 10
Employees............................................................................................... 10
Item 2. PROPERTIES.............................................................................................. 10
Item 3. LEGAL PROCEEDINGS....................................................................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................... 11
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................................... 12
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.................................................................... 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 13
ADDITIONAL FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS AND FINANCIAL CONDITION....... 16
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK............................................... 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................. 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 40
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................................... 40
Item 11. EXECUTIVE COMPENSATION.................................................................................. 40
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................... 40
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................... 40
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................... 41
1
PART I
When used in this Annual Report, the words "believes", "expects,"
"anticipates" and "intends" 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. See "Additional Factors That May Affect Our Business, Future
Operating Results and Financial Condition." 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 any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are urged, however, to review the factors set
forth in reports the Company files from time to time with the Securities and
Exchange Commission.
Item 1. BUSINESS
The Company is a leading provider of unified communications for medium and
large-sized enterprises. The Company provides flexible, cost-effective products
for unified communications and mobile business solutions. These products
address the unified messaging, voice messaging, fax server, production fax,
document delivery, and mobile wireless 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 and 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
business information and resources in a more timely and cost-effective manner.
In response to the growth in overall business information traffic,
organizations are increasingly using unified communications and mobile business
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, anytime and from anywhere.
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
enterprises to optimize their information management capabilities and integrate
voice and data communications.
The AVT Solution
The Company continues to be a leading provider of unified communications for
medium and large-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, document distribution,
and mobile wireless solutions. 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. Additionally, with the acquisition of
Infinite Technologies on January 3, 2001, the Company is positioned to compete
in the mobile business solutions arena.
Strategy
The Company's mission is to deliver business-to-business communications
solutions by providing cost-effective, innovative software products and services
that operate on industry-standard computer platforms, globally.
In March 2001, the Company announced that it is expanding its business
strategy to focus on the mobile business solutions market. At the same time,
the Company intends to closely manage its traditional product lines, such as
RightFAX, CallXpress and MediaLinq, in order to maximize the return on those
products. As part of the change in strategic direction, the Company has
consolidated its two primary product groups, the Computer Telephony Software
Group and Document Exchange Software Group, in order to eliminate redundancies
in areas such as finance and administration, operations, marketing and support.
The Company believes this shift in strategic direction will allow the Company to
increase its investment in the higher growth opportunities in the mobile
business solutions area, while leveraging the Company's existing core
competencies around fax server and broadcast, unified messaging and unified
communications. Key components of the Company's strategy include:
Provide Complete Software-based 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
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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, and e-document delivery products and services.
Provide Wireless Solutions. The Company intends to increase its investment
in, and focus on, the potential higher growth opportunities in the mobile
business solutions area. With the acquisition of Infinite Technologies, the
Company intends to continue an aggressive business plan to develop and market
wireless solutions for the mobile business solutions market.
Focus on the Enterprise Market. The Company currently targets enterprises with
500 to 10,000 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 needs of medium and large-sized enterprises.
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. As evidenced by the recent acquisition of
Infinite Technologies, 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 communications solutions outside the United States,
especially in the area of mobile business solutions, 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.
Unified Communications Products
The Company's product lines include telephony-oriented, computer-oriented, and
wireless based 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. The wireless market adds a new
dimension to the Company's unified communications offering. E-document delivery
services target the outsource mass fax and email markets for time-critical
business-to-business 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.
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Product Line Description
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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.
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PhoneXpress Professional A call answering, routing and voice messaging system for small to medium-sized enterprises
that supports up to 200 users.
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Enhanced E-Documents Delivery
Products:
RightFAX Business Server A full-featured fax server designed to work independently of other fax servers. This server
supports unlimited user accounts, includes one fax channel, and is expandable to 30 channels.
Ideal for small companies, departments or workgroups.
RightFAX Enterprise Server Designed for organizations that want multiple RightFAX servers to share faxes, workloads and
data. Includes such features as Intelligent Least-Cost routing (LCR), load balancing, and
RightFAX InterConnect inbound fax routing.
RightFAX Enterprise Suite Server A fully integrated server-based fax solution designed to meet the needs of large
organizations. Combines comprehensive Least-Cost Routing, load balancing, and received fax
technologies and includes eight key modules.
RightFAX Satellite Server Specifically designed for the branch or satellite office within a large organization.
RightFAX Production & Integration A solution for electronic document delivery from host-based, legacy and industry-leading ERP
System applications that can support high volume document delivery to the Internet, fax, e-mail, and
print.
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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.
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DocumentMerge High-volume delivery, by fax or email, of documents individually personalized from database
information.
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DocumentOnRequest Automated 24/7 access to frequently requested documents via a toll-free number.
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DocumentReply Fully automated receipt of high-volume fax responses, integrated with outbound document
distribution.
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IndustryExpress Custom, high-volume document delivery solutions for targeted vertical markets, including
mortgage, travel, publishing and associations.
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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.
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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.
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Mobile Business Solutions:
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Infinite InterChange An NT-based server application that acts as an e-mail client proxy on behalf of the wireless
user, providing the user with a view into their mailbox where they can interact directly with
the mailbox, performing actions such as reading, replying to, forwarding and deleting
messages.
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Infinite Voice Connector Adds the ability to listen and reply to voice messages using a WAP-enabled phone.
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WAP Gateways The gateway acts as a translator between the wireless device and the Internet and comes in
three configurations, each targeted at a different market segment. It converts message content
from WML/WTP to HTML/HTTP
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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
4
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.
Unified Messaging Applications
Unified Messaging Clients. UM Clients 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. This
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.
PhoneXpress Professional
PhoneXpress Professional is designed to meet the requirements of the small
organization that requires full-featured automated attendant and voice mail
functions. PhoneXpress Professional is designed to support from 4 to 8 ports.
PhoneXpress Professional, 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 7.2 product line, production fax 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.
5
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
RightFAX production systems 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 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 production systems use
current development interfaces like XML, JAVA, and COM to fax-enable a variety
of applications across multiple platforms.
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.
RightFAX offers scalable solutions for delivering faxes over IP.
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, from a standard Web browser using WebLinq, from a Windows-based PC
using MediaLinqClient software, from a fax machine using the Direct Access
interactive voice response system (IVR), or by contacting MediaLinq's Assisted
Services group. Additional access methods include custom integration into a
customer's existing applications using the MediaLinq API and the IP Plus
Connector through the RightFAX 7.2 server. DocumentBroadcast provides 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
and 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 to ensure non-stop business continuity.
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DocumentMerge
DocumentMerge delivers large numbers of personalized documents by fax or email,
providing targeted communications for greater impact. Using either WebLinq or
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 a total 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 simple
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 full-featured service for mortgage bankers and lenders
that automates the complex rate sheet set up and distribution process. Password-
protected access provides selected access to regional or custom-tailored pricing
scenarios. In addition, the MortgageExpress customer is supported by a mortgage-
industry account and customer support team, which is focused on and understands
the needs of the mortgage industry.
TravelExpress is a specially designed database that allows precision 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, NT and 2000, MediaLinqClient provides fast, reliable Internet or modem
connections to launch fax and email broadcasts quickly 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 is a cost-effective solution that requires no
software installation or maintenance and incorporates Secure Socket Layer (SSL)
encryption to ensure secure transactions. Version 3.0, released October 2000,
completed MediaLinq's conversion of its core e-document delivery services to the
Web, delivering full functionality for targeting and personalizing fax and email
broadcasts and enabling complete end-to-end account management capability across
an enterprise.
