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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, 1998
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 (Zip code)
executive offices)
Registrant's telephone number, including area code: (425) 820-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of March 5, 1999 was $320,322,612 (based upon the closing sale price of
$27.50 per share on the Nasdaq National Market on such date).
Number of shares of Common Stock outstanding as of March 5, 1999 was 13,092,674.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders to be held May 11, 1999 are incorporated by reference in response
to Part III, Items 10-13 (Directors and Executive Officers of the Registrant)
TABLE OF CONTENTS
PART I
Item 1. BUSINESS......................................................................................... 1
Industry Background.............................................................................. 1
The AVT Solution................................................................................. 1
Strategy......................................................................................... 2
Products......................................................................................... 3
Distribution..................................................................................... 6
Product Support.................................................................................. 8
Product Development.............................................................................. 8
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.............................................. 10
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.............................................................................. 11
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................................. 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................................ 12
RISK FACTORS..................................................................................... 19
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.............................................................. 39
PART III
Item 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 39
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K......................................................................................... 40
i
PART 1
Item 1. BUSINESS
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. The Company provides flexible, cost-
effective products that address the voice messaging, call center, fax server and
production fax 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 OS/2, and interface with a
wide variety of telephony and computer equipment.
Industry Background
Businesses are increasingly using information technology to improve customer
service, increase employee productivity, decrease costs and more efficiently
disseminate information. As the amount of information exchanged between
organizations increases, and the diversity of the delivery formats and
combinations used by organizations to exchange this information becomes more
complex, there is a growing need for organizations to find new ways to manage
information in a more timely and cost-effective manner.
In response to the growth in voice communications, organizations are
increasingly using voice messaging, call centers with automated intelligent
routing and IVR (interactive voice response) systems that provide voice-prompted
access to data. These computer-telephony solutions allow employees to more
effectively manage communications, significantly improve call center efficiency,
and allow easy access by telephone to large amounts of information that resides
on computer databases.
The growth in data communications presents additional opportunities for
accessing and sending information. For example, organizations are deploying LAN-
based fax servers to store, forward and broadcast their growing volume of
facsimile traffic in an efficient manner. Electronic messaging over LANs, the
Internet and corporate intranets has emerged as another way to access data and
disseminate information. This rapid increase in multiple forms of voice and data
communication has further accentuated the need for organizations to optimize
their information management capabilities and integrate voice and data
communications.
Large corporations have been the first to implement systems that provide
enhanced voice and data integration. These large systems typically have been
based on proprietary hardware and software and are not cost-effective for
medium-sized organizations or smaller offices of large organizations. However,
to remain competitive these medium-sized entities require systems with the same
functionality to provide a comparable level of interaction with customers and
vendors and to reduce operating costs. These organizations do not typically have
the resources or the number of users required to purchase, customize and
maintain proprietary solutions. Rather, they require cost-effective computer-
telephony solutions that provide open standards-based interfaces to a broad
range of voice and data equipment, flexibility to add new functionality and
scaleable capacity to add new users, and that operate on readily available
hardware.
The AVT Solution
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. These solutions are designed to enhance
individual and work group productivity, improve customer service, reduce
business operating costs and simplify information access and dissemination. The
Company's products provide enhanced voice and data integration through
applications such as unified voice and data messaging, call center management,
IVR and document distribution. The Company's products run on off-the-shelf
server hardware, support Windows NT and OS/2, and interface with a wide variety
of telephony and computer equipment.
1
Strategy
The Company's mission is to provide cost-effective, innovative computer-
telephony software products that operate on industry-standard computer
platforms, and market those products throughout the world. Key components of the
Company's strategy include:
Provide Complete Software-based Computer-telephony Solutions. The Company is
focused on providing a comprehensive and affordable set of software-based
computer-telephony solutions designed to enhance productivity, improve customer
service, reduce business operating costs and simplify access to data and
dissemination of information. The Company's products provide enhanced voice and
data integration through applications such as unified voice and data messaging,
call center management, IVR and document distribution.
Focus on Medium-sized Enterprise Market. The Company currently targets
enterprises with 100 to 2,000 employees, including divisions and subsidiaries of
Fortune 1000 companies. The Company's strategy is to continue to invest in new
product development and marketing initiatives to gain market share and further
meet the computer-telephony needs of medium-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. The Company believes that its expertise in these areas enables it
to efficiently bring to market innovative software products that unify and
exchange information on and between the telephone and computer. 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. Moreover, the Company
believes the migration of many of its customers to the Windows NT operating
system will present it with a significant opportunity to sell Windows NT product
upgrades.
Utilize Capabilities of Multiple Distribution Channels. The Company targets
medium-sized enterprises primarily through telephony-oriented distributors and
computer-oriented value-added resellers. The Company believes that some
enterprises will evaluate computer-telephony 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 will be sold to a
particular customer. The Company intends 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, such as the
agreement with Ericsson Enterprise Networks AB.
Grow Through Strategic Acquisitions. The Company believes that growth through
strategic acquisitions of complementary technologies, products and distribution
channels offers the potential for significant competitive advantage. The
Company's open-systems technology facilitates the rapid integration of and
linkage to other complementary open-systems technologies. The Company believes
it is therefore able to accelerate introduction of new technologies to the
market through acquisition, and to respond rapidly to industry changes and
opportunities.
Pursue International Opportunities. The Company believes that the markets for
CTI (computer telephony integration) products outside the United States will
experience accelerated growth in the next few years. To pursue these
opportunities, the Company intends to continue to localize its products for
specific markets and to actively recruit new dealers, distributors and strategic
partners internationally.
2
Products
The Company's product lines include both telephony-oriented and computer-
oriented products. The Company's telephony-oriented product lines serve the
messaging and call center markets and focus on voice and call processing,
unified messaging, IVR, personal and workgroup call management and call center
productivity applications. 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 following table provides an overview of the
Company's products in each of these markets.
- ----------------------------------------------------------------------------------------------------------------------------
Product Line Description
- ----------------------------------------------------------------------------------------------------------------------------
Messaging Products:
CallXpress for Windows NT A multi-application platform for medium-sized to large enterprises that supports
(Introduced 1997) 4 to 64 ports and runs on Windows NT.
CallXpress3 A multi-application platform that has the same capabilities as CallXpress for
(Introduced 1991) Windows NT and runs on the OS/2 operating system.
PhoneXpress A call answering, routing and voice messaging system for small to medium-sized
(Introduced 1993) enterprises that supports 4 to 16 ports.
- ----------------------------------------------------------------------------------------------------------------------------
Call Center Products:
AgentXpress for Windows NT A high-performance ACD system for medium-sized call centers that runs on
(Introduced 1997) Windows NT and supports up to 144 inbound trunk lines and up to 96 agents.
Enhanced Agent Computer-telephony interfaces and applications that support integration of
(Introduced 1997) AgentXpress with CallXpress and RightFAX servers.
- ----------------------------------------------------------------------------------------------------------------------------
Enhanced Fax Products:
RightFAX A high-performance LAN-based fax server that runs on Windows NT and supports
(Introduced 1995) up to 32 fax channels.
RightFAX Enterprise An enhanced version of the RightFAX 5.0 software designed for complex, enterprise
(Introduced 1997) -wide fax server environments.
CommercePath for Windows NT A high-volume, production-oriented server that enables fax and other forms of
(Introduced 1997) electronic transmission for electronic commerce applications, supports up to
48 ports and transmits or receives up to 2,800 pages per hour.
HOST-FAX for Unix A high-volume, production-oriented line of fax servers based on the Unix operating
(Introduced 1991) system with many of the same capabilities found in CommercePath for Windows NT.
- ----------------------------------------------------------------------------------------------------------------------------
3
Messaging Products
CallXpress Line
The CallXpress family of products consists of CallXpress3 and CallXpress for
Windows NT. CallXpress3, introduced in early 1991, is a multi-application
computer-telephony platform that runs on the OS/2 operating system. Succeeding
CallXpress3 as the Company's premier telephony-oriented product offering,
CallXpress for Windows NT was introduced in early 1997. CallXpress for Windows
NT is designed to take advantage of the advanced capabilities of the Windows NT
operating system, and includes significant improvements to the system's
installation and administrative capabilities and increased fax functionality.
The CallXpress line is designed to support from 4 to 64 telephone ports and can
serve the needs of small to large enterprises.
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: call processing, unified messaging, and call
center productivity.
Call Processing 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
Desktop Message Manager. Desktop Message Manager provides a visual interface
to the subscriber's unified mailbox, letting the subscriber know who sent a
message, the type of message sent, when it arrived, whether it is urgent and its
length. The module will play back voice mail messages on the subscriber's
telephone or voice-enabled PC, as well as display fax messages on the computer
screen. A related module provides the subscriber with a visual interface to
manage his or her CallXpress unified mailbox from Microsoft Outlook.
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.
Fax Mail. The Fax Mail module provides store and forward capabilities for fax
documents identical to those provided for voice messages. The Company's Fax
Server supported under CallXpress for Windows NT extends the capabilities of Fax
Mail to include the full feature set, performance and capacity of the RightFAX
fax server.
4
Call Center Productivity 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.
Fax Response. The Fax Response module provides documents such as order
acknowledgments or printouts of customer accounts requested by callers through
the Automated Agent module.
Desktop Call Manager. Desktop Call Manager provides intelligent, real-time
management of incoming calls, allowing the subscriber or member of a workgroup
to take the call, take a message, or redirect the call. Incoming calls are
identified by Caller ID, prompting the system to display the caller's identity
on the subscriber's PC. Desktop Call Manager can be a very cost-effective
application for smaller, informal call centers where an ACD (automated call
distribution) system cannot be cost-justified.
Faxtext. The Faxtext module provides callers 24-hour access to requested
information such as product literature, specification sheets, rate sheets,
technical bulletins or other types of information a company may want to quickly
and easily communicate via fax.
PhoneXpress
PhoneXpress is designed to meet the requirements of small- to medium-sized
enterprises that require full-featured automated attendant and voice mail
functions. PhoneXpress is based on the same core technology as CallXpress3, but
does not provide the application interfaces to support all the advanced
computer-telephony applications of unified messaging and call center
productivity. PhoneXpress is designed to support from 4 to 16 ports and can be
configured with faxtext and networking capability to provide a cost-effective
branch voice processing system for enterprise-wide networks. PhoneXpress, like
CallXpress messaging products, is available as a software kit or as a completely
integrated system.
Call Center Products
AgentXpress for Windows NT
AgentXpress for Windows NT is the Company's first product resulting from the
acquisition of selected assets and liabilities of Telcom Technologies in early
1997. AgentXpress for Windows NT, launched in the second quarter of 1997, brings
a high-performance ACD offering to the Company's advanced computer-telephony
application product line targeted at the call center. AgentXpress is an open
systems-based platform, supporting up to 144 incoming trunk lines, including
analog T1 or ISDN connections, and up to 96 agents utilizing either analog or
digital display phone sets. Designed for the medium-sized call center, the
system contains a variety of features and functions at a price point below
comparable proprietary systems. Up to 16 AgentXpress systems can be networked
together to form a distributed call center environment capable of supporting up
to 1,536 agents and 2,300 incoming calls at any one time.
AgentXpress is sold as a complete turnkey system with fully integrated and
tested PCs, disk drive storage devices of various sizes and configurations,
voice cards, trunk cards, modems, monitors, keyboards and digital display
phones.
Enhanced Agent
Enhanced Agent is a set of computer-telephony interfaces and applications
designed to extend the capabilities of AgentXpress to support integration with
CallXpress and RightFAX computer-telephony servers. Features provided by
Enhanced Agent include seamless transfers of callers to voice mail, the use of
IVR scripting for sophisticated caller interrogation, the ability for agents to
transmit fax-based information to callers while on the line, and the
simultaneous delivery through screen pops of computer-based caller information
to the agent assigned the call.
5
Enhanced Fax Products
The RightFAX high-performance, LAN-based fax servers are designed for
businesses with high fax traffic, with many fax users, or that require secure
and confidential fax management. The RightFAX products consist of server
software, fax cards and desktop clients. Desktop clients can fax documents
directly from any Windows application on their LAN-connected PC. All fax
processing is performed on the server, thereby eliminating the need for a fax
modem or telephone line connected directly to each user's PC. In addition,
because the fax processing is performed on the server, the user's application
sends the information to be faxed to the server, where all the conversions to
fax format and outbound calling and transmission are managed. RightFAX products
are sold in software kit form with or without fax cards.
Like the Company's telephony-oriented products, RightFAX provides a mailbox to
receive incoming faxes, which can be routed to the user's mailbox in a variety
of ways, including OCR (optical character recognition) of a cover page. The fax
is digitally stored and can be viewed on a PC connected to the LAN or from any
web browser on a PC connected to the Internet. Faxes can then be printed on any
printer connected to the LAN or the user's PC, forwarded to other users on the
RightFAX server, or re-faxed to any other fax machine in the world. Since the
fax has been stored digitally, there is no further degradation due to multiple
scannings through standalone fax machines.
RightFAX runs on the Windows NT operating system. The newly announced
RightFAX Enterprise product offers more advanced features, including least-cost
routing, Internet and corporate intranet capabilities and load-sharing features
for multiple server environments. RightFAX servers can be configured from 1 to
32 simultaneous inbound/outbound fax channels, supporting analog or digital T1
connectivity. Capacity is added by installing voice/fax cards and by purchasing
port licenses. RightFAX servers are compatible with all major network operating
systems and are sold as either software licenses or software kits (including fax
cards).
CommercePath offers a high-volume, production-oriented line of servers that
attach to mainframe, midrange or network "host" computers and enable fax and
other forms of electronic transmission for applications on specific host
computers. Sold most often into high-volume business-to-business electronic
commerce environments, these servers are used to convert, transmit or receive
thousands of production documents such as purchase orders, order
acknowledgments, invoices or statements per hour.
CommercePath software is licensed for either Unix or Windows NT environments
starting with a base set of software known as the CommercePath environment.
Functions are purchased in individual module sets. These modules include
Hostfax, Responsefax, EDI-Interpoint, Internetlink and a set of desktop
applications know as Workstation. Capacity is added by installing voice/fax
cards and by purchasing port licenses.
CommercePath servers support up to 48 simultaneous inbound/outbound channels
per server, and analog or digital T1 connectivity, plus simultaneous attachments
to multiple hosts and printers. Each system is scaleable to transmit/receive
faxes at a rate of up to 2,800 pages per hour. CommercePath servers are sold as
complete turnkey systems with fully integrated and tested PCs, disk drive
storage devices of various sizes and configurations, voice and fax cards,
modems, monitors and keyboards.
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. In 1997, the
Company took a significant step toward expanding its international distribution
channels by forming a strategic relationship with Ericsson Enterprise Networks
AB ("Ericsson"). See "--OEM/Strategic Accounts." No single customer represented
10% or more of the Company's net sales during 1997 or 1998. See "Risk Factors--
Dependence on Indirect Distribution."
6
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 18 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, 1998, the computer-oriented sales force consisted of 67 employees.
OEM/Strategic Accounts
To broaden its access to certain markets, the Company has entered into
distribution and private label/OEM agreements with Dictaphone Corporation and
Fujitsu Business Communications Systems Inc. to sell private label versions of
the Company's CallXpress3 and PhoneXpress products, and has an arrangement with
Cardiff Software, Inc. to sell a private label version of its RightFAX products.
The Company expects to pursue additional OEM and private label agreements in the
future. As of December 31, 1998 the Company had 11 employees focused on OEM and
strategic accounts. In December 1997, the Company entered into an OEM agreement
with Ericsson. The agreement provides for the integration of the Company's
CallXpress for Windows NT application into certain Ericsson systems that will be
distributed and marketed by Ericsson worldwide. The agreement also provides for
certain joint product development initiatives.
International Distribution
The international market for computer-telephony products is not as developed
as the market in the United States. The Company believes that over the next few
years the market for both telephony-oriented and computer-oriented computer-
telephony products will grow faster internationally than in the United States.
To address this opportunity, the Company is developing broad coverage of
international markets through a variety of dealer, distributor, and strategic
relationships. To date, the majority of the Company's international sales have
been in English-speaking countries: Canada, Australia, the United Kingdom, South
Africa and New Zealand. The Company expects its accelerated distribution
development and product localization efforts of the past few years will result
in a higher growth rate in non-English-speaking countries than in English-
speaking countries. The Company is actively recruiting new dealers and
distributors in international markets. The Company has sales offices in Canada,
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. See "Risk Factors--Risks of International Markets" and Note
1 to the Consolidated Financial Statements.
7
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. Telephone support
service hours to dealers have been expanded to more effectively service non-U.S.
customers. The Company has also expanded its technical training offerings of
both telephony-oriented and computer-oriented products to its dealers. The
Company provides limited warranties on its RightFAX products and certain
hardware components distributed in conjunction with its products.
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, as well as in the
development of LAN and Internet software applications. 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: CallXpress and
PhoneXpress products are developed in Kirkland, Washington; AgentXpress products
in Montclair, California; RightFAX products in Tucson, Arizona; and CommercePath
products in Portland, Oregon. In total, the Company employed, as of December 31,
1998, 118 engineers, technicians and quality assurance specialists in its
development centers. While development efforts in the past have been separate,
the convergence of technologies is allowing the Company to collaborate and
leverage development efforts among these groups. An example of such
collaborative efforts is the incorporation of the RightFAX fax server into the
CallXpress for Windows NT products. The Company expects these cross-development
efforts to increase in the future.
The Company internally develops its core technology, but believes that it is
more cost-effective to license from third parties certain components of its
products, such as database software, screen viewers, voice and fax cards and
network connectors. Whenever practical, the Company will license and integrate
such technology into its product offerings in order to decrease the cost of
development and shorten the time to market. In addition, the Company also
believes that the acquisition of new technology and new product offerings is
consistent with its strategic initiatives and will continue to pursue such
opportunities as they become available.
The Company believes that, for its product offerings to continue to achieve
acceptance, it will be necessary to continue to develop enhanced versions of its
computer-telephony applications. Over the past year the Company has released
major new versions of its products which operate in the Windows NT environment.
The Company expects to continue to expend significant research and development
efforts in developing new technology, but does not expect to introduce as many
new product lines in future years as the Company did in 1997. See "Risk Factors-
- -Rapidly Changing Technology and Customer Needs."
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.
8
Proprietary Rights
AVT relies on a combination of patents, copyright, trademark and trade secret
laws, nondisclosure and other agreements and technical measures to protect its
proprietary technology. The Company has received a patent in the area of unified
messaging. There can be no assurance that the Company's efforts to protect its
proprietary rights will be successful. AVT has periodically received letters
from third parties asserting patent rights. Following analysis, the Company
generally has not believed it necessary to license any of the patent rights
referred to in such letters. In those cases in which the Company has determined
a license of patent rights was necessary, it has entered into a license
agreement. The Company believes that any necessary licenses or other rights
under patents to products or features could be obtained on conditions that would
not have a material adverse effect on its financial condition, although there
can be no assurance in this regard. See "Risk Factors--Limited Intellectual
Property Protection; Potential Infringements."
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, 1998, the Company had license agreements with Octel
Corporation, Syntellect Inc., Intelligent Environments, Inc., International
Business Machines Corporation and Metasoft Systems, Inc.
Competition
The computer-telephony market is highly competitive and the Company believes
that the competitive pressures it faces are likely to intensify, particularly as
new offerings based on the Windows NT operating system emerge. 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. See "Risk Factors--Competition."
The Company's principal competitors in the telephony-oriented market for voice
messaging and unified messaging systems are independent suppliers, including the
Octel Messaging Division of Lucent Technologies, Inc., Centigram Communications
Corporation, Active Voice Corporation, Voysys Corporation and Callware
Technologies, Inc. The Company's principal competitors in the call center
systems market are manufacturers such as Aspect Telecommunications Corporation
and Rockwell International Corporation. PBX and key telephone systems
manufacturers such as Lucent Technologies, Inc., Northern Telecom Ltd., Siemens
Business Communication Systems, Inc., Executone Information Systems, Inc.,
Panasonic Communications and Systems Co., NEC America, Inc. and Toshiba America
Information Systems, Inc. also compete with the Company by offering integrated
voice messaging systems, unified messaging systems and ACD 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.
9
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, and for
certain internal "switching" components and digital hand sets used in the
Company's ACD products. 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, Natural Microsystems Corp. and Mitel Corp. The
Company purchases fax cards from Brooktrout and Dialogic. See "Risk Factors--
Dependence on Suppliers."
Employees
As of December 31, 1998, the Company had 323 full-time employees, including 44
in administration, 19 in manufacturing, 74 in engineering and product
development, and 186 in sales, marketing and technical support. The Company's
employees enter into agreements containing confidentiality restrictions. The
Company has never had a work stoppage and no employees are represented by a
labor organization. The Company considers its employee relations to be good.