Mobile Business Solutions
Branded under the Infinite product line, the Company's line of mobile business
solutions extend the computer desktop by providing users with access to
information from a variety of next-generation mobile phones and wireless
personal digital assistants (PDAs). The Company believes that the mobility
space, enabling software, and end-to-end solutions is a large market and will
support significant growth.
Infinite InterChange
Infinite InterChange is an NT-based server application that acts as an e-mail
client proxy on behalf of the wireless user, providing the user with a view into
their mailbox that is optimized for the small displays and bandwidth constraints
of wireless environments. Through this proxy, the user interacts directly with
their mailbox, performing all of the standard actions such as reading, replying
to, forwarding and deleting messages.
Add-on Module:
7
Infinite Voice Connector
Infinite Voice adds the ability to listen and reply to voice messages using a
WAP-enabled phone.
Wireless Infrastructure Products:
Infinite WAP Gateway
The gateway acts as a translator between the wireless device and the Internet
and comes in three configurations, each targeted at a different market segment.
It converts message content from WML/WTP to HTML/HTTP.
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 1998, 1999 or
2000.
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 34 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, 2000, the computer-oriented sales force consisted of 109 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, 2000 the Company had 5 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. In
September, 2000, the Company signed an OEM agreement with Sphere Communications,
Inc. under which Sphere will market and sell the AVT CallXpress unified
messaging solution alongside its own Spericall.ems IP PBX through its existing
global channel partner network.
International Distribution
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 continues to develop 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 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.
8
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; e-document delivery services
in San Francisco, California.; and with the acquisition of Infinite Technologies
a fifth location in Owings Mills, MD was added in January, 2001. In total, the
Company employed, as of December 31, 2000, 148 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. The Company expects these cross-development efforts to continue 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.
Proprietary Rights
AVT relies on a combination of patents, copyrights, trademarks and trade
secret laws, nondisclosure and other agreements, and technical measures to
protect its proprietary technology. The Company has received a U.S. patent in
the area of unified messaging and, in 2000, purchased five U.S. patents and two
pending U.S. patent applications in the area of facsimile technology. The
issued patents will expire between 2014 and 2017. There can be no assurance
that the Company's efforts to protect its proprietary rights will be successful.
In particular, there can be no assurance that the Company's current or future
patent applications will be granted or that its current or future issued patents
will not be challenged, invalidated or circumvented, or that the rights granted
under any such patents will provide competitive advantages to the Company.
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 for 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, 2000, the Company had license agreements with
Octel Corporation (now Avaya, Inc.), Syntellect Inc., Intelligent Environments,
Inc., International Business Machines Corporation and Metasoft Systems, Inc.
Competition
9
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
Avaya, Inc., Active Voice, Inc., Cisco Systems, Inc. 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 PTEK Holdings, Cable and Wireless, and other
telecommunications companies who provide fax services. The competitors of our
newly acquired Infinite Technologies include Openwave Systems, Inc., Aether
Systems, Inc. and 724 Solutions, Inc.
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 the Dialogic division of Intel.
Employees
As of December 31, 2000, the Company had 488 full-time employees, including 78
in administration, 25 in manufacturing, 112 in engineering and product
development, and 273 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
70,000 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 March 2000 several class-action lawsuits were 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
ability to achieve revenue expectations for the first quarter of 2000. The
court has approved appointment of three plaintiffs to act as Lead Plaintiffs and
has consolidated all lawsuits into a single action. No class has been
certified. On January 25, 2001, the Court granted AVT's motion to dismiss the
consolidated complaints on the grounds that "none of the four events relied upon
by plaintiffs, whether considered separately or in combination, gives rise to a
strong inference that any of the defendant directors or officers acted with
knowledge or deliberate recklessness." The Court dismissed the claims against
four AVT officers and directors with prejudice. Based on additional
representations made by plaintiffs' counsel at oral argument, the Court granted
10
plaintiffs' request that they be allowed to file an amended complaint to attempt
to correct the legal deficiencies the Court identified in the consolidated
complaint as to AVT and two officers. Plaintiffs filed their Second
Consolidated Amended Complaint on February 25, 2001. AVT and the two remaining
individual defendants have filed a motion to dismiss the Second Consolidated
Amended Complaint with prejudice. That motion is scheduled to be considered by
the Court in April 2001. The Company believes that the allegations of the
lawsuits are without merit and intends to continue to vigorously defend the
lawsuit if the claims are not dismissed.
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 2000.
11
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,
-----------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net sales................................................. $58,693 $76,971 $102,977 $130,224 $100,537
Cost of sales............................................. 23,749 29,233 37,282 44,958 33,407
------- ------- -------- -------- --------
Gross profit.............................................. 34,944 47,738 65,695 85,266 67,130
------- ------- -------- -------- --------
Operating expenses:
Research and development................................ 5,280 7,988 9,474 10,311 10,223
Selling, general and administrative..................... 19,996 26,040 35,035 44,282 46,768
Non-recurring charges(1)................................ 4,140 11,025 287 3,255 -
------- ------- -------- -------- --------
Total operating expenses................................ 29,416 45,053 44,796 57,848 56,991
------- ------- -------- -------- --------
Operating income.......................................... 5,528 2,685 20,899 27,418 10,139
Other income, net (4)..................................... 942 1,104 1,258 1,993 5,643
------- ------- -------- -------- --------
Income before income tax expense.......................... 6,470 3,789 22,157 29,411 15,782
Income tax expense........................................ 3,860 1,470 8,078 11,556 5,086
------- ------- -------- -------- --------
Net income................................................ $ 2,610 $ 2,319 $ 14,079 $ 17,855 $ 10,696
======= ======= ======== ======== ========
Diluted earnings per common share(2)...................... $0.10 $0.08 $0.47 $0.56 $0.33
Net income excluding nonrecurring items(3)................ $ 6,750 $ 9,375 $ 14,262 $ 20,798 $ 9,539
Diluted earnings per common share excluding nonrecurring
Items(2)(3).............................................. $0.25 $0.33 $0.48 $0.65 $0.30
Weighted average common and common equivalent shares
outstanding(2)........................................... 27,114 28,820 30,016 31,856 32,297
December 31,
------------
1996 1997 1998 1999 2000
------- ------- -------- -------- --------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $30,208 $25,432 $ 42,691 $ 75,018 $ 88,423
Working capital........................................... $33,260 $31,743 $ 54,249 $ 86,225 $ 98,317
Total assets.............................................. $53,151 $62,686 $ 85,648 $121,709 $130,244
Long-term debt, less current portion...................... $ 830 $ 492 $ -- $ -- $ --
Total shareholders' equity................................ $42,633 $48,371 $ 71,086 $102,205 $113,001
_________________________
(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.
(4) In the first quarter 2000 a non-recurring gain of $1,784,000 was realized
from the sale of marketable securities held for investment.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. AVT's actual results could differ materially from
those discussed below. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below, and those
discussed in the section titled "Additional Factors that May Affect Our
Business, Future Operating Results and Financial Condition," included elsewhere
in this report. When used in this document, the words "believes," "expects,"
"anticipates," "intends," "plans" and similar expressions are intended to
identify certain of these forward-looking statements. However, these words are
not the exclusive means of identifying such statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements.
Overview
The Company is a leading provider of business to business communication
solutions for small, medium and enterprise-sized organizations. The Company
provides flexible, cost-effective products that address the unified messaging,
voice messaging, fax server, production fax and outsourced document delivery
markets, and distributes these products primarily through independent
distributors, value-added resellers and OEM's. The Company's products run on
off-the-shelf hardware, support Windows NT and Windows 2000; 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's product lines include both telephony-oriented and computer-
oriented products, and outsourced 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, 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 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's telephony-oriented products include:
CallXpress, and CallXpress Enterprise, a multi-application, high capacity
unified messaging platform and PhoneXpress, a full-featured advanced messaging
system for small to medium-sized enterprises. The company's data oriented
enhanced fax products include RightFAX and RightFAX Enterprise, the Company's
LAN-based fax server lines for Windows NT/Windows 2000, and the RightFAX
Production System, a high-volume production-oriented server that enables fax and
other forms of electronic transmission for electronic commerce applications. The
Company's e-document delivery services, branded under the name MediaLinq, 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 four strategic acquisitions, three of
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 Automated Call Distribution (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. On January 3, 2001 the Company
acquired Infinite Technologies, a privately held global supplier of wireless
applications and wireless infrastructure solutions. 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.
On March 15, 2001, the Company announced a new business strategy based on the
Mobile Business Solutions market. In conjunction with this announcement the
Company announced the consolidation of its two primary product groups, Computer
Telephony Software Group and Document Exchange Software Group, resulting in a
14% reduction of its workforce and an expected one-time charge of approximately
$1million. During the transition period following this consolidation, the
company expects that its net sales will be flat for the remainder of 2001.
Additionally, as this new strategy is implemented, expenditures in the areas of
research and development and sales, general and administrative, are expected to
increase from the amounts expended in the year ended December 31, 2000.
13
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,
-----------------------
1998 1999 2000
----- ----- -----
Net sales................................. 100.0% 100.0% 100.0%
Cost of sales............................. 36.2 34.5 33.2
----- ----- -----
Gross profit.............................. 63.8 65.5 66.8
Operating expenses:
Research and development............. 9.2 7.9 10.2
Selling, general and administrative.. 34.0 34.0 46.5
Non-recurring charges................ 0.3 2.5 -
----- ----- -----
Total operating expenses............. 43.5 44.4 56.7
Operating income.......................... 20.3 21.1 10.1
Other income, net......................... 1.2 1.5 5.6
----- ----- -----
Income before income tax expense.......... 21.5 22.6 15.7
Income tax expense........................ 7.8 8.9 5.0
----- ----- -----
Net income................................ 13.7% 13.7% 10.7%
===== ===== =====
Net Sales
The Company derives net sales primarily from initial sales of software kits
and licenses and fully integrated systems, e-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 several years, sales have continued to shift
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, 2000 and 1999. Net sales decreased 22% from $130
million in 1999 to $101 million in 2000. All product lines experienced a
decrease in sales resulting in part from an industry-wide sales decline.
Software product sales decreased 26.5% over 1999 and represented 75.2% of net
sales. E-document delivery services decreased 8.8% during 2000 and represented
24.8% of total sales. International sales decreased 21% in 2000, and represented
19% of net sales.
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 software products increased 26.8% over
1998 and represented 79% of net sales. Sales of e-document delivery services
increased 25.2% during 1999 and constituted 21% of total product sales.
International sales for 1999 increased 45% from 1998, and represented 18% of net
sales.
Gross Profit
Years ended December 31, 2000 and 1999. Gross profit as a percentage of net
sales increased to 66.8% in 2000 compared to 65.5% in 1999, evidencing the
continuing shift to higher margin products in the software products area.
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 products in our software
products segment.
Research and Development
Years ended December 31, 2000 and 1999. Research and development expenses in
2000 decreased 0.8% to $10.2 million from $10.3 million in 1999 reflecting
stable headcount for both years. As a percentage of net sales, research and
development expenses represented 10.1% of sales in 2000, as compared to 7.9% in
1999.
14
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.
Selling, General and Administrative
Years ended December 31, 2000 and 1999. Selling, general and administrative
expenses increased 5.6% to $46.8 million in 2000 from $44.3 million in 1999, due
to our continuing development of our enterprise and international sales channels
across our software product line. Amortization of goodwill relating to
acquisitions in the amount of $1.3 million was included in selling, general and
administrative expenses in both 2000 and 1999. Selling, general and
administrative expenses represented 46.5% of net sales in 2000, as compared to
34% in 1999.
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 our software products 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.
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.
Other Income, Net
For the years ended December 31, 1998, 1999 and 2000, other income increased
from $1.3 million in 1998 to $2.0 million in 1999 and to $5.6 million in 2000.
Included in other income for 2000 was a non-recurring gain of $1.74 million
relating to the sale of marketable securities held for investment. Excluding
this gain, the increase in other income is directly attributable to increasing
interest income on increasing investment and cash balances.
Income Tax Expense
The effective income tax rates excluding acquisition-related charges in 2000,
1999 and 1998 were 32.2%, 39.3% and 36.5% respectively. The Company recognized
an income tax expense of $5.1 million in 2000, $11.6 million in 1999 and $8.1
million in 1998. The decrease in the tax expense and effective tax rate in 2000
was due in part to increases in tax exempt interest income and permanent tax
benefits from the Company's foreign sales corporation.
Net Income and Net Income Per Share
Years ended December 31, 2000 and 1999. Net income was $10.7 million in 2000 as
compared to $17.9 million in 1999. Excluding the nonrecurring charges related to
the merger with MediaTel in 1999, net income would have been $20.8 million for
1999. Diluted net income per share, excluding the nonrecurring items, decreased
to $.30 per share in 2000 from $.65 per share in 1999.
Net income was $17.9 million in 1999 as compared to $14.1 million in 1998.
Excluding the non-recurring 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
15
the 1998 net income excluding non-recurring charges of $14.3 million. Diluted
net income per share, excluding the non-recurring charges, increased to $0.65
per share in 1999 from $0.48 per share in 1998.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased to $88.4 million
at December 31, 2000 from $75.0 million at December 31, 1999 and from $42.7
million at December 31, 1998, due primarily from operations. Cash flow generated
from operating activities was $21.1 million, $29.1 million and $18.3 million in
the years ended December 31, 2000, 1999 and 1998, respectively. The positive
cash flow from operating activities resulted primarily from profitable
operations. Proceeds from the sale of stock options in 2000 also contributed
$5.4 million which was offset by $10.4 million expended for the repurchase of
stock under the Company's stock repurchase program.
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 and 1998 of $250,000 and
$668,000 respectively, and also issued 19,600, and 104,000 additional shares of
common stock, respectively.
On April 14, 1999, the Company merged with MediaTel Corporation. In connection
with the merger the shareholders of MediaTel received an aggregate of
approximately 3,219,192 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
583,400 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 10,050
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.
In March of 2000 the Board of Directors authorized the use of up to $10 million
to repurchase shares of the Company's common stock. The Company utilized these
funds to repurchase a total of 1,057,000 shares during the second quarter of
2000. In August of 2000 the Board of Directors authorized the Company to
repurchase up to $15 million worth of its common stock. As of December 31, 2000
approximately $200,000 of the authorized funds had been expended to repurchase
approximately 35,000 shares. The program is ongoing, although the timing and
size of repurchases, if any, are subject to market conditions, stock prices and
AVT's cash position and requirements going forward.
On January 3, 2001 the Company acquired Infinite Technologies, a privately held
global supplier of wireless applications and wireless infrastructure solutions.
Under the terms of the merger agreement, total consideration paid will
approximate $24 million. At closing, the Company paid approximately $9.1
million in cash and issued approximately 1.6 million shares of the Company's
common stock. The Company will pay approximately $2.9 million in a combination
of cash and the Company's common stock under a deferred payment arrangement over
the next three years. In addition the Company may pay up to an additional $3.9
million in a combination of cash and the Company's common stock under an earn-
out arrangement over the next three years which will be expensed as compensation
by the Company. The Company will account for the business combination as a
purchase.