Item 2. PROPERTIES
The Company's headquarters and its telephony-oriented administrative,
engineering, manufacturing and marketing operations are located in approximately
60,000 square feet of space in Kirkland, Washington under a lease that expires
in January 2003. The Company also conducts telephony-oriented operations in
approximately 6,600 square feet of leased space in Montclair, California. The
Company's computer-oriented operations are primarily located in approximately
19,500 square feet of leased space in Tucson, Arizona and approximately 10,900
square feet of leased space in Portland, Oregon.
The Company believes that these facilities are adequate to meet its current
needs and that suitable additional or alternative space will be available, as
needed, in the future on commercially reasonable terms.
Item 3. LEGAL PROCEEDINGS
In May 1998, CallWare brought suit against AVT in federal court in Salt Lake
City, Utah, alleging various claims relating to purported false advertising by
AVT. (CallWare Technologies, Inc. v. Applied Voice Technology, Inc., Case No.
2:98CV 0329K.) CallWare has claimed $20 million in monetary damages, and an
additional $60 million in punitive damages. The suit is in the discovery phase,
and an initial pretrial conference was held on January 14, 1999 and a trial
date of January 10, 2000 has been set. AVT believes that CallWare's claims are
without merit and is vigorously defending the lawsuit.
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 1998.
10
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
Year Ended December 31,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Income Data:
Net sales............................................................ $28,761 $31,284 $44,127 $58,091 $81,126
Cost of sales........................................................ 12,391 13,364 16,895 21,066 28,098
------- ------- ------- ------- -------
Gross profit......................................................... 16,370 17,920 27,232 37,025 53,028
------- ------- ------- ------- -------
Operating expenses:
Research and development.......................................... 2,671 2,732 4,149 6,719 8,082
Selling, general and administrative............................... 8,357 8,458 14,509 19,212 27,663
Non-recurring charges(1)................................ -- -- 4,140 11,025 287
------- ------- ------- ------- -------
Total operating expenses................................ 11,028 11,190 22,798 36,956 36,032
------- ------- ------- ------- -------
Operating income..................................................... 5,342 6,730 4,434 69 16,996
Other income, net.................................................... 294 1,116 919 1,070 1,145
------- ------- ------- ------- -------
Income before income tax expense..................................... 5,636 7,846 5,353 1,139 18,141
Income tax expense................................................... 1,398 2,512 3,419 410 6,531
------- ------- ------- ------- -------
Net income........................................................... $ 4,238 $ 5,334 $ 1,934 $ 729 $11,610
======= ======= ======= ======= =======
Diluted earnings per common share(2)................................. $0.52 $0.48 $0.17 $0.06 $0.88
Net income excluding nonrecurring items(3)........................... $ 4,238 $ 5,334 $ 6,074 $ 7,785 $11,793
Diluted earnings per common share excluding nonrecurring
Items(2)(3)......................................................... $0.52 $0.48 $0.52 $0.62 $0.90
Weighted average common and common equivalent shares
outstanding(2)...................................................... 8,142 11,222 11,748 12,598 13,165
December 31,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments.................... $22,685 $24,446 $27,679 $22,233 $39,049
Working capital...................................................... $24,294 $29,670 $30,870 $27,926 $48,873
Total assets......................................................... $28,944 $36,932 $46,127 $54,410 $76,107
Long-term debt, less current portion................................. $ -- $ 899 $ 313 $ -- $ --
Total shareholders' equity........................................... $24,998 $32,889 $38,883 $43,010 $63,395
- -------------------------
(1) Reflects nonrecurring charges of $287,000 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 and
1998 referred to above.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a leading provider of software-based computer-telephony
solutions for medium-sized enterprises. These solutions are designed to enhance
individual and work group productivity, improve customer service, reduce
business operating costs and simplify access to data and dissemination of
information. The Company's products provide enhanced voice and data integration
through applications such as unified voice and data messaging, call center
management, IVR and document distribution. The Company's key products are multi-
application computer-telephony platforms that run on off-the-shelf hardware,
support Windows NT and OS/2, and interface with a wide variety of telephony and
computer equipment. The Company also offers add-on modules and software upgrades
that provide increased capacity and functionality.
The Company sells its products primarily through an indirect channel of
resellers and distributors, as well as through direct sales and OEM and private
label agreements. The Company expanded its product offerings significantly in
1997 by releasing Windows NT-based products in each of its main product
categories. The Company's product lines serve the needs of two areas of the
computer telephony market - the telephony oriented buyer and the data oriented
buyer of enterprise software and systems. The Company's telephony-oriented
products include: CallXpress for Windows NT and CallXpress3, the Company's
premier multi-application, high capacity computer-telephony product lines;
PhoneXpress, a full-featured voice messaging system for small to medium-sized
enterprises; AgentXpress for Windows NT, a high-performance Windows NT-based
automated call center (ACD) system for medium-sized call centers; the recently
released Automated Agent for Windows NT, an IVR capability for CallXpress for
Windows NT; and Enhanced Agent, a set of interfaces and applications designed to
extend the capabilities of AgentXpress. The Company's data-oriented products
include RightFAX and RightFAX Enterprise, the Company's LAN-based fax server
lines for Windows NT, and CommercePath's line of production document delivery
systems for Windows NT and Unix. At this time the Company's data-oriented
products are focused on the enterprise fax market. The Company significantly
expanded its product offering in the past 24 months by releasing Windows NT-
based products in each of its main product areas.
Since January 1996, the Company has made three strategic acquisitions, each of
which was accounted for as a purchase. The Company acquired RightFAX, a
developer of LAN-based fax server software, in January 1996. In January 1997,
the Company acquired selected assets and liabilities of Telcom Technologies, a
developer of NT-based open-architecture ACD systems. In October 1997, the
Company acquired CommercePath, a developer of high-volume production-oriented
fax servers. In 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.
12
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,
---------------------------------------
1996 1997 1998
------------ ------------ -----------
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 38.3 36.3 34.6
----- ----- -----
Gross profit.................................. 61.7 63.7 65.4
Operating expenses:
Research and development.................... 9.4 11.6 10.0
Selling, general and administrative......... 32.9 33.1 34.1
Non-recurring charges....................... 9.4 18.9 0.3
----- ----- -----
Total operating expenses.................... 51.7 63.6 44.4
Operating income.............................. 10.0 0.1 21.0
Other income, net............................. 2.1 1.9 1.4
----- ----- -----
Income before income tax expense.............. 12.1 2.0 22.4
Income tax expense............................ 7.7 0.7 8.1
----- ----- -----
Net income.................................... 4.4% 1.3% 14.3%
===== ===== =====
Net Sales
The Company derives net sales primarily from initial sales of software kits
and licenses and fully integrated systems, as well as follow-on sales of add-on
software modules and product upgrades. Sales to dealers and distributors are
recognized when the products are shipped. The sales mix among the Company's
product categories and between software kits and fully integrated systems
affects both net sales and gross margin. Because of their hardware components,
fully integrated systems generate higher revenue per unit and lower margins than
comparable software kits. Advanced CTI application systems generally are sold at
a higher unit price and with a higher gross margin than basic messaging systems
due to the additional software modules purchased and the higher mix of software
kits and software licenses as compared to fully integrated systems. Over the
past three years, sales have shifted toward higher-margin advanced CTI products
and software kits from lower-margin CTI-ready systems and basic messaging
products, but there can be no assurance that this trend will continue. See "Risk
Factors--Fluctuations in Quarterly Operating Results; Limited Backlog" and
"--Declining Average Sales Prices."
Years ended December 31, 1998 and 1997. Net sales increased 40% to $81.1
million in 1998 from $58.1 million in 1997. This increase resulted primarily
from increased sales of enhanced fax products and a full year of sales from our
CommercePath business unit, which on a combined basis increased 92% in 1998, and
represented 57% of net sales, as compared to 42% of net sales in 1997. Sales of
advanced messaging and call center systems continued to strengthen during 1998
and constituted 35% of total product sales in 1998. The lower-margin basic
messaging market continued to be affected by price pressures from competitive
offerings. Basic messaging sales declined 33% in 1998 from 1997, and represented
8% of net sales in 1998 compared to 16% of net sales in 1998. International
sales for 1998 increased 23% from 1997, and represented 18% of net sales.
Years ended December 31, 1997 and 1996. Net sales increased 32% to $58.1
million in 1997 from $44.1 million in 1996. The increase resulted primarily from
sales of enhanced fax products, which increased 79% in 1997, and represented 42%
of net sales, as compared to 31% of net sales in 1996. The Company introduced
new, Windows NT-based, advanced CTI-oriented product lines in the first half of
1997 and included CommercePath's results of operations beginning in November
1997. The lower-margin basic messaging market continued to be affected by price
pressures from competitive offerings. Basic messaging sales declined 18% in 1997
from 1996, and represented 16% of net sales in 1997 compared to 26% of net sales
in 1996.
13
Gross Profit
Years ended December 31, 1998 and 1997. Gross profit as a percentage of net
sales increased to 65.4% in 1998, as compared to 63.7% in 1997, due primarily to
the favorable sales mix of enterprise fax products and advanced CTI applications
and the declining sales of basic messaging systems.
Years ended December 31, 1997 and 1996. Gross profit as a percentage of net
sales improved to 63.7% in 1997, as compared to 61.7% in 1996, due primarily to
the favorable sales mix of advanced CTI applications as compared to basic
messaging systems. Gross profit on basic messaging system sales in 1997
continued to be negatively affected by price erosion and a higher ratio of fully
integrated systems as compared to advanced CTI application systems.
Research and Development
Years ended December 31, 1998 and 1997. Research and development expenses
increased 20% to $8.0 million in 1998 from $6.7 million in 1997, due primarily
to increased personnel costs relating to acceleration of certain development
projects, and a full year of research and development expenses associated with
CommercePath. As a percentage of net sales, research and development expenses
represented 10% in 1998, as compared to 11.6% in 1997.
Years ended December 31, 1997 and 1996. Research and development expenses
increased 62% to $6.7 million in 1997 from $4.1 million in 1996, due primarily
to increased personnel costs relating to acceleration of certain development
projects, the inclusion of the recently formed call center development group,
which was acquired from Telcom Technologies, and research and development
expenses associated with CommercePath. As a percentage of net sales, research
and development expenses represented 11.6% in 1997, as compared to 9.4% in 1996.
Selling, General and Administrative
Years ended December 31, 1998 and 1997. Selling, general and administrative
expenses increased 44% to $27.7 million in 1998 from $19.2 million in 1997, due
primarily to the inclusion of CommercePath expenses for the entire year as well
as increased personnel-related costs of domestic and international development
of both the telephony-oriented and computer-oriented distribution channels.
Selling, general and administrative expenses for 1998 included amortization of
$1.1 million of goodwill relating to acquisitions compared to $0.7 million in
1997. Selling, general and administrative expenses represented 34.1% of net
sales in 1998, as compared to 33.1% in 1997.