On January 25, 2001 the Company announced that plans to form AVT Capital LLC had
been canceled. Given the Company's future plans, a separate entity to focus on
technology investments was no longer deemed necessary.
At December 31, 2000, 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 $2.8 million, $4.3 million and $3.6 million in equipment
and leasehold improvements in the years ended December 31, 2000, 1999 and 1998,
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.
Additional Factors that May Affect our Business, Future Operating Results and
Financial Condition
16
The following factors may materially adversely affect our business, financial
condition or results of operations. In that event the trading price of our
shares could decline and you may lose part or all of your investment, therefore,
you should carefully consider the risks described below before making an
investment decision.
Our recently expanded business strategy to focus on the mobile business
solutions market, which is a new and unproven market, may not be successful.
In March 2001, we announced that we are expanding our business strategy to focus
on the mobile business solutions market, which we believe is a higher-growth
opportunity in our market. In order to implement this strategy, we will be
required to design, develop and introduce competitive new wireless products,
improve our marketing of such products and build credibility among customers
that we are capable of delivering advanced mobile business solutions.
Implementation of this strategy will involve substantial increased costs and, as
a result, our expenses will increase disproportionately to revenue in the near
term. Moreover, implementation on this strategy may disrupt our existing
operations and distract management, which could have a material adverse effect
on our operating results.
There can be no assurance that we will realize a return on our investment in the
mobile business solutions market. If we are not successful in implementing our
strategy, our revenue could decline. Even if we are successful, our revenue may
still decrease if the market opportunity for mobile wireless solutions does not
develop in the ways we anticipate. This market opportunity is in its early
stages and we can not guarantee that the demand for mobile business solutions
will develop as fast as we anticipate, that new technologies will not cause the
market to evolve in a manner different from what we expect or that we will be
able to obtain a leadership position as this market opportunity develops.
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. Such
fluctuations could cause period-to-period comparisons to be less than
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.
Most of our software product revenue comes from current quarter orders and
sales, of which a substantial portion, and sometimes a majority, occurs in the
last month of each quarter. We do not maintain a large backlog of orders, and
most of our distributors maintain little or no inventory. Order fulfillment
cycles are typically short, and often as short as one to two days. Accordingly,
the timing of customer orders can cause significant variations in quarterly
results of operations. Because we sell our products to end-customers through
various third parties such as telephone system manufacturers, value-added
resellers, telephone interconnect dealers, and others, we are unable to project
with certainty the actual orders, sales, and revenues these third parties will
generate in a given quarter. The combination of these factors impairs and
delays our ability to know when revenues and earnings will be higher or lower
than expected. 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.
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 telephone system manufacturers, independent equipment dealers
and value-added resellers.
17
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.
Failure to establish and maintain strategic relationships could limit our
ability to increase sales.
Creation and maintenance of strategic relationships is important to our success
because these relationships enable us to market and distribute our products to a
larger customer base than we could otherwise reach through our director
marketing efforts. We currently have strategic relationships with Ericsson, NEC
Corporation, Fujitsu Limited, Lotus Development Corporation, Xerox Corporation
and others. However, we may not be successful in creating new strategic
relationships on acceptable terms, if at all. Moreover, although we view our
strategic relationships as an important factor in the successful
commercialization of our products and services, our current strategic partners
may not view their relationships with us as significant for their own businesses
and any one them could reassess their commitment to us in the future. Further,
our relationships are generally non-exclusive, which means our strategic
partners may develop relationships with some of our competitors. Failure of one
or more of our strategic partners to successfully develop and sustain a market
for our services, or the termination of one or more of our strategic
relationships could adversely affect our ability to increase sales.
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 five strategic acquisitions
including the January 2001 acquisition of Infinite Technologies. 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.
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, features and services that achieve
broad market acceptance by satisfying those changing customer needs and keeping
pace with those technological developments. To do this, we must spend
substantial funds on product development. We regularly devote significant
resources to technologies that we anticipate will be widely adopted. In
addition, in the future, we intend to pursue new revenue streams by leveraging
our expertise in voice and data communication to integrate these capabilities in
unified messaging and mobile wireless delivery, among other possible areas. The
market for unified messaging software and mobile wireless delivery is relatively
new and as yet unproven. To be successful, we must, among other things, develop
and market products and services that achieve broad market acceptance. 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 operating system. We may not
have the financial resources, marketing, distribution and service capability,
depth of key personnel or technological knowledge to continue to compete
successfully in each of our markets.
We believe the main competitive factors affecting our business are breadth and
quality of application software, product integration, ability to respond to
technological change, quality of a company's sales force, price, size of the
installed base, level of customer support and professional services.
In the telephony-oriented market for messaging systems, our principal
competitors are independent suppliers such as Avaya Inc., Mitel Corporation,
Active Voice Inc., Cisco Systems, Inc. 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.
18
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 of PTEK Holdings, Inc. and
other telecommunications providers such as Cable & Wireless, Inc. The
competitors of our newly acquired Infinite Technologies include Openwave
Systems, Inc., Aether Systems, Inc. and 724 Solutions, 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 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. Recently we believe our business has been, and may
continue to be, adversely affected by the introduction of next generation IP PBX
switches as potential customers delay purchasing decisions as they evaluate
these new 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. Additionally, we have
experienced, as have others in our broadcast fax and document delivery markets,
pricing pressures for our services.
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 patents, copyrights, trademarks and trade secret laws,
nondisclosure and other agreements, and technical measures to protect our
proprietary 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.
Other companies may claim that we infringe their intellectual property or
proprietary rights, which could cause us to incur significant expenses or be
prevented from selling our products.
Our success depends on our ability to operate without infringing the patents and
proprietary rights of third parties. Product development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when filed,
with regard to similar technologies. 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 15%, 18% and 19% of our net sales in
the years ended December 31, 1998, 1999 and 2000, 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
19
. difficulty adapting products to local languages and telephone system
technology;
. inability to respond to changes in regulatory requirements;
. inability to meet special standards requirements;
. 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.
In addition, the laws of some foreign countries are uncertain or do not protect
intellectual property rights to the same extent as the United States. Moreover,
we could be sued for patent infringement or other intellectual property
violations in a foreign country where it could be very costly to defend such a
lawsuit.
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 may not be able to hire and retain highly skilled employees, which could
affect our ability to compete effectively.
To succeed, we must attract and retain key personnel in engineering, research
and development, marketing, sales, finance and administration. In particular,
as we implement our recently announced strategy of focusing on mobile business
solutions, we will need to hire employees with experience developing and
providing wireless products and services. We also depend to a significant degree
on the efforts of our senior management team. If we fail to recruit such
personnel or lose the services of existing key persons in any functional area,
our current operations and new product development efforts could be adversely
affected. Competition for skilled personnel is intense. When our stock price is
lower than our employees' stock option price, it is particularly difficult to
retain skilled personnel. We do not maintain material key person life
insurance.
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 (now a part of Intel Corporation) for our voice cards, and on
Dialogic and Brooktrout, 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;
20
. 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.
21
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, 2000, 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.
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AVT Corporation:
We have audited the accompanying consolidated balance sheets of AVT Corporation
(a Washington corporation) and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. 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 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 represent 21% of total
revenues in 1998. 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 MediaTel Corp., is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits 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 and subsidiaries as of December 31,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Seattle, Washington
January 22, 2001
23
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
24
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AVT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
------------
1999 2000
-------- --------
ASSETS (in thousands)
Current assets:
Cash and cash equivalents..................................................... $ 23,923 $ 36,744
Short-term investments........................................................ 51,095 51,679
Accounts receivable, less allowance of $1,104 and $794........................ 20,303 16,010
Inventories................................................................... 5,319 6,249
Deferred and prepaid income taxes............................................. 3,000 3,007
Prepaid expenses and other..................................................... 2,089 1,871
-------- --------
Total current assets........................................................ 105,729 115,560
Equipment and leasehold improvements, net...................................... 6,630 6,220
Intangibles, net............................................................... 5,926 5,256
Deferred income taxes.......................................................... 3,424 3,208
-------- --------
$121,709 $130,244
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 5,432 $ 4,914
Other current liabilities...................................................... 12,748 12,329
Income taxes payable........................................................... 1,324 --
-------- --------
Total current liabilities................................................... 19,504 17,243
-------- --------
Commitments and Contingencies (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, 120,000,000 shares authorized;
30,637,054 and 30,666,319 outstanding........................................ 306 307
Additional paid-in capital.................................................... 55,505 56,186
Retained earnings............................................................. 45,812 56,508
Accumulated other comprehensive income........................................ 582 --
-------- --------
Total shareholders' equity.................................................. 102,205 113,001
-------- --------
$121,709 $130,244
======== ========
See the accompanying notes to these consolidated financial statements.
25
AVT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------
1998 1999 2000
-------- -------- --------
(in thousands, except per
share data)
Net sales................................................................... $102,977 $130,224 $100,537
Cost of sales............................................................... 37,282 44,958 33,407
-------- -------- -------
Gross profit............................................................... 65,695 85,266 67,130
-------- -------- -------
Operating expenses:
Research and development................................................... 9,474 10,311 10,223
Selling, general and administrative........................................ 35,035 44,282 46,768
Non-recurring charges...................................................... 287 3,255 --
-------- -------- -------
Total operating expense................................................... 44,796 57,848 56,991
-------- -------- -------
Operating income............................................................ 20,899 27,418 10,139
-------- -------- -------
Other income:
Interest income............................................................ 1,169 2,133 3,779
Other...................................................................... 89 (140) 1,864
-------- -------- -------
Other income.............................................................. 1,258 1,993 5,643
-------- -------- -------
Income before income tax expense............................................ 22,157 29,411 15,782
Income tax expense.......................................................... 8,078 11,556 5,086
-------- -------- -------
Net income.................................................................. $ 14,079 $ 17,855 $ 10,696
======== ======== =======
Basic earnings per common share............................................. $ 0.51 $ 0.60 $ 0.35
Weighted average common shares outstanding.................................. 27,444 29,652 30,898
Diluted earnings per common share........................................... $0.47 $0.56 $0.33
Weighted average common and common equivalent shares outstanding............ 30,016 31,856 32,297
See the accompanying notes to these consolidated financial statements.
26
AVT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1999 and 2000
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, 1997........... 26,231,572 262 34,057 -- 14,052 48,371
Stock issued in acquisition............ 104,400 2 248 -- -- 250
Exercise of stock options.............. 2,125,178 20 3,891 -- -- 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........... 28,461,150 284 42,845 -- 27,957 71,086
Exercise of stock options.............. 2,175,904 22 6,597 -- -- 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........... 30,637,054 306 55,505 582 45,812 102,205
Exercise of stock options.............. 1,127,177 12 5,372 -- -- 5,384
Tax benefit of stock options
exercised............................. -- -- 5,672 -- -- 5,672
Unrealized gain on marketable
securities............................ -- -- -- (582) -- (582)
Stock repurchase....................... (1,097,912) (11) (10,363) -- (10,374)
Net income............................. -- -- -- -- 10,696 10,696
----------- ------- -------- ----------- -------- ----------
Balance at December 31, 2000........... 30,666,319 $ 307 $56,186 -- $56,508 $113,001
=========== ======= ======== =========== ======== ==========
See the accompanying notes to these consolidated financial statements.
27
AVT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------
1998 1999 2000
-------- -------- --------
(in thousands)
Cash flows from operating activities:
Net income............................................................ $ 14,079 $ 17,855 $ 10,696
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 4,064 4,882 4,945
Non-recurring charges................................................. 287 460 (1,784)
Stock compensation expense............................................ 5 -- --
Deferred income taxes................................................. 12 (1,220) 209
Stock option income tax benefit....................................... 4,649 6,063 5,672
Changes in current assets and liabilities:
Accounts receivable, net............................................. (4,655) (2,740) 4,293
Inventories.......................................................... (652) 241 (930)
Prepaid expenses and other........................................... (700) (553) 218
Accounts payable..................................................... 865 639 (518)
Accrued compensation and benefits.................................... 2,316 1,072 (1,585)
Income taxes payable................................................. (2,275) 418 (1,324)
Other accrued liabilities............................................ 268 2,025 1,166
-------- -------- --------
Net cash provided by operating activities.............................. 18,263 29,142 21,058
-------- -------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements...................... (3,550) (4,276) (2,807)
Purchase of short-term investments, net............................... (13,957) (21,960) (1,483)
Net proceeds from the sale of investments............................. 37 -- 2,101
Other intangibles and long-term assets................................ (280) (68) (1,058)
-------- -------- --------
Net cash used in investing activities................................ (17,750) (26,304) (3,247)
-------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt........................................... (991) -- --
Proceeds from exercise of common stock options........................ 3,906 6,619 5,384
Dividends paid on stock............................................... (126) -- --
Repurchase of common stock............................................ -- -- (10,374)
Net cash provided by (used in) financing activities.................. 2,789 6,619 (4,990)
-------- -------- --------
Net increase in cash................................................. 3,302 9,457 12,821
Cash and cash equivalents at beginning of period....................... 11,164 14,466 23,923
-------- -------- --------
Cash and cash equivalents at end of period............................. $ 14,466 $ 23,923 $ 36,744
======== ======== ========
Cash paid for interest................................................. $ 51 $ 191 $ --
======== ======== ========
See the accompanying notes to these consolidated financial statements.
28
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 3,219,192 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
583,400 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 10,050
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,
-------------------
1999 2000
-------- --------
(in thousands)
Computers and other equipment.............. $ 17,376 $ 19,786
Leasehold improvements..................... 1,176 1,398
Furniture and fixtures..................... 1,241 1,533
-------- --------
19,793 22,717
Less accumulated depreciation.............. (13,163) (16,497)
-------- --------
Equipment and leasehold improvements, net.. $ 6,630 $ 6,220
======== ========
29
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
Long-lived assets
The Company assesses potential impairment to its long-lived assets when there is
evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. An impairment loss is recognized when the sum
of the expected future undiscounted net cash flows is less than the carrying
amount of the asset.
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, 1998, 1999 and 2000 was $1,674,000, $1,818,000, and $1,726,000,
respectively.
December 31,
-----------------
1999 2000
------- -------
(in thousands)
Goodwill from CommercePath acquisition.. $ 1,829 $ 1,829
Goodwill from RightFAX acquisition...... 5,906 5,906
License agreements and other............ 4,583 5,639
------- -------
12,318 13,374
Less accumulated amortization........... (6,392) (8,118)
------- -------
Intangibles, net........................ $ 5,926 $ 5,256
======= =======
Other Current Liabilities
December 31,
-----------------------
1999 2000
-------- ---------
(in thousands)
Accrued compensation and benefits.. $ 5,169 $ 3,584
Deferred maintenance revenue....... 4,310 5,475
Other.............................. 3,269 3,270
------- -------
Other current liabilities.......... $12,748 $12,329
======= =======
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.
Reclassifications
Certain prior period balances have been reclassified to conform with the
current period presentation.
30
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue is recognized when earned, in accordance with applicable accounting
standards, including American Institute of Certified Public Accountants (AICPA)
Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended.