Years ended December 31, 1997 and 1996. Selling, general and administrative
expenses increased 32% to $19.2 million in 1997 from $14.5 million in 1996, due
primarily to increased personnel-related costs of domestic and international
development of both the telephony-oriented and computer-oriented distribution
channels, the new product launches of CallXpress for Windows NT and AgentXpress
for Windows NT, and the inclusion of CommercePath expenses for the last two
months of 1997. Selling, general and administrative expenses for 1997 included
amortization of $0.7 million of goodwill relating to acquisitions. Selling,
general and administrative expenses represented 33.1% of net sales in 1997, as
compared to 32.9% in 1996.
14
Non-recurring Charges
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. The Company
recognized a nonrecurring charge of $4.1 million in the first quarter of 1996
for the write-off of purchased, in-process research and development associated
with the acquisition of RightFAX.
Other Income, Net
For the years ended December 31, 1998 and 1997, other income remained constant
at $1.1 million. Other income increased to $1.1 million in 1997 from $0.9
million in 1996 due to increased cash and investment balances.
Income Tax Expense
The effective income tax rate in 1998, 1997 and 1996 was 36%, excluding
acquisition-related charges. The acquisitions of Telcom Technologies and
CommercePath in 1997 were taxable transactions, and, therefore, the resulting
excess of purchase price over net tangible assets acquired is deductible for
income tax purposes. By contrast, the excess of the purchase price over net
tangible assets acquired associated with the acquisition of RightFAX in 1996 is
not tax deductible. Primarily as a result of the differing tax treatment of
these acquisitions, the Company recognized an income tax expense of $6.5 million
in 1998 and $0.4 million in 1997, as compared to an income tax expense of $3.4
million in 1996.
Net Income and Net Income Per Share
Years ended December 31, 1998 and 1997. The Company recognized net income in
1998 of $11.6 million as compared to $0.7 million in 1997. Excluding the
nonrecurring charges related to the cancellation of the follow-on stock offering
in 1998, net income would have increased to $11.8 million compared to the 1997
net income excluding non-recurring charges of $7.8 million. Diluted net income
per share, excluding the nonrecurring charges, increased to $.90 per share in
1998 from $.62 per share in 1997.
Years ended December 31, 1997 and 1996. The Company recognized net income in
1997 of $0.7 million as compared to $1.9 million in 1996. Excluding the
nonrecurring charges related to the RightFAX, Telcom Technologies and
CommercePath transactions discussed above, net income for 1997 would have
increased 28% to $7.8 million, from $6.1 million in 1996. Diluted net income per
share, excluding the nonrecurring charges, increased to $.62 per share in 1997
from $.52 per share in 1996.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments increased to $39.0
million at December 31, 1998 from $22.2 million at December 31, 1997 and from
$27.7 million at December 31, 1996, due primarily from operations. Cash flow
generated from operating activities was $15.7 million, $10.3 million and $8.2
million in the years ended December 31, 1998, 1997 and 1996, respectively. The
increases resulted primarily from profitable operations.
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
15
to increase immediately and uniformly by 10% from levels at December 31, 1998,
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.
In February 1995, the Company prepaid the remaining balance due under a
royalty agreement associated with a 1989 business combination. See Note 6 to the
Consolidated Financial Statements. The cash disbursement, which amounted to $1.8
million, was recorded as an intangible asset and has been amortized over the
remaining term of the original royalty agreement, approximately six years. In
addition, the Company amended a license agreement in September 1995, prepaying
its remaining royalty obligation by issuing a note in the amount of $1.9 million
payable in 12 equal quarterly installments of $161,417 each, including imputed
interest at 8.75% per annum. The Company amended an additional license agreement
in July 1996, prepaying its remaining royalty obligation by issuing a non-
interest-bearing note for $450,000 that was fully paid prior to December 31,
1996. For each of these license agreement amendments, the related intangible
asset is being amortized on a straight-line basis over the average remaining
lives of the patents, which are approximately 12 years in the case of the
license amended in September 1995 and approximately seven years in the case of
the license amended in July 1996.
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 1998 and 1997 of $668,000 and
$1,408,000, respectively, and also issued 52,000 and 190,000 additional shares
of common stock. In January 1999, the Company paid the final amounts on the
earn out of $250,000 and 9,800 shares of common stock. This earn out resulted
in additional goodwill being recorded in December 1998, 1997 and 1996 of $0.5
million, $1.3 million and $2.0 million, respectively.
In January 1997, the Company acquired selected assets and liabilities of
Telcom Technologies. The purchase price for the acquisition was $3.5 million in
cash, plus warrants to purchase 200,000 shares of Common Stock exercisable at
$6.68 per share, which may be exercised any time prior to January 3, 2002. The
Company accounted for the business combination as a purchase and recognized a
nonrecurring charge of $3.9 million in the first quarter of 1997, representing
the value of the purchased, in-process research and development.
In October 1997, the Company acquired all the outstanding capital stock of
CommercePath from Forest City Trading Group, Inc. for $10.4 million in cash. In
connection with the acquisition, the Company also granted options to purchase
240,000 shares of Common Stock, at an exercise price of $14.05 per share, to two
of CommercePath's executive officers. The Company accounted for the acquisition
as a purchase and recorded a nonrecurring charge of $7.1 million for the write-
off of purchased, in-process research and development. In addition, the Company
recorded $1.8 million of goodwill that will be amortized over seven years. See
Note 8 to the Consolidated Financial Statements.
At December 31, 1998, 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 May 1999 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 $2.1 million, $1.1 million and $0.9 million in equipment
and leasehold improvements in the years ended December 31, 1998, 1997 and 1996,
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.
16
Impact of the Year 2000 Issue
The "Year 2000 Issue" is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. Systems that do not properly recognize date sensitive information
when the year changes to 2000, or interact with systems or components that fail
to do so, could generate erroneous data or otherwise fail to function properly,
or at all. There is speculation that a significant amount of litigation will
arise out of Year 2000 compliance issues, and the Company is aware of a growing
number of lawsuits against other software vendors. Because of the unprecedented
nature of such litigation, it is uncertain whether or to what extent the Company
may be affected by it.
The Company has developed a plan to ensure its internal systems and products
are Year 2000 compliant, and to mitigate its risks in the event that its vendors
or other third-parties with whom it has material relationships are not Year 2000
compliant on a timely basis. The Company has potential exposure relating to the
Year 2000 issue in four areas: (1) the Company's internal software and hardware
systems, including non-information technology systems; (2) suppliers of hardware
and software the Company resells as part of its products; (3) internally
developed software the Company sells; and (4) other third-parties with whom the
Company has material relationships. The following information explains how the
Company is addressing each of these potential risk areas:
1. With respect to internal software and hardware systems, the Company
reviewed all its material systems to determine which systems were not
Year 2000 compliant. The Company is currently in the process of
completing all necessary upgrades, modifications and conversions to its
programs and equipment to ensure they will continue to be effective in
the year 2000, and expects to complete this process not later than June
30, 1999. All of such upgrades have been or are being done as part of a
normal upgrade cycle and accordingly no additional costs are being
incurred as a result of Year 2000 issues. The Company expects that the
only expense it will incur to make its internal software and hardware
systems Year 2000 compliant is approximately $5,000 to update an alarm
system.
2. The Company has tested and will continue to test computer components,
including fax and voice cards and software it purchases from third
parties, for Year 2000 compliance. The Company has verified that all
such components and software currently in use are Year 2000 complaint.
The Company, however, has identified alternate sources for critical
components in the event that a supplier' s business is disrupted by the
advent of the year 2000.
3. Since June 1998, all of the Company's products available for sale to
customers have been Year 2000 compliant. The Company has offered free or
reduced cost upgrades to certain purchasers of the Company's products
that were not Year 2000 compliant when sold. The cost of developing and
providing such upgrades was approximately $100,000. The Company does not
intend to offer upgrades for certain of its older products.
4. The Company has begun a process to contact third parties with which it
has material relationships, including its vendors, distributors, banks,
and transfer agent, to attempt to determine their preparedness with
respect to Year 2000 issues and to analyze the risks to the Company in
the event any such third parties experience significant business
interruptions as a result of Year 2000 noncompliance. The Company
expects to complete this review process by March 31, 1999.
The Company believes that it is taking the necessary steps regarding Year
2000 compliance with respect to matters within its control to ensure that the
Year 2000 issue will not materially impact the Company. However, the Company
may be materially adversely affected if important distributors or customers of
the Company experience significant disruptions in their systems or business due
to the advent of the Year 2000. In addition, the costs of the Year 2000 project
and the date on which the Company plans to complete Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third
17
party modification plans and other factors. There can be no guarantee that these
assumptions will prove to be correct and actual results could differ materially
from those expected. The Company intends to develop a contingency plan to
address unexpected Year 2000 issues by June 30, 1999.
Certain Trends and Uncertainties
When used in this discussion, the words "believes," "anticipates" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Factors which could affect the
Company's financial results are described below under "Risk Factors" and in Item
1 (Business) of this Annual Report on Form 10-K. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events.
18
RISK FACTORS
Fluctuations in Quarterly Operating Results; Limited Backlog. The Company's
quarterly results of operations are subject to significant fluctuations due to a
variety of factors, including the timing of customer orders, changes in the
Company's mix of products and distribution channels, the announcement or
introduction of new products by the Company or its competitors, pricing
pressures and general economic conditions. For example, mix shifts between fully
integrated systems and software kits result in fluctuations in gross margins
because fully integrated systems generate higher revenue per unit but have lower
margins due to their hardware component. The Company's results of operations
also may fluctuate as a result of seasonal factors. Specifically, due to typical
year-end dealer sales patterns and end-user buying patterns, net sales in the
Company's first quarter, without taking into account the effect of acquisitions,
have in the past declined from the fourth quarter of the previous year. Because
substantially all of the Company's revenues in each quarter result from orders
received in that quarter, the Company has historically operated with little or
no backlog. The Company establishes its expenditure levels for product
development and other operating expenses based on its expected revenues, and
expenses are relatively fixed in the short term. As a result, variations in the
timing of sales can cause significant variations in quarterly results of
operations. Accordingly, the Company's results of operations for any period are
not necessarily indicative of results for any future period.
Dependence on Indirect Distribution. A substantial majority of the Company's
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 both the Company's
competitors and from providers of other products normally distributed through
these channels. In addition, many of these dealers and resellers do not have the
financial resources to withstand a downturn in their businesses. The lack of
active effort or interest on the part of these dealers and resellers in selling
the Company's products, the loss of a major dealer or reseller, or any other
event or condition negatively affecting the distribution network could have a
material adverse effect on the Company's business, results of operations and
financial condition. There can be no assurance that the Company will be able to
maintain or expand its network of dealers and resellers in the future or that
such dealers and resellers will maintain or expand their present level of
efforts to sell the Company's products. See "Business--Distribution."