Revenue from product sales to dealers are generally recognized when related
products are shipped, provided fees are fixed and determinable and collection is
deemed probable. In instances where the Company has an installation obligation,
revenue is recognized when product installation is complete. Costs related to
insignificant customer support obligations, which include telephone support, are
accrued at the time the related revenue is recorded as are estimated returns,
which have not been significant. Revenues from software maintenance agreements
are recognized over the contract periods, generally one-year, on a straight-line
basis. Revenues from document delivery services are recognized when services
are provided.
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.
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,
---------------------------
1998 1999 2000
------- ------- -------
(in thousands, except per
share amounts)
Diluted earnings per common share:
Net income........................................................ $14,079 $17,855 $10,696
------- ------- -------
Weighted average common shares outstanding........................ 27,444 29,652 30,898
Plus: dilutive options assumed exercised.......................... 5,304 6,398 3,991
Less: shares assumed repurchased with proceeds from exercise...... (2,732) (4,194) (2,592)
------- ------- -------
Weighted average common and common equivalent shares outstanding.. 30,016 31,856 32,297
------- ------- -------
Diluted earnings per common share................................. $0.47 $0.56 $ 0.33
======= ======= =======
Segment Reporting
The Company has adopted Statement of Accounting Standard No. 131 "Disclosures
about Segments of an Enterprise and Related Information "(SFAS No. 131). This
standard is based on a management approach, which requires segmentation based
upon the Company's internal organization and disclosure of revenue and operating
income based upon internal accounting methods. The segment information provided
reflects the two distinct business models of the Company's organizational
structure: software products and e-document delivery services. Interest and
other debt expense, provision for income taxes, interest income and gains and
losses on the disposition of marketable securities are centrally managed at the
corporate level and, accordingly, such items are not presented by segment since
they are excluded from the measure of segment profitability reviewed by the
Company's management. Reconciling items include corporate expense items and
non-recurring charges which are not allocated to operating segments. The
Company's assets are managed on a company-wide basis versus by segment and
accordingly, asset information is not reported.
31
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Software E-document Reconciling
Products Services Amounts Total
-------- ---------- ----------- --------
(in thousands)
Year ended December 31, 2000
Net Sales...................................... $ 75,589 $24,948 $ - $100,537
Operating Income............................... 6,959 4,612 (1,432) 10,139
Year ended December 31, 1999
Net Sales...................................... $102,860 $27,364 $ - $130,224
Operating Income............................... 31,076 5,581 (9,239) 27,418
Year ended December 31, 1998
Net Sales...................................... $ 81,126 $21,851 $ - $102,977
Operating Income............................... 17,282 3,904 (287) 20,899
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, 1998, 1999 and 2000, no
customer represented more than 10% 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,
-----------------------
1998 1999 2000
-------- -------- --------
(in thousands)
United States............... $ 88,019 $106,340 $ 81,655
Canada...................... 3,914 3,965 3,071
United Kingdom.............. 3,307 4,650 6,018
Other....................... 7,737 15,269 9,793
-------- -------- --------
$102,977 $130,224 $100,537
======== ======== ========
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 offset by tax exempt interest income and permanent tax
benefits from the Company's foreign sales corporation.
The following is a reconciliation from the U.S. statutory rate to the effective
tax rate:
Year Ended December 31,
-----------------------
1998 1999 2000
---- ---- ----
Amount % Amount % Amount %
------ ------ ------- ------ ------- -----
(dollars in thousands)
Tax at statutory rate................ $7,533 34.0 $10,294 35.0% $5,524 35.0%
Research and experimentation credit.. (150) (0.7) (26) -- -- --
Nondeductible merger costs........... -- -- 894 3.0 -- --
Nondeductible goodwill amortization.. 319 1.5 379 1.3 358 2.2
Nontaxable interest income........... (227) (1.0) (515) (1.8) (795) (5.0)
State taxes and other................ 603 2.7 1,158 3.9 970 6.2
FSC Benefit.......................... -- -- (628) (2.1) (971) (6.2)
------ ---- ------- ---- ------ ----
Income tax expense................... $8,078 36.5% $11,556 39.3% $5,086 32.2%
====== ==== ======= ==== ====== ====
32
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax expense and cash paid for income taxes are as follows:
Year Ended December 31,
-----------------------
1998 1999 2000
------ -------- ------
(in thousands)
Current..................... $7,863 $12,776 $2,595
Deferred.................... 215 (1,220) 2,491
------ ------ ------
Total income tax expense... $8,078 $11,556 $5,086
====== ======= ======
Cash paid for income taxes.. $5,672 $ 5,237 $ 564
====== ======= ======
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,
1999 and 2000 are as follows:
December 31,
--------------
1999 2000
------ ------
(in thousands)
Deferred tax assets and prepaid income taxes:
Accounts receivable allowances................. $ 404 $ 291
Inventories.................................... 461 98
Depreciation and amortization.................. - 201
Accrued compensation and benefits.............. 349 546
Purchased in-process research and development.. 3,397 3,208
Deferred maintenance revenue................... 1,529 --
Other.......................................... 284 1,871
------ ------
Deferred tax assets and prepaid income taxes.... $6,424 $6,215
====== ======
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 13,900,000 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 1998, 1999 and 2000 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:
33
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31,
-----------------------
1998 1999 2000
------- ------- -------
(in thousands expect per share data)
Net Income: As Reported $14,079 $17,855 $10,696
Pro Forma.. $11,830 $15,622 $ 5,967
Basic EPS: As Reported $ 0.51 $ 0.60 $ 0.35
Pro Forma.. $ 0.43 $ 0.53 $ 0.19
Diluted EPS: As Reported $ 0.47 $ 0.56 $ 0.33
Pro Forma.. $ 0.40 $ 0.56 $ 0.21
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, 2000: risk-free
interest rates of 6.85%; expected lives of five years; expected volatility of
31%; and $0 dividends. For 1999 the assumptions were: risk-free interest rates
of 6.85%; expected lives of five years; expected volatility of 43%; and $0
dividends. For 1998 the following assumptions were used: risk-free interest
rates of 6.25%; expected lives of five years; expected volatility of 44%; and $0
dividends.
Stock Option Plans
A summary of the status of the Company's stock option plans at December 31,
1998, 1999 and 2000, and the changes during the years then ended, is presented
in the table and narrative below:
1998 1999 2000
---------- ---------- ----------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning of period.. 6,251,520 $2.67 5,797,974 $ 4.94 6,832,782 $ 9.63
Granted............................. 1,807,700 $9.25 3,301,590 $13.97 3,266,963 $13.53
Exercised........................... (2,063,918) $1.77 (1,957,540) $ 3.13 (1,092,977) $ 4.84
Canceled............................ (197,328) $5.53 (309,242) $10.61 (733,349) $15.00
---------- ----- ---------- ------ ---------- ------
Outstanding at end of period........ 5,797,974 $4.94 6,832,782 $ 9.63 8,273,419 $11.34
========== ========== ==========
Exercisable at end of period........ 3,009,316 $2.84 2,419,218 $ 4.58 2,821,390 $ 8.00
========== ========== ==========
Weighted average fair value of
options granted.................... $4.56 $ 5.89 $ 4.04
Options outstanding have exercise prices ranging from $0.40 to $28.13 per share,
with weighted average remaining contractual lives of 7.4, 8.0and 8.0 years at
December 31, 1998, 1999 and 2000, respectively. At December 31, 2000, 1,612,961
shares of the Company's common stock were available for future grant under the
Company's stock option plans.