Risks Associated With Recent and Future Acquisitions. Since January 1996, the
Company has made three strategic acquisitions. The Company's management
frequently evaluates potential acquisitions of products, technologies and
businesses. Acquisitions by the Company may result in the diversion of
management's attention from the day-to-day operations of the Company's business
and may include numerous other risks, including difficulties in the integration
of operations, products and personnel. The failure of efforts to integrate
future acquisitions could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition,
acquisitions by the Company have the potential to result in dilutive issuances
of equity securities, the incurrence of debt, write-offs of purchased, in-
process research and development and amortization expenses related to goodwill
and other intangible assets.
Rapidly Changing Technology and Customer Needs. The market for the Company's
products is subject to rapid technological change, changes in customer
requirements and frequent new product and feature introductions. Customer needs
and expectations will require the Company to continue to identify, develop and
market new products and features that satisfy those needs and keep pace with
technological developments, including evolving industry standards and
competitive offerings. Such activities will require the Company to make
substantial expenditures on product development. In addition, the Company has
devoted significant expenditures to technologies that it anticipates will become
widely adopted, such as Windows NT and the Internet. There can be no assurance
that new products or product enhancements developed by the Company will achieve
market acceptance or that the Company will successfully develop new products or
product enhancements on a timely basis. Any failure by the Company to anticipate
or respond adequately to technological developments, customer requirements or
evolving industry standards, or any significant delays in product development or
introduction, could have a material adverse effect on AVT's business, results of
operations and financial condition. See "Business--Product Development."
Competition. The computer-telephony market is highly competitive and the
Company believes that the competitive pressures it faces are likely to
intensify, particularly as new offerings based on the Windows NT operating
system emerge. The Company's principal competitors in the telephony-oriented
market for messaging systems are independent suppliers, including the Octel
Messaging Division of Lucent Technologies, Inc., Mitel Corporation, Active Voice
Corporation,
19
Voysys Corporation and Callware Technologies, Inc. The Company's principal
competitors in the call center systems market are manufacturers such as Aspect
Telecommunications Corporation and Rockwell International Corporation. In
addition to these independent suppliers of computer-telephony solutions, private
branch exchange ("PBX") and key telephone systems manufacturers such as Lucent
Technologies, Inc., Northern Telecom Ltd., Siemens Business Communication
Systems, Inc., Executone Information Systems, Inc., Panasonic Communications and
Systems Co., NEC America, Inc. and Toshiba America Information Systems, Inc.
also compete with the Company by offering integrated voice messaging systems,
unified messaging systems and automatic call distribution ("ACD") 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.
The Company believes that further acceptance of open systems architectures and
the development of industry standards in the call processing market will
eliminate some of the technical barriers to entry, allowing additional
competitors to enter the market. Many of the Company's existing competitors have
substantially greater technical, financial and marketing resources, as well as
larger customer and installed bases and greater name recognition, than the
Company. Further, some of the Company's competitors are able to achieve
marketing advantages by bundling their call processing equipment or competitive
facsimile solutions as part of their broader product offerings. The Company
expects its competitors to continue to offer improved product technologies and
capabilities, the availability of which could cause a significant decline in
sales of the Company's existing products. There can be no assurance that the
Company will be able to compete successfully or that such competition will not
have a material adverse effect on the Company's business, results of operations
or financial condition. See "Business--Competition."
Declining Average Sales Prices. The Company has experienced declining average
sales prices in its basic voice messaging products as a result of competitive
pressures and in the future may experience declining prices in some of its other
product lines. Declining average sales prices of the Company's more significant
product lines could lead to a decline in the Company's overall gross margins. To
offset and forestall declining average sales prices, the Company believes that
it must continue to develop product enhancements and new products with advanced
features that are likely to generate higher-margin incremental revenue. If the
Company is unable to develop new products and enhancements in a timely manner or
if such products do not achieve significant customer acceptance, the Company's
business, results of operations and financial condition could be materially
adversely affected. See "--Competition".
Limited Intellectual Property Protection; Potential Infringements. The
Company's success depends in part on its ability to protect its proprietary
technology. The Company has received a patent in the area of unified messaging,
but there can be no assurance that the claims in the patent will not be
successfully challenged or circumvented by competitors, or that the patent will
provide competitive advantages for the Company's products. In addition, the
Company relies on a combination of copyright, trademark and trade secret laws,
nondisclosure and other agreements and technical measures to protect its
proprietary technology. There can be no assurance that the Company will be able
to obtain any meaningful patent protection for its technology in the future, or
that the measures taken by the Company will be adequate to prevent or deter
misappropriation of its technology or the development of technologies having
similar performance characteristics. The Company's use of open systems
architecture in the design of its products may make it easier for competitors to
misappropriate or replicate the Company's designs and developments. The
computer-telephony software industry has historically been characterized by
numerous allegations of patent infringement among competitors, and considerable
related litigation. The Company has received claims of patent infringement from
several parties and likely will receive additional claims in the future.
Although none of these claims has led to litigation to date, the Company's
investigation into some of these claims has been limited by, among other things,
lack of sufficient information regarding the claims. These claims may yet result
in the Company's incurring substantial legal expenses and being required to
obtain licenses, pay damages for infringement, or cease offering products that
infringe such patents. There can be no assurance that a license under patents or
other intellectual property that the Company is allegedly infringing would be
available to the Company on reasonable terms, if at all. The inability of the
Company to obtain necessary licenses or other rights or to protect its
proprietary
20
technology could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Proprietary
Rights."
Risks of International Markets. The Company's future growth depends in part
on continued expansion of its international sales, which accounted for
approximately 18%, 21% and 18% of net sales in the years ended December 31,
1996, 1997 and 1998, respectively. This expansion requires significant
management attention and financial resources, and has resulted in a significant
portion of the Company's revenues being subject to the risks associated with
international sales. Such risks include necessary product adaptations to local
languages and telephone system technology, changes in regulatory requirements,
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. Although substantially all
of the Company's international sales currently are denominated in U.S. dollars,
as the Company continues to expand its international operations, it expects its
non-dollar-denominated sales and its exposure to gains and losses on
international currency transactions to increase. The Company does not currently
engage in transactions to hedge against the risk of currency fluctuations.
Because most sales are U.S.-dollar denominated, exchange rate fluctuations may
make the Company's products noncompetitive in certain markets. Furthermore,
continued growth in international markets for the Company's products depends in
part on the pace at which various foreign countries are upgrading their
telephone systems. There can be no assurance that these factors will not have a
material adverse effect on the Company's business, results of operations or
financial condition. See "Business--Distribution--International Distribution."
Dependence on Key Personnel; Management of Growth. The Company's success
depends on its ability to attract and retain key personnel involved in
engineering, research and development, marketing, sales, finance and
administration. In particular, the Company depends to a significant degree on
the efforts of its senior management team. The Company does not maintain
material key person life insurance. The competition for skilled personnel is
intense and the loss of the services of key persons in any functional area could
have a material adverse effect on AVT's current operations and on new product
development efforts. There can be no assurance that the Company will be able to
hire or retain sufficient qualified staff to meet its goals. The Company's
success also depends on the ability of its officers and key employees to manage
growth successfully and to continue to successfully develop product enhancements
and new products. The growth in the Company's business has placed, and is
expected to continue to place, significant demands on the Company's management
and operations. To manage its growth, the Company must continue to implement and
improve its operational, financial and management information systems and
expand, train and manage its employees. The Company's failure to manage growth
effectively could have a material adverse effect on the Company's business,
results of operations or financial condition.
Dependence on Suppliers. The Company uses standard computer hardware for its
products. While most components utilized by the Company are readily available,
voice processing circuit boards ("voice cards") and facsimile processing circuit
boards ("fax cards") are available in quantity only from three domestic
suppliers of voice cards and two domestic suppliers of fax cards. The Company
has historically relied almost exclusively on Dialogic Corporation ("Dialogic")
for its voice cards, and on Dialogic and Brooktrout Technologies, Inc.
("Brooktrout") for its fax cards, primarily because of volume price discounts
and the cost and effort required to develop software for an alternate voice or
fax card. If the Company were to experience significant delays, interruptions or
reductions in its supply of voice or fax cards, or unfavorable changes to price
and delivery terms, the Company's business, results of operations and financial
condition would be materially adversely affected. See "Business--Manufacturing."
21
Possible Volatility of Stock Price. The market price of the Company's Common
Stock has been, and is likely to continue to be, volatile. Factors such as new
product announcements or changes in product pricing policies by the Company or
its competitors, quarterly fluctuations in the Company's 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, among other
factors, may have a significant effect on the market price of the Company's
Common Stock. The market prices of securities issued by many companies,
particularly in high-technology industries, experience volatility for reasons
unrelated to the operating performance of the specific companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference from the
section labeled "Liquidity and Capital Resources" in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Annual Report on Form 10-K.
22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AVT CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
1997 1998
- ------------------------------------------------------------------------------------------------ ---------- ---------
ASSETS (in thousands)
Current assets:
Cash and cash equivalents..................................................................... $ 7,965 $10,824
Short-term investments........................................................................ 14,268 28,225
Accounts receivable, less allowance of $787,000 and $766,000.................................. 10,098 14,153
Inventories................................................................................... 4,908 5,560
Deferred and prepaid income taxes............................................................. 1,119 1,430
Prepaid expenses and other.................................................................... 968 1,393
------- -------
Total current assets....................................................................... 39,326 61,585
Equipment and leasehold improvements, net....................................................... 2,364 3,263
Intangibles, net................................................................................ 8,815 7,677
Deferred income taxes........................................................................... 3,905 3,582
------- -------
$54,410 $76,107
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................................. $ 2,352 $ 3,669
Other current liabilities..................................................................... 6,114 8,669
Note payable--current portion................................................................. 313 -
Income taxes payable.......................................................................... 2,621 374
------- -------
Total current liabilities.................................................................. 11,400 12,712
------- -------
Commitments.....................................................................................
Shareholders' equity:
Preferred stock, par value $.01 per share, 2,000,000 shares authorized; none
outstanding................................................................................. -- --
Common stock, par value $.01 per share, 60,000,000 shares authorized;
11,522,558 and 12,623,255 outstanding....................................................... 115 126
Additional paid-in capital.................................................................... 31,604 40,368
Retained earnings............................................................................. 11,291 22,901
------- -------
Total shareholders' equity................................................................. 43,010 63,395
------- -------
$54,410 $76,107
======= =======
See the accompanying notes to these consolidated financial statements.
23
AVT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------
1996 1997 1998
----------- ----------- ----------
(in thousands, except per share data)
Net sales............................................................................ $44,127 $58,091 $81,126
Cost of sales........................................................................ 16,895 21,066 28,098
------- ------- -------
Gross profit....................................................................... 27,232 37,025 53,028
------- ------- -------
Operating expenses:
Research and development........................................................... 4,149 6,719 8,082
Selling, general and administrative................................................ 14,509 19,212 27,663
Non-recurring charges.............................................................. 4,140 11,025 287
------- ------- -------
Total operating expenses........................................................ 22,798 36,956 36,032
------- ------- -------
Operating income..................................................................... 4,434 69 16,996
------- ------- -------
Other income:
Interest income.................................................................... 909 808 1,056
Other.............................................................................. 10 262 89
------- ------- -------
Other income.................................................................... 919 1,070 1,145
------- ------- -------
Income before income tax expense..................................................... 5,353 1,139 18,141
Income tax expense................................................................... 3,419 410 6,531
------- ------- -------
Net income........................................................................... $ 1,934 $ 729 $11,610
======= ======= =======
Basic earnings per common share...................................................... $0.18 $0.06 $0.96
Weighted average common shares outstanding........................................... 10,752 11,364 12,115
Diluted earnings per common share.................................................... $0.17 $0.06 $0.88
Weighted average common and common equivalent shares outstanding..................... 11,748 12,598 13,165
See the accompanying notes to these consolidated financial statements.
24
AVT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
Common Stock Additional Total
----------------- paid-in Deferred Retained shareholders'
Shares Amount capital compensation earnings equity
---------------- ---------- ------------ -------- -------------
(in thousands, except share data)
Balance at December 31, 1995................ 10,288,080 $103 $24,170 $(34) $ 8,650 $32,889
Unrealized loss on investments.............. -- -- -- -- (22) (22)
Exercise of stock options................... 236,748 2 616 -- -- 618
Stock compensation expense.................. -- -- -- 34 -- 34
Stock issued in acquisition................. 326,598 3 3,427 -- -- 3,430
Net income.................................. -- -- -- -- 1,934 1,934
---------- ---- ------- ------- ------- -------
Balance at December 31, 1996................ 10,851,426 108 28,213 -- 10,562 38,883
Stock issued in acquisition................. 191,032 2 666 -- -- 668
Warrants issued in acquisition.............. -- -- 700 -- -- 700
Exercise of stock options................... 480,100 5 1,463 -- -- 1,468
Tax benefit of stock options
exercised.................................. -- -- 562 -- -- 562
Net income.................................. -- -- -- -- 729 729
---------- ---- ------- ------- ------- -------
Balance at December 31, 1997................ 11,522,558 115 31,604 -- 11,291 43,010
Stock issued in acquisition................. 52,200 1 249 -- -- 250
Exercise of stock options................... 1,048,497 10 3,866 -- -- 3,876
Tax benefit of stock options
exercised.................................. -- -- 4,649 -- -- 4,649
Net income.................................. -- -- -- -- 11,610 11,610
---------- ---- ------- ------- ------- -------
Balance at December 31, 1998................ 12,623,255 $126 $40,368 $ -- $22,901 $63,395
========== ==== ======= ======= ======= =======
See the accompanying notes to these consolidated financial statements.
25
AVT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
1996 1997 1998
----------- ------------- ------------
(in thousands)
Cash flows from operating activities:
Net income.................................................................... $ 1,934 $ 729 $ 11,610
------- -------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................. 1,395 2,083 2,908
Non-recurring charges......................................................... 4,140 11,025 287
Stock compensation expense.................................................... 34 -- --
Deferred income taxes......................................................... (137) (3,406) 228
Changes in current assets and liabilities:
Accounts receivable........................................................ 5 (1,944) (4,055)
Inventories................................................................ (551) (1,239) (652)
Prepaid expenses and other assets.......................................... (237) (340) (712)
Accounts payable........................................................... 241 16 1,317
Accrued compensation and benefits.......................................... 514 (52) 2,283
Income taxes payable....................................................... 546 2,278 2,183
Other accrued liabilities.................................................. 271 1,124 272
------- -------- --------
Total adjustments.......................................................... 6,221 9,545 4,059
------- -------- --------
Net cash provided by operating activities.................................. 8,155 10,274 15,669
------- -------- --------
Cash flows from investing activities:
Purchase of equipment and leasehold improvements.............................. (930) (1,112) (2,136)
Cash paid in acquisition, net of cash acquired................................ (3,318) (15,426) --
Purchase of short-term investments............................................ (3,309) -- (13,957)
Net proceeds from the sale of investments..................................... -- 1,216 --
Other intangibles and long-term assets........................................ -- (64) (280)
------- -------- --------
Net cash used in investing activities...................................... (7,557) (15,386) (16,373)
------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt................................................... (983) (586) (313)
Proceeds from exercise of common stock options................................ 331 1,468 3,876
------- -------- --------
Net cash provided by (used in) financing activities........................ (652) 882 3,563
------- -------- --------
Net decrease in cash....................................................... (54) (4,230) 2,859
Cash and cash equivalents at beginning of period................................ 12,249 12,195 7,965
------- -------- --------
Cash and cash equivalents at end of period...................................... $12,195 $ 7,965 $ 10,824
======= ======== ========
Cash paid for interest.......................................................... $ 129 $ 57 $ 15
See the accompanying notes to these consolidated financial statements.
26
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., as of January 2, 1996, and CommercePath,
Inc., as of October 22, 1997. All intercompany accounts have been eliminated.
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,
----------------------------
1997 1998
-------------- ------------
(in thousands)
Computers and other equipment...................................................... $ 5,758 $ 7,505
Leasehold improvements............................................................. 427 606
Furniture and fixtures............................................................. 584 794
------- -------
6,769 8,905
Less accumulated depreciation...................................................... (4,405) (5,642)
------- -------
Equipment and leasehold improvements, net.......................................... $ 2,364 $ 3,263
======= =======
27
APPLIED VOICE TECHNOLOGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
Intangibles
Goodwill is being amortized using the straight-line method over its estimated
useful life of seven years. License agreements are amortized using the straight-
line method over the remaining lives of the related patents, which range from
approximately 6 to 12 years.
December 31,
---------------------------
1997 1998
------------- ------------
(in thousands)
Goodwill on CommercePath acquisition.................................................... $ 1,793 $ 1,829
Goodwill on RightFAX acquisition........................................................ 5,406 5,906
License agreements...................................................................... 4,516 4,516
------- -------
11,715 12,251
Less accumulated amortization........................................................... (2,900) (4,574)
------- -------
Intangibles, net........................................................................ $ 8,815 $ 7,677
======= =======
Other Current Liabilities
December 31,
-----------------------
1997 1998
----------- ----------
(in thousands)
Accrued compensation and benefits...................................................... $1,485 $3,768
Acquisition costs...................................................................... 1,336 250
Deferred maintenance revenue........................................................... 1,891 2,210
Other.................................................................................. 1,402 2,441
------ ------
Other current liabilities.............................................................. $6,114 $8,669
====== ======
Use of Estimates
The preparation of the Company's consolidated financial statements, in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain prior period balances have been reclassified to conform with the current
period presentation.
Revenue Recognition
Revenues from sales to dealers are recognized when the products are shipped.
When the Company has an installation obligation, revenues are recognized when
product installation is complete. Revenues for software maintenance contracts
are recognized over the maintenance periods, generally one year. Revenues from
extended warranty agreements are recognized over the lives of the related
service contracts on the straight-line method. The Company accrues estimated
costs of technical support to customers as related revenues are recognized.
Research and Development Costs
Research and development costs are expensed as incurred. The Company has not
capitalized any software development costs, as technological feasibility is not
generally established until substantially all development is complete.
28
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic earnings per common share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share were computed by dividing net income by the
sum of the weighted average number of shares of common stock outstanding during
the year plus the net additional shares that would have been issued had all
dilutive options been exercised less shares that would be repurchased with the
proceeds from such exercise. Dilutive options are those that have an exercise
price which is less than the average stock price during the year.
The computation of diluted earnings per common share is as follows:
Year Ended December 31,
------------------------------------
1996 1997 1998
----------- ---------- -----------
(in thousands, except per share amounts)
Diluted earnings per common share:
Net income............................................................................ $ 1,934 $ 729 $11,610
------- ------- -------
Weighted average common shares outstanding............................................ 10,752 11,364 12,115
Plus: dilutive options assumed exercised.............................................. 1,592 2,790 2,364
Less: shares assumed repurchased with proceeds from exercise.......................... (786) (1,624) (1,314)
Plus: other common stock equivalents.................................................. 190 68 -
------- ------- -------
Weighted average common and common equivalent shares outstanding...................... 11,748 12,598 13,165
------- ------- -------
Diluted earnings per common share..................................................... $0.17 $0.06 $0.88
======= ======= =======
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, 1997 and 1996, no
customer represented 10% or greater of the Company's net sales. The Company
performs ongoing credit evaluations of its customers' financial conditions and,
generally, no collateral is required.
The Company's export sales were as follows:
Year Ended December 31,
---------------------------------
1996 1997 1998
---------- --------- ----------
(in thousands)
Canada................................................................................ $2,660 $ 3,395 $ 3,914
Other................................................................................. 5,338 8,757 11,044
------ ------- -------
$7,998 $12,152 $14,958
====== ======= =======
29
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Reporting
The Company adopted Statement of Accounting Standard No. 131 "Disclosures
about Segments of an Enterprise and Related Information "(SFAS No. 131) during
1998. SFAS 131 requires companies to disclose certain information about
operating segments. Based on the criteria within SFAS No. 131, the Company has
determined that it has one reportable segment, computer telephony products.
Sales of the Company's product by categories and amount are as follows:
Year Ended December 31,
---------------------------------
1996 1997 1998
---------- --------- ----------
(in thousands)
Enhanced fax products.................................... $13,580 $24,253 $46,532
Advanced messaging and call center products.............. 18,911 24,276 28,159
Basic messaging products................................. 11,636 9,562 6,435
------- ------- -------
$44,127 $58,091 $81,126
======= ======= =======
2. Income Taxes
Income taxes are provided for in the consolidated statements of income using
the asset and liability method. The difference between the provision for income
taxes and the statutory tax rate applied to income before income tax expense is
due to certain expenses not being deductible for tax purposes and research and
experimentation credits.