In December, 2000, the board of directors authorized the establishment of a non-
officer employee stock compensation plan and reserved one million shares to be
used under the plan. Subsequent to year end the board of directors allocated an
additional four million shares to the plan. At December 31, 2000 no grants had
been made under this plan. In January, 2001 options to purchase 287,350 shares
were granted as part of the acquisition of Infinite Technologies.
Information relating to stock options outstanding and stock options exercisable
at December 31, 2000 is as follows:
34
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
------------------------ --------- ---------------- --------- ---------- ---------
$0.00 - $2.81............ 253,216 4 $ 1.97 240,193 $ 1.97
$2.82 - $5.63............ 1,269,066 6 $ 4.01 904,934 $ 3.58
$5.64 - $8.44............ 1,611,919 9 $ 6.45 508,577 $ 7.26
$8.45 - $11.25........... 837,308 8 $10.31 266,311 $10.44
$11.26 - $14.06........... 2,914,536 8 $12.70 749,121 $12.86
$14.07 - $28.13........... 1,387,374 9 $23.19 152,254 $18.06
--------- ---------------- -------- --------- --------
8,273,419 8 $11.34 2,821,390 $ 8.00
========= ================ ======== ========= ========
Warrants
At December 31, 2000, there were outstanding warrants to purchase 125,504
shares of the Company's common stock at $3.34 per share. The warrants were
issued in connection with an acquisition made in 1997and expire January 3, 2002.
4. Line of Credit
At December 31, 2000, the Company had a $4.0 million unsecured revolving line
of credit, none of which was used during the years ended December 31, 1999 and
2000. 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, 2000, the bank's prime rate was 9.5%, and its interbank offering
rate was 6.56%.
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, 1999 and
2000 consisted primarily of municipal notes and bonds whose amortized cost
approximates estimated fair value. As of December 31, 1999 and 2000 average
maturity for these investments was ten and eight months respectively.
In the first quarter 2000 a non-recurring gain of $1,784,000 was realized from
the sale of marketable securities held for investment and included in other
income.
35
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 $1,290,000 in 1998,
$2,154,000 in 1999 and $2,241,000 in 2000. Future minimum lease payments under
noncancelable operating leases are as follows (in thousands):
2001..................................................... $2,295
2002..................................................... 1,348
2003..................................................... 407
2004..................................................... 94
------
$4,144
======
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. Cash contributions made to the plan in
1998, 1999 and 2000 were $235,000, $416,000 and $677,000 respectively.
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 1998, 1999 and $214,000 in 2000. As of December 31, 2000, the
prepayment had been fully amortized.
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 1998, 1999 and 2000.
36
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal Proceedings
In March 2000 several class-action lawsuits were 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
ability to achieve revenue expectations for the first quarter of 2000. The
court has approved appointment of three plaintiffs to act as Lead Plaintiffs and
has consolidated all lawsuits into a single action. No class has been
certified. On January 25, 2001, the Court granted AVT's motion to dismiss the
consolidated complaints on the grounds that "none of the four events relied upon
by plaintiffs, whether considered separately or in combination, gives rise to a
strong inference that any of the defendant directors or officers acted with
knowledge or deliberate recklessness." The Court dismissed the claims against
four AVT officers and directors with prejudice. Based on additional
representations made by plaintiffs' counsel at oral argument, the Court granted
plaintiffs' request that they be allowed to file an amended complaint to attempt
to correct the legal deficiencies the Court identified in the consolidated
complaint as to AVT and two officers. Plaintiffs filed their Second
Consolidated Amended Complaint on February 25, 2001. AVT and the two remaining
individual defendants have filed a motion to dismiss the Second Consolidated
Amended Complaint with prejudice. That motion is scheduled to be considered by
the Court in April 2001. The Company believes that the allegations of the
lawsuits are without merit and intends to continue to vigorously defend the
lawsuit if the claims are not dismissed.
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, 1998............. $ 909 309 -- 289 $ 929
December 31, 1999............. $ 929 727 -- 552 $1,104
December 31, 2000............. $1,104 217 -- 527 $ 794
(1) Amounts include write-offs of accounts receivable deemed uncollectable.
8. Businesses Acquired
On April 14, 1999, the Company merged with MediaTel Corporation. In
connection with the merger the shareholders of MediaTel received an aggregate of
approximately 3,219,192 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
583,400 shares of the Company's common stock. On March 27, 2000 the escrow
account was terminated and the shares held therein, less approximately 10,050
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 year ended December 31, 1998 and the quarter ended March 31,
1999.
Year Ended December 31, Quarter Ended March 31,
----------------------- -----------------------
1998 1999
---- ----
(in thousands)
Net Sales
AVT................ $ 81,126 $22,621
MediaTel........... 21,851 6,222
-------- -------
Combined $102,977 $28,843
======== =======
Net Income
AVT................ $ 11,610 $ 3,313
MediaTel........... 2,469 629
-------- -------
Combined $ 14,079 $ 3,942
======== =======
37
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Subsequent Events
On January 3, 2001 the Company acquired Infinite Technologies, a privately
held global supplier of wireless applications and wireless infrastructure
solutions. Under the terms of the merger agreement, total consideration paid
will approximate $24 million. At closing, the Company paid approximately $9.1
million in cash and issued approximately 1.6 million shares of the Company's
common stock. The Company will pay approximately $2.9 million in a combination
of cash and the Company's common stock under a deferred payment arrangement over
the next three years. In addition the Company will pay up to an additional $3.9
million in a combination of cash and the Company's common stock under an earn-
out arrangement over the next three years which will be expensed as compensation
by the Company. The Company will account for the business combination as a
purchase. In connection with the acquisition, the Company expects to record a
one-time charge in the first quarter of 2001 for acquired research and
development and other items in the amount of approximately $2 million.
(unaudited)
On January 25, 2001, the Company announced that its board of directors had
adopted a shareholder rights plan and declared a dividend distribution of one
preferred share purchase right on each outstanding share of AVT. The Rights
will be exercisable only if a person or group acquires 15 percent or more of
AVT's common stock or announces a tender offer. Each Right entitles shareholders
to buy one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $50. The nontaxable dividend
distribution was made on February 2, 2001. The Rights expire January 24, 2011.
On March 15, 2001, the Company announced a new business strategy based on the
Mobile Business Solutions market. In conjunction with this announcement the
Company announced the consolidation of its two primary product groups, Computer
Telephony Software Group and Document Exchange Software Group, resulting in a
14% reduction of its workforce and an expected one-time charge of approximately
$1 million.