The following is a reconciliation from the U.S. statutory rate to the
effective tax rate:
Year Ended December 31,
-----------------------
1996 1997 1998
-------------- --------------- ---------------
Amount % Amount % Amount %
------- ----- ------- ------ -------- -----
(dollars in thousands)
Tax at statutory rate.................................... $1,820 34.0% $ 387 34.0% $6,168 34.0%
Research and experimentation credit...................... (69) (1.3) (105) (9.2) (150) (1.0)
Write-off of purchased, in-process research and
development............................................. 1,408 26.3 -- -- -- --
Nondeductible goodwill amortization...................... 101 1.9 230 20.2 319 1.8
Nontaxable interest income............................... (217) (4.0) (235) (20.6) (227) (1.3)
State taxes and other.................................... 376 7.0 133 11.6 421 2.5
------ ---- ----- ----- ------ ----
Income tax expense....................................... $3,419 63.9% $ 410 36.0% $6,531 36.0%
====== ==== ===== ===== ====== ====
30
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income tax expense and cash paid for income taxes are as follows:
Year Ended December 31,
---------------------------------------
1996 1997 1998
------------ ------------- ----------
(in thousands)
Current........................................................................... $3,556 $ 4,378 $6,303
Deferred.......................................................................... (137) (3,968) 228
------ ------- ------
Total income tax expense....................................................... $3,419 $ 410 $6,531
====== ======= ======
Cash paid for income taxes........................................................ $3,010 $ 1,539 $4,101
====== ======= ======
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,
1997 and 1998 are as follows:
December 31,
-----------------------
1997 1998
----------- ----------
(in thousands)
Deferred tax assets:
Accounts receivable allowances............................................................. $ 283 $ 276
Inventories................................................................................ 75 85
Depreciation and amortization.............................................................. 64 -
Accrued compensation and benefits.......................................................... 171 192
Purchased research and development......................................................... 3,841 3,549
Deferred Revenue........................................................................... - 468
Other...................................................................................... 590 442
------ ------
Deferred tax assets and prepaid income taxes.................................................. $5,024 $5,012
====== ======
3. Shareholders' Equity
On April 23, 1998, the Company announced that its Board of Directors approved
a two-for-one stock split of the Common Stock effected in the form of a stock
dividend. Shareholders received an additional share of common stock for every
share held on the record date of May 4, 1998. The additional shares were payable
on May 11, 1998. Accordingly, the accompanying financial statements have been
restated to reflect this stock split.
On April 20, 1998, the Company's Board of Directors approved an increase of
the authorized shares of Common Stock, from 30 million to 60 million and an
increase of the authorized shares of Preferred Stock from one million to two
million, in order to reflect the stock split. Shareholder approval of these
increases was not required.
The Company has stock option plans under which employees, directors, officers
and other agents may be granted options to purchase common stock. The Company
has reserved approximately 5,700,000 shares of common stock for issuance
pursuant to these plans upon exercise of outstanding options and upon exercise
of options to be granted in the future. Options generally vest over three to
four years and expire 10 years from the date of grant. The options are
exercisable at prices determined at the discretion of the Board of Directors.
The Company accounts for these plans under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," under which no compensation
cost has been recognized and is based on the difference between the exercise
price and fair market value at the date of grant, if any. Had compensation cost
for stock option grants made in 1996, 1997 and 1998 been determined using the
fair value method consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based
31
Compensation" (SFAS 123), the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
32
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31,
--------------------------------------
1996 1997 1998
----------- ------------ -----------
( in thousands expect per share data)
Net Income: As Reported................................ $1,934 $ 729 $11,610
Pro Forma.................................. $ 793 $ (441) $ 9,374
Basic EPS: As Reported................................ $ 0.18 $ 0.06 $ 0.96
Pro Forma.................................. $ 0.08 $(0.04) $ 0.77
Diluted EPS: As Reported................................ $ 0.17 $ 0.06 $ 0.88
Pro Forma.................................. $ 0.07 $(0.04) $ 0.74
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, 1998: risk-free
interest rates of 6.25%; expected lives of five years; expected volatility of
44%; and $0 dividends. For 1997 the assumptions were: risk-free interest rates
of 6.85%; expected lives of five years; expected volatility of 49%; and $0
dividends. For 1996 the following assumptions were used: risk-free interest
rates of 6.25%; expected lives of five years; expected volatility of 45%; and $0
dividends.
Stock Option Plans
A summary of the status of the Company's stock option plans at December 31,
1996, 1997 and 1998, and the changes during the years then ended, is presented
in the table and narrative below:
1996 1997 1998
--------------------- --------------------- ----------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------- --------- ---------- --------- ----------- ---------
Outstanding at beginning of period..................... 1,476,568 $1.48 2,900,730 $ 4.44 2,840,210 $ 5.71
Granted................................................ 1,783,800 $6.63 483,600 $10.86 852,978 $18.82
Exercised.............................................. (236,748) $1.41 (480,102) $ 3.06 (1,018,344) $ 3.55
Canceled............................................... (122,890) $6.51 (64,018) $ 6.95 (67,319) $14.19
--------- --------- ----------
Outstanding at end of period........................... 2,900,730 $4.44 2,840,210 $ 5.71 2,607,525 $10.62
--------- --------- ----------
Exercisable at end of period........................... 1,196,472 $1.38 1,472,694 $ 3.46 1,333,282 $ 6.17
Weighted average fair value of options granted......... $2.89 $ 5.51 $ 9.06
Options outstanding have exercise prices ranging from $0.50 to $23.25 per
share, with weighted average remaining contractual lives of 7.2, 6.9 and 7.3
years at December 31, 1996, 1997 and 1998, respectively. At December 31, 1998,
1,879,325 shares of the Company's common stock were available for future grant
under the Company's stock option plans. Information relating to stock options
outstanding and stock options exercisable at December 31, 1998 is as follows:
33
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
- ------------------------------------------ --------- ---------------- --------- --------- ---------
$ 0.50 - $8.25........................... 1,505,292 6 $ 5.50 1,218,875 $ 5.52
$ 8.26 - $16.50.......................... 574,487 9 $14.08 114,307 $13.07
$16.51 - $23.25.......................... 527,748 9 $20.91 100 $22.50
--------- - ------ --------- ------
2,607,525 7 $10.63 1,333,282 $ 6.17
========= = ====== ========= ======
Warrants
At December 31, 1998, there were outstanding warrants to purchase 174,560
shares of the Company's common stock at $6.68 per share. The warrants were
issued in connection with the Telcom Technologies Inc. acquisition discussed in
Note 8 below.
4. Line of Credit
At December 31, 1998, the Company had a $4.0 million unsecured revolving line
of credit, none of which was used during the years ended December 31, 1997 and
1998. The Company's line of credit expires in May 1999, 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, 1998, the bank's prime rate was 7.75%, and its interbank
offering rate was 5.1%.
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 as a component of shareholders' equity.
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, 1997 and
1998 consisted of municipal notes and bonds whose amortized cost approximates
estimated fair value. As of December 31, 1997 and 1998 average maturity for
these investments was four and eight months respectively.
34
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 $654,000 in 1996, $1,048,000
in 1997 and $1,290,000 in 1998. Future minimum lease payments under
noncancelable operating leases are as follows (in thousands):
1999...................................................... $1,403
2000...................................................... 1,378
2001...................................................... 1,251
2002...................................................... 806
2003...................................................... 67
------
$4,905
======
Retirement Savings Plan
The Company offers a 401(k) profit-sharing plan to substantially all of its
employees. Company contributions are determined annually and are at the
discretion of the Board of Directors. Contributions made to the plan were
$54,000 in 1996, $165,000 in 1997and $235,000 in 1998.
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 1996, 1997 and 1998.
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 1996, 1997 and 1998.
35
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal Proceedings
In May 1998, CallWare brought suit against AVT in federal court in Salt Lake
City, Utah, alleging various claims relating to purported false advertising by
AVT. (CallWare Technologies, Inc. v. Applied Voice Technology, Inc., Case No.
2:98CV 0329K.) CallWare has claimed $20 million in monetary damages, and an
additional $60 million in punitive damages. The suit is in the discovery phase,
and an initial pretrial conference was held on January 14, 1999 and a trial
date of January 10, 2000 has been set. AVT believes that CallWare's claims are
without merit and is vigorously defending the lawsuit.
7. Supplemental Information--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, 1996........................ $483 248 -- 125 $606
December 31, 1997........................ $606 208 97 124 $787
December 31, 1998........................ $787 218 -- 239 $766
(1) Amounts include write-offs of accounts receivable deemed uncollectable.
8. Businesses Acquired
On January 3, 1997, the Company acquired selected assets and liabilities of
Telcom Technologies Inc., a developer of NT-based open-architecture automatic
call distribution systems. The purchase price for the acquisition was $3.5
million in cash, plus warrants to purchase 200,000 shares of the Company's
common stock at $6.68 per share, which may be exercised at any time prior to
January 3, 2002. The Company accounted for the business combination as a
purchase and recognized a nonrecurring charge of $3.9 million in the first
quarter of 1997, representing the value of the purchased, in-process research
and development.
On October 22, 1997, the Company acquired all the outstanding capital stock of
CommercePath, Inc. (CommercePath) from Forest City Trading Group, Inc. for $10.4
million in cash. The Company accounted for the business combination as a
purchase and recorded a nonrecurring charge of $7.1 million in the fourth
quarter of 1997, representing the value of the purchased, in-process research
and development, and recorded $1.8 million of goodwill that it will amortize
over seven years.
The pro forma unaudited consolidated operating results of the Company for the
years ended December 31, 1996 and 1997, assuming the acquisition of CommercePath
had been made as of January 1, 1996 and 1997, respectively, are summarized
below:
1996 1997
----------------------------- ---------------------------
Pro Forma Pro Forma
Actual (unaudited) Actual (unaudited)
------------- -------------- ----------- --------------
(in thousands, except per share data)
Net sales........................ $44,127 $50,401 $58,091 $63,468
Net income....................... $ 1,934 $ 1,811 $ 729 $ 226
Diluted earnings per share....... $ 0.17 $ 0.16 $ 0.06 $ 0.02
36
AVT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as additional amortization resulting from
allocating a portion of the purchase price to goodwill. They do not purport to
be indicative of the results of operations which actually would have resulted
had the combination been in effect on January 1, 1996 or January 1, 1997, as the
case may be, or future results of operations of the consolidated entity.
9. 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,
1997 1997 1997 1997 1998 1998 1998 1998
---------- -------- --------- --------- --------- -------- --------- --------
(in thousands except per share data)
Net sales................................. $12,062 $13,660 $14,781 $17,588 $17,166 $19,439 $20,834 $23,687
Cost of sales............................. 4,590 4,958 5,475 6,043 6,344 6,969 6,937 7,848
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 7,472 8,702 9,306 11,545 10,822 12,470 13,897 15,839
Operating expenses:
Research and development................ 1,498 1,571 1,678 1,972 1,927 2,001 2,073 2,081
Selling, general and
administrative......................... 4,183 4,640 4,599 5,790 5,846 6,555 7,329 7,933
Non-recurring charges.................... 3,898 -- -- 7,127 287 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses............. 9,579 6,211 6,277 14,889 8,060 8,556 9,402 10,014
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)................... (2,107) 2,491 3,029 (3,344) 2,762 3,914 4,495 5,825
Other income, net......................... 240 278 265 287 235 320 241 348
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax
expense.................................. (1,867) 2,769 3,294 (3,057) 2,997 4,234 4,736 6,173
Income tax expense (benefit).............. (672) 997 1,185 (1,100) 1,079 1,524 1,705 2,223
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $(1,195) $ 1,772 $ 2,109 $(1,957) $ 1,918 $ 2,710 $ 3,031 $ 3,950
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per common
share (1)................................ $ (0.11) $ 0.14 $ 0.17 $ (0.17) $ 0.15 $ 0.20 $ 0.22 $ 0.29
Net income excluding nonrecurring
Items.................................... $ 1,300 $ 1,772 $ 2,109 $ 2,604 $ 2,102 $ 2,710 $ 3,031 $ 3,950
Diluted earnings per common share
excluding nonrecurring items(1).......... $ 0.12 $ 0.14 $ 0.17 $ 0.20 $ 0.16 $ 0.20 $ 0.22 $ 0.29
Weighted average common and
common equivalent shares
outstanding.............................. 11,208 12,254 12,686 11,520 13,108 13,401 13,640 13,615
Stock price range (2)
High.................................... 10.06 9.69 15.06 16.25 20.31 23.50 25.75 29.69
Low..................................... 5.88 5.69 8.69 9.50 13.38 17.13 19.63 12.19
(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, 1998, there were approximately 70
shareholders of record of the Company's common stock. The Company has not
paid any cash dividends on its common stock.
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
of AVT Corporation
We have audited the accompanying consolidated balance sheets of AVT
Corporation (a Washington corporation) and its subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AVT Corporation and its
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
January 28, 1999
38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Part III (Item 10-13) is incorporated by reference
to information in the Company's definitive proxy statements which will be filed
pursuant to Regulation 14a within 120 days of December 31, 1998.
39
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, 1998 and 1997
. Consolidated Statements of Income--Years ended December 31, 1998, 1997 and 1996
. Consolidated Statements of Shareholders' Equity--Years ended December 31, 1998, 1997 and 1996
. Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996
. Notes to Consolidated Financial Statements
. Report of Independent Public Accountants
2. Index to Financial Statement Schedules
. See Note 8 of Notes to Consolidated Financial Statements--Valuation and Qualifying--Accounts
3. Index to Exhibits
Exhibit No. Description
----------- -----------
3.1 Restated Articles of Incorporation of AVT Corporation (A) (Exhibit 3.1)
3.2 Amended and Restated Bylaws of AVT Corporation (A)(Exhibit 3.2)
4.1 Form of Warrant, dated January 3, 1997, issued by Applied Voice Technology, Inc. to
shareholders of Telcom Technologies, Inc. (E) (Exhibit 4.1)
+10.1 1994 Nonemployee Directors Stock Option Plan (A) (Exhibit 10.1)
+10.2 Restated 1989 Stock Option Plan (F)
+10.3 1986 Incentive Stock Option Plan (A) (Exhibits 10.3)
+10.4 Management Incentive Compensation Plan (A) (Exhibit 10.4)
+10.5 Employment Agreement dated May 1, 1993 between Applied Voice Technology, Inc. and
Richard J. LaPorte (A) (Exhibit 10.5)
+10.6 Form of Indemnification Agreement between Applied Voice Technology and each of its
directors and officers (A) (Exhibit 10.6)
10.7 Loan Agreement and Promissory Note dated May 16, 1997 between U.S. Bank of Washington
and Applied Voice Technology, Inc.(G) (Exhibit 10.7)
10.8 Lease Agreement dated June 30, 1989 between Riggs National Bank of Washington D.C. and
Applied Voice Technology, Inc. as amended (A) (Exhibit 10.11)
10.9 Second Amendment to Lease Agreement dated February 1, 1995 between Riggs National Bank
of Washington D.C. and Applied Voice Technology, Inc. (D) (Exhibit 10.11)
10.10 Third Amendment to Lease Agreement dated May 28, 1997 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. (G) (Exhibit 10.10)
10.11 Lease Agreement dated May 28, 1997 between Riggs National Bank of Washington D.C. and
Applied Voice Technology, Inc. (G) (Exhibit 10.11)
#10.12 Amended Patent License Agreement dated September 29, 1995 between Syntellect
Technology Corp. and Applied Voice, Technology Inc. (B) (Exhibit 10.1)
10.13 Master Software Manufacturing License Agreemented dated June 11, 1992 between Intelligent
Environments Inc. and Applied Voice Technology, Inc. as amended (A) (Exhibit 10.16)
10.14 Agreement and Plan of Merger among Applied Voice Technology, Inc., Cracchiolo & Feder,
Inc., the shareholders of Cracchiolo & Feder, Inc. and CFI Acquisition Corp., dated as of
January 2, 1996. (C) (Exhibit 10.1)
10.15 Registration Rights Agreement among Applied Voice Technology, Inc., Joseph J. Cracchiolo
and Bradley H. Feder, dated as of January 2, 1996 (C) (Exhibit 10.2)
21.1 Subsidiaries of Applied Voice Technology, Inc.(G) (Exhibit 21.1)
23.1 Consent of Arthur Andersen, LLP.
27.1 Financial Data Schedule for Year End 12/31/1998
____________________
40
(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. 33-85452.
(B) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(C) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 2, 1996.
(D) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1995 Annual Report on Form 10-K.
(E) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 3, 1997.
(F) Previously filed with, and incorporated by reference to, appendix A to the
Company's definitive Proxy Statement dated April 16, 1996.
(G) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1997 Annual Report on Form 10-K.
+ Management contract or compensatory plan or arrangement.
# Confidential treatment requested for a portion of this agreement.
B. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1998.
41
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 22nd day of March, 1999.
AVT CORPORATION
By: /s/ Richard J. LaPorte
--------------------------
Richard J. LaPorte
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacities indicated below on the
22nd day of March, 1999.
Signature Title
/s/ Richard J. LaPorte President, Chief Executive Officer and Director
- ------------------------ (Principal Executive Officer)
Richard J. LaPorte
/s/ Roger A. Fukai Executive Vice President of Finance and Administration and Chief
- ------------------------ Financial Officer (Principal Financial and Accounting Officer)
Roger A. Fukai
/s/ James S. Campbell Director
- ------------------------
James S. Campbell
/s/ Robert L. Lovely Director
- ------------------------
Robert L. Lovely
/s/ William L. True Director
- ------------------------
William L. True
/s/ Robert F. Gilb Director
- ------------------------
Robert F. Gilb
42
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Restated Articles of Incorporation of AVT Corporation (A) (Exhibit 3.1)
3.2 Amended and Restated Bylaws of AVT Corporation (A)(Exhibit 3.2)
4.1 Form of Warrant, dated January 3, 1997, issued by Applied Voice Technology, Inc. to
shareholders of Telcom Technologies, Inc. (E) (Exhibit 4.1)
+10.1 1994 Nonemployee Directors Stock Option Plan (A) (Exhibit 10.1)
+10.2 Restated 1989 Stock Option Plan (F)
+10.3 1986 Incentive Stock Option Plan (A) (Exhibits 10.3)
+10.4 Management Incentive Compensation Plan (A) (Exhibit 10.4)
+10.5 Employment Agreement dated May 1, 1993 between Applied Voice Technology, Inc. and
Richard J. LaPorte (A) (Exhibit 10.5)
+10.6 Form of Indemnification Agreement between Applied Voice Technology and each of its
directors and officers (A) (Exhibit 10.6)
10.7 Loan Agreement and Promissory Note dated May 16, 1997 between U.S. Bank of Washington
and Applied Voice Technology, Inc.(G) (Exhibit 10.7)
10.8 Lease Agreement dated June 30, 1989 between Riggs National Bank of Washington D.C. and
Applied Voice Technology, Inc. as amended (A) (Exhibit 10.11)
10.9 Second Amendment to Lease Agreement dated February 1, 1995 between Riggs National Bank
of Washington D.C. and Applied Voice Technology, Inc. (D) (Exhibit 10.11)
10.10 Third Amendment to Lease Agreement dated May 28, 1997 between Riggs National Bank of
Washington D.C. and Applied Voice Technology, Inc. (G) (Exhibit 10.10)
10.11 Lease Agreement dated May 28, 1997 between Riggs National Bank of Washington D.C. and
Applied Voice Technology, Inc. (G) (Exhibit 10.11)
#10.12 Amended Patent License Agreement dated September 29, 1995 between Syntellect
Technology Corp. and Applied Voice, Technology Inc. (B) (Exhibit 10.1)
10.13 Master Software Manufacturing License Agreemented dated June 11, 1992 between Intelligent
Environments Inc. and Applied Voice Technology, Inc. as amended (A) (Exhibit 10.16)
10.14 Agreement and Plan of Merger among Applied Voice Technology, Inc., Cracchiolo & Feder,
Inc., the shareholders of Cracchiolo & Feder, Inc. and CFI Acquisition Corp., dated as of
January 2, 1996. (C) (Exhibit 10.1)
10.15 Registration Rights Agreement among Applied Voice Technology, Inc., Joseph J. Cracchiolo
and Bradley H. Feder, dated as of January 2, 1996 (C) (Exhibit 10.2)
21.1 Subsidiaries of Applied Voice Technology, Inc.(G) (Exhibit 21.1)
23.1 Consent of Arthur Andersen, LLP.
27.1 Financial Data Schedule for Year End 12/31/1998
____________________
(A) Previously filed with, and incorporated herein by reference to, designated
exhibits to Registration Statement on Form S-1 of Applied Voice Technology,
Inc. File No. 33-85452.
(B) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
(C) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 2, 1996.
(D) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1995 Annual Report on Form 10-K.
(E) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's Current Report on Form 8-K dated January 3, 1997.
(F) Previously filed with, and incorporated by reference to, appendix A to the
Company's definitive Proxy Statement dated April 16, 1996.
(G) Previously filed with, and incorporated by reference to, designated exhibit
to the Company's 1997 Annual Report on Form 10-K.
+ Management contract or compensatory plan or arrangement.
# Confidential treatment requested for a portion of this agreement.