38
10. 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,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- -------- -------- -------- --------
(in thousands except per share data)
Net sales.................. $28,843 $31,864 $33,247 $36,270 $24,875 $25,240 $25,412 $25,010
Cost of sales.............. 10,174 11,322 11,558 11,904 8,594 8,548 8,228 8,038
------- ------- ------- ------- ------- -------- ------- -------
Gross profit............... 18,669 20,542 21,689 24,366 16,281 16,692 17,184 16,972
Operating expenses:
Research and development.. 2,621 2,357 2,565 2,768 2,463 2,494 2,541 2,725
Selling, general and
administrative........... 10,277 11,073 11,151 11,782 10,827 11,724 12,066 12,151
Non-recurring charges..... -- 2,388 -- 867 -- -- -- --
------- ------- -------- ------- ------- ------- ------- -------
Total operating expenses.. 12,898 15,818 13,716 15,417 13,290 14,218 14,607 14,876
------- ------- -------- ------- ------- ------- ------- -------
Operating income........... 5,771 4,724 7,973 8,949 2,991 2,474 2,577 2,096
Other income, net.......... 427 384 512 670 2,558 930 951 1,190
------- ------- -------- ------- ------- ------- ------- -------
Income before income tax
expense................... 6,198 5,108 8,485 9,619 5,549 3,404 3,528 3,286
Income tax expense......... 2,256 2,710 3,100 3,489 1,998 1,192 1,235 661
------- ------- -------- ------- ------- ------- ------- -------
Net income................. $ 3,942 $ 2,398 $ 5,385 $ 6,130 $ 3,551 $ 2,212 $ 2,293 $ 2,625
======= ======= ======== ======= ======= ======= ======= =======
Diluted earnings per common
share (1)................. $ 0.13 $ 0.08 $ 0.17 $ 0.19 $ 0.10 $ 0.07 $ 0.07 $ 0.08
Net income excluding
nonrecurring Items........ $ 3,942 $ 4,786 $ 5,385 $ 6,685 $ 3,551 $ 2,212 $ 2,293 $ 2,625
Diluted earnings per
common share excluding
nonrecurring items(1)..... $ 0.13 $ 0.15 $ 0.17 $ 0.20 $ 0.10 $ 0.07 $ 0.07 $ 0.08
Weighted average common and
common equivalent shares
outstanding............... 31,332 31,934 32,726 33,156 33,841 31,884 31,119 31,103
Stock price range (2)
High...................... $ 15.47 $ 19.06 $ 20.25 $ 23.75 $ 36.13 $ 12.25 $ 7.50 $ 6.56
Low....................... $ 10.07 $ 9.13 $ 12.94 $ 13.07 $ 9.50 $ 5.75 $ 4.75 $ 4.38
(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, 2000, there were approximately 174
shareholders of record of the Company's common stock. The Company has not
paid any cash dividends on its common stock. The Company intends to retain
any future earnings to fund the development and growth of its business, and
therefore, does not currently anticipate paying any cash dividends in the
foreseeable future.
39
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to AVT's
proxy statement for its 2001 Annual Meeting of Shareholders, which will be filed
with the Commission pursuant to Regulation 14A not later than 120 days after
December 31, 2000.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to AVT's
proxy statement for its 2001 Annual Meeting of Shareholders, which will be filed
with the Commission pursuant to Regulation 14A not later than 120 days after
December 31, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to AVT's
proxy statement for its 2001 Annual Meeting of Shareholders, which will be filed
with the Commission pursuant to Regulation 14A not later than 120 days after
December 31, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to AVT's
proxy statement for its 2001 Annual Meeting of Shareholders, which will be filed
with the Commission pursuant to Regulation 14A not later than 120 days after
December 31, 2000.
40
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, 2000 and 1999
. Consolidated Statements of Income--Years ended December 31, 2000, 1999
and 1998
. Consolidated Statements of Shareholders' Equity--Years ended December
31, 2000, 1999 and 1998
. Consolidated Statements of Cash Flows--Years ended December 31, 2000,
1999 and 1998
. 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. (B) (Exhibit 4.1)
4.2 Rights Agreement, dated as of January 24, 2001, between AVT Corporation and Mellon Investor Services, LLC.
(C) (Exhibit 2.1)
10.1 1994 Nonemployee Directors Stock Option Plan (A) (Exhibit 10.1)
10.2 AVT Corporation Restated 1989 Stock Option Plan (D) (Exhibit 99.4)
10.3 Management Incentive Compensation Plan (A) (Exhibit 10.4)
10.4 Employment Agreement dated May 1, 1993 between Applied Voice Technology, Inc. and Richard J. LaPorte (A) (Exhibit
10.5)
10.5 Form of Indemnification Agreement between Applied Voice Technology and each of its directors and officers (A)
(Exhibit 10.6)
10.6 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)
10.7 Second Amendment to Lease Agreement dated February 1, 1995 between Riggs National Bank of Washington D.C. and
Applied Voice Technology, Inc. (E) (Exhibit 10.11)
10.8 Third Amendment to Lease Agreement dated May 28, 1997 between Riggs National Bank of Washington D.C. and Applied
Voice Technology, Inc. (F) ( Exhibit 10.10)
10.9 Lease Agreement dated May 28, 1997 between Riggs National Bank of Washington D.C. and Applied Voice Technology, Inc.
(F) Exhibit 10.11)
10.10 Fourth Amendment to Lease Agreement dated November 9, 2000 between Riggs National Bank of Washington D.C. and
Applied Voice Technology, Inc.
#10.11 Amended Patent License Agreement dated September 29, 1995 between Syntellect Technology Corp. and Applied Voice,
Technology Inc. (G) (Exhibit 10.1)
10.12 Master Software Manufacturing License Agreement dated June 11, 1992 between Intelligent Environments Inc. and
Applied Voice Technology, Inc. as amended (A) (Exhibit 10.16)
10.13 Employment Agreement dated April 14, 1999 between AVT Corporation and David Sohm (H) (Exhibit 10.19)
10.14 Loan Agreement and Promissory Note dated August 15, 1999 between U.S. Bank of Washington and AVT Corporation (H)
(Exhibit 10.20)
10.15 Agreement and Plan of Merger among AVT Corporation, Raven Acquisition Corp., Infinite Technologies, Inc. and the
stockholders of Infinite, dated as of January 3, 2001. (I) (Exhibit 10.1)
10.16 Escrow Agreement among AVT Corporation, Raven Acquisition Corp., Brett Warthen, as Shareholder Representative, and
Mellon Investor Services, LLC, escrow agent, dated as of January 3, 2001. (I) (Exhibit 10.2)
10.17 AVT Corporation 2000 Non-Officer Employee Stock Compensation Plan.
10.18 Employment Agreement, dated October 26, 2000, between AVT Corporation and David Anastasi.
10.19 Nonqualified Stock Option Letter Agreement, dated November 15, 2000 between AVT Corporation and David Anastasi.
10.20 Nonqualified Stock Option Letter Agreement, dated December 14, 2000 between AVT Corporation and Tom Ryan.
21.1 Subsidiaries of AVT Corporation
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of PriceWaterhouseCoopers LLP
41
_________________
(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 Current Report on Form 8-K dated January 3, 1997, File No.
0-25186.
(C) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Registration Statement on Form 8-A, filed on February 2,
2001, File No. 0-25186.
(D) Previously filed with, and incorporated by reference to, designated exhibit
to Registration Statement on form S-8 of AVT Corporation, File No. 333-
38570.
(E) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1995 Annual Report on form 10-K, file No. 0-25186.
(F) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1997 Annual Report on Form 10-K, File No. 0-25186.
(G) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Quarterly Report on Form 10Q for the quarter ended
September 30, 1995, File No. 0-25186.
(H) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1999 Annual Report on form 10-K, File No. 0-25186.
(I) Previously filed with, and incorporated by reference to, designated exhibit
to the Company Current Report on Form 8-K dated January 7, 2001, file No.
0-25186.
# 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, 2000.
42
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 29th day of March, 2001.
AVT CORPORATION
By: /s/ DAVID P. ANASTASI
-------------------------
David P. Anastasi
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
29th day of March, 2001.
Signature Title
/s/ DAVID P. ANASTASI President, Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
David P. Anastasi
/s/ JEFFERY B. DECILLIA Executive Vice President and Chief Financial
- ------------------------- Officer (Principal Financial and Accounting
Jeffrey B. deCillia Officer)
/s/ RICHARD J. LAPORTE Chairman of the Board
- -------------------------
Richard J. LaPorte
/s/ JAMES S. CAMPBELL Director
- -------------------------
James S. Campbell
/s/ ROBERT L. LOVELY Director
- -------------------------
Robert L. Lovely
/s/ ROBERT F. GILB Director
- -------------------------
Robert F. Gilb
/s/ JOHN A. KELLEY Director
- -------------------------
John A. Kelley
43